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Opinion: Worried about inflation? Buy these, says State Street

Investors worry about inflation risk to their retirement portfolio put money in the fund invest in inflation-protected Treasury bonds, known as TIPS, for obvious reasons.

However, according to a new study, they may be backing the wrong horse.

Commodities like oil, copper and soybeans instead of TIPS are the best insurance against rising inflation, according to an analysis presented yesterday by State Street Global Advisors at a webinar run by the industry journal. institutional retirement.

Natural resource stocks – that is, stocks of companies that produce goods, such as mining companies or oil companies – as well as real estate investment trusts and infrastructure stocks cascading is like better insurance against inflation than TIPS, the analysis adds.

In summary, these other assets tend to rise and fall as inflation occurs, but in some cases it tends to increase significantly more than TIPS, which means you can get a lot of coverage. more dangerous for your money.

State Street calculates that since 1970, when interest rates have risen, stocks and bonds have both cost you money under real inflationary terms. But commodities have earned 24% year-over-year, and other real assets like resource, REIT and infrastructure stocks are at 9%.

All of this is, of course, based on past performance and comes with the age-old caveat that past performance is no guarantee of future results.

There’s another issue with TIPS that Rob Guiliano, senior portfolio manager at State Street Global Advisors, didn’t mention, but may be paramount: TIPS are so expensive these days that they actually guarantee guarantee that you will lose purchasing power over the life of the link.

TIPS, first introduced in the late 1990s, are in theory almost the perfect investment for retirees and others looking for a secure and reliable income. They are issued by the United States Treasury, and like other Treasuries, are safe from default. You will get your money, to hell or high country. Meanwhile, unlike other Treasury bonds, they also adjust your payments to reflect consumer price inflation. About 20 years ago, when TIPS were new, you could buy them and be sure you’d earn interest rates above 2% or even 3% a year inflation.

Today, TIPS offers guaranteed interest rates lower than the inflation rate. In other words, no matter if prices rise 2% or 5% or 10% in the coming years, you’re guaranteed to lose purchasing power. The loss can be small – from 0.4% a year to 2% a year – but it is real.

The reasons for this are varied, and include the fact that TIPS are still bonds, and in the era of 0% interest rates, all bond yields fall. Bonds act like a seesaw: If the price goes up, the “yield” or interest rate falls.

It is in this environment that the latest research is very interesting. Everyone knows that inflation has risen sharply this year: The October figure hit 6.2%, the highest in decades. Debates are still raging over whether this is a short-term phenomenon caused by the massive change to the world economy after nearly two years of shutdown, or a longer-term phenomenon caused by things like spending government spending and deficits. Most of the people commenting on this thread seem to have some interest in promoting one answer or another, or a political interest. Since American politics has now degenerated into a version of religious sectAll political professionals should be viewed as religious fanatics shouting from the soapbox, and their prognosis as a branch of theology. This includes their economic prognosis. Therefore, when it comes to money, all of their comments should be handled with caution.

All I know is that the bond market currently expects inflation to average 2.73% over the next 10 years. That’s the highest prediction the market has made this millennium, and a huge jump from January, when the forecast was just 2%. Otherwise, it’s still a long way from the 1970s, let alone Weimar Germany.

If you’re worried about inflation, State Street suggests a multi-proportional approach. Giuliano said that investors may want to allocate 5% or 10% of their portfolios to inflation-protected assets, though he added some may want to go as high as 15%. “or even 20%”.

Regardless of the number, their analysis suggests breaking down the allocation by five assets: Commodities themselves, natural resource stocks, infrastructure stocks, real estate investment trusts US property or REIT, as well as TIPS. (For example, if you were allocating $10,000 to inflation hedges, State Street’s diversification strategy would involve $2,500 in commodities, $2,500 in natural resource reserves, and $2,000 in natural resource reserves. $2,000 in infrastructure, $2,000 in TIPS, and $1,000 in REITs.)

All of these are easily investable by ordinary investors: For example through the iShares Bloomberg Roll Select Commodity Strategy low-cost ETFs (equivalents)
CMDY,
-0.47%
,
SPDR S&P Global Natural Resources
GNR,
-2.06%
,
iShares Global Infrastructure
IGF,
-1.42%
,
Vanguard Real Estate Index Fund
VNQ,
-0.59%

and iShares TIPS Bond
TIP,
-0.18%
.
(I own GNR in my own retirement portfolio.)

Of course, if inflation fears subside again, you could suffer from these. Commodities are incredibly volatile, and because they don’t generate income – it really costs money to own a futures contract – they are a painful investment when they go against you. The Bank of America’s latest survey of major institutional investors also shows that commodity futures, which have gained 30% so far this year, are now particularly popular with the big money crowd. If history is any guide it is reason to be cautious.

https://www.marketwatch.com/story/worried-about-inflation-buy-these-says-state-street-11637209545?rss=1&siteid=rss Opinion: Worried about inflation? Buy these, says State Street

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