Protect Your Wealth from the Ravages of Inflation Copyright © 2011 by Paul M King All rights reserved No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage or retrieval system, without the prior written permission of the copyright owner and the publisher ISBN-13 (pbk): 978-1-4302-3822-5 ISBN-13 (electronic): 978-1-4302-3823-2 Trademarked names, logos, and images may appear in this book Rather than use a trademark symbol with every occurrence of a trademarked name, logo, or image we use the names, logos, and images only in an editorial fashion and to the benefit of the trademark owner, with no intention of infringement of the trademark The use in this publication of trade names, trademarks, service marks, and similar terms, even if they are not identified as such, is not to be taken as an expression of opinion as to whether or not they are subject to proprietary rights President and Publisher: Paul Manning Lead Editor: Jeff Olson Editorial Board: Steve Anglin, Mark Beckner, Ewan Buckingham, Gary Cornell, Jonathan Gennick, Jonathan Hassell, Michelle Lowman, Matthew Moodie, Jeff Olson, Jeffrey Pepper, Frank Pohlmann, Douglas Pundick, Ben Renow-Clarke, Dominic Shakeshaft, Matt Wade, Tom Welsh Coordinating Editor: Adam Heath Copy Editor: Damon Larson Compositor: Mary Sudul Indexer: SPi Global Artist: SPi Global Cover Designer: Anna Ishchenko Distributed to the book trade worldwide by Springer Science+Business Media, LLC., 233 Spring Street, 6th Floor, New York, NY 10013 Phone 1-800-SPRINGER, fax (201) 348-4505, e-mail orders-ny@springer-sbm.com, or visit www.springeronline.com For information on translations, please e-mail rights@apress.com, or visit www.apress.com Apress and friends of ED books may be purchased in bulk for academic, corporate, or promotional use eBook versions and licenses are also available for most titles For more information, reference our Special Bulk Sales–eBook Licensing web page at www.apress.com/info/bulksales The information in this book is distributed on an “as is” basis, without warranty Although every precaution has been taken in the preparation of this work, neither the author(s) nor Apress shall have any liability to any person or entity with respect to any loss or damage caused or alleged to be caused directly or indirectly by the information contained in this work For my son, Josh, the inspiration for everything I Contents About the Author Acknowledgments Acronyms, Abbreviations, and Symbols Introduction Chapter 1: Financial Fitness Chapter 2: Inflation: What's the Problem? Chapter 3: Step 1: Set Up an Emergency Fund Chapter 4: Step 2: Make Savings and Working Capital Work for You Chapter 5: Step 3: Generate a Good Risk-Adjusted Return on Investments Chapter 6: Taking Control Appendix A: Recommended Reading Appendix B: Useful Resources Index About the Author Paul M King is owner, head trader, trading coach, and financial consultant at PMKing Trading, LLC His background is in information systems, but he moved from technology to the business side as a consultant to Wall Street companies King is passionate about trading and helping traders improve their performance through his international mentoring program He has trading clients all over the world, including in the United States, Canada, South America, and Australia As well as sharing his insights on his blog, mini-eBooks about trading, and articles published in Futures magazine and elsewhere, King is very interested in personal finance and helping his clients become wealthier Author of The Complete Guide to Building a Successful Trading Business, King's philosophy on trading and life in general is summed up by this old Chinese proverb: “Those who say a thing is impossible should not interrupt the people doing it.” Acknowledgments First, I'd like to thank the governments of the world and their wonderful fiat currencies and interesting monetary and fiscal policies—without which this book would not be useful or required On a less facetious note, I'd also sincerely like to thank Jeff Olson, the lead editor of this book, without whom I would never, ever, have gotten around to doing a brain dump of all the information I've accumulated by helping various financial advice clients over the years Jeff, many thanks for your initial gentle prodding to consider writing this book in the first place, your tireless editorial improvements, and your unique ability to let me know when I was assuming my readers would know what the heck I was talking about when it was obvious to you they wouldn't (because you didn't) This book is much, much better than it would have been if I'd ever bothered to self-publish it (which is doubtful) Thank you Acronyms, Abbreviations, and Symbols ADV AMEX ATR AUD CAD CAGR CD CHF CPI CPI-U DD EEM EFA EPI ETF EUM EUR EWA EWC EWG EWH EWJ EWT EWV EWZ FARCE FTSE FX FXI FXP GBP GLD GTC HELOC HKD Average daily volume American Stock Exchange Average true range Australian dollar Canadian dollar Compound annual growth rate Certificate of deposit Swiss franc Consumer Price Index Consumer Price Index for All Urban Consumers Drawdown iShares MSCI Emerging Markets Index Fund ETF iShares Trust MSCI EAFE Index Wisdom Tree India Earnings ETF Exchange-traded fund ProShares Short MSCI Emerging Markets ETF Euro iShares MSCI Australia Index ETF iShares MSCI Canada Index ETF iShares MSCI Germany Index ETF iShares MSCI Hong Kong Index ETF iShares MSCI Japan Index ETF iShares MSCI Taiwan Index ETF ProShares UltraShort MSCI Japan ETF iShares MSCI Brazil Index ETF Faithful annual rebalancing of common ETFs Financial Times and London Stock Exchange Foreign exchange iShares FTSE China 25 Index Fund ETF ProShares UltraShort FTSE China 25 ETF British pound SPDR Gold Trust ETF Good until cancelled Home equity line of credit Hong Kong dollar IB Interactive Brokers IRA Individual Retirement Account IWM iShares Russell 2000 Index ETF JO iPath DJ-UBS Coffee TR Sub-Idx ETN JPY Japanese yen MAR Managed Account Reports MOO Market Vectors Agribusiness ETF MSCI Morgan Stanley Capital International NASDAQ National Association of Securities Dealers Automated Quotation System NLV Net Liquidation Value NYSE New York Stock Exchange NZD New Zealand dollar PALL Physical Palladium Shares ETF PPLT Physical Platinum Shares ETF PSQ ProShares Short QQQ ETF QID ProShares UltraShort QQQ ETF QQQ PowerShares QQQ ETF RSX Market Vectors Russia ETF RWM ProShares Short Russell2000 ETF SEK Swedish krona SH ProShares Short S&P500 ETF SKF ProShares UltraShort Financials ETF SLV iShares Silver Trust ETF SPY SPDR S&P 500 ETF TBT ProShares UltraShort 20+ Year Treasury ETF TIP iShares Barclays TIPS Bond ETF TIPS Treasury inflation-protected securities TLT iShares Barclays 20+ Year Treasury Bond ETF TWS Trader Workstation UGL ProShares Ultra Gold ETF UNG United States Natural Gas ETF US United States USD US dollar USO United States Oil ETF UUP PowerShares DB US Dollar Index Bullish ETF XLE Energy Select Sector SPDR ETF XLF Financial Select Sector SPDR ETF Investment Gurus: A Road Map to Wealth from the World's Best Money Managers , by Peter J Tanous (Prentice Hall, 1999) Money Game, The, by Adam Smith (Vintage, 1976) Money Masters, The, by John Train (HarperBusiness, 1994) New Rules of Money: 88 Simple Strategies for Financial Success Today , The, by Ric Edelman (Collins, 1999) Pied Pipers of Wall Street: How Analysts Sell You Down the River , The, by Benjamin Mark Cole (Bloomberg Press, 2001) Safe Strategies for Financial Freedom, by Van K Tharp, D R Barton, Jr., and Steve Sjuggerud (McGraw-Hill, 2004) Miscellaneous Art of War, The, by Sun Tzu (translated by Samuel Griffith) (Oxford University Press, 1963) Black Swan: The Impact of the Highly Improbable, The, by Nassim Nicholas Taleb (Random House, 2007) Blink: The Power of Thinking Without Thinking, by Malcolm Gladwell (Back Bay Books, 2007) Labyrinths of Reason: Paradox, Puzzles and the Frailty of Knowledge, by William Poundstone (Anchor, 1989) Probability Without Tears: A Primer for Non-Mathematicians , by Derek Rowntree (Prentice Hall, 1984) Way of The Warrior-Trader: The Financial Risk-Taker's Guide to Samurai Courage, Confidence and Discipline, The, by Richard D McCall (McGraw-Hill, 1997) Why Café, The, by John Strelecky (Aspen Light Publishing, 2011) APPENDIX B Useful Resources While this list of resources may look a bit sparse, I've cut it down to only the really useful resources I use all the time, rather than including a huge list of everything to with money and investing online Trading and Investments pmkingtrading.com finance.yahoo.com Precious Metals www.goldmoney.com globalgold.ch www.perthmint.com.au bullionvault.com Brokers interactivebrokers.com Economics and Statistics www.shadowstats.com www.tradingeconomics.com www.economist.com Currency Interest Rates and Consumer Price Indexes AUD: www.abs.gov.au CAD: www.statcan.gc.ca CHF: www.bfs.admin.ch EUR: epp.eurostat.ec.europa.eu GBP: www.statistics.gov.uk HKD: www.censtatd.gov.hk JPY: www.e-stat.go.jp NZD: www.rbnz.govt.nz SEK: www.scb.se USD: www.bls.gov Products qmatix.com tradingblox.com office.microsoft.com Index A Acceptable real rate of return, 51 Assets definition, increase in, Australian dollar, 53, 54, 110 capital allocation, 55 currency holdings after purchase, 56 FX account after rebalancing, 61 ideal and actual allocations, 60 inflation rate, 53 interest rate, 53 positive real interest rate environment, 54 real rate of return, 53 B Balance sheet definition, Miss Borderline, Mr and Mrs Fit, Mr and Mrs Unfit, Bank, definition of, 48 Base currency, 57, 58 Basket of commodities, 19 Benchmark rate, 54 British pound, 53, 110 capital allocation, 55 currency holdings after purchase, 56 FX account after rebalancing, 61 ideal and actual allocations of, 60 inflation rate, 53 interest rate, 53 positive real interest rate environment, 54 real rate of return, 53 Brokerage account, 45 Bullion Vault Company, 44 Buy-and-hold strategy, 110–112 C CAGR See Compound annual growth rate Canadian dollar, 53, 110 capital allocation, 55 currency holdings after purchase, 56 FX account after rebalancing, 61 ideal and actual allocations of, 60 inflation rate, 53 interest rate, 53 positive real interest rate environment, 54 real rate of return, 53 Capital allocation, for currencies, 55 gains, 46 gains tax, 45 implementation of, 14 objectives and types, 14 Cash flow statement, expenses, reduction of, income, increase in, Miss Borderline, Mr and Mrs Fit, Mr and Mrs Unfit, Cash rebalancing method, 57 Certificate of deposit (CD), 52 Compound annual growth rate (CAGR), 16, 17, 71–73 Consumer Price Index (CPI), 24 Consumer Price Index for All Urban Consumers (CPI-U), 15, 16 Counterfeiting, 22 CPI-U See Consumer Price Index for All Urban Consumers Currency allocation of 100,000 US dollars, 56 devaluation, 23, 49 real rate of return on, 53 rebalancing, 67 trading, peculiarities of, 58 types of, 53 units, supply of, 22 weighting, 55 D DD See Drawdown Defunct currency, 113 Devaluation of currency See Currency, devaluation Discretionary expenses, Dollar cost averaging, 32, 111 Drawdown (DD), 30 Dreyfus (WisdomTree), 59 E EFA annual rebalancing of, 34 ETF allocation, 33 Emergency fund, 14, 39 creation, 108 establishment, Mr & Mrs Fit, 46 objective, 109 purchasing power protection, 39 alternative solution, 47 increasing emergency fund, 40 precious metals, investment on, 41 ETFs See Exchange-traded funds Euro, 53, 110 capital allocation, 55 currency holdings after purchase, 56 FX account after rebalancing, 61 ideal and actual allocations of, 60 inflation rate, 53 interest rate, 53 positive real interest rate environment, 54 real rate of return, 53 Everbank, 57 Exchange-traded funds (ETFs), 15, 30, 59 allocation, 33 inverse fund, 88, 91, 92 liquid, 90, 91 noncorrelated, 90 ranked by volume, 88–90 rebalancing, 67 ultra-short fund, 92 Expenses discretionary, mandatory, reduction of, 7, F FARCE strategy, 111, 112 Fiat (by decree) counter-feiting, 22 currency, 22 paper currency, 43, 45, 47 Financial fitness, 1, 13 achievement, 107 balance sheet, cash flow statement, meaning of, Financial meltdown, 114 Financial nightmare, 10 Fiscal policy, 21, 22 Foreign currency, 52 Foreign exchange (FX) trade, 57–59 after rebalancing, 61 ideal and actual allocations, 60 G Global Gold Company, 44 Gold (GLD) Australian dollars, price in, 43 control, 110 dollar allocation, 63, 64 ETF recommendation, 62 GoldMoney, 44, 109, 113 investment on, 41 and oil ratio, 37 prices in dollars, 36 savings account funding, 109 standard, 22 vs US dollar, 47 GoldMoney holdings, 45 H "Hedonic quality adjustment", 25 HELOC See Home equity line of credit Holding See GoldMoney holdings Home equity line of credit (HELOC), 48, 108 Hong Kong dollar, 53, 110 capital allocation, 55 currency holdings after purchase, 57 FX account after rebalancing, 61 ideal and actual allocations, 60 inflation rate, 53 interest rate, 53 positive real interest rate environment, 54 real rate of return, 53 I IB See Interactive brokers Income characteristics, increase, 7, Individual retirement account (IRA), 69 Inertia, 81 Inflation Consumer Price Index, 24 definition, 15 financial fitness, 13 inevitability of, 22 MAR ratio, 35 negative real interest rates, 15 purchasing power, 15 rates, on currencies, 53 responsibility, 28 market performance, 30 Mr and Mrs Fit, seeking financial advice, 29 single-currency problem, 26 Inflation-proof emergency fund, 42 Interactive brokers (IB), 57 Interest rates, on currencies, 53 International currency, 109 Inverse bond funds, 61, 64 Inverse Treasury Bonds (TBT), 62, 64, 110 Investment account, 14 Investment account management, 69, 111 construction of investment, 70 FARCE avoidance, 77 IRA, 69 Mr and Mrs Fit portfolio managers See Portfolio management visit a casino, 75–77 risk adjustment, 70 risk and return measurement, 70 CAGR calculation, 71, 72 drawdown (DD) percentage, 73 MAR ratio, 73 performance achievement, 74 periodic value, 73 return value, 71 uncontrolled risk, 74 risk minimization, 75 ROI, 75 trading vs investment, 78 annual rebalancing, 83, 84 buy and hold investor, 79 entry signal, 81, 82 exit strategy, 78, 82, 83 instrument filter, 80 market selection, 79 position-sizing method, 82 rebalancing portfolio, 78 setup conditions, 81 six components, 78 trend capturing 2% annual fee, 84, 85 average true range (ATR), 94, 96, 97 capital efficiency, 99 exit strategy, 101–103 financial spending, 86 instrument filter (see Exchange-traded funds) market selection, 88 NLV, 97, 98 no annual fee, 85–87 risk per trade, 100, 101 risk per share calculation, 98 setup condition, 93 true range, 94 volatility, 98 XLQ, 97 Investment portfolio ETFs, 113 iShares Trust Barclays 20+ Year Treasury Bond Fund, 62 J Japanese yen, 53, 110 capital allocation, 55 currency holdings after purchase, 57 FX account after rebalancing, 61 ideal and actual allocations, 60 inflation rate, 53 interest rate, 53 positive real interest rate environment, 54 real rate of return, 53 L Liabilities decrease in, definition, Liquidity, migration of, 113 Low/negative real interest rate environment, 61 M Managed Account Reports (MARs) ratio, 31, 35 Mandatory expenses, Market performance, 30 Momentum, 81 Monetary policy, 21 Money supply, factors affecting, 22 N Negative net worth, Negative real interest rate environment, 52, 54, 61 reduction in, 15 Negative real rate of return, 26 Net capital gain, 45 Net cash flow calculation, Net liquidation value (NLV), 97, 98 Net worth, New Zealand dollar, 53, 110 capital allocation, 55 currency holdings after purchase, 57 FX account after rebalancing, 61 ideal and actual allocations, 60 inflation rate, 53 interest rate, 53 positive real interest rate environment, 55 real rate of return, 53 P Palladium (PALL) control, 110 dollar allocation, 63, 64 ETF recommendation, 62 investment on, 41 savings account funding, 109 Passive income, Periodic rebalancing, 35 Perth Mint, 44 Platinum (PPLT) control, 110 dollar allocation, 64 ETF recommendation, 62 investment on, 41 savings account funding, 109 Portfolio management brokerage account, 104, 105 ETF and poor performance, 104 skills acquisition, 104 statistics, 105 Positive net worth, Positive real interest rate environment, 52, 54 Precious metal(s) ETFs, 109 holdings of, 45 investment companies, 44 investment on, 41 emergency fund establishment, of Mr & Mrs Fit, 46 Gold vs US dollar, 47 GoldMoney, working of, 45 inflation-proof emergency fund, 42 practical problems, 43 owing, 112 Price inflation, 15, 21, 39 Procrastination, 107 brokers going out of business, 114 defunct currency, 113 emergency fund creation, 108 financial fitness achievement, 107 financial meltdown, 114 GoldMoney, 113 investment account management, 111 investment portfolio ETFs, existence of, 113 owing precious metals, 112 precious metals ETFs, existence of, 113 savings account, funding of, 109 Purchasing power emergency fund maintenance, 40 protection, 39 reduction in, 15 Q Quote currency, 58 R Rake, 75 Random walk strategy, 117 Real rate of return on currencies, 53 definition, 52 Rebalancing model curriencies vs ETFs, 67 Recommended reading, 117, 121 money and investment, 120 probability, 120 trading, 117–119 Recurring income, Repeatable income, Return on investment (ROI), 75 in TIP, 17 in TLT, 18 Risk-adjusted return, 66 Rydex (CurrencyShares), 59 S S&P 500 index, 112 investment return, 30, 31 Savings account funding of, 109 objective, 14 Savings and working capital, 51 acceptable real rate of return, 51 historical results, 65 low/negative real interest rate environment, 61 positive real interest rate environment, 54 currency trading, peculiarities of, 58 Scalable income, Silver (SLV) control, 110 dollar allocation, 63, 64 ETF recommendation, 62 investment on, 41 savings account funding, 109 Single-currency problem, 26 Single-currency risk, 26 Smart money, 42 Sound investment, 31 SPY, 33 annual rebalancing of, 34 S&P 500 dollar cost averaging, 32 S&P 500 investment return, 31 Swedish krona, 53, 110 capital allocation, 55 currency holdings after purchase, 57 FX account after rebalancing, 61 ideal and actual allocations, 60 inflation rate, 53 interest rate, 53 positive real interest rate environment, 55 real rate of return, 53 Swiss franc, 53, 110 capital allocation, 55 currency holdings after purchase, 57 FX account after rebalancing, 61 ideal and actual allocations, 60 inflation rate, 53 interest rate, 53 positive real interest rate environment, 55 real rate of return, 53 T TBT, 62, 63 Time-for-money income, TIP security See Treasury Inflation Protected (TIP) security TLT, 33, 62, 63 annual rebalancing of, 34 return on investment in, 18 Trading Blox, 66 Treasury Inflation Protected (TIP) security ETF, 15, 16, 110 return on investment in, 17 savings and working capital, 62 US dollar allocation, 64 U United States (US) dollar, 53, 64, 110 capital allocation, 55 currency holdings after purchase, 57 FX account after rebalancing, 61 ideal and actual allocations, 60 vs Gold, 47 Index, 27 inflation rate, 53 interest rate, 53 positive real interest rate environment, 55 real rate of return, 53 Useful online resources consumer price index, 122 economics and statistics, 122 interactive brokers, 122 interest rate, currency, 122 precious metals, 121 products, 122 trading and investment, 121 Z Zero percent tax bracket, 17 ... not about generating a massive return really quickly It's about the other side of the coin: preserving the assets that you already have and making sure you can more easily weather any financial... liabilities Assets are things that have a market value, such as a home, a car (that you own rather than lease), cash in a checking account, shares in a public listed company, and so on Liabilities are... generate a reasonable risk-adjusted return that's greater than inflation rates? Table 2-1 shows the three types of capital and what the objectives are for each It's useful to think of your cash assets