THURSDAY, F|BRUARY 22.197*

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INFLATION INVESTING

Nineteen-seventy-eight's puni- vestment inflation fighters. It shing nine percent inflation rate appreciated 37 percent in 78 i* now nothing more than an Obviously buyers of cold bullion

unpleasant entry in the economic history book. A blurred blip on the memory scanner of U.S. citizens who suffered through it. Consumers/wage earnees in the economic mainstream, though hardly surviving unscathed, probably found their buying power hedged at least a little bit by cost-of-living

iviously buyers of gold bullion don’t enjoy any dividends or interest on their investment, but with that kind of price mark-up,

who cares?

Buyers of silver had some bright and shiny results, too. The 1978 mark-up for this metal was 24 percent, a number that beat inflation into cowering sub-

mission.

paycheck increases, merit raises Obviously, modem day inor some other variety of salary yestors who want to survive uptick. But for those dependent inflation and also have a prospect on traditional investment for of prosperity, need a new “now'’

their livelihood, it was different,

and far sadder, story. One devoid not only of happy ending, but comprised primarily of one tearstained chapter after another. It once again dramatically drove home the point that traditional, time-tested investment programs and policies do not function well in inflation environments. Worse, they tend to strip their followers of principal and continuously expose their investment flanks to every inflation counter-attack that comes along. They are left with virtually no place to hide. For example, if the 1978 investor relied exclusively on savings accounts and certificates of deposit his rate of return would have ranged from S.’S percent (savings accounts) to 7.7 percent (CD’s average total return). Since inflation gobbled principal at a nine percent rate (not to mention doing the same thing to the generated income) a little shell shock is clearly in order. Many other traditional fixed income investments fared little better. Some, in fact, did worse. Corporate bonds (long-term variety) achieved a “total return'' of less than one percent. Tax-exempt bonds (municipals) had a negative return of 3.5

percent.

(Total return, hy the by, takes into consideration not only coupon rates, but price changes of the underlying securities, as well. What especially damages bond returns are the downticks that occur in bond prices when interest rates are rising — which they were all of last year. When this is factored into the total return picture the results are a little bleak). Short term debt instruments (and money funds comprised of same) did a lot better. They produced total returns of 7.7 percent. They started out 1978 with yields in the 6.5 percent ballpark. But by year-end they were running down the track in a virtual dead heat with inflation’s rate (nine to ten percent). But nobody obviously was winning. Investors opting for common stocks took a few lumps, too. If they selected stocks in the industrial category, they recorded an average total return of 7.6 percent. But transportation * id public utility shares both had negative total returns. It was minus 1.7 percent for the carriers, and minus 3.4 percent for the "conservative" public utilities. Of course, it should be pointed out, these are only "averages”. We know of a lot of common stock investors who did better, much better. But, sadly, we also know more than a few who did worse Are we saying then that all investors in all categories were net losers to inflation, llie answer is a resounding "yesv if the investor restricted his acflvities to the traditional roads. But if he followed a more flexible strategy and looked around for the one or two of the more aggressive inflation fighting vehicles the results could have been a lot different - with inflation finishing a poor second. Gold was one of the best in-

investment strategy. To get from here to there, here’s what must be done - now, today, im-

mediately.

First, recognize that inflation can move from six to 15 percent annual rates - with alarming frequency and velocity - and back again, this causes all investments to behave far differently than they ever did before - as 1979 just taught us again. Next, forget long-term investing. As valid as it once was - and hopefully will be again someday - it doesn’t work in an inflation environment. Consign it to the investment scrapheap.

Thirdly, key on four basic categories of investment. Longterm bonds (or CD’s) which tend to do well when inflation rates are waning or at least are steady. Common stocks (high grade blue chips, what else!) when inflation is doing likewise. $hort-term (under two years maturity) bonds when inflation is kicking up its heels. And gold or silver bullion (or companies that traffic in same) when inflation’s wrath is at its worst (as in '74 and ‘79, to mention a couple of vintage years). True enough, timing is important. Moving from one catagory to another can be perilous and potentially harmful to your investment health. But standing still is to court disaster - or worse! Investment oblivion is on the other side of such a decision. And if the moves are made gradually, instead of all at once, the dangers are greatly reduced. Maybe even eliminated althogether. Such a sti ategy not only keeps the investor out of harm’s way, but can make him an exploiter of inflation’s trends rather than a victim.

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