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Don't Let Bernanke Pick Your Pocket!

Alex Dumortier, CFA
May 31, 2011

This month, the rate of inflation exceeded the yield on the 10-year Treasury bond for the first time since 2008. That's a negative real yield! Your assets will lose purchasing power with that return. Bill Gross, who manages the world's biggest bond fund, told Bloomberg Television last week: "Savers are being disadvantaged. ... We call [what policymakers are trying to do] pocket picking." Don't let central bankers pick your pocket. Here are a few asset allocation guidelines to avoid just that.

Saving is healthy -- necessary, even. Indeed, during the housing bubble, there was spending on a massive scale, with people borrowing against the value of their home to fund their spending habits. Now that the party is over, U.S. consumers are left licking their wounds ... or balance sheets, as it were.

Avoid cash and government bonds
However, by setting interest rates at zero, the Federal Reserve isn't making it easy for people to save -- that's the idea. With negative real Treasury yields , saving intelligently for the long term means avoiding cash instruments (T-bills, money market funds, etc.) and Treasury bonds (I'm not referring to an emergency fund here). With regard to government bonds, the longer the maturity, the more interest rate risk you take. Steer clear of the iShares 20+ Year Treasury Bond ETF (NYSE: TLT  ) , for example.

If you have money in a corporate bond fund that is run by a competent manager who you are comfortable with, that's an acceptable choice.

Favor real assets -- at the right price
There is only one reason to have your long-term savings in cash right now: because you're waiting for asset valuations to become more attractive. Otherwise, you should be investing those funds -- very selectively -- in real assets (assets that can be expected to provide a return above the rate of inflation, such as stocks or real estate.) In a stock market that