Inflation Defense: Five Strategies To Consider (And A Bonus)

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Bureau of Labor Statistics (BLS) on December 14, 2021, released Data about a significant increase in the Producer Price Index (PPI), the biggest increase since the data was first calculated in November of 2010. For the 12 months ended November 2021, the PPI was up 9.6%. PPI is important because it measures the average change in prices received by producers for many products and some services. As the chart below shows, there is no question that we have some form of inflation. the question is. How do we play defense?

Why does inflation matter? Inflation is important to our retirement planning considerations because it determines our ‘real rate of return’ or what we do after inflation. So, if our portfolio is making 3% and inflation is 3%, we are stable. If inflation is 6% and we’re making 2%, we’re going backwards. Here is a chart from the Fed to show the Treasury rate minus CPI. Note that we are in negative territory:

Components matter. As long as there is money, inflation is with us. Inflation is a measure of purchasing power. Traditionally, there have been three versions of inflation: demand-pull, where demand exceeds production capacity (think cars both used and new, or homes); cost-push, where the cost of raw materials drives up prices (for example, steel is going up several hundred percent); or built-in, where wages rise as prices rise (real wages rise as a result of employment conditions). For 2022, it appears that all three variants exist. Whether it is ‘sticky’ or ‘slippery’ (or both) remains to be seen. In any case, we must consider a defensive strategy.

Defense, defense There are a variety of ‘common’ defensive strategies for inflation investing. This includes:

Treasury Inflation Protected Securities (TIPS)

· Sleep

Small Cap Stocks

· natural resources

· real estate

Tips: Standard Defense. This solution, invented specifically for the purpose of offset inflation, is called Treasury Inflation Protected Securities (Treasury Inflation Protected Securities).Tips) According to, “Treasury Inflation-Protected Securities, or TIPS, provide protection against inflation. The principal of a TIPS, as measured by the Consumer Price Index, increases with inflation and decreases with deflation. When a TIPS maturity, you are paid adjusted principal or principal principal, whichever is higher. TIPS pay interest twice a year at a fixed rate. The rate is applied to the adjusted principal, therefore, like the principal, Interest payments rise with inflation and fall with deflation.” In short, a TIPS is a Treasury bond that is indexed for inflation, where the principal is adjusted to reflect an increase or decrease based on the CPI. TIPS pay interest twice a year, and interest is on an adjusted basis, so it can vary.

The coupon rate doesn’t change, but pays off. Individual TIPS are available directly from the Treasury or are often purchased through a fund or ETF. It sounds simple, so why won’t everyone hedge against inflation with TIPS? the answer is ‘negative yield curve, As of 12/15/21, the 5-year TIPS yield was -1.41%, while the 30-year negative yield was -0.35%. The negative yield is attributed to the rate being lower than the rate of inflation on regular Treasury bonds. Therefore, holding individual TIPS will protect against inflation if they are purchased directly from the Treasury and held until maturity. On the other hand, a TIPS fund or ETF can buy or sell TIPS at any time, which can cause prices to fluctuate. As on 12/15/21, 10-year performance of iShare Tips The bond ETF was up 3.26%.

Small, but mighty bonus: I-bonds. Another inflation-protected Treasury security with some strong inflation-protection properties is I-bond, Unlike TIPS, I-bonds pay a fixed rate and interest based on the rate of inflation. As of 12/15/21, I-Bonds pay a remarkable 7.12% introductory interest rate. This rate is good till April 2022. I-bond interest is federally taxable, but not subject to state and local income taxes. You can cash them at face value after 1 year. If you cash them out before 5 years, you lose 3 months of interest. They can be purchased electronically Treasury Direct, up to $10,000 per calendar year.

Gold: All That Shines, Gold has historically been regarded as an inflation hedge, although it is probably better suited as a currency hedge. There are several ways to invest in gold, such as the base metal, or ETFs that buy the base metal. GLD, To buy gold mining stocks or a fund or ETF that miners buy. But is it a hedge? On August 15, 1971, Richard Nixon announced that he had removed America from the gold standard. Since that time, we have faced some serious bouts of inflation. according to a study by Robert Arnotte, gold sometimes works and sometimes doesn’t:

During the time frame of 1973-79. Gold easily outperformed inflation, REITs and commodities. However, gold actually had negative returns during the inflationary period, in the next two rounds, 1980-84 and 1988-91. If we measure from the time the US dropped the gold standard, gold returned from 1971-2019, 10.61%, slightly less than a stock or commodity. For a fun look at more than 3,000 years of gold, check out this of Claude Erb paper.

Small Cap Stocks. The principle here is simple: Smaller companies are more nimble and can increase prices to customers more easily. History seems to bear this out when comparing inflation-adjusted returns from 1969:

natural resources, Natural resources are widely considered an inflation hedge because increases in raw material prices are related to inflation. There is a difference between underlying commodities and commodity producers. Manufacturers behave more like stocks. In the high inflationary period of 1973–79 and in 1988–1991, commodities outperformed inflation. In the period 1980–1984, commodities had positive returns, but failed to keep pace with inflation.

Real Estate: They’re not building anything more than this. In each of the three high inflationary periods over the past 50 years, only real estate investment trusts (REITS) has provided higher returns than inflation. Real estate rents and real estate values ​​tend to rise in times of inflation, which gives a REIT a steady cash flow rate. REITs can be invested in the REIT itself, or through a fund or ETF. REITs also have special tax treatment, which can convert after-tax returns into taxable accounts.

Bottom line: diversification. Whether we’re in a period of sticky or slippery inflation (or both), diversification makes sense. Remember to rebalance your portfolio, some of the weight may be shifted to small caps, real estate and commodities. Also, don’t forget I-bonds: 7.12% on government security is great. As always, I’ll try to answer questions: [email protected]


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