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Create Your Own "Personal-Inflation-Protection" Portfolio

|Includes: iShares U.S. Real Estate ETF (IYR), MOO, UGA, XLV

There is continual debate over what the real rate of inflation is. While some accept the CPI, others choose alternative measures of inflation ranging from much higher to much lower. Calculating the "rate" of inflation matters a lot to government officials and economists. After all, interest rates, social security payments, GDP estimates, and many labor contracts are tied to inflation. But to the average person these are just technical numbers and the official rate of inflation actually matters very little. What does matter to each of us however, is our own personal cost of living.

What it costs to live obviously depends on a lot of factors. The amount one drives each day in a large city like Los Angeles means different costs than driving in a small town would. The cost of weathering a harsh winter could vary a lot depending on whether or not a home is heated with gas or oil. Some have large families and education expenses to worry about; others have young careers that have them eating out almost every night; while others require prescriptions and constant visits to the doctor. Different lifestyles incur different "inflation rates."

Another big factor in our personal rates of inflation is what we do for work. General contractors, builders, construction workers, real-estate agents, appraisers and mortgage lenders live in a world of deflation right now. The price of what they sell has been going down together with their income. In fact, both have been falling for years. But those who work in exports, agriculture, or energy, currently reside in a booming "inflationary" world with routine dramatic price increases and unemployment in the low 3-4% range. Where we live and which sector we work in goes a long way in determining whether we are personally experiencing "inflation" or "deflation."

And that's really not what economists are talking about when they debate inflation. They are charged with figuring out what is going on with the economy as a whole, not necessarily you personally. Besides, they know that as long as the money supply is stable, prices going up in one area mean prices must fall in another. There simply can't be "gasoline inflation" without consumers spending less money elsewhere. How could there be "food inflation" without prices falling on some other goods? In any evenly rotating economy some prices are going up as others fall. Increasing and decreasing prices in a market economy is normal, and that's exactly what we have had for the past thirty years.

With all the talk about inflation some may not realize that we haven't had a significant across the board increase in inflation in thirty years. In fact the CPI has fallen from rates of 14% to under 1% in what could be described as a period of progressive disinflation. Some argue that's because the indexes measuring inflation are wrong. I have news for these folks. The indexes are always wrong. No matter which index you use it must be wrong by its nature. An index cannot accurately measure all prices and their cross relationships even for a single moment in time. Indexes work for economists who need a yardstick to compare different types of goods, services, weightings, and compensations. These indexes are subjective.

But increases or decreases in the prices we pay for goods and the services we need are not subjective. And while gold is one way to protect our wealth from the threat of general inflation, it's important to understand that inflation as defined by economists-a progressive across the board increase in prices-can only happen when excessive amounts of money is being printed and chasing goods. A more immediate threat to us all is high gas prices, high food prices, high medical prices; or any specific price trend (higher or lower) that personally affects our cost of living.

Fortunately there is a way to protect ourselves based on our individual price vulnerabilities: ETFs. Exchange-Traded Funds make it possible for investors to slice and dice up industries and sectors and hedge against potential price increases or decreases that would impact their personal cost of living. Done right, we can now customize our own personal-inflation-protection portfolio using ETFs in gasoline (NYSEARCA:UGA), food (NYSEARCA:MOO), healthcare (NYSEARCA:XLV), housing (NYSEARCA:IYR), and more. Inverse ETFs make it even easier to cover one's downside and protect against those price decreases which would hurt the most.

In the same way countries and companies hedge against general or sector specific inflation and deflation, ETFs can offset the major increases or decreases in the prices individuals pay for goods and services in their everyday lives, and offset some of the losses they might experience if the sector they work in is performing poorly. Protecting wealth from inflation is important, but equally important is protecting against price actions capable of seriously affecting one's lifestyle, income, and standard of living. Using ETFs as a hedge, while not perfect, is one effective way to do this.