Lessons from the financial crisis (Part 4)

Five things to try now to help improve your personal economy.

Step 4 - Manage your tax and inflation exposure.

Five years ago, deflation was the big economic fear. But today, massive deficits and unprecedented central bank asset purchases have turned the tables and pushed taxes and inflation to the top of investors’ worry list. More than half of the investors we surveyed said that tax and inflation strategy had become more of a focus during the last five years. If you want to build your portfolio for the next five years and beyond, you need to consider these risks.

Prepare for inflation. Inflation can erode the purchasing power of savings. Even with a low, 2% inflation rate, money held in a money market fund yielding 0.01% is losing money in real terms. Ditto for a Treasury bond yielding 1.92%. Indeed, the eroding purchase power and rising rates associated with inflation can eat away at most bond investments to varying degrees. As a result, investors may want to consider including in their diversified portfolios some income sources that have some ability to react to inflation—for instance, leveraged loans, TIPS, or stocks.

Manage your tax exposure. The first federal income tax increase since the 1990s passed as part of the fiscal cliff deal in early January. But with government deficits remaining high, it may not be the last. So today's savers should take time to understand the new tax law and look at ways to manage taxes, including the use of Roth accounts, tax-smart asset location, tax loss harvesting, and more.

(To be continued...)

Source:  Fidelity Investments

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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