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inflation hedge alternatives
Old 11-19-2010, 01:31 PM   #1
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inflation hedge alternatives

With TIPS yielding zilch right now I'm looking around for other options to get inflation protection in my portfolio. I'm considering natural resources equities such as mining, timber, materials. Any ideas out there?
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Old 11-19-2010, 06:07 PM   #2
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For the moment, I'm enjoying all the deflation. I guess you're looking for something safe if you're into TIPS. PenFed credit union has some nice CD rates including 3.49 APY on 7 years. Discover bank also has some nice rates. I ladder CD's and if inflation returns I suspect those CD rates will rise. That rise is my hedge.
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Old 11-19-2010, 08:42 PM   #3
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bradh,
- Welcome to the board.
- We had an interesting discussion on whether inflation would return and how one could best hedge against it in this thread. I'm sure others will chime in here.
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Old 11-19-2010, 10:51 PM   #4
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With TIPS yielding zilch right now I'm looking around for other options to get inflation protection in my portfolio. I'm considering natural resources equities such as mining, timber, materials. Any ideas out there?
I like rental properties. I rent out a flat and get $1200 a month out of it. After tax and expenses I net $900 to $1000 in income. I can jack the rent up if inflation becomes and issue. I'm also going to renovate once the current tenants move out and add a bedroom so that I'll be able to get $1800/month. It's also nice to have monthly income that is decoupled form the stock and bond markets.
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Old 11-20-2010, 03:47 PM   #5
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I think gold and timber have place in anyone's portfolio, just as stabilizers. They can also be excellent inflation hedges.
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Old 11-20-2010, 06:29 PM   #6
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Well, I guess the answer depends on what you're truly interested in. Do you really want an inflation hedge, or do you want a speculative investment with inflation sensitivity? The only option I'm aware of that fits the former category is TIPS. Commodities, FX, real estate, equities of any kind, all fit the latter.

The difference is that TIPS principal, and coupon, specifically track an inflation index and hedge exposure to that index nearly perfectly (less tax leakage). All of the others have the shortcoming that they price in a significant amount of inflation expectations already. If inflation turns out to be lower than those expectations, you can suffer negative returns even as inflation stays positive. Consider the example of someone who bought gold in 1980 as an inflation hedge. It turned out to be a terrible hedge for nearly three decades, because it isn't really a hedge at all.

If you're taking a view that inflation is going to accelerate significantly, I think gold probably has the most leverage . . . but I wouldn't consider it a hedge.
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Old 11-20-2010, 07:06 PM   #7
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The answer is "it depends" - on (i) how much inflation there is and (ii) how how the various goods and services that collectively comprise the economy are individually affected. If inflation is X%, there will be things which appreciate by more than X% and things which appreciate by less than X%. If an asset can't return at least X% after taxes and expenses, then it is a losing investment.

In my part of the world at least, cash in the bank, CDs and short to medium term bonds are all yielding less than the current rate of inflation - which means that they are losing value by the day. I'd rather take market risk on equities and other risk assets than the certainty of loss which cash etc provides.

My take is that one of the best hedges against inflation is to borrow money and invest in something that (i) produces enough cash flow to service the debt and (ii) has at least the potential to increase in value over time (even if it does not track general inflation very well). Rental property in an area with favourable demographics (among other factors) meets this description. The combined effect of the fall in the real value of the debt and the increase in the nominal value of the real estate can provide decent return.
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Old 11-20-2010, 07:23 PM   #8
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Quote:
Originally Posted by bradh View Post
With TIPS yielding zilch right now I'm looking around for other options to get inflation protection in my portfolio. I'm considering natural resources equities such as mining, timber, materials. Any ideas out there?
Here are the questions.
- What is your personal inflation rate
- What is the time period of inflation you are looking at
- What is the risk of the investment you are looking at vs the inflation risk you see

I see the risk/reward ratio of commodities/stocks over the next 6-8 months not worth it versus lower risks investments.
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Old 11-21-2010, 06:03 AM   #9
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Originally Posted by nun View Post
I like rental properties. I rent out a flat and get $1200 a month out of it. After tax and expenses I net $900 to $1000 in income. I can jack the rent up if inflation becomes and issue. I'm also going to renovate once the current tenants move out and add a bedroom so that I'll be able to get $1800/month. It's also nice to have monthly income that is decoupled form the stock and bond markets.

Yes, but it is more like being the proprietor of a small business one owns and invested in rather than investing in securities.

Also rent is more like revenue before expenses including any operating expenses.
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Old 11-21-2010, 10:25 AM   #10
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Originally Posted by Pete View Post
For the moment, I'm enjoying all the deflation. I guess you're looking for something safe if you're into TIPS. PenFed credit union has some nice CD rates including 3.49 APY on 7 years. Discover bank also has some nice rates. I ladder CD's and if inflation returns I suspect those CD rates will rise. That rise is my hedge.
Pete,

This is/was my plan also. But I see that the stuff I buy has inflated a lot over the last 2 years while the CPI has not shown much inflation. My cd's have remained very low in interest, since apparently they correlate to CPI, not to my actual inflation experience.

I've been agonizing over what to do, if anything, about inflation. Might buy into a commodities fund in one of my 401k's.


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Old 11-21-2010, 10:44 AM   #11
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Here is one man's approach:

The ‘blazingly simple,' must-have portfolio - The Globe and Mail
“The idea just came to me, and it was blazingly simple,” he said from his Toronto home. “I basically sat down and thought, what is absolutely essential to our society, and who provides those essentials?”

"Mr. Henderson’s focus is on the function of a company, not its size.

The first step in building the portfolio was to set a rule that all stocks had to pay a dividend. As a retiree, dividend income is essential to Mr. Henderson."

"The cumulative average 10-year total return on these stocks (that’s share-price gains plus dividends) was 305 per cent."
Of course, he should have more diversification. But I think his approach emphasizes predictable growth of value and regular cash flow in companies that provide goods and services that will always be in demand. Middle of the road rental properties share those characteristics, because people have to live somewhere, year round.
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Old 11-26-2010, 03:47 PM   #12
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Well, I think stocks like Coke, McDonald's, Exxon, and Walmart are a good start. They are likely to be able to raise prices along with inflation.

If you want something a little more off the beaten path, buy carefully selected vintage high-grade comic books
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Old 11-26-2010, 03:52 PM   #13
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If you want something a little more off the beaten path, buy carefully selected vintage high-grade comic books
The recent sale aside - the people who are vintage high-grade comic books collectors are getting older and dying off so the outlook is not that good.
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Old 11-26-2010, 06:16 PM   #14
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After experiencing two gas crisis's causing recessions, I vote oil stock. As the oil companies get record profits, cola shoots up. It also is neg correlated, or at least was. If inflation is because of M1 oversupply, gas prices rise and you are still covered. I do not foresee oil companies taking a major loss even after the spill.
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Old 11-26-2010, 06:17 PM   #15
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The recent sale aside - the people who are vintage high-grade comic books collectors are getting older and dying off so the outlook is not that good.
Which leads us to wonder what today's kids will want to buy in 30 years as a reminder of their youth.
- Music now comes completely free of any tangible item--no album covers, no CD cases, etc.
- Same with other popular media. While movies are still available on DVD, in 30 years I'm not sure what you'd play them on.
- Cars are still relatively unchanged, and kids will want to relive the glory days of their 30 MPG 4cyl tuner cars, but holding onto a car for a few decades in hopes it will appreciate is an expensive proposition.

The best bet would be something that is relatively inexpensive today, that people feel an emotional attachment to (or associate with a time in their lives), that requires little/no maintenance, which people don't already collect in large numbers and which can't be reproduced easily at a later date.

Maybe today's laptop machines, software, printers, operating systems and applications will seem quaint enough to be in demand in a few decades. Already most folks under 30 have probably never seen a "C:\" prompt. An 8" or 5 1/4" "real" floppy disk is already an interesting novelty.
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Old 11-26-2010, 06:24 PM   #16
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After experiencing two gas crisis's causing recessions, I vote oil stock. As the oil companies get record profits, cola shoots up. It also is somewhat neg correlated, or at least was at one time.
This would work, but only if the economy is also healthy. If things are in a slump, demand for oil (and other commodities) falls which can keep their prices level even as costs for other things rise.
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Old 11-26-2010, 06:27 PM   #17
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But wouldn't the return still beat TIPs current rates and avoid interest rates rise losses?
I will have to do some checking but a company in a country with a currency hedge of a conservative money policy and not inflating relative to euro or dollar relatively speaking and rich in natural resources would be nice in a foreign equity portion of a portfolio.
Consumer stalwarts such as P&G have been mentioned, gold producers are already priced in, what about life insurance? Policies raise premiums by increasing coverage but inevitably pay in inflated money.
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Old 11-26-2010, 06:34 PM   #18
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History question: in the Nixon era of double digit inflation, who came out ahead?
Gerald Ford
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Old 11-26-2010, 07:31 PM   #19
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Rotf.
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Old 12-05-2010, 02:56 PM   #20
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Likewise I'm having trouble getting my mind around TIP's right now. The great majority of my holdings are index funds - Total Stock / Total Bond / Total Int'l. Stock. However, I have bought some Vanguard Materials ETF (VAW) thinking this may give some basic inflation protection in the future.
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