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How To Protect Against Inflation?

By Paul J. Carroll, CFP®September 14, 2020December 1st, 2023Videos

With the central banks throughout the world printing money with abandon, how are we supposed to protect ourselves and our portfolios from the risk, ever-present, of runaway inflation? Central banks are using quantitative easing to print money for good reason. The greatest danger is deflation, but as a result we are awash in cash. And from an asset point of view, we’re seeing asset price inflation, acid bubbles. But how do we protect ourselves? We know that deflation is being managed as best as central banks can, but how do we protect ourselves from inflation damaging conservative portfolios? We have a number of options.

First, most obvious, is gold. The problem with gold is something called contango, which led to oil prices being negative briefly back in March, the cost of storage and the fundamental volatility. Real estate has its own problems. Again, it’s a great inflation asset, but right now we’re in a commercial real estate depression, globally. Yes, there are pockets of surviving commercial real estate. There are REITs – real estate investment trusts. They have been decimated this year. They might actually be a good asset class to be getting into. But real estate’s definitely under duress, with the exception of residential suburban real estate. Then there’s debt. You know, the value of debt as a hedge is that with inflation, the debt is devalued. In fact, very much this is what central governments throughout the world are counting on. The Fed has recently announced they don’t care so much about inflation. They’d like to see it exceed 2% because that will devalue the debt. The problem with debt at the individual level is if we do have deflation, debt will be death. You will have to pay off bills with ever-appreciating dollars.

So, whereas that may be a great strategy for a nation-state it’s a little troublesome for the individual. And then there’s TIPS – treasury inflation protected securities. These are interesting devices. On average they have a duration – that’s a weighted average maturity – of about seven years. So a basket of TIPS actually comes with significant interest rate risk. Yes, they will protect you if inflation goes up, but if interest rates go up significantly TIPS will get hammered, as will long bonds. So what are the best options? I would posit that a combination of two strategies makes a lot of sense. First, there’s one piece of real estate that most people have and that’s their own residence. That on its own is a great inflation hedge: maintaining a manageable mortgage refinanced at the lowest possible rate. Maybe even paying a little bit extra, but not being in too big a hurry to pay it off is a great way to hedge against inflation. If you can pay it off, maybe you should put that money somewhere else. Because if there’s inflation, you’ll be paying it off with depreciated dollars. And the second option is TIPS, but specific type: short-term treasury inflation protected securities. What short-term TIPS give us is inflation protection with significantly mitigated interest-rate risk. They are also good ballasts for a portfolio, especially a conservative portfolio. So, whereas it’s impossible for us to forecast what’s coming next we need to keep in mind a couple of things. There are significant risks – landmines – out there right now. There’s a significant chance or risk that as CARES unwinds if Congress and the Senate cannot come to some sort of an agreement, that the economy will quite literally fall off a cliff. We don’t know what’s going to happen. But being protective, both against inflation and against severe recession, is good head work at this time. We wish you the best of success. Thank you.



Treasury Inflation-Protected Securities (TIPS) Definition – Investopedia

Practical Strategies for Adding TIPS to a Portfolio – Vanguard Investor News

Benefits and Risks of TIPS – The Balance

Founder & CEO at Avion Wealth

Paul is the founder and CEO of Avion Wealth, LLC. He leads a team of wealth managers in building and executing financial plans for high net worth individuals and families. Contact Avion Wealth to speak with a financial advisor.