Well, I'm way overdue for my portfolio review and rebalancing, but am doing it now. We've discussed possible impending inflation due to the huge slug of money dumped into the economy by the government--when the velocity of money picks up again, these bucks will be used to buy a relatively unchanged quantity of goods and services=higher inflation. Of course, the fed could take steps to bring this money out of circulation--all of which would put a damper on growth, possibly during an election year. Unlikely
So, what's a rebalancing investor to do?
TIPS, TIP funds, gold, oil, other currencies: there are plenty of options out there. The article here does the best job I've seen of explaining the pitfalls of each.
- TIPS and TIPS Funds:
-- May not accurately reflect your own inflation (where's CFB when we need him!)
-- The value of existing TIPS could take a huge hit once the Fed raises rates. Or, if they have to raise rates because investors are increasingly concerned about getting repaid their money. So, inflation is raging, but the value of your TIPS (or TIPS fund) is plummeting because the govt is issuing new bonds (maybe including TIPS) which pay a higher rate than yours. Not much protection. Only buying an actual bond and holding it to maturity will avoid these problems.
- Gold and Gold mining:
-- Poorly correlated to actual inflation in the past.
-- When the fed raises rates, gold prices will go down as people seek higher fixed returns and have reduced concerns about future inflation (regardless of what is actually happening to prices at that time) .
- Commodities ETFs and funds
-- For esoteric reasons, the futures contracts many deal in can get driven down in price even when prices, and expected future prices, for the underlying commodity are going up (today's new word: "contango")
-- If economic activity decreases while inflation rages, there'll be less demand for many commodities, so their prices will stay steady or decrease.
Okay, so there are no "silver bullet" solutions out there to protect against inflation in all scenarios. Our options, as I see them (comments/criticisms solicited):
A) Diversify across these types of inflation insurance: Buy some of each and hope that you'll be protetced by something in the particular inflationary environment that comes next.
B) Make a bet. Try to guess which might do best. Right now, if I had to bet I would buy some exposure to energy stocks. If the dollar devalues, oil is likely to keep the same value and be worth more of the devalued dollars. Sure, if industrial demand goes down then oil prices will go down somewhat, but they'll come back. Over time, world demand for energy of all kinds is going to mushroom. I'm not worried about the windmills and PV panels.
c) Fuggedaboutit: Don't try to outsmart the inflation guessers. The expectations about possible upcoming inflation are already built into the price of any "insurance" you could buy. Just own a bunch of diversified stocks. They generally do well in keeping up with moderate inflation. You'll own some things that do well in high inflation (REITs, etc) and some things that might get hurt, but overall things will go okay. Stocks don't do well in "crazy high" inflation (which disrupts the financial markets and business cycles), but at that point we're in a whole new ballgame--guns, ammo, dried food and small gold coins.
How are you addressing this? I'm leaning toward Option C, but a small bit of Option B might help address the need to feel like I'm doing something about the potential problem.
So, what's a rebalancing investor to do?
TIPS, TIP funds, gold, oil, other currencies: there are plenty of options out there. The article here does the best job I've seen of explaining the pitfalls of each.
- TIPS and TIPS Funds:
-- May not accurately reflect your own inflation (where's CFB when we need him!)
-- The value of existing TIPS could take a huge hit once the Fed raises rates. Or, if they have to raise rates because investors are increasingly concerned about getting repaid their money. So, inflation is raging, but the value of your TIPS (or TIPS fund) is plummeting because the govt is issuing new bonds (maybe including TIPS) which pay a higher rate than yours. Not much protection. Only buying an actual bond and holding it to maturity will avoid these problems.
- Gold and Gold mining:
-- Poorly correlated to actual inflation in the past.
-- When the fed raises rates, gold prices will go down as people seek higher fixed returns and have reduced concerns about future inflation (regardless of what is actually happening to prices at that time) .
- Commodities ETFs and funds
-- For esoteric reasons, the futures contracts many deal in can get driven down in price even when prices, and expected future prices, for the underlying commodity are going up (today's new word: "contango")
-- If economic activity decreases while inflation rages, there'll be less demand for many commodities, so their prices will stay steady or decrease.
Okay, so there are no "silver bullet" solutions out there to protect against inflation in all scenarios. Our options, as I see them (comments/criticisms solicited):
A) Diversify across these types of inflation insurance: Buy some of each and hope that you'll be protetced by something in the particular inflationary environment that comes next.
B) Make a bet. Try to guess which might do best. Right now, if I had to bet I would buy some exposure to energy stocks. If the dollar devalues, oil is likely to keep the same value and be worth more of the devalued dollars. Sure, if industrial demand goes down then oil prices will go down somewhat, but they'll come back. Over time, world demand for energy of all kinds is going to mushroom. I'm not worried about the windmills and PV panels.
c) Fuggedaboutit: Don't try to outsmart the inflation guessers. The expectations about possible upcoming inflation are already built into the price of any "insurance" you could buy. Just own a bunch of diversified stocks. They generally do well in keeping up with moderate inflation. You'll own some things that do well in high inflation (REITs, etc) and some things that might get hurt, but overall things will go okay. Stocks don't do well in "crazy high" inflation (which disrupts the financial markets and business cycles), but at that point we're in a whole new ballgame--guns, ammo, dried food and small gold coins.
How are you addressing this? I'm leaning toward Option C, but a small bit of Option B might help address the need to feel like I'm doing something about the potential problem.