Business is booming.

Five Strategies To Consider (And A Bonus)

34


On December 14, 2021, the Bureau of Labor Statistics (BLS), released data about a significant increase in the Producer Price Index (PPI), the largest increase since the data was first calculated in November of 2010. For the 12 months ending 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 illustrates, there is no question we have some form of inflation. The question is. How do we play defense?

Why Inflation Matters. Inflation is critical to our retirement planning considerations because it sets our ‘real rate of return’, or what we make after inflation. So, if our portfolio is making 3% and inflation is 3%, we are standing still. If inflation is 6% and we’re making 2%, we’re going backwards. Here’s a chart from the Fed to show the Treasury rate minus CPI. Note that we’re in the negative territory:

Components matter. Inflation has been with us about as long as money has existed. Inflation is a measure of purchasing power. Traditionally, there are three versions of inflation: Demand-pull, where there is more demand than production capacity (think cars both used and new, or houses); Cost-push, where the cost of raw materials increases prices (e.g., steel being up several hundred percent); or Built-in, where wages rise as prices rise (real wages are up as a result of the employment situation).  For 2022, it appears all three types are present. Whether this is ‘sticky’ or ‘slippery’ (or both) remains to be seen. In either case, we should consider defensive tactics.

Defense, defense. There are a variety of ‘normal’ defensive tactics for inflation investing. These include:

·       Treasury Inflation Protected Securities (TIPS)

·       Gold

·       Small Cap Stocks

·       Natural resources

·       Real estate

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

The coupon rate doesn’t change, but the payment does.  Individual TIPS are available direct from the Treasury or are most often bought through a fund or ETF. This sounds easy, so why wouldn’t everyone hedge inflation with TIPS? The answer is ‘negative yield curve’. As of 12/15/21, a 5-year TIPS had a yield of -1.41%, while a 30-year had a negative yield of -0.35%. The negative yield is attributed to the rate on regular treasury bond being lower than the rate of inflation. So, holding individual TIPS will protect against inflation if they are bought directly from the Treasury and held to maturity. On the other hand, a TIPS fund or ETF can buy or sell TIPS at any time, causing the prices to be volatile. As of 12/15/21, the 10-year performance of the iShares TIPS Bond ETF was 3.26%.

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

Gold: All That Glitters. Gold is historically regarded as an inflation hedge, although it is probably better characterized as a currency hedge. There are a number of ways for investing in gold, ranging from the base metal, or an ETF that buys the base metal like GLD; to buying gold mining stocks or a fund or ETF that buys miners. But is it a hedge? On August 15, 1971, Richard Nixon announced that he had taken the US off the gold standard. Since that time, we’ve had some serious bouts of inflation. According to a study by Robert Arnott, gold sometimes worked and sometimes didn’t:

During the 1973-79 timeframe. Gold handily outperformed inflation, REITs, and Commodities. However, in the next two rounds, 1980-84 and 1988-91, gold actually has a negative return during inflationary periods. If we measure from the time the US dropped the gold standard, Gold returned, from 1971-2019, 10.61%, slightly less than stocks or commodities. For a fun look at gold over 3,000 years, have a look at Claude Erb’s paper.

Small Cap Stocks. The theory here is simple: small companies are more nimble and can pass on price increases to customers more easily. History seems to bear this out when we compare inflation-adjusted returns from 1969:

Natural Resources. Natural resources are also widely considered an inflation hedge since raw material price increases tend to correlate with inflation. There is a difference between the underlying commodities and commodity producers. Producers tend to behave more like stocks. In the 1973-79 high inflation period and in 1988-1991, commodities outpaced inflation. In the period 1980-1984, commodities had a positive return, but failed to keep up with inflation.

Real Estate: They Aren’t Making Any More of It. In each of the three higher inflation periods in the last 50 years, only Real Estate Investment Trusts (REITS) have provided a return greater than inflation. Real estate rents and real estate values tend to rise in inflationary times, which gives a REIT a steady cash flow stream. REITs can be invested in though the REIT itself, or through a fund or ETF. REITs have special tax treatment as well, which can change the after-tax return in taxable accounts.

Bottom Line: Diversify. Whether we are in a period of sticky or slippery inflation (or both), diversifying makes sense. Remember to rebalance your portfolio, maybe shifting some weight to small caps, real estate, and commodities. Also, don’t forget the I-bond: 7.12% on a government security is pretty darn good. As always, I’ll try to answer questions: llabrecque@sequoia-financial.com.



Source link

34 Comments
  1. Cczkmt says

    order lanoxin 250mg – order digoxin 250 mg for sale lasix ca

  2. Uxcqeq says

    hydrochlorothiazide pill – zestril 5mg us order bisoprolol online cheap

  3. Tefwlc says

    order lopressor online – order inderal 20mg online cheap order generic adalat 10mg

  4. Jeskfy says

    buy nitroglycerin pill – order nitroglycerin sale order diovan without prescription

  5. Alqvlj says

    rosuvastatin frown – pravastatin while caduet buy wound

  6. Ykxjxd says

    zocor speech – gemfibrozil moral atorvastatin shame

  7. Rrgfgl says

    viagra professional online glare – malegra sheep levitra oral jelly online angry

  8. Vmdpgi says

    priligy bug – levitra with dapoxetine terror cialis with dapoxetine shoulder

  9. Cjzgjh says

    cenforce descend – zenegra pills communication brand viagra pills lose

  10. Qctkpw says

    brand cialis italian – brand levitra roger penisole darling

  11. Llnllc says

    cialis soft tabs tune – cialis soft tabs online happen viagra oral jelly online would

  12. Fsvtof says

    brand cialis sing – zhewitra count penisole american

  13. Kmiqhf says

    cialis soft tabs peer – caverta drop viagra oral jelly online student

  14. Mfjnzs says

    cenforce believe – brand viagra pills bill

  15. Fwfnfa says

    acne medication kiss – acne medication police acne medication gun

  16. Jthiww says

    asthma treatment cable – asthma medication muscle asthma treatment sole

  17. Dtzapd says

    uti treatment back – uti antibiotics immediate treatment for uti horizon

  18. Pauzea says

    pills for treat prostatitis burst – prostatitis medications minute pills for treat prostatitis hole

  19. Aquklf says

    valacyclovir pills baby – valtrex online torch valacyclovir pills alas

  20. Hriqwq says

    claritin pills habit – claritin pills stupid loratadine medication whether

  21. Bmtzdv says

    priligy upper – dapoxetine friend dapoxetine await

  22. Wbwwov says

    loratadine recollection – loratadine medication nanny claritin pills owner

  23. Sjgytl says

    ascorbic acid ink – ascorbic acid park ascorbic acid desperate

  24. Iupzjt says

    promethazine during – promethazine buy promethazine sailor

  25. Wtlsog says

    clarithromycin pills difficulty – clarithromycin bowl cytotec cost

  26. Ijqkka says

    florinef pills accident – fludrocortisone pills puff lansoprazole pills potato

  27. Nkbewy says

    buy generic rabeprazole for sale – buy motilium tablets domperidone medication

  28. Wpkxgo says

    bisacodyl for sale – buy oxybutynin pill liv52 20mg brand

  29. Tspmmw says

    buy bactrim 960mg generic – order tobramycin 10mg sale tobra 5mg cheap

  30. Jrxyvy says

    purchase zovirax sale – oral hydroquinone buy dydrogesterone 10mg sale

  31. Hfcxhy says

    buy dapagliflozin generic – dapagliflozin 10 mg uk order acarbose 25mg sale

  32. Kelrzz says

    griseofulvin over the counter – order generic dipyridamole lopid generic

  33. Ctvphy says

    buy dramamine 50 mg for sale – actonel generic pill risedronate 35 mg

  34. Kkwrps says

    where to buy vasotec without a prescription – buy zovirax online cheap latanoprost sale

Leave A Reply

Your email address will not be published.