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By Christine Benz and David Blanchett | 01-30-2013 10:00 AM

3 Inflation-Fighting Assets for Your Toolkit

TIPS, real estate, and commodities are great inflation-hedging, liquid investments, says Morningstar's David Blanchett, who details the importance of exposure to these assets.

This video discusses Morningstar's Real Asset Index, which is designed to help benchmark multiasset inflation investments; investors may also use the index to help shape the portion of the portfolio they have earmarked for explicit inflation protection. Note that the three asset classes discussed in the video--Treasury Inflation-Protected Securities, real estate, and commodities--are not intended to supplant traditional core asset classes like stocks, nominal bonds, and cash, but rather to augment them. The amount of inflation protection one needs varies by individual, with retired investors generally needing more inflation protection than younger people who are still earning paychecks.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. One of investors' key challenges is to beat the rate of inflation over time. Joining me to share some tips on how to do that is David Blanchett. He is head of retirement research for Morningstar.

David, thank you so much for being here.

David Blanchett: Thank you for having me.

Benz: David, let's talk about why and who needs inflation protection. It sounds like it kind of depends on where you are in your life stage. Let's say, I am a person who is still working, and I am. How much do I need to build inflation protection explicitly into my portfolio?

Blanchett: Most people, as you noted who are still working, have an excellent inflation hedge; that's their wages. Wages tend to increase through time by inflation. So, if you're very young, most of your kind of total net worth is in your wages and so you don't actually need an inflation hedge. But as you kind of move toward retirement and your human capital, your wages, is replaced with financial capital, your savings, you'd look more and more toward inflation-hedging investments to kind of make sure that as you move through time, the real value of your money stays on pace with inflation.

Benz: So, you have contributed to some research that constructed a Real Asset Index from Morningstar, and I'd like to talk about the constituent holdings within that index. What are the key asset classes that you think belong in an inflation fighter toolkit for a portfolio?

Blanchett: Well, there's lots of different investments that you can use to hedge against inflation. There's expected inflation and unexpected inflation. And the three main asset classes we looked at were Treasury Inflation-Protected Securities, real estate, and commodities. Those were kind of the three main aspects of the index because those three are not only kind of great hedges against inflation, but also very liquid investments for investors to purchase.

Benz: Let's discuss then rough allocations to those three asset classes; how would you apportion…

Blanchett: Within the index, it's 40% TIPS, 30% commodities that are long and short, 15% real estate, and then 15% long-only commodities--things like master limited partnerships and actual stocks that kind of go out and dig for iron and things like that.

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