Monday, June 22, 2009

Inflation coming soon? Maybe not!

Working in a bank, I see people coming in all day long to buy, renew, or inquire about CD rates. Most people make a comment or two about rates being low and wish that rates would be higher. To get the best rates, they are told that they need to buy CD's with maturities over 3 years. No, they want a one year CD. Why? Because they are worried that rates are going back up soon due to inflation. Is this a good strategy? No. First of all, if you want CD's, you should build a CD ladder with 1, 2, 3, 4, and 5 year CD's. Each year when your CD matures buy the 5 year CD. That way you'll always get the better rate and you will have new money available each year. Secondly, how do you know rates are going up? Is inflation really a problem? Actually right now we are in a deflationary environment. Unemployment is rising and there is no upward pressure on wages. The economy is still struggling as well. There is really no threat of inflation in the near future. If you don't believe me, read a couple of recent articles from economists with more credentials than I have:



So what if you aren't a CD buyer? Well, good for you! Areas to increase your holdings in would be energy, commodities, and TIPS (Treasury Inflation Protected Securities). For the average investor, the problem isn't buying the wrong investments, it's not saving enough! Don't fight the Fed!



No comments: