Inflation

[Robandcindy2]

(Didn't know whether to put this in The Economy area or here)

Inflation is currently in the Death By A Thousand Cuts phase at 1.5%.
Inflation Calculator

But it will be back in a big way eventually as the Fed is running out of ammo.

Some even write that "a little inflation will be good for investors/economy"
Inflation Article

A good article on Morningstar got me wondering about this. Previously I had simply followed Rick Ferri's (Portfolio Solutions) bond allocation in buying TIPS.

Is Your Retirement Portfolio's Asset Allocation on Track?

And specifically this chart:

M* Lifetime Allocations

So......

This weekend's question is:

Are you investing (some or all) of your assets in preparation for higher inflation?

Have a terrific week everyone!

Rob

[Dividend Watcher]

(02-09-2014, 09:47 AM)Robandcindy2 Wrote: Are you investing (some or all) of your assets in preparation for higher inflation?

I really have no portfolio strategy for inflation specifically.

I think Eddie Herring's article on SA did a credible job of pointing out quality companies were able to at least hold their own during the inflationary 70s. Will I be able to pick them all or, should I say, every one I hold will exhibit those qualities? Highly doubtful. Just like I know I'm not a good market timer.

What are the alternatives? Bonds? CDs? Well, rates certainly did rise but once you invested your money, I don't recall rates rising and falling on a specific bond to compensate for the change in inflation rate. You were stuck at the rate you bought which may or may not have been adequate depending on how well you flipped the coin, IMO. Then, several years later when your CD or bond matured, you were left with seriously devalued principal. Now where this would work in your favor is if the maturity was well after the inflationary period ended and rates went back down to "normal" levels. In the meantime you're still getting the elevated rates you purchased until maturity as long as they're not called on you.

Gold is assumed to be a good hedge but once the crisis passes, whether it was the inflationary 70s or what we've seen so far through the great recession, it eventually falls back down. So I guess if your timing is good, you can probably make a good return with securitized gold (miners, ETFs, etc.). The thing I don't like is the bullion market. You're going to buy at retail but sell it back at wholesale. Again, your timing has to be good to overcome the spread.

I found this on Wikipedia when I was wondering about gold in the recession:

"In his book Basic Economics, Thomas Sowell argued that, in the long-term, gold's high volatility when compared to stocks and bonds, means that gold does not hold its value compared to stocks and bonds:

To take an extreme example [of price volatility], while a dollar invested in bonds in 1801 would be worth nearly a thousand dollars by 1998, a dollar invested in stocks that same year would be worth more than half a million dollars in real terms. Meanwhile, a dollar invested in gold in 1801 would by 1998 be worth just 78 cents."

Land or real estate seems to be a good hedge. However, I ain't rich so the cash required, and the illiquidity, would prevent me from holding much. So maybe equity REITS would be good investment. I hold O right now and plan on adding a couple more positions at some time.

Commodities may be good investment. I'm ignorant of the commodities markets so it probably is not a good idea for me to try that. However, there are some stocks that are commodity producers.

So my strategy, which is the same without considering inflation, is to diversify in industry sectors and companies and monitor. That's my plan. I still have a hole in the commodities/basic materials sector but I'm working on that.

In reality, I'm more concerned with deflation for the foreseeable future rather than inflation.

[hendi_alex]

For inflation, IMO, it is best to either invest in physical things or companies which own physical assets and/or to invest in companies which have wide moats and who have pricing power.

[Robandcindy2]

I have been evaluating this ETF for my Inflation Hedge:

RLY SPDR SSgA Multi-Asset Real Return ETF

http://etfs.morningstar.com/quote?t=rly

It is an ETF of ETF's. Listed below (sorry for the formatting) is the current allocation according to M*. I already have TIP funds so not sure if I want more TIPs or to buy these ETF's using my own allocation amounts, or sell my TIPs and just hold RLY....

SPDR S&P Global Natural Resources 37.81
—
SPDR Barclays TIPS 13.24
—
SPDR Dow Jones Intl Real Estate 9.46
—
PowerShares DB Commodity Index Tracking 9.39
—
SPDR Dow Jones REIT ETF 9.38
—
SPDR DB Intl Govt Infl-Protected Bond 6.54
—
SPDR S&P Metals & Mining ETF 4.73
—
Energy Select Sector SPDR 3.82
—
PowerShares Global Agriculture 2.94
—
SPDR S&P International Energy Sector 2.02
—
Market Vectors Gold Miners ETF 0.58
—
PowerShares DB Oil 0.01