DennisMiller

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You can take steps to permanently secure your retirement, no matter what snafu hits the markets at home or abroad.

Part of building a bulletproof portfolio — one that doesn’t keep you from fun activities by requiring that you divine what the market will do — is understanding how different types of assets behave and assigning them corresponding fixed shares in your retirement portfolio.

With that in mind, let’s take a look at different financial environments and how investments common to retirement portfolios fare in each. Then I’ll share my plan for coming out ahead.

Rising inflation favors the debtor. Precious metals — gold in particular — top the list of assets that generally do well when inflation is rising. Other commodities, like oil, also generally perform well, as do foreign currencies, real estate, and the stocks of companies in those sectors.

On the other hand, gradually declining inflation usually helps common stocks, small businesses, and holders of long-term bonds, mortgages, and other fixed-income money market investments. And don’t overlook cash-value life insurance, annuities, and pension plans that pay a fixed dollar amount.

What about rapidly declining inflation? This sort of environment benefits owners of fixed-income investments that carry little risk of default, such as CDs (up to FDIC-insurance limits), U.S. Treasury bills, and fixed annuities from well-capitalized insurance companies.

Rapidly declining inflation is harmful to nearly every other type of conventional investment because widespread bankruptcies and bank failures often accompany it, and because it carries the threat of a general financial crisis and deflationary depression.

What happens when inflation rapidly rises?This can be just as disturbing as rapidly declining inflation. The disruption of normal economic activity — or just the fear of such disruption—can quickly plunge the economy into a downturn. A lot of traditional inflation hedges can suffer; real estate may be particularly vulnerable. The disruption, however, can be extremely profitable for gold. Thus, a portfolio’s inflation hedges should include gold.

(A quick side note on gold: The U.S. government has confiscated gold before. Anyone serious about securing their retirement should at least consider taking the necessary steps to legally hold gold offshore — sooner rather than later.)

Assets denominated in foreign currencies help hedge against the inflation challenge. Silver and platinum are also worth considering. Income-producing real estate like farmland is another tried-and-true option. If you have a tenant farmer and share in the profits, even better!

When inflation goes up quickly, those relying on income from annuities, high-quality bonds, and/or CDs will see their buying power slip away.

Preparing for the big kahuna — hyperinflation

Hyperinflation happens when the world loses confidence in a currency. At that point, the currency is like a hot potato. No one wants to hold it, and folks will dump it at any cost.

When hyperinflation hits, the economy comes to a screeching halt. Quite literally, paper money becomes worthless. Those left holding the hot potato—lots of cash or cash instruments—are generally wiped out.

The value of many tangible assets like gold or farmland may rise rapidly during hyperinflation; however, this environment also brings larger societal problems that leave few untouched. The food supply is disrupted, normal commerce stops, and barter is common. Historically, life becomes about basic survival.

Folks who read my regular monthly newsletter already know our game plan for the big kahuna. To start, everyone should keep at least 10% of their assets in reliable holdings like gold or farmland. These are your core holdings, which you never want to have to sell.

Think of your core holdings as survival insurance should hyperinflation or another all-out catastrophe hit. If you’re quite concerned about hyperinflation, consider allocating more than 10% to your core holdings or adding additional inflation hedges outside of your core holdings.

Where should retirees hold their other assets?

Your core holdings should be separate from your retirement portfolio. You may want to hold other inflation hedges, such as foreign or international stocks, in your portfolio. My analyst team and I currently recommend the following allocations:

• 50%: Sector-diversified equities providing growth, income, and a high margin of safety.
• 20%: Investments made for higher yield coupled with appropriate stop losses.
• 30%: Conservative, stable income vehicles.

No single investment should make up more than 5% of your retirement portfolio. In most cases, we also recommend setting a 20% trailing stop loss for additional protection.

These allocations are designed to give retirement investors the maximum level of safety while optimizing their investment income. While they may change as our financial environment shifts, this is the best way conservative investors can plan around market mayhem right now.