I heard comedian Drew Hastings on the radio the other morning.  Actually, I should say I heard Drew’s alter ego Jack Freeman on the radio the other morning.  Drew does a parody of success gurus with the character of Jack Freeman. 

Last week Drew/Jack used the phrase “financial obesity”.  Now of course this was viewed in a humorous manner, but it sent me down a different path.

The term financial obesity may sound like fun, if you are the one fat with cash.  But I kept thinking about obesity in another form.  The obese budget deficit we are looking at in this country is extremely daunting.  Democrats can blame the Bush administration for the deficit that President Obama inherited and Republicans can blame the various stimulus packages of the Obama administration, but pointing fingers isn’t going to solve the problem.

When I was thinking about this article I shared my thoughts with my colleagues and I pointed out how if a person is overweight, they didn’t gain 100 pounds overnight and they aren’t going to shed the extra weight overnight either.  My colleague Jon Herring pointed out that you aren’t going to lose the extra weight by eating more ice cream either.

Not only are we eating more ice cream, we are eating the cake as well and then we are washing it down with chocolate milk.

I could care less who you want to blame when it comes to the budget.  The only two things I want to know are how are we going to fix it and how can I profit from it?

As for now, inflation is being kept in check.  But you can guarantee that inflation will rear its ugly head at some point in the future.  There is simply too much money being printed and eventually all those dollars floating around in the economy will be chasing a supply of goods that simply isn’t large enough.

So how do you invest for inflation that isn’t here yet?

First, you want to wait until you see the Consumer Price Index and the Producer Price Index creeping up a little bit.  Don’t wait until it is a concern and then react, when it starts increasing slightly you want to take action.

The actions you will want to take are as follows: diversify your portfolio with appropriate allocations to bonds, precious metals and stocks.  How much do you allocate to each?  That is really up to you, but you will want to factor in things like your age, your comfort level with risk and how many years you have until you retire.  There are other factors, but my point is you want to diversify with a balance of investment vehicles, not just diversify within the stock market or bond market, you have to diversify among asset classes as well.

And if you think you can diversify with foreign investments, you are only partially right.  I was reading some data from Dimensional Fund Advisers, a mutual fund company that applies extreme levels of academics to their investing practices, Thursday evening.  Included in that material was a table showing the performance of various global equity markets over the last 24 years.  There were two things that jumped out at me from that table.  First, the only equity market that was positive in the bear market of 2001 was the Australian market (+1.68%).  This list doesn’t include all equity markets, but it includes all the countries I would consider developed markets.  The second thing that jumped out at me was the fact that over the last 24 years, the U.S. equity market has never been the top performing market.  Among the other markets that have not been the leading market over the last 24 years are France and Germany.

These two pieces of information tell me two things: one, diversification among different countries only gets you so far and secondly, the thought of seeking safety in the most developed markets leads to underperformance in most instances.  This should all tie back in to your comfort level.

As far as my plan, I will probably leave approximately 50% of my portfolio in equities (diversified among various markets and sectors of course), and then put approximately 25% each in bonds and precious metals.  And when I talk about my portfolio, I am talking about the 80% I view as long-term.  The 20% that I trade on a short-term basis changes from day to day.

Make a plan for when the U.S. is forced to go on a diet, and don’t expect to shed these extra pounds in a few weeks.  It is going to take time to shed the extra weight we have put on in the last nine years or so.

Source: Financial Obesity