The case for a nonpartisan portfolio

Have strong opinions on politics and policy? When it comes to investing, ignore them.

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By Pat Regnier, Money Magazine assistant managing editor

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(Money Magazine) -- Most of the time we keep our political opinions and our investing decisions in separate mental compartments. Sure, some folks buy "socially responsible" mutual funds to match the bumper stickers on their Priuses, but they're in the minority. And even they probably don't think that their political sentiments will make them an extra nickel.

But this isn't most of the time. Today Obama, Bernanke & Co. seem to have the future of capitalism in their hands. So how you feel about the people in power can easily bleed into how you feel about your investments.

My Facebook friend who's a Sarah Palin fan has started posting video clips of Peter Schiff, the broker who says Washington is leading us to a dollar crash and sky-high inflation. Meanwhile, in the liberal blogs you'll read that concern about soaring deficits and loose Federal Reserve policy is for wing nuts.

This is important stuff to think about now. But it still makes sense to keep your strategy at arm's length from your politics.

Inflation phobia

The case for panic is a simple (if sometimes simplistic) one. The federal budget deficit will hit $1.8 trillion this year. Some suggest that the Fed will allow high inflation to make that debt easier to pay. Or that the Fed's decision to pump cash into the financial system has already made high inflation inevitable.

The other side, spearheaded by economist and liberal columnist Paul Krugman, calls this politicized bunk. The Fed may seem to be "printing money" -- but banks are scared to lend it out, and consumers are just as terrified of borrowing it. And nobody's spending it. So the real risk is actually nasty deflation. Without the Fed's actions and the government's extra spending, they say, there would be an even bigger crater in the economy.

Don't overcommit

Thinking in the voting booth is generally binary: You decide which policy you think is likelier to succeed, then put your chips on blue or red. Investing is about considering the range of possibilities and protecting yourself from the risks that worry you the most. So while I happen to think Obama and the Fed are moving in the right direction, I also think it can be wise to have a hedge against unexpected inflation.

For instance, if you have assets you want to keep totally safe for retirement, it makes sense to own Treasury Inflation-Protected Securities (TIPS), whose principal values rise and fall with the consumer price index. Whatever happens to prices, you'll have at least preserved your real purchasing power if you hold to maturity.

By the same token, I wouldn't bet heavily on inflation doomsday; a hedge isn't the same as a vault. Gold, for example, runs up when disaster is in the headlines but can (and does) crash.

We're cursed to live in interesting times -- anything could happen. So don't do anything too interesting in your portfolio.  To top of page

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