MORE NEW STRATEGIES.

If inflation continues to soar, you're going to have to work like a dog just to live like one. ~George Gobel.



George Gobel Has Been Gone a Long Time. So has inflation. In the early 80's, if you would have told me that we would have inflation levels below 5% in the new century, I would have laughed in your face. For the year 2009, we will actually have negative inflation. Those on social security have a surprise coming in 2010: There will be no cost of living adjustment. In fact, depending on what happens to Medicare Part B premiums, many may actually see their net social security income go down. Combining this with reduced investment income could make things difficult for many seniors.

Inflation May Not Be Dead After All. The current low inflation environment is not likely to continue if the predicted future federal deficit levels actually occur. The combination of low revenue, due to the slow economy and high spending levels will make it extremely difficult to reduce these deficit levels. If this trend continues the probability for increased inflation is difficult to ignore. For this reason, most investment portfolios need to contain some exposure to assets that do well in a higher inflation environment. Here are some areas to consider.


Energy. Oil prices have rebounded strongly since the low levels earlier. Most oil stocks have rebounded off their earlier lows; however, if the economy rebounds and inflation picks up, the shares of most oil companies will become more valuable. One of my favorites in this area has been Marathon Oil, a 22 billion company selling for around 8 times last year's earnings. Natural gas is selling at historic lows relative to oil and is almost certain to rebound; however, it is difficult to find a company to recommend at this point because the shares of companies producing natural gas have not fallen as much as the basic commodity. Finally, pipeline companies such as Kinder Morgan Partners have an excellent history of increasing dividends and should benefit as more products go through their lines.



Real Estate Securities. Shares of Real Estate Investment Trusts have been beaten down in the market place as investors fear their exposure to the credit markets and potential higher vacancy rates. I have done well in selected companies such as Health Care Properties and Pro Logis Trust. The key to safety in this area is low debt levels or their ability to handle higher levels. While many have loans coming due that will be difficult to refinance, their lenders may find it beneficial to renew these loans on a short-term basis rather than foreclose and find themselves responsible for managing properties, a task for which they have little or no experience.


Direct Ownership Of Real Estate. I have worked with real estate investors for many years and participated in acquisition, development, financing, management and sale transactions. This type of ownership is more complex than investing in listed securities. Successful direct ownership investment requires considerable skill in negotiation and management. Poor performance in either of these areas can keep you from realizing the full potential of your investment. Conversely, you can create a good investment from a mediocre one by superior skills. Small investors will likely do well buying in this environment. The combination of low interest rates, low sale prices, and limited new building bode well for those who buy in this environment. Unless you are a very experienced investor, your interests would be well served by retaining the services of an experienced agent to represent your needs. One additional note, there will probably be less competition for the acquisition of lower end properties after the government's $8,000 tax credit expires at the end of November.



Precious Metals. Although there are several precious metals available for direct purchase, the most widely traded of these is Gold. It is virtually impossible to listen to the radio without hearing commercials touting the ownership of gold as an investment. Most will tell you that if you had bought gold in 2003, the value of your investment would have increased by 203%. This represents a compound return of 20.7% per year, outperforming virtually any alternative investment. What they won't tell you that if you had bought gold at the average price 29 years ago, your investment would have increased by 55%, an anemic 1.53% per year. Another thing I dislike about gold ownership is that it provides no interim cash flow during the holding period. Finally, unless you make sizable investments, much of your potential profits will go to dealers in the form of mark-up from the price at the time of purchase and a discount from the market price at the time of sale. Despite these disadvantages, there is no argument that gold has done very well over the past seven years and it can provide some stability in certain environments. If you decide to devote some of your capital to direct ownership of gold, the best bet is an established product such as Krugerrands or Canadian Maple Leafs. These have very little premium value over the price of the metal and are most easily traded.


These Are Not Recommendations. They are ideas for you to consider. Every person needs an investment portfolio designed to meet his or her needs. Selection of the investment that is right for you will require considerable research and constant monitoring.