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Author: Goofyhoofy Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35357  
Subject: Re: Inflation for the Long Run Date: 1/30/2010 3:30 PM
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A couple of things:

The claim made by that mantra, if I’m remembering right, is that there has never been a 20-year period in which owing stocks failed to yield a positive return.

The Dow average was lower in 1932 than it was in 1912. Or in 1907 for that matter.

And why are you using a metric of "20 years" for stocks, when complaining about a 7-year CD? Apples; oranges, that sort of thing?

What is the bet such a person is making? Such a buyer is betting that inflation over the next 7 years will be low enough to offer a real rate of return after taxes.

You can bust a CD and eat the penalty and still come out ahead. Most long-term CD's require you to forfeit a year's interest, which, if you did it in year two, would cut the return in half, to around 1.87%, but still better than you get in a passbook account. Nobody is sitting in passbook accounts, are they? Or sitting with cash in a money market? Of course if you wait until year 5 or 6 to bust your 7-year CD, your percentage rate is significantly better, even with the penalty. You can get bonds paying better, obviously, but then this is FDIC and they're not.

So, what is the most likely rate of inflation over the next 7-year period? The max rate, the min rate, the average rate, or, maybe, the average of the average rate?

Well, it's less than the "average", because the 70's is included in "average", and that hasn't happened here before, ever. And if it does, it's not as though it is going to start next Tuesday; there is plenty of warning - both in the markets and on the store shelves to alert you.

But if that is your big concern, I suggest I-bonds, which are carrying a whopping 0.3% rate - on top of a current inflation rate of something like 3.3% (bound to go down) - but no matter what inflation does, you'll be ahead. You be even more ahead if there's deflation, because they can never go down. (I'm assuming that US paper will still have value, which is a 10-sigma bet, I think.)

Can't buy much, I'll admit, but it's a start:

http://www.forbes.com/2010/01/15/i-bonds-risk-free-yield-per...
http://www.forbes.com/2010/01/29/buying-risk-free-i-bonds-pe...

I'm not recommending any of this, but if you want to tremble in fear of inflation, there are lots of ways to play it.
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