How to invest for an increase in inflation

[Mike]

I am interested in knowing the preferred strategies from the group if
one were to assume an increase in inflation over the next several
years. Thanks for your input.

 

[dapperdobbs]

I am interested in knowing the preferred strategies from the group if
one were to assume an increase in inflation over the next several
years.  Thanks for your input.

Bonds are the tradtional 'loser' during inflation, as well as cash,
but at this moment in markets, cash has been a big winner. The
question, as you accurately see it, is what to convert the cash into
if inflation is around the corner.

One obvious home for your inflation-proof money is a home
(literally Housing prices are well off their highs, some think
they may have bottomed, and a home is a very big-ticket, inflation-
sensitive item with immediate personal utility.

If you have all the real estate you want, my next bet is stock in a
company with products or services that are either best-in-world or not
easily imported. By purchasing part of "the establishment" you have an
inflation hedge. By purchasing increasing sales and earnings, as well
as possibly increasing dividends, you have a "kicker." You have an
income stream, and the AICPA definition of liquid assets.

Gold is usually highlighted (as if the shiny-yellow needed
highlighting and if you can justify the holding and transaction
costs, I suppose gold or silver are good for retention of value, but
be very mindful of your market timing.

I think the idea behind inflation hedging is to hold "real
value" (that which money buys), as opposed to "buying money." Make
sure you keep cash for expenses

 

[PeterL]

I am interested in knowing the preferred strategies from the group if
one were to assume an increase in inflation over the next several
years.  Thanks for your input.

TIPS, gold/precious metals, materials, real estate.

 

[Mike Morgan]

One way is to buy real estate investment trusts (REITs). Landlords raise
rents in times of inflation, so REITs are an effective hedge. Buy the
equity type, not the mortgage type. One simple way is through the Vanguard
Equity REIT index mutual fund. REITs are depressed right now (aren't we
all), but recovering.

Mike

 

[Igor Chudov]

Over a long enough time, buying a stock market index fund, should
decently keep up with inflation.

i

 

[anoop]

I am interested in knowing the preferred strategies from the group if
one were to assume an increase in inflation over the next several
years.  Thanks for your input.

You can get close to keeping up with inflation in a risk-free fashion
using TIPS (in an IRA or taxable account) and i-bonds (in a taxable
account). If you are looking to beat inflation, you'll need to take
on more risk with no guarantee that it will pay off - see other
replies for various suggestions.

If buying TIPS, look at buying individual bonds because the
expense ratio of mutual funds will cause you to fall further
behind on tracking inflation.

Anoop

 

[BreadWithSpam]

If buying TIPS, look at buying individual bonds because the
expense ratio of mutual funds will cause you to fall further
behind on tracking inflation.

As you said, only buy TIPs in an IRA or other tax-deferred
account.

As far as expenses, Vanguard's TIP index fund charges 0.20%
as does the iShares TIP ETF. Vanguard's institutional class
on their TIP fund (which may be available in one's 401k)
charges only 0.08%.

Swedroe's book on Alternative Investments has an excellent
brief chapter about TIPS and iBonds, some strategies for
managing them, and some notes about their correlation (or
lack thereof) with equities.

 

[Douglas Johnson]

Over a long enough time, buying a stock market index fund, should
decently keep up with inflation.

I think the evidence for that is kind of weak. Certainly in the 70's, stocks
kind of stumbled along. They didn't come close to keeping up with inflation. At
least one reason then is that P/E ratios contracted. I think some of that was
just part of the secular cycle, but some of it was increased discounting of
future earnings, partially driven by high interest rates.

The market didn't take off until inflation got under control in the early '80s.

-- Doug

 

[Ron Peterson]

I am interested in knowing the preferred strategies from the group if
one were to assume an increase in inflation over the next several
years.  Thanks for your input.

I think that the general stock market should be a good hedge against
inflation. Many companies are leveraged which will increase their
return in an inflationary environment.

 

[Yadda]

I think that the general stock market should be a good hedge against
inflation. Many companies are leveraged which will increase their
return in an inflationary environment.

TIPS.

 

[Yadda]

Over longer stretches, equities form a pretty good hedge
against inflation, inasmuch as their inflation-adjusted
return has been higher than other asset classes.

However, in shorter ones, just when inflation
heads up, they stink. (ie. consider the inflation spike
in the late 70s/early 80s -- and how equities did over
that same period). To balance this out, one might consider
an asset class which has a relatively low correlation with
equities and which performs well during inflation spikes.
Probably the purest such asset class is TIPs. Exposure
to both TIPS and equities should help ride out bouts
of inflation, both as it heats up and over the longer run.

(Note, of course, to keep the TIPs in an IRA or similar
account)

TIPS are fine in a taxable account as a hedge. If the US$ collapses,
might as well put the gun to your head as world travel is restricted for
new residence.