What’s the best inflation hedge?
I’ve been reading a couple of different things lately that suggest the U.S. is headed for a period of higher inflation. I can think of a few items that are clearly heading that way like health care, education, and gas. It got me wondering what the best action to take is if you expect a rise in inflation.
I know the most common inflation hedge is gold. The problem with that as I see it is gold has had an enormous run-up lately. It’s gone from around $300 per ounce five years ago to pushing $700 today. That looks like buying at the top to me. Besides, I’m not entirely sure of the mechanism involved.
Inflation-protected Treasury securities is another option. I’ve talked about TIPS before. You can’t put a large portion of your portfolio in TIPS, though. The yield is too low for most situations.
A third possibility is ‘hard’ assets like REITs or natural resources. For REITs, it’s the same fundamental problem as gold. The price of real estate has run up recently. I think there’s not much gas left in REITs. As for natural resources, I don’t know anything about timber, oil, or natural gas. That’s out.
So what to do? If I think inflation is headed up, what moves, if any, should I make in my finances? Looks like I’ll be doing more reading…
April 29th, 2007 at 10:41 pm
I’m a big fan of diversification, so diversify among all these inflation hedges to help you mitigate the risk of buying one at the top. A little TIPS, a little REITs, maybe some gold/silver ETFs… Also, as for natural resources, how about some sector-specific funds for natural resources, commodities, and/or energy. Finally, I don’t know if you own a home, but there’s part of your inflation hedge right there. Put a little more into your motgage payments and get a little more equity in your home now that we are, I believe, approaching the bottom of the residential real estate downturn.
May 1st, 2007 at 4:57 am
If you have a fixed rate mortgage, where your interest rate is pinned low, every penny that you have leveraged on that property (meaning NOT in equity) is a hedge against inflation. Once you are out from under PMI and paying a low interest rate on a regular schedule, why would you want to pay ahead if your interest rate is below current rates? To take out equity later when overall interest rates are lower? Yes, the property itself is a hedge against inflation, but paying more money into your mortgage doesn’t increase the value of the property or increase your ownership/use of it. As long as you can make your mortgage payment through the life of your loan, you own 100% of the house from the day you buy it until the day you sell it. Or maybe I’m confused by your idea.
May 2nd, 2007 at 9:43 pm
No, Micah, you’re right. No need to put extra equity into the house if the value will increase anyway due to inflation. I’m just debt averse and let that cloud my judgements…
March 25th, 2008 at 7:53 pm
In your fight against inflation, the safest inflation hedge you can have is disciplined management of your personal debt. Managing debt effectively may not be as exciting as investing in the latest hot stock market sector or squirrelling away gold bullion in a vault hidden in your mother-in-law’s back forty, but it will give you a superior return on your effort and will free up scarce funds that you can invest productively later.