Tuesday, June 24, 2008

Profiting from Stagflation

In these stagflationary times, it’s hard to know how to invest. Almost all asset classes seem to be falling in value. The assets that aren’t—like oil—are volatile and probably caught up in a bubble. You know how things go--invest in a bubble and it will burst two days later. There are ways, however, to profit from stagflation.

First, develop good financial habits. Save more. This will help your portfolio grow even if its returns are tepid. Instead of saving 2% or 3% of your income, make it 5%, or 10%. Better yet, make it 15% or 20% and pretty much guarantee that your standard of living won't fall in retirement. (For an explanation of why this is so, see http://blogger.uncleleosden.com/2007/04/goals-for-retirement-saving-and-why.html.) Invest in a diversified way. Form the right financial habits and you’ll profit for the rest of your life.

Take up a cause close to your heart. There's more to life than fretting over your retirement portfolio as it meanders. Volunteer. Advocate. Help the disadvantaged. Work on something larger than yourself and you'll have good memories for the rest of your life.

If you’re laid off and have a lot of time on your hands, use your wealth of time. Read books you always intended to read. There’s the public library if you don’t want to buy them. Rent DVDs of classic movies you’ve always wanted to see. Start playing the piano again. The instrument you inherited from your parents could sing once again. Spend more time with your loved ones. Use the time fruitfully and you'll profit even if you're not being paid.

When confronted with adversity, look for opportunity. By all accounts, the economy will be dreary for a while, and inflation will probably get nastier. Opportunities to profit financially will diminish. But other profit opportunities will come up; keep them in mind.

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