Monday, February 21, 2011

How to Profit From Inflation

Inflation,long a sleeping giant, is finally awakening. And that could present problems—along with opportunities—for investors.  

A quick glance at the overall inflation numbers might suggest there is little reason to worry. The most recent U.S. Consumer Price Index was up just 1.5% over the past year. Not only was that lower than the historical average of about 3%, but it was uncomfortably low for Federal Reserve Chairman Ben Bernanke, who prefers to see inflation at about 2%.

Yet it is a much different situation overseas, particularly in the developing world. In South Korea, the CPI rose at a 4.1% clip in January from a year earlier, higher than the 3.8% estimate. In Brazil, analysts expect prices to rise 5.6% this year, exceeding the central-bank target of 4.5%. China, meanwhile, has been boosting interest rates and raising bank capital requirements to keep inflation, which rose to 4.6% in December, in check.

"Emerging market economies are overheating," says Julia Coronado, chief economist for North America at BNP Paribas in New York. "They need to slow growth or inflation will become destabilizing."
Even some developed economies are seeing rising prices. Inflation in the U.K. surged to 3.7% in December, while the euro zone's rate climbed to 2.4% in January, the fastest rise since 2008.

Much of the uptick has been driven by commodity prices. During the past six months, oil has jumped 9%, copper has gained 36% and silver has shot up 56%. Agricultural products have soared as well: Cotton, wheat and soybeans have risen 100%, 24% and 42%, respectively. That's a problem because rising input prices "work their way down the food chain to CPI," says Alan Ruskin, global head of G-10 foreign-exchange strategy at Deutsche Bank.

Of course, the main inflation driver is usually wages—and that isn't a factor in the U.S., where high unemployment has kept a lid on pay for three years.

Yet there isn't a historical blueprint for the inflation scenario that seems to be unfolding now. Not only has the global economy changed drastically since the last big inflationary run during the 1970s, but the lingering effects of the recent debt crisis remain a wild card.

For investors, that means traditional inflation busters such as real estate and gold might not work as expected, while other strategies might perform better.

So how should you position your portfolio? The best approach, say advisers, is to tweak asset allocations rather than overhaul them. That involves dialing back on some kinds of bonds, stocks and commodities and increasing holdings of others. Here's a guide:
What to Sell
• Bonds. The price of a bond moves in the opposite direction of its yield. When inflation kicks up, interest rates usually move higher, pressuring bond prices. Even buy-and-hold investors get hurt, because higher inflation erodes the real value of the interest payments you receive and the principal you get back when the bond matures.

The drop is usually most extreme in longer-dated bonds, because low yields are locked in for a longer period of time. So inflation-wary investors should shorten the maturities of their bonds, say advisers.
The safest bonds, especially Treasurys, are usually hardest hit, because those are the most influenced by changes in rates—unlike corporate bonds, whose prices also move based on credit quality. From September 1986 through September 1987, for example, as inflation moved higher, Treasurys dropped 1.2%.
It might even make sense to dial back on Treasury inflation-protected securities, whose principal and interest payments grow alongside the CPI. That's because investors already have flooded into TIPS, driving up prices and driving down the real, inflation-adjusted yields. A typical 10-year TIPS, for example, yields just 1.1% after inflation, compared with an average of more than 2% in recent years.

With so little cushion, long-term TIPS carry a higher risk of loss for investors who are forced to sell before the bonds mature. "Even if inflation is rising, you can still lose money," says Joseph Shatz, interest-rate strategist at Bank of America Merrill Lynch.
• Hard assets. Real estate may be a classic inflation hedge, but it seems likely to disappoint investors this time around. Even though rising inflation should put upward pressure on home prices, the twin forces of record-high foreclosures and consumers reducing their debt loads are expected to mute price gains for several years, says Milton Ezrati, senior economist at asset manager Lord Abbett. That's a far cry from the 1970s, when the median home price rose 43%, according to U.S. Census data.

Gold is another traditional inflation hedge that might be less effective now. With prices already having more than quadrupled over the past nine years, many strategists see substantial inflation already factored into the price.

Historically, gold has moved with the money supply. During the last 30 years, the correlation has been about 69%, according to FactSet data. (A correlation of 100% means two indexes move in lockstep all the time; a correlation of minus-100% means they move in perfect opposition.) Based on the money supply alone, gold is priced 25% above where it should be, says Russ Koesterich, chief investment strategist at BlackRock Inc.'s iShares.
• Stocks. Equities can be a decent hedge against creeping inflation, because companies are better able to pass off costs to customers. But when input costs suddenly jump, profit margins take a hit.
At the same time, the higher interest rates that accompany inflation prompt investors to demand more profits for each dollar invested. As a result, price/earnings ratios tend to shrivel. Over the past 55 years, the average trailing P/E ratio of a stock in the Standard & Poor's 500-stock index has fallen to 16.95 during periods with inflation running between 3% and 5%, from 19.24 during periods with inflation of 1% to 3%, the most common inflation range since 1955, Mr. Koesterich says.

Sectors that are sensitive to interest rates, including financials, utility stocks and consumer staples, are especially vulnerable, say advisers.
What to Buy
• Cash and bank products. Money-market mutual funds are more attractive in inflationary environments because the funds invest in short-term securities that mature every 30 to 40 days, and therefore can pass through higher rates quickly. In an extreme example, money funds posted yields over 15% during the inflation-ravaged 1970s and early 1980s, says Pete Crane of Crane Data, which tracks the funds.

A growing number of inflation-linked savings products are cropping up as well. Incapital LLC, a Chicago investment bank, says it has seen a pickup recently in issuances of certificates of deposit designed for a rising-rate environment. Savers, for example, can invest in a 12-year CD whose rate starts at 3% then gradually steps up to 4.25% starting in 2015, and peaks at 5.5% starting at 2019 until the CD's maturity in 2023.

A caveat: If inflation eases and rates fall, investors could get burned, since the issuer may call the CDs and investors would lose out on the higher rates at maturity.
• Bonds. One way to reduce the impact of rising inflation on bond holdings is to build a bond ladder—buying bonds that mature in, say, two, four, six, eight and 10 years. As the shorter-term bonds mature, investors can reinvest the proceeds into longer-term bonds at higher rates.

"A bond ladder is best for someone who doesn't mind holding them for up to 10 years," says Jeff Feldman, an adviser in Rochester, N.Y.

Highly cautious investors might prefer the I Bond, a U.S. savings bond that earns interest based on a twice-yearly CPI adjustment. Although the current yield on I Bonds is only 0.74%, that yield is likely to move higher on May 1, the next time the rate is adjusted. I Bonds aren't as volatile as TIPS and appeal to conservative, buy-and-hold investors. The interest may also be tax-free for some families for education expenses.

More adventurous types might consider the inflation-protected government debt of other nations, which carry higher yields along with greater risks. The SPDR DB International Government Inflation-Protected Bond Fund is an international inflation-protected bond exchange-traded fund designed to do well if inflation in overseas countries moves higher. The fund returned about 6.8% in 2010 and 18.5% in 2009, according to Morningstar Inc.
• Bank-loan funds. Another way to exploit rising inflation is through mutual funds that buy adjustable-rate bank loans, many of which are used to finance leveraged corporate buyouts. So-called floating-rate funds are structured so that if interest rates rise, they collect more money. During periods of rising rates, floating-rate funds usually outperform other bond-fund categories. In 2003, for example, as investors anticipated higher interest rates and a stronger economy, bank-loan funds gained 10.4% while short-term bond funds gained 2.5%.

Now, amid expectations of rising inflation, investors are once again flocking to these funds, pouring in about $7.6 billion into loan funds in the fourth quarter of last year, according to Lipper Inc.—more than double the previous quarterly record set in 2007. The pace has accelerated this year, with investors putting in about $3.4 billion thus far.

After gaining almost 10% last year, the funds shouldn't be counted on for much price appreciation, says Craig Russ, who co-manages $22.7 billion of floating-rate investments across three floating-rate funds and other accounts at Eaton Vance Corp., including the Eaton Vance Floating Rate Fund. But the funds generate plenty of income, yielding about 4% to 5% now, according to Morningstar.

Be warned: Floating-rate funds can get creamed when investors fear the underlying loans are too risky. In 2008, for example, bank-loan funds lost 29.7%, although they zoomed 41.8% in 2009, according to Morningstar. What's more, banks are beginning to make riskier "covenant-light" loans that carry fewer stipulations for corporate borrowers—a sign of frothier trends in the market.

Given the potential for volatility, floating-rate funds are best viewed as a complement to—not a replacement for—investors' core bond holdings. Among Morningstar's picks in this category is the Fidelity Floating Rate High-Income Fund, among the more conservative in the category.
• Commodities. Materials that are more closely tied to industrial or food production seem better positioned now than gold, say advisers. The trick is to find the best investment vehicle.
The easiest way for small investors to gain exposure to most commodities is through exchange-traded funds, many of which use futures contracts. But such funds can be dangerous because they often face "contango"—when the price for a future delivery is higher than the current price. The result: The ETFs lose money as they buy new contracts, even when prices are rising.

The losses can be extreme. In 2009, for instance, while the price of natural gas rose 3.4%, the United States Natural Gas Fund lost 56.5% as a result of rolling over futures contracts.

Some firms have rolled out ETFs that aim to address the problem. One of Morningstar's picks is the U.S. Commodity Index Fund, run by U.S. Commodity Funds LLC. The portfolio buys the seven commodities that are most "backwardated"—the opposite of "contango," so rolling contracts should result in a profit—along with the seven commodities with the most price momentum.

"USCI provides an outlet for investors who want broad commodities exposure but don't want to worry about the daily dynamics," says Tim Strauts, a Morningstar analyst.

Other funds play inflation by holding many different assets to protect against rising prices no matter where they show up. The IQ Real Return ETF, launched in 2009 by IndexIQ, aims to provide a return equal to the CPI plus 2% to 3% over a two- to three-year period. To get there, it invests across a dozen or so inflation-sensitive assets—including currencies and commodities.
• Stocks. One corner of the market tends to do better when prices rise suddenly: small-company value stocks. "Because value and small stocks tend to be fairly highly [indebted] companies, inflation reduces their liabilities," says William Bernstein of Efficient Frontier Advisors LLC, an investment-advisory firm in Eastford, Conn.

From January 1965 through December 1980, for example, inflation averaged 6.6% a year. The Ibbotson Small-Cap Value Index posted average annual returns of 14.4%, according to Morningstar's Ibbotson Associates, double the S&P 500's 7.1% gain.

Morningstar's picks in the small-cap value fund category include Allianz NFJ Small Cap Value, Diamond Hill Small Cap, Perkins Small Cap Value and Schneider Small Cap Value. Just be warned: Small value stocks have had a good run recently, returning 134%, on average, since March 6, 2009.

In the end, the particulars of any inflation-fighting plan may not be as important as developing a plan in the first place.

"The real problem you run into with any kind of inflation hedges," says Jay Hutchins, a financial adviser in Lebanon, N.H., "is that if you don't already have them when inflation is around the corner, you've missed the boat."

Source: Write to Ben Levisohn at and Jane J. Kim at

Wednesday, August 18, 2010

What To Do When you Need Money Immediately

While we all hate the thought of not being able to pay our bills on time, more Americans are finding themselves stuck in a difficult situation when it comes to their finances. Whether it is because a member of the family recently suffered a job loss, a decrease in pay, or an unexpected bill that was not budgeted for, many find themselves burdened with a high level of stress that causes them to seek out any means possible to obtain the cash they need to cover their expenses. While many options exist to help you accumulate some extra cash over an extended period of time, very few options are available when you find yourself in the situation that I need money today. Before you throw your hands up in the air in despair, here are a few of the most popular options that can help you get the money you so desperately need when you need it most.

First, consider asking your friends or family for some financial help. If you have recently hit a patch of bad financial luck due to a job loss or decrease in pay, there is a good chance that those who love and care about you will be sympathetic to your financial situation. If you only need a small sum of money to tide you over until your next paycheck, don’t be afraid to ask your friends and family for help. Just don’t expect that the money they give you will be a gift. Although they may not say it, there is a good chance that they will expect you to pay back the money that they lend you in a timely manner. In order to stay on good terms, it may be in your best interest to draw up a lender contract and specify what your expected repayment date may be. You can choose to repay with interest or not, but when you put it in writing it goes to show that you are serious about making good on the loan when you get back on more stable financial footing.

Lastly, consider opting for a payday loan. If you don’t want to ask your friends or family for help simply because you do not want to be judged for your financial problems, you could always consider applying for a payday loan. While these loans most commonly come with excessively high interest rates and added fees, they usually can deliver the cash you need when you are in the I need money today situation. If you choose this option, make sure you have a good understanding of all the fine print associated with the payday loan. Make sure you can meet the repayment date and that you will be able to afford all the added fees and interest that will be charged on the money you plan to borrow. If you can’t afford the added fees, this may not be the best option for your I need money today woes.

These are just a few of the options you should consider when you find yourself thinking I need money today. Consider asking your friends and family for help, but if you are embarrassed about your financial situation, a payday loan is always a good option. Regardless of the option you choose, both are a good way to obtain the money you need, when you need it.

Monday, July 12, 2010

Go back in time to learn how to manage money!

Ever heard of your dad or grand dad take a loan for a vacation or for that matter for a festive and high spending involved occasion like a wedding? Do you recall them buying clothes because retail therapy helped their blues every other month? They always preferred quality over quantity on anything purchased be it the furniture, utensils, clothes or home accessories.

We are a transition generation trying to find a balance between retaining our traditional values and also finding a way to ape the west in terms of lifestyle changes. Well, one of the areas that seems to face marked change due to this shift is that of personal finance. Managing money has been a constant challenge for today’s young generation who have upped the antennae on the spending. They are more brand conscious than any generation before has ever been, the wardrobe has 10 or more different styles of attire for every occasion, vacations abroad are common, buying a house and a car by availing loans is also common. Educational loans and vacation loans are also on the rise.


Ever heard of your dad or grand dad take a loan for a vacation or for that matter for a festive and high spending involved occasion like a wedding? Do you recall them buying clothes because retail therapy helped their blues every other month? In fact the average person belonging to the previous generation would spend money on clothes for festivals, weddings or periodically once or twice a year. They always preferred quality over quantity on anything purchased be it the furniture, utensils, clothes or home accessories.


This is not the case in today’s generation. They like living life to the full. What is the point in hoarding away money for a future which is as unpredictable as the weather! They would rather enjoy themselves to the hilt, while the party lasts! Stress is a huge factor that contribute to these drastic lifestyle changes one is a witness of now. Today’s generation work very hard and play very hard. They want to experience everything in a short span of time. They are impatient for goals to be reached and in the hurry to reach their destinations they forget to savour the simple pleasures of life that our parents and grandparents had all the time for. They lived within the incomes they received and saved as much as they could. Their income expense statements showed more cash inflows rather than outflows.

However, the younger generation argues on this aspect. We have but one life and it is too short, so we need to pack all the action in before old age sets in. What’s the point in trying to spend on entertainment, travel, food, looks and grooming with creaky joints and false teeth.


There sure is a point there. Our dads and grand dads lived like an ant generation. Slaving away day after day in the same environment, in the same job for years together, stowing away finances in different debt instruments to accumulate and serve their purpose, when they are old. Of course some invested it in land, stocks, gold etc. as well, which was left to their discretion and knowledge in such matters. The point then is to step back and look at both the lifestyles. Take the good out of both and ensure that our life is to the fullest, with the best of both worlds.


1. Ensure that there is an emergency fund stowed away for a rainy day. A job loss, recession, illness etc. could prove to be a temporary setback for which you may incur additional expenses best managed with this emergency fund.

2. Keep impulse purchases to a minimum. Indulging in branded items for certain purchase choices like consumer durables and other long lasting products is fine. However, it does not mean that you should go overboard with being brand conscious all the time. In case of clothes, look out for the sales season where you avail discounts, shop for quality over quantity, which is any day better. However, if you are the kind who loves a lot of variety and like to outgrow your liking for the same kind of clothes over a period of time, indulge in less expensive clothes with a comparatively lesser shelf life, which can be discarded and refilled with other choices.

3. Don’t live life king size all the time, try and bring it down a few notches most of the time. For eg. Instead of planning a vacation that is out of the continent, you could try a vacation spot in Asia or India, which will bring the same benefits in terms of relaxation and fun and yet be less cumbersome on your purse strings.

4. When there is a boom, there is bound to be crash around the corner. So hold your horses and don’t overindulge in luxuries, tomorrow may not work out as planned, nevertheless it is wise to be prepared for it, even if it is bound to take you by surprise. A little foresight could save you from a load of trouble.

5. Take care to have a mixed portfolio with investments in debts and equities apart from an emergency fund and other savings.

6.Debt counsellors advise 60% of your income should be set aside for savings and investments and 40% should be able to cover your living expenses as well as any debt expenses you might have incurred.

7. Use your credit card judiciously or don’t use it at all and keep a tab of your debts to ensure they are safely manageable. In fact do not take a loan unless it fits it well with the rest of your financial goals and you can safely repay it without any stress to your budget.

By all means enjoy life, but in moderation. Balance is the key element to have the best of both worlds. A little bit of this and a little bit of that make for a wholesome, balanced life sprinkled with variety.

Teaching your child the value of money

Use real-life experiences to demonstrate everything you want to teach. Learning by observing and doing is the most powerful tool. Such as when you go grocery shopping, and can use the opportunity to showcase planned spending, or how to recognise value for money. Or if you decide to use a credit card at a restaurant, you could show your child how a credit card works, when it can be used, and how to calculate a tip!

How important is it to teach your children about money, its place, and its value? Considering that money does, in a lot of ways, make the world go round, you might think it one of life’s obvious lessons, gained through experience. Or you might assume that money management is tackled in school. Think again. Arming your child with the right attitude and necessary skills at the right time will afford them with the greatest possible advantage: the opportunity and power to make decisions.

How, and when to communicate money values to children is, however, one of the toughest challenges that parents face. Educating, motivating, and empowering children to become regular savers and investors will enable them to keep more of the money they earn and do more with the money they spend.


Discuss money openly. So many parents do not discuss finances within the family either because it’s considered inappropriate, or personal. Consider this: if you don’t actively provide the correct information to your child, how is he/ she to know, understand and inculcate your values? Therefore, as soon as your child can count, introduce him/ her to money. Observation and repetition are two important ways in which children learn. As they grow older, have frank discussions about how to save it, how to make it grow, and how to spend it wisely.

Help distinguish between needs and wants. These are habits that die hard, and influence how your child will approach money and its place in his/ her life. If they can differentiate between need-to-have and nice-to-have, then they’re halfway to a solid and secure future.

Set goals for your child. Better still, help your child set his/ her own goals. If it’s a toy that they must have, then regard this as a good opportunity to teach your child how to be responsible with money, and prioritise between what they want, and mindless spending. Allow your child to make spending decisions, which means that they will learn from the choices they make. And learn that it’s to their advantage to do a little homework before buying, waiting for the right time to buy, and actually deciding if the product selected is what they really want.

Encourage your child to save. Begin simply, as your parents might have done, with a piggy bank. If you do give your child an allowance, get them to set aside a small portion of it every time. Explain and demonstrate the concept of earning interest income on savings. Provide an incentive; offer to match what your child saves on his/ her own.

Help your child maintain a record of money saved, invested, or spent. To make it easy, use 12 envelopes, 1 for each month, with a larger envelope to hold all the envelopes for the year. Encourage your child to save receipts from all purchases in the envelopes and keep notes on what he/ she does with his/ her money.

Use real-life experiences to demonstrate everything you want to teach.Learning by observing and doing is the most powerful tool. Such as when you go grocery shopping, and can use the opportunity to showcase planned spending, or how to recognise value for money. Or if you decide to use a credit card at a restaurant, you could show your child how a credit card works, when it can be used, and how to calculate a tip!

Finally, your child needs to understand that spending money can be fun and very productive when spending is well-planned, and that a penny saved is, indeed, a penny earned!

Things to remember about your personal loan

Evaluate all loan offers. The first condition for loan offer selection is the total money outflow that the loan will cost. The second factor is the EMI. A loan offer with a lower EMI and a longer tenure may seem attractive, as it could be easy on your purse strings, however not all such loans prove to be cost effective in the long run. Hence, first calculate the total loan cost and then try to opt for a higher EMI, which you can comfortably manage to enable a shorter loan tenure.

Personal loans constitute around 17% of the retail loan market share. However, in recent times banks have tightened unsecured lending due to the prevailing financial uncertainty and the increasing number of defaults in this segment. The focus of the banks currently is to keep defaults to a minimum. However, a personal loan for the credit worthy is indeed a boon in the hour of sudden need. This article explores the advantages of a personal loan for such an individual and provides a checklist one needs to keep track of when choosing a loan offer.

Why an unsecured loan

A secured loan would mean that you need to pledge a house or other forms of security as collateral to obtain the loan. However, a personal loan needs no such security pledge.

An unsecured loan is easier and less time consuming to access compared to a secured loan, which has a longer processing time. A personal loan can be accessed within a day’s notice and is easy to procure with minimal documentation. The borrowing range varies between Rs.50,000 and Rs.20L and the repayment tenure ranges from a year to 5 yrs.

The purpose for an unsecured loan is loosely defined and is not intended for one specific use, you could obtain it for wedding expenses, cruise holidays, as an education fund, to pay up sudden hospitalization expenses, purchase a car or a consumer durable and so on.

Six pointers to choose your personal loan

Calculating the cheapest loan offer: Personal loans come with very high interest rates ranging from 14% to 24%. Compare interest rates and get the complete picture by understanding the annualized interest rates for each offer. Then figure out the total amount of repayment you need to shell out with all the offers before opting for the loan of your choice.

Processing fee: You need to keep in mind the processing fee and other fees that will be levied when you apply for your personal loan.

Prepayment penalty check: Ask upfront if there would be any penalty payments for prepayment of the loan at any point in time. More often than not loan consumers tend to pay up their loans earlier than planned to be rid of debt. Hence, its important to know if your personal loan offer allows part prepayments. If that is the case, then you should be aware from what time frame in the loan period you can start prepaying and understand the cost you incur due to such prepayments in part or full.

EMI and tenure: Evaluate all loan offers. The first condition for loan offer selection is the total money outflow that the loan will cost. The second factor is the EMI. A loan offer with a lower EMI and a longer tenure may seem attractive, as it could be easy on your purse strings, however not all such loans prove to be cost effective in the long run. Hence, first calculate the total loan cost and then try to opt for a higher EMI, which you can comfortably manage to enable a shorter loan tenure.

Keeping track of your credit history: Especially in the case of unsecured loans, your credit history, which is recorded by CIBIL ( Credit Bureau India Limited) plays a critical role in your loan application being accepted. A good repayment track record ensures not only an instant loan approval but brownie points in the form of more attractive interest rates.

A personal loan is the best way out when you cannot access your personal savings to meet an unexpectedly huge expense. These pointers should help you on your way in landing the best deal on your personal loan.