Inflation-proof your savings

By PHIL MULKINS World Staff Writer - 10/21/2009


Wealth management advisers for Forbes 400 billionaires say their clients are "uncomfortable with the nation's financial volatility and are revisiting their investment and saving strategies," according to a Bankrate.com online treatise.

"Rich folks are sitting on their cash, just like the rest of us, and are worried about the future," it says.

Wealthy people are consuming less and saving more, Bankrate says. As with many other Americans, the affluent were overextended in real estate and other investments that went sour, and now they are more likely to invest in fixed-income vehicles — they're scared of risk.

A subset of the wealthy, since September 2008, is frozen and nervous as they look at remaining principal and worry, "If I lose any more, I jeopardize my quality of life."

Safety: According to Bankrate, well-off people are saving by holding onto wealth, putting safety first and protecting against inflation. They are turning to experts and scouring the Internet for the best rates on CDs (see a CD rate locator at tulsaworld.com/FindCD ). They also seek best rates on money market accounts and other FDIC-insured options, sticking to fixed income, Treasury bills and fixed assets.

Bank caveat emptor: Beware of banks that offer much higher-than-average rates of return because they could be cash-strapped and near failure, Bankrate says. The Federal Deposit Insurance Corp. insures bank accounts for up to $250,000 each, so people with millions to invest get multiple savings accounts at solid institutions to ensure the best possible returns for the least risk. They select safe, FDIC-insured banks, thrifts and credit unions to buy these from.

FDIC bank find: When shopping around for banks, look into each institution's overall financial health at tulsaworld.com/FDICbank . This locates single FDIC-insured institutions but also allows you to locate multiple institutions based on one or more of the following: name, address, city, state and ZIP code.

Bank, thrift and credit union ratings: A proprietary system providing ratings on the relative financial strength and stability of U.S. commercial banks, savings institutions and credit unions is available at tulsaworld.com/BANKsafensound . It applies 22 tests to each institution to measure its capital adequacy, asset quality, profitability and liquidity.

Inflation: Rising prices are the nemesis of "cold hard cash," but for now inflation is subdued. Banks are paying low, low rates on savings — all in the 1 percent range. If you can find a savings account paying 1 percent and inflation runs at minus 1 percent, you net 2 percent. Forecasters expect inflation to return with a vengeance, biting into the savings of rich and poor alike, especially those with too much in safe, low-yielding savings vehicles. When rising prices return, your "safe" savings will be worth less and less.

Inflation-proof your portfolio: See a list of seven financial products that can buffer your portfolio, primary of which is "Treasury inflation-protected securities" (TIPS) at tulsaworld.com/InflationProof .





Treasury uses price index to protect your investments

"Treasury inflation-protected securities" have been at the battlefront of the inflation war since 1997.

TIPS: Investors seeking to protect their portfolios from the ravages of inflation can learn how to buy TIPS as individual bonds, exchange-traded funds or mutual funds at tulsaworld.com/TIPS

The Treasury Department uses the Consumer Price Index as a guide to adjust the principal for inflation on a semiannual basis, and a fixed interest rate is paid semiannually on the adjusted principal.

Example: You buy a $10,000 bond with a 2 percent interest rate but inflation equals 3 percent that year — the face value of the bond increases 3 percent ($300 to $10,300) and the 2 percent interest rate will be applied to the new face value: $10,506.

Deflation: In a deflationary environment the principal is adjusted downward, but as long as you hold the bond to maturity you receive your original investment.

Long-term investment: TIPS bonds are meant to be long-term investments. There is a secondary market, meaning you can sell your bond before maturity, but as mentioned you won't receive your full principal investment if you've owned the bond during a deflationary period, says the U.S. Treasury Department Web site.

Maturities: TIPS are issued with maturities of five, 10 and 20 years and are auctioned during specific months according to their maturities. Five-year TIPS are auctioned in April and October; 10-year TIPS in January, April, July and October; and 20-year TIPS in January and July.

Two auction flavors: Two ways to participate in TIPS auctions are available. Most people place noncompetitive bids — they agree to the yield determined at the auction. You can also place competitive bids in which you state the yield you're willing to accept. Going the noncompetitive route, you're likely to receive a better rate because you're going along for the ride with the money managers who can demand a better rate because they're spending millions at the auction.





Tulsa World consumer writer Phil Mulkins wants to know which topics interest you most. Call 699-8888 or e-mail your interest to phil.mulkins@TulsaWorld.com or mail it to Tulsa World Consumer, PO Box 1770, Tulsa OK 74102-1770.




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