What to do about the coming inflation (if it comes)?

[Meadbh]

Quote:

Originally Posted by smjsl @Meadbh: Thanks for the explanations. It's been a while since I had to take chemistry :-) Have you considered I-bonds instead of or in addition to RRBs? Or are you ineligible for some reason for I-bonds or are there RRB advantages (e.g. I would be wondering how I-bonds are taxed with dual citizenship)?

Only US citizens can purchase I bonds. I'm not a US citizen.
https://www.treasurydirect.gov/RS/BP...&page=rscreate

[audreyh1]

Quote:

Originally Posted by samclem Apologies in advance for another long-ish post.

No problem about the long post. You started a very valuable thread.

I don't worry overmuch if some asset classes become more closely correlated for some periods of time. IMO this "correlation drift" is not necessarily in a permanent direction. IMO we go through periods where some asset classes are more closely correlated and then other periods where they diverge again. So over the very long run, you can still benefit from the diversification.

I hold 5% of my equity holdings in REITs. I have rebalanced many times over the last 10 years, because the REIT position seems to be much more volatile compared to my other equity asset classes. I had many years of taking profits and many years of adding due to losses. To me, if I observe within my own portfolio big swings between asset classes over a several year period, that means my diversification is "working". I don't care what anyone speculates for the future.

Even though I don't expect a huge inflation monster over the next few years, that doesn't mean I don't take steps to protect my portfolio from inflation over the long term, because moderate inflation over many years still can impact a portfolio, and it is still prudent to invest accordingly.

So, I keep a fairly healthy equity exposure, with a 5% of equity position in REITs, and international exposure as well, to offset US inflation versus other currencies. In my bond funds I own diversified bond funds including one that gives international and emerging market exposure. That fund also owns TIPs, but I don't own TIPs directly. I prefer to let the bond fund manager decide when to own TIPs.

I have been watching this fund: Fidelity Strategic Real Return FSRRX Fidelity Strategic Real Return, mutual funds, quote, price - Morningstar. As I increase my bond allocation over time (due to growing older) I may build a position in this fund.

So you can see, even though I am not overly concerned about high inflation, I still own some asset classes that hedge against inflation.

Audrey

[FIREd]

Quote:

Originally Posted by samclem And . . . audrey1, YearstoGo, FIREdreamer, MichaelB, ejman: I want you guys to be right. Inflation is a bad beasty, especially for us ants (the grasshoppers are less affected). If you are wrong, I hope I (and FinanceDude) are big enough not to say "I told you so."

Actually, what I was saying is: Maybe we will or maybe we won't see high inflation. I become wary when a large group of people convinces itself that it knows, without the shadow of a doubt, what will happen in the future. When, everyone starts hawking gold, oil and the Euro, I think it is wise to take a step back and look at the situation from a different perspective. I am just saying that the situation might not as clear cut as some people portrait it to be.

So, since I don't know what the future holds, I prefer to permanently devote a portion of my portfolio to assets providing insurance against inflation, just as I permanently devote a portion of my portfolio to assets providing insurance against deflation.

[youbet]

Quote:

Originally Posted by audreyh1 Even though I don't expect a huge inflation monster over the next few years, that doesn't mean I don't take steps to protect my portfolio from inflation over the long term, because moderate inflation over many years still can impact a portfolio, and it is still prudent to invest accordingly....................................... .................................................. ................ So you can see, even though I am not overly concerned about high inflation, I still own some asset classes that hedge against inflation.

I agree with this outlook 100%. Folks that think inflation is only troublesome if it reaches so-called "hyperinflation" levels will be in for a big surprise when we have a decade or two of 3% - 5% inflation with investment returns lower than historic trends.

[ejman]

Quote:

Originally Posted by youbet I agree with this outlook 100%. Folks that think inflation is only troublesome if it reaches so-called "hyperinflation" levels will be in for a big surprise when we have a decade or two of 3% - 5% inflation with investment returns lower than historic trends.

Agree also, but in fact we have lived over the last decade with inflation at about 2 % a year or so and equity investment returns have been very poor over that period and probably not kept up even with that low inflation. But many individuals (myself included) have returns from a diversified portfolio that bettered both inflation and an all equity portfolio

I think this just points to the value of a diversified investment outlook. One never knows exactly (or even approximately) how events will unfold and many pots cooking certainly seems to me as a safer approach than betting it all in one or a few pots. After all, once one is ER'd (if the planning was realistic) it doesn't take much more than a few % points over inflation to stay ER'd.

I am concerned that for some people the current common knowledge that commodities + Gold/Silver will be the impregnable refuge for the inevitable coming hyperinflation will result in over concentrated portfolios. I got burned with this approach In my reckless youth when I used to think that oracles actually were such. I bought Gold at about $800 or so an oz back in 1980 and then watched it go down to $250 and change when I finally sold it mid 90's. Thank God that in the meantime I also started constructing a separate diversified Portfolio that did allow me to ER. If I had remained with my original thinking I'd still be at the salt mines...

[youbet]

Quote:

Originally Posted by ejman Agree also, but in fact we have lived over the last decade with inflation at about 2 % a year or so and equity investment returns have been very poor over that period and probably not kept up even with that low inflation..

The difference between a couple of decades with 2% inflation and a couple of decades with 3% - 5% inflation (as suggested in my post) will be huge. Not a good comparison. I'm suggesting that folks who mistakenly think that mid-level inflation over a prolonged period will look the same as the recent mild 2% are going to be in for trouble.

I'm three yrs into retirement. The FireCalc run built on my situation at retirement uses historical CPI as the inflation factor and has a survival rate of 99.1%. I'm hoping that future inflation is no worse than historical inflation. If I plug in some other inflation rates, I get different results, some kind of scary. Here are some examples of my retirement plan survivor rates assuming other rates of inflation going forward:

Historical CPI - 99.1%
2% - 100%
3% - 99.1%
4% - 91.7$
5% - 47.7%

It doesn't take too much inflation (certainly not "hyperinflation" levels) over a retirement to kick the ever loving pajeebees out of survival rates of your portfolio. I lived through the WIN buttons and high inflation rates of the 70's and made it OK. But I am worried that inflation rates during my retirement will creep up to regularly be in the 4% or 5% range and that's going to hurt if I don't find a way to cope via portfolio performance.

BTW - no cola'd pensions here......

[Gearhead Jim]

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Originally Posted by . . . Yrs to Go ... I happen to think economists today know a lot more about monetary policy than they did in the 70's. I wouldn't count on them making the same mistakes. ...

Unfortunately, politicians DO keep making the same mistakes.

You've heard about the May Day parade is Russia where they had the economists marching with the army? Putin asked why the economists were there, and an aide replied "Because they have done so much damage."

Unfortunately, my crystal ball remains very cloudy.

[Gone4Good]

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Originally Posted by Gearhead Jim Unfortunately, politicians DO keep making the same mistakes. You've heard about the May Day parade is Russia where they had the economists marching with the army? Putin asked why the economists were there, and an aide replied "Because they have done so much damage." Unfortunately, my crystal ball remains very cloudy.

We'll I'll agree once we start using the military as a political goon squad.

In terms of political pressure on the Fed, things couldn't have lined up better. Bernanke has essentially secured his re-appointment as Chairman already. Withdrawing liquidity will be a chore for the early part of his second term - long before he has to worry about a 3rd term. And that 3rd term will be appointed by the next president, not this one.

Besides, Bernanke stands to go down in history as the man who prevented the second Great Depression. He's fully aware that he can only claim that title if he doesn't mess up the final act. There is no way he jeopardizes his legacy in exchange for a 3rd term. No way!

[Gone4Good]

Quote:

Originally Posted by youbet Historical CPI - 99.1% 2% - 100% 3% - 99.1% 4% - 91.7$ 5% - 47.7%

I suspect this sensitivity gives misleading results because it changes one variable and leaves other dependent variables unchanged. Negative real interest rates come to mind. Inflation during the Great Depression is another.

Meanwhile, from 1970-2000 the average annual increase in CPI was 5.1%. According to FireCalc a 4% WR on a 60/40 portfolio still survived those 30 years.

I'm not saying higher inflation isn't bad. I just think modestly higher inflation probably isn't as devastating as your sensitivity suggests.

Psst. TIPs

[samclem]

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Originally Posted by . . . Yrs to Go Besides, Bernanke stands to go down in history as the man who prevented the second Great Depression.

I dunno. Being a "preventer" is not a road to fame and adulation (ask anyone who flew for SAC or spent years beneath the waves on an SSBN. These guys are still waiting for the parade they deserve). OTOH, if inflation somehow gets out of hand such a way that the Fed doesn't get blamed and Bernanke can muscle it down, he might take the crown from Volker.

[unclemick]

I seem to remember bits and pieces of some long winded debates with the Brit/Commonwealth engineers (late 70's/early 80's) - Swiss annuities!

They thought provincial Americans were too - wellll provincial and didn't think global enough.

1. Provincial to the bitter end - psssst Wellesley!

2. Or American passport, Vanguard Total World Stock Index (conservative allocation for your age) and short term fixed instuments in the currency of where you are at.

And like the Terhorst's over the decades - know when to leave Argentina - AND when to return.

heh heh heh - Agile, mobile and hosile. Saw a cogent agrument last night rating Alabama no. 1.

[Gone4Good]

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Originally Posted by samclem I dunno. Being a "preventer" is not a road to fame and adulation (ask anyone who flew for SAC or spent years beneath the waves on an SSBN. These guys are still waiting for the parade they deserve).

Maybe, but this feels a lot more like Kennedy and the Cuban Missile Crisis than someone anonymously doing yeoman's work as part of the silent service.

[ejman]

Quote:

Originally Posted by youbet The difference between a couple of decades with 2% inflation and a couple of decades with 3% - 5% inflation (as suggested in my post) will be huge. Not a good comparison. I'm suggesting that folks who mistakenly think that mid-level inflation over a prolonged period will look the same as the recent mild 2% are going to be in for trouble. I'm three yrs into retirement. The FireCalc run built on my situation at retirement uses historical CPI as the inflation factor and has a survival rate of 99.1%. I'm hoping that future inflation is no worse than historical inflation. If I plug in some other inflation rates, I get different results, some kind of scary. Here are some examples of my retirement plan survivor rates assuming other rates of inflation going forward: Historical CPI - 99.1% 2% - 100% 3% - 99.1% 4% - 91.7$ 5% - 47.7% It doesn't take too much inflation (certainly not "hyperinflation" levels) over a retirement to kick the ever loving pajeebees out of survival rates of your portfolio. I lived through the WIN buttons and high inflation rates of the 70's and made it OK. But I am worried that inflation rates during my retirement will creep up to regularly be in the 4% or 5% range and that's going to hurt if I don't find a way to cope via portfolio performance. BTW - no cola'd pensions here......

Thank you for noting the inflation impact on Firecalc runs. Although I used Firecalc quite a bit for my own ER, I've never really played with the inflation input parameter. With my own asset allocation and spending versus assets, I get 100% success until I hit 6 % inflation when it drops to 99.1% then it starts dropping a little faster 83.5% at 8 % inflation and at 10% inflation I'm down to 28.4% success- back to the salt mines for me! (No REAl Pensions either well, a little $5k/year non cola'd pension starting 6 years from now)

I don't really understand how the inflation adjustment factor works in Firecalc so I'm all ears (or eyes anyway)

[Kabekew]

Macro Economic theory has come a long way in the 30 years since the U.S. last had an inflation problem, so I don't see how you guys think the Fed will forget how to control it all of the sudden?

[IBWino]

Quote:

Originally Posted by Kabekew Macro Economic theory has come a long way in the 30 years since the U.S. last had an inflation problem, so I don't see how you guys think the Fed will forget how to control it all of the sudden?

Not an issue of forgetting...I think it's more an issue of not letting politics get in the way of inflation control.