Once more, into the breach.
If inflation is to rear its ugly head once more, what are investor's choices for protecting their portfolios? Luckily, we are no longer wedded to stocks and bonds in our arsenal. The 60/40 portfolio, simple and prevalent, has some serious competition. We can now choose among a variety of asset classes that should do quite well in an inflationary environment. Let's take a look.
What doesn't do well? Traditional bonds as their fixed returns are eaten away by inflation. Case in point a 5% fixed instrument in a 4% inflation environment. Real return? 1%.
Stocks don't necessarily perform well with an inflationary backdrop. Companies can't pass along costs quickly enough and margins erode from higher input prices. In the 1970s we saw the result of this. The market declined steadily as inflation pressures, especially commodity (oil) shocks, decimated the economy.
Real Estate Investment Trusts (REITs)offer a measure of protection. Rents can be adjusted upwards, sometimes annually. Oftentimes the leases themselves have provisions that increase the rent automatically to increases in the CPI or other index.
Timber is said to be an inflation hedge although those other than institutions have difficulty accessing the asset class.
Commodities are a direct inflation play. While the rising cost of inputs shrinks the margins of many businesses it obviously is a great benefit to the equities of the producers, refiners, and miners.
Treasury Inflation Protected Securities (TIPs) are a government bond that has embedded inflation protection. Their nominal return adjusts upward so that the return is protected from inflation.
If you fear that inflation may take hold in the economy at some point discuss with your advisor ways to protect your portfolio.
No comments:
Post a Comment