Inflation

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  1. 3 Risks That Might Be Lurking in Your Portfolio

    Video Reports

    Wed, 28 Jan 2015

    isn't on a lot of folks' minds is inflation risk because we haven't seen a lot ..... assessment. Benz: That's right. Inflation has been very, very low, and one thing ..... would typically use as hedges against inflation . So, we've seen pretty strong outflows

    Inflation found at 5:37

    risk, though, that probably isn't on a lot of folks' minds is inflation risk because we haven't seen a lot of it, especially recently with oil prices coming down. But that doesn't mean you should ignore it as you're doing a risk assessment. Benz: That's right. Inflation has been very, very low, and one thing we've seen when we look at flows going in and out of funds is that investors seem to be abandoning a lot of investment types that they would typically use as hedges against inflation . So, we've seen pretty strong outflows coming out of Treasury Inflation -Protected Securities funds--also commodities funds. Certainly, performance hasn't been great in either of these areas. Commodities, especially, have been affected by slumping energy prices, so investors appear to be kind of giving up on these inflation hedges--and there might be some rational reasons to do so. I think the key thing that they want to keep in mind, though, is that the prices have become depressed as well. So, is it necessarily a good time to be giving up on some of these categories if you know, in the long term, you want them to be part of your portfolio? Stipp: So, inflation protection is like buying insurance. And if insurance is cheap, maybe it's a good time to buy some of it, if you want that protection in the long term. So, let's talk a little bit about how I size up this inflation risk. The first thing is how concerned should I be about inflation ? It has been tame, but it also depends on me and my life stage--how much of a risk it is right now. Benz: It absolutely does. So, I would address this question based on life stage. For people who are in accumulation mode--certainly early accumulators--they don't have a lot of reason to be too worried about the impact of inflation on their portfolios. The key reason is that they are not yet spending those portfolios. And if they have ample equity exposure within their portfolios, that is the asset class that, over time, will tend to outrun inflation --and over long periods of time, probably by a decent margin. So, if they have ample equity exposure in their portfolio, that's one key reason not to worry. The other key reason is that the money that they are spending is coming from salary, and that over time, under normal circumstances, will typically be sort of an inflation -protected salary. So, they will receive periodic cost-of-living increases as part of that salary. So, younger accumulators don't have to worry too much about adding explicit inflation protection. That ample equity exposure is probably inflation protection enough. Stipp: What if I'm someone who is close to retirement or in retirement? It seems inflation , given the kind of investment mix that I have, would be a bigger concern. Benz: Here is where inflation protection does become more important--for folks who are in retirement or getting ready to retire. The reason they want to be more attuned to the risk of inflation is that at some point--or currently--they will be spending from that portfolio, and if they don't take steps to inflation -protect that income stream that they are drawing from that portfolio, certainly if they are just owning nominal bonds, that purchasing power from that income stream will be eaten away over time. So, they need to lay in explicit inflation hedges. The best way to do that is to look at some sort of inflation -protected bond, whether it's I-Bonds, which you can buy directly from Treasury.gov , or some sort of a TIPS--Treasury Inflation -Protected Securities--fund is another way to do it. The idea there is that either the income you receive, in the case of an I-Bond, or the principal value of the bond, in the case of a TIPS bond, is adjusted to keep pace with inflation . This category, in general, has not been too attractive to investors recently, as we discussed; but I think, for investors looking to add TIPS exposure, it's arguably pretty cheap because TIPS are currently embedding pretty low expectations for inflation . So, if you buy a TIPS bond today, the inflation expectation that's embedded within it is roughly somewhere under 2%, currently. We know, historically, inflation has run hotter than that. Stipp: And if I'm trying to figure out [whether or not] I have enough inflation protection, what's a good guideline for the amount of TIPS, perhaps, that I should have in a portfolio in retirement? Benz: It will vary based on the investor; but looking at the data that our colleagues at Morningstar Ibbotson Associates put out, when they recommend TIPS allocations, typically somewhere in the neighborhood of 20% to 30% of the fixed-income portfolio would be earmarked for some sort of inflation -protected bond exposure. Stipp: Of course, if you are in retirement, a lot of times you'll also be holding some equities for the out years of your retirement. That, as you said before, will also give you some inflation protection. Benz: Perhaps some sort of a commodities-tracking product might make sense here, too. Again, I would keep it to a fairly small slice of the portfolio. When we look at the recommendations from Morningstar Ibbotson [Associates], it's typically in the neighborhood of 4% to 6% of the total portfolio. With precious-metals equities, it's debatable how great of an inflation hedge they've been historically, but there are some arguments for precious-metals equities also being good and cheap currently, as well. So, you might consider that a portion of your inflation hedge, too. Stipp: Let's talk about a third big risk that you want to size up with respect to your portfolio. Somewhat related to inflation --they often go hand in hand--is interest-rate risk, the risk that rates might go up. It's something that we've been expecting but haven't
  2. Malaysia c.bank keeps policy rate on hold, as expected

    Headlines

    Wed, 28 Jan 2015

    KUALA LUMPUR, Jan 28 (Reuters) - Malaysia's central bank held its key interest rate steady at 3.25 percent on Wednesday, as expected, saying inflation was expected to be lower than forecast and the...

  3. Fed seen remaining patient with rate guidance amid global turmoil

    Headlines

    Wed, 28 Jan 2015

    WASHINGTON (Reuters) - The Federal Reserve is expected to signal it remains on track to begin raising interest rates later this year, as the central bank shows confidence that low inflation and rising risks from abroad have yet to derail the U.S. economic recovery.

  4. Morningstar's 5-Point Retirement Portfolio Checkup

    Headlines

    Wed, 28 Jan 2015

    including a discussion of market valuation, interest rate, and inflation concerns. A Roadmap for Assessing Retirement Portfolio Performance ..... on valuations and gauge their portfolios' vulnerability to inflation and rising interest rates when rebalancing, says Morningstar

  5. India: What Lies Ahead

    Headlines

    Tue, 27 Jan 2015

    business friendly Monetary policy as lower inflation would reduce the cost of private investment Executive ..... stability of its currency. India’s inflation is significantly affected by oil prices and lower inflation could eventually translate into a lower

  6. Australian shares seen tracking Wall St lower

    Headlines

    Tue, 27 Jan 2015

    underlying S&P/ASX 200 index. On Tuesday, the benchmark index rose for a fourth straight session to close at its highest in over two months. Inflation data due at 0030 GMT will be closely watched. A low reading of the underlying measu

  7. Global Equities 2015: Fasten Your Seat Belt for a Multi-Speed World

    Headlines

    Tue, 27 Jan 2015

    various economies in terms of growth, inflation and the potential for at least temporary ..... having a “transitory” impact on inflation . In aggregate, we believe that liquidity ..... be realized (albeit only in headline inflation ). That said, new, aggressive QE programs

  8. ECB Review: Blowing on the Embers of a Reflationary Fire

    Headlines

    Tue, 27 Jan 2015

    the European Central Bank’s (ECB) inflation mandate with a vengeance. And rightly so ..... a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2% over the

  9. U.S. Lodging: The Recovery Checks In for an Extended Stay

    Headlines

    Tue, 27 Jan 2015

    and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds

  10. Arnott on All Asset January 2015

    Headlines

    Tue, 27 Jan 2015

    markets – including some of our core inflation fighters – are not yet cheap. What ..... stocks and bonds fail in this role? When inflation expectations are rising. Here’s where ..... problem is most self-evident. Inflation expectations are in a powerful bear market

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