Comments on: Saving money while avoiding the spectre of inflation

Question: Saving money while avoiding the spectre of inflation

chef_boyardee — Sun, 18 Feb 2007 19:39:44 -0800

What's a safe long-term savings investment if (1) I'm concerned about inflation and/or the dollar getting weaker and (2) I'll only be investing a small amount, like $100 a month? Is it possible for me (in the U.S.) to buy small amounts of Euros without getting eaten alive by transaction/exchange fees?

By: TrashyRambo

TrashyRambo — Sun, 18 Feb 2007 20:05:58 -0800

If you live in the US and plan to spend dollars then you don't need to worry about the exchange rate (and the dollar is as likely as not to get much stronger as much weaker; if you know better you could make a fortune as a currency trader).

To answer your question, if you did try this, you'd probably lose a few percentage points in transaction fees. That's at least as much as you'd expect to gain by any differences in inflation rates or interest rates.

Also, there's no reason to believe the Fed's inflation fighting skills are any worse than the ECB's.

By: backupjesus

backupjesus — Sun, 18 Feb 2007 20:22:58 -0800

Series I savings bonds provide exactly the kind of long-term inflation protection you're looking for, with small purchase amounts and no fees.

Please, please, please, though, consider globally diversified low-cost stock index mutual funds for your long term investing needs. Yes, there's more risk, but the returns will clobber a savings bond in any non-nutty long-term future.

By: southof40

southof40 — Sun, 18 Feb 2007 20:25:30 -0800

Hey TrashyRambo shouldn't that read ... "If you live in the US and plan to spend dollars on things that have no imported components then you don't need to worry about the exchange rate" ;-)

By: cschneid

cschneid — Sun, 18 Feb 2007 20:47:21 -0800

If you're talking long term as in 10+ years, throw it in the stock market. It's more volitile, but should beat inflation over the long haul (and make much more than things like IBonds.

If you're really paranoid about inflation, you could buy gold, it keeps its value over time compared with the dollar (or any other currency). In addition, if inflation ever gets ultra stupid and things happen like the government starts collapsing, then gold is probably going to be the only currency you could even use.

By: TrashyRambo

TrashyRambo — Sun, 18 Feb 2007 20:50:45 -0800

If you live in the US and plan to spend dollars on things that have no imported components then you don't need to worry about the exchange rate

Good point, I made a simplified point ...

But euros hardly a good hedge against imported manufactures. It's a very convoluted strategy to protect against a fall in purchasing power in a relatively small fraction of the typical consumption basket.

By: milkrate

milkrate — Sun, 18 Feb 2007 22:49:50 -0800

Buying currency as a "safe, long term investment" is, to be blunt, a terrible idea. Over the long term, the expected return to any currency versus another is zero (there's a body of financial literature to this effect).

"Safe, long term investments" would be I-bonds, TIPS or maybe a global bond fund.

By: tundro

tundro — Mon, 19 Feb 2007 05:48:33 -0800

If you're considering long-term (10+ year) investments I would suggest opening up a Roth IRA. You can invest up to $4000 per year ($5000 starting in 2008, I believe) and while it would put your money into the stock market, historically you'll see returns anywhere from 8%-12% per year. I opened one two years ago and so far I'm averaging a little over 11% per year.

I've found that Vanguard has these interesting target retirement age Roth IRAs that shifts the risk over time (so from heavy on stocks to heavy on bonds). They've been performing quite well over the last 5 years.

By: backupjesus

backupjesus — Mon, 19 Feb 2007 09:18:56 -0800

I actually think TrashyRambo had it right in the first place -- price changes in goods and services driven by currency fluctuations are already part of inflation. Inflation is an increase in prices of goods and services of equivalent quality, but not necessarily from the same country of origin. Thus, not only does inflation measure the effect of the increased cost of a foreign-made component on prices after a foreign currency strengthens, it also measures the possibility of the manufacturer substituting an equivalent-but-now-cheaper component from a supplier in another country.

cschneid, gold does not necessarily retain its dollar value over time (see this graph) and the cost to store and insure gold cuts into any nominal returns.