Managing Your Portfolio:
What Does Chocolate Pudding Have To Do With Your Portfolio?
Smart Profits Issue #498
February 19, 2008
By Marc Lichtenfeld
Senior Analyst, Smart Profits Report
I’m not sure when it happened and I’m not sure how it happened, but one day I woke up and had become my Dad.
I swore it would never happen to me, but there I was doing the grocery shopping at 8:00 AM on a Saturday.
8:00 AM! And on a holiday weekend, too.
As a teenager, I distinctly remember thinking, “Why would anyone in their right mind get out of a perfectly good bed early on the weekend to go food shopping?”
Yet there I was this past Saturday morning, strolling through Publix in a world of frozen pizza and bananas.
And that’s when things got a little depressing…
Full Bellies… Full Gas Tanks… But Empty Wallets
In the past, I’ve always been able to hit the grocery store and get out of there about $100 lighter in the wallet. But as you’ve probably noticed yourself, food prices are taking a heftier toll on consumers these days. When I leave now, I’ve paid $120 for the same groceries.
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On Saturday, I noticed just how high some prices had risen. By my unscientific calculations, bananas are up about 20% over last year, chocolate pudding (one of the major food groups in my household) has climbed 12%. Corn, orange juice, cereal… the list goes on. Nearly everything we buy has seemingly gone up in price.
But when you think about it, this trend isn’t entirely surprising. Consumer prices shot up 4.1% in 2007 - the biggest jump in 17 years. Energy costs rose 17.4% while gasoline skyrocketed 29.6%. Food was higher by 4.9%. And economists predict that January’s consumer price figures will show a further 0.3% rise.
Inflationary times call for similarly inflationary measures - at least when it comes to beefing up your own finances…
As Interest Rates Head Lower, Inflation Heads Higher
What makes this bout of inflation so unnerving to a lot of people is that their investment portfolios may not be keeping pace with rising costs. In 2007, for example, while inflation was up over 4%, the S&P 500 posted only a 3.5% gain.
And short-term money isn’t keeping up with inflation either. For example, my money market account currently pays 3.8%. If inflation rose by the same amount as last year, the buying power of my ultra-safe cash holdings would actually decrease.
Right now, investors are in a real quandary. They’re faced with a situation where GDP growth, the real estate market, and stock market are all falling. This is forcing the Federal Reserve to lower interest rates… even as inflation rises.
So if they want to see higher yields or returns, they’re forced to take on more risk. However, if you’ve got time on your side, I wouldn’t be too concerned. In fact, the next year may be a good time to increase your exposure to the stock market.
How To Build An Inflation-Beating Portfolio
Since 1950, the compounded annual growth rate of the S&P 500 is 8.7%.
Keep in mind that most years won’t return 8.7%. Some ugly years might see measly returns, while other years could bounce to gains of over 20%. But those investors in the market for the long haul should have no problem beating inflation.
For example, my wife and I recently reviewed our portfolio and despite all the negative news reports about recession, inflation and financial Armageddon, we’ve decided not to touch our asset allocation (we almost never do). In fact, we’re looking to put more money into the stock market over the course of the year.
The reason is simple: I don’t try to time the market, so I’m not waiting for it to hit a specific level before I increase my stock holdings. Instead, we plan to buy beaten-up stocks and mutual funds several times over the next year.
So what sectors will I be looking at?
One To Buy… And One To Bury
Amid the market beatdown recently, there are several sectors that look attractively cheap at current levels.
Then again, there are other sectors that still look like pigs, no matter how much lipstick you slap on.
One To Watch: The Financial Sector: Most of the bad news may already be priced into the sector and I’ll be scouting investment opportunities with interest over the rest of the year.
One To Avoid: Homebuilders: However, I’ll avoid the homebuilders. They might be cheap, but I think they have potentially to get hit even more and become cheaper. After all, Toll Brothers (NYSE: TOL) CEO Robert Toll recently stated that, “The housing market remains very weak in most areas. Based on current traffic and deposits, we are not yet seeing much light at the end of the tunnel.”
Here’s what else you can do to get proactive in a market that is currently enduring many knee-jerk reactions…
Injecting Some Health And Cold, Hard Cash Into Your Portfolio
As a healthcare specialist, I’ve naturally always been a big fan of investing in the sector - both the big pharmas, as well as emerging biotech.
I’d also suggest that you get proactive regarding your short-term cash. Brokerages and banks are running all kinds of specials to attract new deposits. The Internet is filled with sites that will show you the highest yielding CDs and money markets.
The highest-yielding money market I found was 4.39% at Everbank. I only dug up one 3-month CD yielding higher than 4%. But if you do your homework and are ready to pounce on a special offer, you may find something more to your liking. Last month, for example, TD Ameritrade had a special 5.3% 3-month CD for new money - a sensational rate in this market.
Here are a couple of websites to get you started:
http://www.bankrate.com/brm/static/cd-rti.asp
http://www.money-rates.com/cdrates.htm
Satisfied? Dissatisfied? Here’s The Bottom Line…
This is a tough environment to manage your finances. A possible recession, weak stock market and rising inflation, coupled with low interest rates, make it difficult to get ahead. But here’s the bottom line…
If you’re satisfied with your asset allocation and can live with volatility for a couple of years, I wouldn’t change too much, except to add some exposure when you can.
If you’re not satisfied with your financial picture, take the necessary steps now to make some changes, using some of the ideas above if it fits in with your plan. If you don’t, your buying power will deteriorate.
That’s a scenario I can’t afford in the wake of higher pudding prices.
Marc Lichtenfeld
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Today’s Smart Profits Notes:
?An “unforeseen and unprecedented shift.” That’s how the United Nations describes the rapid shortage in global food supplies. According to the U.N. Food and Agriculture Organization (FAO) records, wheat reserves sank 11% in 2007 to the lowest level since 1980, while there are only 8 weeks of global corn reserves on tap. The global shortage has resulted in a food price spike across the world. In fact, the FAO’s food index soared by 40% in 2007, compared with a 9% rise in 2006.
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