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Re: inflation hedges
Old 03-07-2007, 07:47 PM   #21
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Re: inflation hedges

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Originally Posted by HaHa

We shouldn't forget that as investors, especially as soon to be retired investors, what we are after is a reliable growing flow of spendable money. This is the weakness of gold, silver and other commodities. They may be fine for someone who is working and intends to keep working, but it presents cash flow problems for retirees or wannabe retirees.
That is a very good point. Gold doesn't grow. It doesn't pay interest or dividends. It just sits there waiting for a bigger sucker someone else to pay a higher price for it.

The other problem is that commodities do not protect against inflation year-in and year-out. They tend to massively overshoot (like recently, maybe?) and then do nothing for decades. High prices encourage new supply, make alternatives viable, and curtail demand. So if I'm buying an inflation hedge don't I have to worry that what I'm buying has outpaced inflation by 300% or more in the past couple of years? Is it the current price, or the year 2000 price, that is going to keep pace with inflation over the next 20 years? Because I don't know, and because no one else does either, I'll stick with TIPs and stocks.

BTW the S&P 500 has nearly a 10% allocation to Energy stocks and another 1-2 percentage points dedicated to other commodity producers (S&P Mid Cap has 7.5% Energy allocation and the S&P Small Cap has a 6% allocation). So most folks have more commodity exposure then they realize even without doubling up on it through a separate allocation.
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Re: inflation hedges
Old 03-07-2007, 08:02 PM   #22
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Re: inflation hedges

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Originally Posted by jazz4cash
yeahbut, I don't see the real estate as the hedge as it may be tough to unload.........I think of the MORTGAGE as the hedge. If you have a "fixed" payment on this significant percentage of your cost of living, it limits your inflation risk to "consummables". I think I might get hammered for this because "to have or not to have" (a mortgage) can be pretty emotional around here. One of the first financial professionals I ever met brought this to my attention: Each dollar on a fixed mortgage payment is devalued by inflation, so your payment is actually going down over time. He used to joke about trying to get a 100 year mortgage.
makes a lot of sense. thanks
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Re: inflation hedges
Old 03-07-2007, 08:29 PM   #23
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Re: inflation hedges

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Originally Posted by 2B
You are asking good questions NYL.
I hope so. One of the reasons why I accumulated a large sum at a young age is because I ask questions and actually listen and then go and research for myself. This forum has some great information and wonderful people. Often people are too scared of asking dumb questions or looking foolish. This really does halt progress.
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Re: inflation hedges
Old 03-07-2007, 09:56 PM   #24
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Re: inflation hedges

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Originally Posted by jazz4cash
Each dollar on a fixed mortgage payment is devalued by inflation, so your payment is actually going down over time.
Unfortunately, the same thing is happening to the value of your portfolio invested using the money you didnt use to pay the mortgage.

Once again, there is no free lunch unless you leave stuff out of the equation.
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Re: inflation hedges
Old 03-07-2007, 10:19 PM   #25
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Re: inflation hedges

i am sorry cute fuzzy bunny but i don't understand what you mean
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Re: inflation hedges
Old 03-08-2007, 01:12 AM   #26
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Re: inflation hedges

i understand the first part of what you said, please explain the latter.
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Re: inflation hedges
Old 03-08-2007, 08:20 AM   #27
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Re: inflation hedges

Well, its one of those funny bits in discussions like the mortgage/no mortgage debate. People know what answer they want, so they seek out facts that help support their preordained decision, but they dont always apply the facts evenly.

If I take out a mortgage, over time the value of the mortgage dollars declines as inflation works on it. Assuming a fixed 3% rate of inflation (as an example), the principal of the loan the bank lent you becomes devalued by 3% per year. After 10-15 years into a 30 year mortgage, the money simply isnt worth as much, but its the banks money. In the meanwhile IF YOU'RE AN ACCUMULATOR and not a retiree, your paycheck is becoming MORE valuable due to cost of living raises, salary range increases, etc. For a straight worker bee paying off the mortgage, this becomes more and more attractive as time goes on.

On the flip side, money an accumulator DOESNT put towards the mortgage and invests or money an early retiree has already invested in a portfolio and is drawing from...also devalues by the same rate of inflation. This is the battle an early retiree has to fight...make money, pay the tax man, offset inflation, offset personal inflation/spending/lifestyle changes, and still pull out enough cash after all that to pay the bills.

So inflation does devalue the banks money, but it also devalues your holdings.

This works great for the traditional person in their 20's or 30's, not a lot invested, no big intentions of retiring early or achieving financial independence. Bite off a huge mortgage at a sub 6% rate, let inflation devalue that money while you continue to be an up and comer making more and more money every year at your job...fast forward 10-15 years and that huge honking mortgage that used to be 50% of your paycheck is now a measly 25%, the house is worth more, and you've got higher spendable income and higher net worth.

Really a big difference when you look at someone in their 50's or older, who may have reached their peak earnings, who are building an investment portfolio, planning for FI/ER. Inflation affects both ends of it for them.

One interesting thing is to note current prime mortgage rates and subtract the CPI from them. Then look at TIPS coupon and add the current CPI to them.

Hmmm...some efficiency there...

So a mortgage is a fine NEUTRAL inflation hedge in that it will take money from peter and pay paul, but you arent going to make/save anything on it.
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Re: inflation hedges
Old 03-08-2007, 10:38 AM   #28
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Re: inflation hedges

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Gee, if the economy collapses who's gonna pay $200 for a barrel of oil.
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Re: inflation hedges
Old 03-08-2007, 11:15 AM   #29
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Re: inflation hedges

I'm surprised to see so little mention of TIPS. In a hyperinflation situation the US govt might be unable to pay, but short of that they should be good. Easy to buy, easy to sell (especially if inflation heats up), not much expertise required. Not as the major part of your portfolio, but still a part. Or am I missing something?
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Re: inflation hedges
Old 03-08-2007, 11:31 AM   #30
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Re: inflation hedges

Nope, they're fine if you like the "real" rate of return they provide, and dont mind paying the taxes on the inflation adjustment every year even though you dont get the inflation adjustment until the bond matures.

In a high inflationary period, you could be paying a bunch of taxes and the bonds wont be providing you the income to do it with...
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Re: inflation hedges
Old 03-08-2007, 12:15 PM   #31
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Re: inflation hedges

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Originally Posted by Gearhead Jim
I'm surprised to see so little mention of TIPS. In a hyperinflation situation the US govt might be unable to pay, but short of that they should be good. Easy to buy, easy to sell (especially if inflation heats up), not much expertise required. Not as the major part of your portfolio, but still a part. Or am I missing something?
If you read the first post - it says that the OP is looking for stuff other than TIPS and Iflation indexed bonds. Anyway that was wha I was writing about - We all agree TIPS and Inflation indexed bonds have a role in our bond portion of the portfolio but we are looking into other asset classes which act as an hedge.

-h
p.s: also as CFB keeps pointing out the govgt has real motivation to fudge the numbers when calculating CPI
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Re: inflation hedges
Old 03-08-2007, 12:26 PM   #32
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Re: inflation hedges

Personally, I don't like a real rate of less than 5%, but that's just me...

If I buy TIPS, they'll be in an IRA that (hopefully) I don't need to draw on for a long time.

Any other advantages/disadvantages that I might have missed?
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Re: inflation hedges
Old 03-08-2007, 12:27 PM   #33
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Re: inflation hedges

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Originally Posted by lswswein
If you read the first post - it says that the OP is looking for stuff other than TIPS and Iflation indexed bonds.
You're right, short term memory loss at work for me.
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