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Protecting Against Inflation: Evaluating Inflation Hedge Misconceptions and Strategies

The financial media are full of conjecture about which strategies might effectively hedge inflation risk or not. Here we explore which asset classes, if any, have been effective at protecting against inflation risk. First, it is helpful to address some common logical and analytical misconceptions about hedging inflation risk.

Focus on Correlation, Not Volatility

When evaluating whether an asset class effectively protects against inflation, the focus....

Why Rate Increases Are Almost Certainly Good News for Investors
Interest rates have been so low for so long that rate increases in 2013 have no doubt surprised some investors. Per the Treasury's site, the five-year Treasury rate went from 0.76 percent at the start of the year to 1.63 percent through August 19, and the 10-year Treasury rate increased from 1.86 percent to 2.88 percent over this period. These rate increases have prod....
What Are Fixed Income Markets Now Telling Us?

Fixed income markets have experienced a fairly substantial shift in 2013. In particular, we’ve seen a strong shift since Federal Reserve Chairman Ben Bernanke indicated that the Fed might tighten monetary policy earlier than originally expected. I thought it would be worth examining what fixed income markets were projecting at the end of 2012 relative to what they’re projecting now. While acting on personal (or expert) predictions of market movements usually leads to trouble, I think it can be useful to understand what....

Is High Inflation All But Guaranteed?
Many pundits (and a good number of individual investors) have been predicting high inflation as a result of the Federal Reserve’s monetary policy. Over the four years ending 2012, inflation has averaged just 2.2 percent per year, and currently the market expects inflation over the next five years to be just 2.1 percent per year. Clearly, realized inflation has been low and the market expects inflation to be low in the future, which can hardly be interpreted as signs that high inflation is a foregone conclusion. This ....
Investor, Behave Thyself!
Numerous studies have documented the counterproductive tendencies of individual investors. These include paying excessive mutual fund fees, holding tax-inefficient portfolios, having improper asset allocations, chasing returns and poorly diversifying portfolios. My colleague Carl Richards has aptly termed this collection of behaviors "The Behavior Gap," since they can greatly reduce the returns that investors could have earned. I firmly believe corre....
Science vs. Speculation in Post Crisis Bond Markets
This post is obviously a bit anecdotal, but I’ve been thinking about three prominent predictions from the past few years and analyzing those predictions relative to what the market was forecasting and what academic research had to say. The three predictions were:
  1. Interest rates would increase so, you should stick to short-term bonds (if investing in bonds at all).
  2. The municipal market would experience significant trouble in 2011.
  3. ....
Fixed Income Fallacies
It’s hard to think of an area of the world’s capital markets that is more misunderstood and confusing than the fixed income markets. I wanted to clear up some of the fallacies I frequently hear when I talk to investors about fixed income.
“I expect rates to go up, so I’m just going to keep everything in short-term fixed income.”
If I’ve heard this once over the past couple of years, I’ve heard it a thousand ti....
Market-Based Forecasts
I’m taking a break this week from my posts on return premiums to focus on market-based forecasts (a topic that came up in a recent presentation I did for a group out in Oregon). Humans can’t help themselves from forecasting, and many unfortunately act on their own market forecasts or those of the “experts,” which tend to do more harm than good. Yet we can look to the markets themselves for forecasts of the future — forecasts that I would argue are generally more useful than ....
Pick Your Favorite Discount Rate
It’s depressing how little investment knowledge most so-called financial professionals have. (I have theories why this is the case, but those are for another post.) One recent, real-world example of a severe lack of financial knowledge is the ongoing dispute about how state and local pension liabilities should be valued.
In one camp, we have our so-called financial professionals arguing the current methodology is appropriate. This methodology is best d....
Protecting Your Portfolio Against Inflation

At an annual inflation rate of 3 percent, a retiree who is currently spending $100,000 per year will find that spending has grown to approximately $134,000 within a 10-year period. Ideally, most investors want the growth in the value of their portfolio to track inflation as closely as possible and hopefully exceed it substantially. Inflation protection is also important because traditional asset classes such as stocks and nominal bonds have tended to do poorly when inflation is unexpectedly high.