{"id":350,"date":"2009-12-27T19:18:22","date_gmt":"2009-12-28T00:18:22","guid":{"rendered":"https:\/\/david.bookstaber.com\/Interests\/?p=350"},"modified":"2020-01-04T19:01:39","modified_gmt":"2020-01-05T00:01:39","slug":"investing-for-inflation-protection","status":"publish","type":"post","link":"https:\/\/david.bookstaber.com\/Interests\/2009\/12\/investing-for-inflation-protection\/","title":{"rendered":"Investing for Inflation Protection"},"content":{"rendered":"

Last year I recommended TIPS funds<\/a> as particularly attractive for tax-exempt investment accounts.<\/p>\n

TIPS have gained substantially since then<\/a>, but from a historical perspective the current 10-year TIPS break-even rate of 2.1% is still low. (“Break-even” is the realized inflation rate above which an inflation-protected security will pay more than its non-inflation-protected equivalent. In the case of TIPS that would be regular treasury bonds. A break-even rate of 2.1% means that ). Since inflation protection is valuable insurance in a market like this, with low current inflation but exploding money supply (which could easily lead to surprisingly high inflation in the next few years), one might expect TIPS break-even rates to run above the long-run expected inflation rate, which is around 2% per year. Indeed, it is still cheaper to buy TIPS than to buy treasuries and hedge against inflation with options<\/a>.<\/p>\n

However, as I noted earlier, TIPS aren’t a perfect inflation hedge<\/a>. Bill Tedford, a successful treasury bond portfolio manager and inflation bug, has other ideas on investing for protection against inflation:<\/p>\n

\nIn his own portfolio, Mr. Tedford has begun shorting 30-year Treasurys, expecting the prices to fall as interest rates begin to rise. For clients, however, Stephens is encouraging the use of exchange-traded funds to own exposure to real assets. Mr. Tedford says a 5% or 10% position overall “is big enough to protect a larger portfolio.”<\/p>\n

Among ETFs, Stephens likes the U.S. Gasoline Fund, the iShares Dow Jones U.S. Oil & Gas Exploration & Production Index, SPDR Gold Trust, PowerShares DB Base Metals Fund and the PowerShares DB Agriculture Fund. The firm also likes Plum Creek Timber Co.<\/p>\n

Though Treasury inflation-protected securities, or TIPS bonds, would seem a natural bet, Mr. Tedford says his group just this month sold off its TIPS investments. Real yields on TIPS are barely above 1% now and Mr. Tedford expects those yields will increase as inflation mounts, hurting prices, which move in the opposite direction.<\/p>\n

The likely result: “The return on your TIPS could fall 10% or 15%,” basically wiping out the bond’s inflation protection.<\/p><\/blockquote>\n

I would personally steer clear of gold as an inflation hedge because it is particularly prone to speculative bubbles<\/a>, and has less intrinsic value than most other commodities. But diversified investments in energy, industrial metals, and the agricultural sector should also serve as good long-term inflation hedges.<\/p>\n","protected":false},"excerpt":{"rendered":"

Last year I recommended TIPS funds as particularly attractive for tax-exempt investment accounts. TIPS have gained substantially since then, but from a historical perspective the current 10-year TIPS break-even rate of 2.1% is still low. (“Break-even” is the realized inflation rate above which an inflation-protected security will pay more than its non-inflation-protected equivalent. In the […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[49],"tags":[],"class_list":["post-350","post","type-post","status-publish","format-standard","hentry","category-finance"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/po3d1-5E","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/david.bookstaber.com\/Interests\/wp-json\/wp\/v2\/posts\/350","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/david.bookstaber.com\/Interests\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/david.bookstaber.com\/Interests\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/david.bookstaber.com\/Interests\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/david.bookstaber.com\/Interests\/wp-json\/wp\/v2\/comments?post=350"}],"version-history":[{"count":4,"href":"https:\/\/david.bookstaber.com\/Interests\/wp-json\/wp\/v2\/posts\/350\/revisions"}],"predecessor-version":[{"id":1697,"href":"https:\/\/david.bookstaber.com\/Interests\/wp-json\/wp\/v2\/posts\/350\/revisions\/1697"}],"wp:attachment":[{"href":"https:\/\/david.bookstaber.com\/Interests\/wp-json\/wp\/v2\/media?parent=350"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/david.bookstaber.com\/Interests\/wp-json\/wp\/v2\/categories?post=350"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/david.bookstaber.com\/Interests\/wp-json\/wp\/v2\/tags?post=350"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}