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By Christine Benz | 09-29-2010 05:20 PM

Zweig: Prepare for 'Meflation'

Inflation or deflation--Investors should worry about whichever one will hurt them more personally, says Wall Street Journal editor Jason Zweig.

Christine Benz: So, Jason, also in the context of asset allocation, investors have been grappling with this inflation/deflation question, which is the bigger threat, what should they be concerned about? You wrote a great column a couple weeks ago talking about what you called "meflation," and you said that whether it's deflation or inflation, your bigger concern really depends on who you are.

Jason Zweig: Yeah, exactly. What everyone wants to know is which is coming; inflation or deflation. And if you can just tell me which one I have to worry about, then I'll prepare for that. So, if it's inflation, I'll run out and I'll buy a lot of commodities and maybe some stocks, and if it's deflation, I'll move all my money into long-term bonds, and then I'll be fine.

The problem is that which is likely to happen is almost immaterial. What you should be thinking about is which one actually matters to me. I gave a very simplified example, which is if you're, I would say, the typical retiree, deflation may not be much of a concern for you at all. You live primarily on a fixed income, you get a social security check every month, you probably don't have a mortgage, so your house is paid off. And under those circumstances, even if deflation came, you wouldn't necessarily want to prepare for it because it's not going to hurt you all that much.

Benz: It may even help you.

Zweig: It may even help you. So, running out and buying a lot of long-term bonds and diving into a bunker with all your other assets isn't that advisable for you. Instead you should realize that it's your personal inflation or deflation risk that matters, what I've been calling "meflation." And in your case, if you are a retiree, like the person I described, what you are much more likely to have to worry about is inflation.

The idea, the term "meflation" is just to focus investors inward, and instead of trying to figure out whose forecast is correct, you should instead say to yourself which forecast would be the one that would hurt me. That's the '-flation' I need to worry about. In many cases, inflation is the thing that will hurt you. In other cases, deflation is the thing that will hurt you. And whichever one will hurt you more is the one you need to prepare for, not the one that the pundits say is most likely to happen.

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