Daily Gains Letter

How to Stop Inflation from Burning a Hole in Your Retirement Savings

By for Daily Gains Letter |

Stop Inflation from Burning American investors are sitting on a lot of money. According to the Investment Company Institute, total U.S. money market mutual fund assets for the week ended July 31 came in at $2.612 trillion. Of that total, 65%, or $1.69336 trillion, is attributed to institutional investors, while $918.93 billion belongs to retail investors. (Source: “Money Market Mutual Fund Assets,” ICI.org, August 1, 2013.)

Even though the stock market has been bullish since early 2009, with the S&P 500 advancing around 140%, investors sitting on the sideline remain skeptical. And on one hand, it’s not hard to see why: the financial crisis that led to the Great Recession may have started back in 2007, but the ripple effects are still being felt today.

U.S. unemployment has been above seven percent for over four years, underemployment has been at least 14% since 2009, and the minimum wage hasn’t budged from $7.25 an hour since July 2009. On top of that, personal debt is up, disposable income is a myth, and consumer confidence is down.

Hints that the Federal Reserve could begin tapering its $85.0-billion-per-month bond-buying program have also made global investors jittery, resulting in markets that are increasingly volatile—and for good reason.

On May 22, the Federal Reserve hinted it might scale back its quantitative easing policy. Over the following weeks, the S&P 500 lost 6.5% of its value. After clawing back the losses throughout July, the S&P 500 took another hit in early August after two Federal Reserve Bank presidents said it was possible the bond-buying program could end in September.

For many Americans, risk in the stock and bond markets is just too high. And with the Federal Reserve holding its data-dependent quantitative easing decision close to its chest, there is no clear direction in which Americans can direct their long-term investing decisions.

What many risk-averse, income-starved investors have been doing instead, though, is plunking a solid portion of their retirement portfolio in money market mutual funds. It might be a safe haven for their money, but with barely-there interest rates, it’s not really working for them, either.

Investors who are sitting on cash and also want to save their money from inflation can consider an exchange-traded fund (ETF) like the IQ Real Return ETF (NYSEArca/CPI) as one investment strategy.

The IQ Real Return ETF seeks investment results that provide a hedge against the U.S. inflation rate by providing a return above the rate of inflation, as represented by the Consumer Price Index.

While the IQ Real Return ETF trades like a stock, it’s not linked to the daily fluctuations of the stock or bond markets; instead, it follows the rate of inflation. Right now, the IQ Real Return ETF isn’t going to make investors a lot of money, but it will preserve capital.

However, thanks to the Federal Reserve’s quantitative easing policy (its balance sheet has ballooned to roughly $3.0 trillion) and reckless U.S. government spending, the ebb and flow of inflation may be on the rebound.

Since 2009, the U.S. budget deficit has been above $1.0 trillion. In fiscal 2013, the U.S. budget deficit is expected to come in at $500 billion. While this may seem like a major achievement, it’s important to remember that any budgetary deficit adds inflationary pressure to the economy.

As it stands, it might not look like inflation is high, but going forward, this will change. Investors who want to take advantage of inflationary measures might want to consider inflation-adjusted investment opportunities like the IQ Real Return ETF.

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