These 2 Hedges Always Work

11/30/2011 11:00 am EST

Focus: STRATEGIES

Terry Savage

Author, The Savage Truth on Money

Investors have heard a lot about hedging with gold and dividend-paying stocks, but why is this so important? MoneyShow’s Terry Savage explains.

Terry, we have seen the dollar all over the board, the stock market all over the board, very much volatility. What is the long-term impact, and what should we do about it?

Well, in terms of the stock market, if you are a long-term investor this is your retirement account. I have always counseled, keep putting that $300 or $400 in every month, in a diversified stock portfolio. History shows you will come out ahead.

The dollar is another question. Let’s specify we are not talking about currency trading and trying to be in and out. The fact is that inflation—which is the diminishing value of the dollar, the buying power of the dollar over time—can have a huge impact on your financial planning.

Just think about this: At only 3% inflation, which has been the historic average—we are below that now. Nobody is thinking about it, and inflation is merely the process of too much money being created…so the money is out there, we just don’t have that match that has lit the volatility of it. But at only 3% inflation, the spending power of your dollar is cut in half in 25 years.

So if you retire at age 65 and live to age 90, and you thought $3,000 a month will carry you through all your expenses, you need double that in 25 years just to be breaking even if you average 3% inflation. So part of your retirement planning should be including a hedge against the future value of the dollar, especially since the feds created so much of them.

Yes, so what is that hedge?

Well, the obvious hedge, and we have seen it in the last year…I have been talking about gold as a hedge for many, many years.

So gold has now become a more speculative trading market, as we see these days, but gold since Rumpelstiltskin they have been trying to create more gold. Nobody has ever been able to create more gold. So that is a hedge against paper currencies, which governments always resort to printing more in times of trouble.

What caught us up in the 1970s was we were fighting the Vietnam War, they wanted the Great Society, and they wanted Americans to pay for higher oil prices. So the feds just printed more money.

If you remember back in 1980, we had that massive round of inflation clamped down by Paul Volcker. It could ignite again, but it is not on the immediate horizon.

So, what has always beaten inflation besides gold? A diversified portfolio of US stocks. It is astounding, and people don’t realize this, but over every 20-year period going back to the 1920s, a diversified portfolio of large company, US stocks with dividends reinvested has always come out a winner—including and ahead of inflation.

So that is another argument for diversifying your retirement investments, even though you want to be careful and you are worried about risk. Have at least a portion in the stock market.  

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