How to Protect Yourself from Real Inflation

For those who believe that the government has your best interest at heart, ask why it keeps rejiggering how the Consumer Price Index is calculated.inflation-rising
The reason the government wants to keep the CPI low is because many government payments are tied to a rise in the inflation rate from one year to the next.
Then there’s all that nonsense about “core CPI,” which excludes energy and food prices because they are so volatile. I don’t know about you, but I buy food and energy every day! I want to know how much those costs are increasing.
Now you can.
However, I have to warn you, the news I’m about to drop on you is really bad. Real inflation – that is, the increase in costs for the things you and I buy every day – is nowhere near 3%.
Depending on where you live, it’s between 6.6% and 13.7%.
That’s the data calculated by The Chapwood Index, the brainchild of Ed Butowsky of Chapwood Investments in Dallas. This index reports the actual price fluctuations of the 500 products that Americans purchase most often in the 50 largest U.S. cities. There are no alterations or seasonal adjustments. These are real prices, measured on a monthly basis.
So if you think that investing in bonds and dividend stocks paying 3% is keeping you at pace with inflation, you are regrettably in worse shape than you may realize.
That creates a real problem for retirement investors. On the one hand, you want to engage in a more conservative risk profile as you get older. On the other hand, you need to live on a fixed income, especially if you aren’t enjoying a hefty pension. The conventional wisdom of this “conservative” strategy that orbits the central concept of “preservation of capital” must be questioned.
Now, you can’t just jump into all high-growth stocks and hope for the best. You have to take a new look at your portfolio and take a reasoned approach on how to adjust it.
That’s going to be a frightening process. You may be in denial, hoping that perhaps things really aren’t that bad with respect to inflation. You may assume that because food and energy prices sometimes fluctuate that the highest range of the index is overinflated. Gas prices are lower this year, after all.
That’s a fair assessment. But if you smooth out these numbers over a long period of time, you sure aren’t going to end up at 3%. You may not end up at 7% or 13%, either. But if you want to be prudent, you have to assume the truth is somewhere in the middle – which means inflation anywhere from 4.8% to 8.3%.
That still means you need to look at your portfolio in a new way. In a few weeks, I’ll be launching The Liberty Portfolio, which takes all this into account (you can express your interest by letting me know at [email protected]).
For now, here are some suggestions on how to boost your dividend yields without taking on extraordinary new risks.
I frequently write about preferred stocks, which typically offer yields of 6% to 9%. While theoretically riskier than bonds, preferred stocks offer much higher yields with little additional risk. The above-referenced links make specific suggestions, but you could also go with an ETF, iShares US Preferred Stock (NYSE: PFF), which yields 6.18% and offers diversity.
The Global X SuperDividend ETF (NYSE: SDIV) pays 5.72% and holds numerous high-quality U.S. and international dividend stocks. The beta on the ETF is 0.91, meaning it offers 9% less volatility compared to the S&P 500.
For more aggressive investors, look at UBS ETRACS Wells Fargo Business Development Company ETN (NYSE: BDCS), which trades a basket of business development companies. These companies make investments in fast growing companies and must pay out 90% of income to shareholders. They are fine as long as interest rates are not aggressively rising.

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