Inflation is a reality that investors have to face and prepare for. By investing in assets that can outperform inflation and diversifying your portfolio across different asset classes, you can hedge against inflation and preserve your wealth. And hopefully, you can also have some fun along the way. Because investing doesn’t have to be boring or stressful. It can also be enjoyable and rewarding.
In this post I will share my opinion on what is commonly recommended and what I prefer to protect against Inflation.
Treasury Inflation-Protected Securities (TIPS)
There are some benefits to residing in a sound and free country. There is nothing I favor more than the profound impulsive behavior of the common person to spend their money on useless things in the pursuit of happiness. Some call that freewill, I view that as the base of our economy! Then there are Treasury Inflation Protection Securities.
Treasury Inflation-Protected Securities (TIPS) are a type of government Bond that adjusts its principal and interest payments according to the changes in the Consumer Price Index (CPI), which measures inflation. TIPS offer a fixed real rate of return that is guaranteed by the U.S. government.
TIPS can protect your investments from inflation risk, as they ensure that your purchasing power is maintained over time. However, TIPS also have some drawbacks, such as low nominal yields (Adjusting overtime), interest rate risk, and Federal Tax implications. Investing in TIPS can be done through individual bonds, mutual funds, or ETFs.
I believe every parent should purchase Inflation Protected Treasury Bonds at regular intervals for their children. It is a solid base for many Investment Strategies, secure Savings, Tax Advantaged Interest (Especially if you live in NJ), and easily accessible funds (Internet seems to be a requirement).
ETF's and Treasury Direct provide access to Treasury Inflation Protection assets at lower rates. ETF's can be purchased through a Broker, like eTrade, using Automatic Investment Strategies. For example, an Investor could Invest $20 per week in an ETF. Alternatively, Savers can purchase I-Bonds at smaller Intervals through TreasuryDirect.Gov. Treasury Direct offers investment Intervals too. I suggest a monthly allotment. Children will be able to redeem portions of the I-Bonds in the Future, rather than redeeming the entire I-Bond.
Some ETF's that offer exposure to TIPs (eTrade offers Automatic Investing):
- VTIP (Vanguard Short-Term Inflation-Protected ETF - One of my Fav's)
- TIP (iShares TIPS Bond ETF)
- SCHP (Schwab U.S. TIPS ETF)
- GTIP (Goldman Sachs Access Inflation Protected USD Bond ETF)
Diversification (Appropriate Position Sizing)
A well-diversified portfolio should include some exposure to Stocks, Bonds, Gold, Commodities, Real Estate, and TIPS/I-Bonds. The exact allocation will depend on your risk tolerance, time horizon, and investment objectives. You should also review your portfolio periodically and rebalance it as needed to maintain your desired asset mix. I believe it is very important to focus on the overall economy nationally and internationally, when making rebalancing decisions. As Interest rates are increasing, my favor shift towards short term Bonds, Brokered CD's, and stalwart Stocks surrounding energy and commodities that offer Tax Favorable Dividends.
Real Estate
Real estate is another asset class that can provide inflation protection. Real estate is a tangible asset that can generate income through Rents or Capital Appreciation through Price Appreciation. Real Estate, however, is also illiquid, expensive, and burdensome.
Investing in real estate can be done through Direct Ownership, Real Estate Investment Trusts (REITs), or Real Estate Mutual Funds or ETFs. But watch out, these vehicles can also have their own challenges, such as Taxes, Maintenance, Financing, and Management. Plus, you may end up dealing with tenants from hell, neighbors from hell, or landlords from hell.
I prefer Direct Ownership for my own (or Family) Housing needs. Purchasing a suitable Home is ideal and a solid foundation for yourself and/or your family. There is nothing more stabilizing than home ownership and that should be a priority.
As for Investment vehicles, I prefer REIT's (Stocks) and ETF's. I own four REITs. Dividends paid by my REITs have been Taxed as Ordinary Income. My Portfolio includes the following REITs:
- CCI (CROWN CASTLE INC COMMON STOCK)
- CUBE (CUBESMART)
- NNN (NNN REIT INC COMMON STOCK)
- OHI (OMEGA HEALTHCARE INVESTORS INC)
- DHI (D R HORTON INC COM)
- ETD (ETHAN ALLEN INTERIORS INC)
- HD (HOME DEPOT)
- KMI (Formerly a REIT - KINDER MORGAN)
- LEN (LENNAR CORPORATION)
- PHM (PULTE GROUP)
- BAC (BANK OF AMERICA)
- CFG (CITIZENS FINANCIAL GROUP - with Subsidiary CFG Home Loans)
- PNC (PNC FINL SVCS GROUP)
- PNFP (PINNACLE FINL PARTNERS INC)
