Don't get clobbered by inflation

If prices begin to rise, inflation-protected investing strategies could help take the ache out of a bruised portfolio.

Inflation isn't high on the list of most people's fears right now. With the global economy expected to contract nearly 3% this year and the U.S. still just limping toward recovery, the most immediate concern is falling, not rising, prices.

The "smart money," however, is betting on inflation. And that means now may be the right time for average investors to take a few small steps to secure the purchasing power of their cash.

The Federal Reserve has held down interest rates while pouring out $1.5 trillion in an effort to reinflate the economy. In the long term, those actions could cause prices to rise significantly, says Brian Weinstein, a managing director who oversees inflation-protected assets at investment company BlackRock.

TIPS for guarding against inflation

So what can investors do to inflation-proof their portfolios?

One option is to invest in TIPS, or Treasury inflation-protected securities. Unlike regular Treasurys, whose value can be eroded by inflation, TIPS are adjusted to reflect changes in the Consumer Price Index. TIPS pay a fixed interest rate on a CPI-adjusted principal. So if you buy a security with a 2% return for, say, $100 and inflation rises to 3%, the government will pay you 2% on $103, for a principal of about $105. With regular Treasurys, if you buy $100 worth with a 3% return and inflation rises to 3%, your principal would be $103. And the $3 earned from interest wouldn't buy you any more than the $100 did previously.

So why buy Treasurys? Because they often have return rates that are significantly higher than TIPS. When inflation isn't a problem, Treasurys yield better returns than TIPS.

TIPS can be purchased directly from the U.S. Treasury Department or by buying into a fund that owns them. The advantage of a fund is that investors can sell their positions at any time. The Blackrock Inflation Protected Bond Fund (BPRAX, news, msgs), which is 100% in TIPS, has increased nearly 30% in value so far this year.

Buy commodity hedges

If you've ever wanted to buy pork bellies or grain futures, or just to stock up on silver or gold, now may be your time. Commodities are not for the risk-averse or folks looking to retire in the next five years, as they can be volatile and are not as easily traded as stocks. But for investors who can withstand some ups and downs, industrial and precious metals, grain, oil and other commodities can be effective hedges against inflation.

The reason is that commodities have intrinsic value. Grain, for example, is something people are willing to spend money on even in the toughest of times. If the value of the dollar decreases, the price of grain will increase because the demand for grain (and the meat of animals fed with grain) will remain roughly the same.

An investor who believes inflation is on the horizon could protect himself by purchasing commodity futures, which are basically contracts that allow the purchase of goods for a set price at a later date. If an investor has a futures contract allowing him to buy grain at $10 a bushel and inflation pushes the price up to $13 a bushel, the difference is profit.

The problem with commodity futures, or any contract tied to a specific commodity, is that prices can vary based on an array of potential factors. Crop-destroying storms can decrease supplies, causing prices to rise, and hardier strains and pesticides can increase yields, thus decreasing the price of grains. Consumption habits could also change. A scare over "mad cow" disease, for example, could drastically reduce demand for grain fed animal products, thus reducing the price of wheat.

Given the risk to individual commodities, it may make more sense for some investors to buy into a basket of such goods. Doing so spreads out the risk that an individual commodity could be negatively affected by a supply or demand shock. Investors can do this by purchasing exchange-traded funds, or ETFs, through their broker or directly via online stock trading services such as Scottrade and E-Trade.

There are also funds that lump together the three main commodity plays: agriculture stocks, energy stocks and metals stocks. ETFs that track the performance of the Dow Jones AIG All Commodities Index (ESGJF, news, msgs), which includes 19 commodities, or the even larger Goldman Sachs (GS, news, msgs) commodity index are among the ways investors can buy large baskets of commodities. Investors can also look for funds that invest directly in commodity futures or the goods themselves. One such fund, Elements Rogers International Commodities Fund (RJI, news, msgs), is up more than 14% for the year.

John Brynjolfsson, the chief investment officer of hedge fund Armored Wolf, recommends metal commodity funds as an inflation hedge. Unlike grains and oil, metals can be easily stored, so their prices can respond more quickly to anticipated inflation. Grains, on the other hand, can go bad before prices start to increase.

Bet against the dollar

Another inflation play for consumers is currencies. Consumers who are paid in dollars and want to ensure they can still afford to buy products from, for example, Europe, even if the value of the dollar decreases relative to the euro, can purchase euros directly. If inflation weakens the dollar, those euros have greater purchasing power.

As with commodities, investors can buy a basket of currencies or an ETF that tracks the dollar exchange rate to several currencies in order to guard against any one currency inflating relative to the dollar. PowerShares DB US Dollar Index Bearish Fund (UDN, news, msgs) is one such vehicle. The fund bets that the dollar will deflate against a basket of currencies, including the euro, yen, British pound, Canadian dollar, Swedish krona and Swiss franc.

Brynjolfsson is particularly bullish on the Canadian and Australian dollars, as these countries also sell large quantities of commodities that should increase in price as the value of the U.S. dollar declines.

Survival guide for breadwinner wives

Women who earn more than their husbands are hardly rare, but that doesn't mean it's a comfortable role for them (or their spouses). Here are 3 tips to make it easier.

My breadwinner days are numbered: My husband is going back to work. I never thought I would say this, but I'll be sad to surrender my role as household chief financial officer.

It was a job I signed up for willingly three years ago -- so brave! so forward-thinking! -- but then I swiftly resented the financial strain of being the provider, the time away from my then-newborn son, the baffling changes to my marriage.

Despite the rocky start, I am proud of having been something of a pioneer in a vast new territory -- sort of like being a female astronaut.

The breadwinner wives I've interviewed agree: This job is daunting, thrilling and stomach-churning all at once. If you're doing it, you're among an increasing number of women. Here are some thoughts on how to thrive in a role that requires you to ditch tradition, trust yourself and keep a parachute handy.

Gains at work, struggles at home

How many women are a significant source of financial support for their families? The numbers are growing, says Ellen Galinski, a co-author of "Times Are Changing: Gender and Generation at Work and Home (.pdf file)," a 2008 study by the Families and Work Institute, a nonprofit, nonpartisan research organization in New York.

Among dual-income couples in 1997, just 15% of women were earning significantly (at least 10 percentage points) more than their spouses or partners, according to the report, which relies on data from the Bureau of Labor Statistics. By 2006, 26% of women were earning more.

"This is a sea change," Galinski says. A number of forces have converged, putting more women in the primary earner role:

• Women are better educated. Women were earning 58% of all bachelor's degrees and 60% of all master's degrees as of 2006, according to the U.S. Department of Education.

• Men have lost more jobs. Unemployment data from January 2008 through January 2009 suggest that recent layoffs have hit male-dominated professions (e.g., construction and manufacturing) harder, leaving more women to bring home the bacon.

• Women are profitable. Several studies indicate the presence of women in executive positions is linked to better company performance, according to the best seller "Womenomics" by Claire Shipman and Katty Kay. "The companies with the very best records of promoting women beat the industry average by 116 percent in terms of equity, 46 percent in terms of revenue, and 41 percent in terms of assets," the authors write, referring to a 19-year study of more than 200 Fortune 500 companies conducted by researchers at Pepperdine University.

All those statistics sound empowering because they focus on the gains women are seeing professionally. But they're not the whole story.

The bigger, continuing struggle for most breadwinner women and their mates is adapting to changing roles and expectations on the home front, especially regarding conflicts around household chores, child care and money.

• Talk back: What challenges do you find in being a breadwinner?

Galinsky says that as difficult as these changes are for women, "they're even more painful for men."

Finding some sort of equilibrium emotionally and financially requires many steps and stumbles, a willingness to be creative and three essential adjustments.

1. Give up on 'Father Knows Best'

There is a belief in our society that money is power, and when your income is bigger, there's a tendency to want to call the shots. The male breadwinner model says, "You should be in charge." But this can backfire when a woman is at the helm.

"I've become the drill sergeant, and it has become a huge problem," says Jennifer Owen, a mother of two who commutes four hours round trip each day to her job as a corporate trainer in New York City. She earns more than double the salary of her husband, a former actor, who has just started a job in sales.

"When I would come home, in the beginning, I couldn't understand why he didn't have dinner done," she says.

At times, she also resents how he spends money. "I'm working my butt off to provide for the family, so I feel that I have the authority to say things like 'You shouldn't be spending money on that,' even though I know that's totally unfair."

Taking that kind of control grew stressful for both. The solution for Ann (she didn't want her last name used), an interior designer in New York who is the primary earner in her relationship, was to define a new, more collaborative dynamic with her spouse, "so that you're not the bitchy breadwinner or the dictator."

I agree: My marriage improved 600% when I stopped trying to rule the roost. But true collaboration, I found, can't be in spirit only; partners have to find fair ways to renegotiate the balance between paid and unpaid work.

2. Split the work fairly

It dates to Neolithic times, no doubt, but we tend to value those who come home with a big side of bison more than those who spent their day tending hearth and cave.

In my own relationship, I've found that it helps to behave as if both parties are earning an income, under the assumption that the labor-force role and the at-home role are equally valuable -- because they are.

In fact, Salary.com does an annual survey of what a stay-at-home parent's labor is worth, in terms of the number of hours they work and the skills they provide (cook, chauffeur, soccer coach, psychologist, etc.). For 2009, that work is equivalent to a job with an annual salary of $122,732, the Web site says. You can plug your own duties into the salary wizard to see the dollar value of the work.

Renegotiating the household chores seems small and perfectly reasonable, but it can be hairy. My husband and I had one big, very short fight -- and a thousand small discussions -- about who should do laundry, shopping and cleaning when I was basically the sole provider.

Hiring outside help would have been ideal, but most of us don't have that luxury. He ended up doing most household chores, but it wasn't like I kicked back every night with a brandy either. I did my share.

(Note: The traditional expectations are different for guys, unfortunately. Now that he's working more, guess who's doing more dishes, child care and vacuuming?)

When you renegotiate domestic roles, you really have to toss tradition out the window and respect your partner's contribution -- even if it's not on your terms. That's what Lynne (a pseudonym), a real-estate developer in Los Angeles, found when her husband took an early retirement three years ago, when their children were 9 and 11.

"The hardest thing for me was learning to keep my mouth shut, not asking him how he was spending every hour of his day," says Lynne, who didn't want her real name used. "He is not my nanny; he is not my maid. I can't give him some big to-do list.

"I learned that if the dishes didn't get done after breakfast, they'd get done eventually. And if the kids ate pizza five nights in a row, well, there are more important things to worry about."

3. Manage your money

If you earn the lioness's share of the income, it's up to you to make certain that the bases are covered, as I wrote in "Secret lives of breadwinner wives," my first take on the subject a couple of years ago.

Although I felt strongly that a mutually agreeable money management system was important then, having interviewed more breadwinner wives, I now think it's essential.

Basic money management is tough for most couples, and the issue often gets more fraught when the woman is earning more. But don't let that become an excuse for treating the household finances as a hot potato.

Ann believes that being financially open is a tonic. "It alleviates anxiety and stops you from blowing things out of proportion, especially when you're the breadwinner and feel like you're supposed to do everything."

10 top stocks to buy on the pullback

Many stocks have already gone on sale, but how do you know what's a bargain and what's a sinking ship? Start by asking 6 questions.

Did you miss the bear market bottom? If you snapped up stocks in March, with the S&P 500 Index ($INX) near 675, you're probably feeling pretty perky.

If not, you may have another chance. The rally stalled in mid-June, and a lot of experts are predicting a sizable pullback. Many stocks have already lost ground.

That leaves us to face vexing questions: Is a stock's drop a great buying opportunity or a sign of trouble ahead? Is the market regrouping, or is the real bottom still ahead?

How do you know the difference, anyway?

I posed these questions to several seasoned money managers with decades of market experience. The initial reaction was always the same: a knowing laugh that said, "That's the trickiest thing about investing. And if you find the answer, let me know."

"No one ever rings a bell at the bottom," says Insight newsletter writer Gary Shilling, who bought his first stock in 1961.

Still, these money managers helped me put together basic guidelines that point to about two dozen stocks as potential buys right now. In this group, I like these 10 the most: Berkshire Hathaway (BRK.B, news, msgs), Applied Materials (AMAT, news, msgs), KLA-Tencor (KLAC, news, msgs), Genzyme (GENZ, news, msgs), McMoRan Exploration (MMR, news, msgs), ConocoPhillips (COP, news, msgs), ViroPharma (VPHM, news, msgs), Gap (GPS, news, msgs), Walgreen (WAG, news, msgs) and BHP Billiton (BHP, news, msgs).

Question No. 1: Did anything change?

Whenever a stock has sold off, your basic challenge is to figure out whether anything has changed that permanently impairs the company's profit potential. Is the business fundamentally different?

Your first stop is the news flow. You need to understand whether news developments have affected a company's competitive advantage, says Pat Dorsey, the director of stock analysis at Morningstar. "If a company can't raise prices anymore, but it could in the past, that's a big deal."

One shortcut here is to avoid one-trick companies with a hot product that could flame out. Stick with tried-and-true businesses that continue to profit from competitive advantages, such as solid brand names or mastery of their niches.

Morningstar calls these wide-moat companies. Their competitive advantages won't vanish quickly. So you can feel comfortable buying during pullbacks as long as you're an investor with a long-term horizon -- at least a couple of years.

If you don't want to mess with individual stocks, Morningstar has an investment vehicle that rebalances the cheapest of its wide-moat companies every quarter, called Elements Morningstar Wide Moat Focus (WMW, news, msgs), an exchange-traded note. It's outperforming the market this year by about 17 percentage points.

When sizing up a sell-off, be careful of two traps. First, even with no news reports, there could be a company development that hasn't yet been made public. Check the trading volume. If one day's volume is a lot higher than the average for the past month, look out. Some people probably know something you don't.

Also, never be lulled by company comments that it "knows of no reason" for a sell-off. "That is not very reassuring," says Hugh Johnson of Johnson Illington Advisors. "They may not know of a reason. But other people may."

Question No. 2: Are insiders buying on the drop?

This is usually a good sign that it's safe for you to buy as well. You can check by using the insider trading page at MSN Money; just punch in a stock symbol.

Here's a great example from earlier this month: Energy company McMoRan Exploration sold off in mid-June when it issued stock to raise capital. On the pullback, co-Chairman James Moffett purchased more than $5 million worth of shares, and the other co-chair, Richard Adkerson, bought $500,000 worth. Each paid $5.75 a share (the stock closed Tuesday at $5.96).

McMoRan has been reporting big losses. But the insiders say it also has big potential. "We have multiple high potential deep gas and ultradeep targets," Moffett said in April. And he and Adkerson are backing those words up with money.

Just remember that insiders are typically early. So when you follow them into a stock, be sure to have a time horizon of at least a year or two.

Question No. 3: Is stock below where smart investors purchased?

Certain investors have such great long-term records that it pays to tag along. Warren Buffett of Berkshire Hathaway is an obvious example. I also like two biotech investors, Julian and Felix Baker. Their Baker Bros. Advisors has a great record.

You can track the buying of smart investors by searching for their "13D" or "13G" filings with the Securities and Exchange Commission. When any of their major holdings fall below the price at which they bought, that's a good indication a stock is a buy -- assuming they're not selling, too. (You can check their positions by stock using the "insider trading" data on MSN Money.)

ConocoPhillips is one Buffett stock that's currently trading well below the price where he purchased. He bought it last year in the low $80 range. It's now trading in the low $40s. Buffett bought Johnson & Johnson (JNJ, news, msgs) in the low $60 range; it recently sold for $56. At $25.50, Kraft Foods (KFT, news, msgs) sells below Buffett's entry of around $33. And around $18, US Bancorp (USB, news, msgs) is well below the $31 Buffett paid.

At $5.80 a share recently, the biotech company ViroPharma was trading below the $6 or so paid by the Baker Bros. back in May.

Question No. 3: Is stock below where smart investors purchased?

Certain investors have such great long-term records that it pays to tag along. Warren Buffett of Berkshire Hathaway is an obvious example. I also like two biotech investors, Julian and Felix Baker. Their Baker Bros. Advisors has a great record.

You can track the buying of smart investors by searching for their "13D" or "13G" filings with the Securities and Exchange Commission. When any of their major holdings fall below the price at which they bought, that's a good indication a stock is a buy -- assuming they're not selling, too. (You can check their positions by stock using the "insider trading" data on MSN Money.)

ConocoPhillips is one Buffett stock that's currently trading well below the price where he purchased. He bought it last year in the low $80 range. It's now trading in the low $40s. Buffett bought Johnson & Johnson (JNJ, news, msgs) in the low $60 range; it recently sold for $56. At $25.50, Kraft Foods (KFT, news, msgs) sells below Buffett's entry of around $33. And around $18, US Bancorp (USB, news, msgs) is well below the $31 Buffett paid.

At $5.80 a share recently, the biotech company ViroPharma was trading below the $6 or so paid by the Baker Bros. back in May.

Gap, for example, looks buyable after its recent pullback, believes Tim Ghriskey of Solaris Asset Management. The clothing retailer goes for a P/E ratio of around 12, compared with the much higher P/E ratios of similar clothing retailers such as J. Crew Group (JCG, news, msgs) and Abercrombie & Fitch (ANF, news, msgs). Gap is in the midst of a restructuring that is bringing down costs, which will help profitability in the future, and it is improving its merchandising, Ghriskey says.

Value investor Todd Lowenstein, a co-portfolio manager of the HighMark Value Momentum Fund (HMVMX), thinks McGraw-Hill (MHP, news, msgs), Walgreen and Comcast (CMCSA, news, msgs) all look attractive because they have sold toward the low end of their historical valuation ranges. Yet their businesses all still have the fundamental strengths they had when their stocks traded at much higher levels. So they aren't "value traps," or value stocks that will stay down forever, Lowenstein believes.

Question No. 6: Is the company financially strong?

Especially these days when credit is still tight, it pays to check whether a company in a downtrend has the financial strength to survive whatever is pressuring the stock, says Jack Adamo of Insiders PLUS, a top investment newsletter, according to Hulbert Financial Digest.

Shares of the mining company BHP Billiton have been in an uptrend for the past decade, a great long-term record. But it's currently in a pullback, probably because of concerns that commodity stocks have rallied more than is justified in this economy.

But Billiton has a solid balance sheet with minimal net debt for its size, which means it has the financial strength to wait out the recession. That's one reason Adamo is waiting for a pullback into the mid-$40 range, from around $55, to buy the stock.

I compiled my list of 10 from the many stocks these experts mentioned and my own research. Consider it a starting point for your own efforts. A lot of stocks have gone on sale, but the trick is finding the real bargains.