What comes next after reflation?

According to Wikipedia, the definition of reflation is the act of stimulating the economy by increasing the money supply or reducing taxes.

It is the opposite of disinflation. It can refer to an economic policy whereby a government uses fiscal or monetary stimulus in order to expand output.

Reflation is our current monetary policy and there are those who would argue that without reflation we would currently be in a depression.

But policy makers cannot continue to reflate the economy forever, so what comes next? This is the challenging part. With all that stimulus out there, the Fed, along with Treasury must contract or drain money out of the system with such precision as to not stunt recovery or create rampant inflation. So how many of you are confident that this can be accomplished? Don't put me on that list.

Congress cannot agree on a budget to avoid a shutdown of federal services and my confidence is the Federal Reserve was shaken after Alan Greenspan completely misjudgeded the problems in the mortgage and housing markets allowing interest rates to remain low for way too long.

So, if you too might be in the camp of the less-than-optimistic and are just now starting to see recovery in your portfolio or 401K, you should be asking now what can you do to protect your money from the uncertain outcome of reflation.

I decided to check with the pros that did well during the recent recession and actually profited by not being part of the herd. Those experts include Jim Rogers, Marc Faber, Mohammed El Erian, Bill Gross, Michael Burry and John Paulson.

All seem to feel similarly that inflation is already here and cannot be ignored by the Federal Reserve so all felt that treasury bonds are not the place to be right now. Bill Gross, the bond king at Pimco actually sold all treasury positions from his mammoth funds stating there was not enough return for the amount of risk in holding US bonds. Other common threads were commodities, (primarily food and metals), emerging markets, foreign currencies, basic materials and farmland.

So should you create your own reflation model portfolio? Each person is different. We all have varying time frames, objectives and tolerance to risk, but I think everyone agrees that getting hammered again like 2008-2009 is not desirable. I am not advising you to abandon your existing portfolio in favor of anything that you do not understand or that could be too risky for you personally, but please afford yourself a little protection.

You do not need to trade futures to get access to commodities or Forex to trade currencies. These days almost everything can be found in exchange trade fund form or in a mutual fund. If you do your own investing, it is easy to get access to research on ETF's and funds on the internet or with your online broker. If you work with an advisor, make sure you have one that is familiar will all investment choices and not a select few. If you have been told to buy and hold forever and are offered only mutual funds or annuities, you may want to consider a new advisor. Advisors who have access to only a few investment product choices will limit you to what they have , so if all they have is a hammer, everything looks like a nail. Markets are in flux and there are geopolitical risks out there that cannot be ignored, so rebalancing on a regular basis, especially in retirement accounts is a must.

I watched a documentary this past week called "Broke, the new American dream." On the cover was a sheep with the word broke sheared into it's wool. The theme of the film was that the average American does not make any money investing because they follow a sheep mentality. Believing that the government will solve all their problems, people follow the herd. They buy the wrong investments at the wrong times and remain in cash when they should be fully invested. With the looming probability that Social Security and Medicare will undergo massive changes in order to remain solvent, it is more important that ever that the average person take control of their own destiny and make good investment decisions. Buy and ignore equals broke in your golden years, so be proactive, not reactive.Make sure your money is going to pay for all your living expenses and consider entitlement programs as a bonus. I cannot emphasize this enough. Do not wait for an advisor to tell you that you need to make changes to ensure that you are going to have enough money in retirement. By the time they tell you this, it may already be too late.