How investors can hedge against inflation


The Social Security Administration’s announcement on Oct. 13 of a 5.9% cost-of-living (COLA) adjustment for benefits in 2022 may have come as a surprise to many. After all, the U.S. Consumer Price Index for All Urban Consumers (CPI-U) on which the COLA was based had maintained average annual increases. less than 2.5% since 2012 until the ramp-up this year.

CPA financial planners interviewed agreed that the majority of investors probably do not need to take drastic inflation hedging measures.

On the one hand, many analysts doubt that the country will enter high or prolonged inflation. The Federal Open Market Committee (FOMC) of the US Federal Reserve Summary of economic projections for September 22 cited the US Department of Commerce Bureau of Economic Analysis’s personal consumption expenditure price index as predicting that inflation would drop to 2.2% for 2022 and 2023 and 2.1% for 2024. However, Others might view this forecast with skepticism, given that the FOMC in its December 2020 summary forecast inflation this year to be just 1.8%.

On the other hand, the majority of investors, who typically save for retirement, have an interest in keeping their eyes on a time horizon longer than inflationary cycles, CPAs said.

“When we invest for clients, typically we invest over long periods of time,” said Michael Goodman, CPA / PFS, president of Wealthstream Advisors Inc. in New York and co-chair of AICPA and CIMA. Personal Financial Planning Summit. “And we don’t expect inflation to be a problem in the long run.”

Likewise, Chris Benson, CPA / PFS, at LK Benson & Co. in Baltimore, said the prospect of higher inflation shouldn’t necessarily cause advisers to change their investment strategy.

“I don’t think anyone knows how long the current inflationary period will last or how bad the inflation will be,” Benson said, adding that the current increase would be due to circumstantial factors which may well be transient, in particular COVID- 19 business closures and related supply chain disruptions. Even if this persists, “we still don’t know exactly how this would affect the different asset classes.”

Yet even temporary, moderate inflation can erode the value of many assets and any fixed income they generate. Retirees and others depending on their investments for current income may see more meaning in coverage. A diversified portfolio typically includes assets that perform better than others in times of inflation. Benson said clients have been asking for months what they should do about inflation and in some cases have increased their holdings of those assets.


One instrument specifically designed as an inflation hedge is Inflation-Protected Treasury Securities (TIPS), which have been offered since 1997. The principal of TIPS increases with inflation as measured by the CPI-U (and decreases with deflation). TIPS also pay semi-annual fixed interest, which is usually much lower than that of ordinary Treasury bonds. They can be held to maturity or sold on the secondary market. The Treasury offers them through competitive and non-competitive auctions, with maturities of five, 10 and 30 years. Some corporate bonds also include an inflation protection feature (CIPS). For more information, see “TIPS and CIPS”, JofA, January 2007.

TIPS make sense, but only in a conservative strategy, and even there, probably not as a primary position, Benson and Goodman said.

“We don’t buy individual bonds for clients but generally have an allocation to a TIPS fund, especially for retirees who are dipping into their wallets,” Benson said.

“There is no question that TIPS is a good cover,” agreed Goodman. “But that will only protect your bond position or your short-term liquidity needs. You won’t get the growth you need beyond inflation.”


Real estate has also long been viewed as a haven from inflation, although most investors are not looking to buy buildings and land, which come with their own risk and volatility, or “noise,” as it was called. Goodman. On the contrary, positions in mutual funds and exchange-traded funds (ETFs) investing in real estate are generally more achievable and predictable, as well as in real estate investment trusts (REITs), and can provide some of the benefits. the perceived inflation protection of the underlying real estate interests.

REITs “are another asset class that we include in almost all client portfolios,” said Benson. But, he said, “correlations are low between nominal yields and inflation for REITs, and research is mixed as to whether they will still provide protection in an inflationary environment.”

With COVID-19 still prompting many office workers to work from home, the outlook for commercial real estate could be concerning, but some cities are showing improvement in this sector, he added. “A diversified fund like the Vanguard Real Estate ETF (VNQ) is exposed to many types of real estate, and I think this is the best way to mitigate the potential downside risk on the trading side.”

Gold and other raw materials

The two CPAs played down the traditional view of gold as a safe haven.

“I don’t generally recommend gold in my clients’ portfolios,” Goodman said. With no expected return, the metal’s value is almost entirely speculative, he said.

“While a lot of people think of gold as a hedge against inflation, the data doesn’t seem to support that idea,” Benson said.

A commodity fund may have a minor place in a portfolio, “but this asset class has been losing money steadily for years,” Benson said. Stocks with growth potential and bonds and other fixed income investments are generally a better bet.


Despite the recent corrective jolts, given that the S&P 500 Index is up nearly 19% for 2021 as of this writing, it’s hard to argue with a portfolio’s weighting in equities, including as an antidote to inflation, Benson suggested.

“I think stocks in general are one of the best hedges against inflation and, if you stay invested for the long term, they will likely outperform inflation,” he said.

While it’s hard to say which sector of trade stocks is better than another in an inflationary environment, Goodman said he had a hunch that companies producing everyday consumer goods and funds investing primarily in these the latter might be a wise choice.

“Your basic daily needs that people, even if prices go up, will just need to buy ‘are probably better,’ when they might forgo buying something more expensive or more luxurious,” Goodman said. . Likewise, healthcare could be a good area to watch, he added.

Other strategies

While not an investment, the Social Security COLA itself protects against inflation, and Benson pointed out that this is true even for a worker who has reached retirement age. full rate but deferred payment of retirement benefits. COLA increases potential benefits, in addition to the credit by 8% (for those born 1943 and later) for each year that benefits are deferred, until age 70, when the latter increase ceases.

“While it’s always a life expectancy calculation, if you’re worried about long-term inflation, you can’t get a much better investment than this,” Benson said.

Paul Bonner ([email protected]) is a JofA senior editor.


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