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Investing Specialists

Tips for Inflation-Proofing Your Portfolio

Favoring equities, buying TIPs, and owning real estate are among the inflation-hedging strategies used by readers.

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As Morningstar’s director of economic analysis Bob Johnson discussed in a recent column, there was some surprising inflation data nuzzled in the government's January consumption report. Moreover, Morningstar director of personal finance Christine Benz noted recently that the differential between the yield on 10-year Treasury bonds and 10-year Treasury Inflation-Protected Securities has been widening, indicating that investors are taking a renewed interest in inflation.

Given the evidence at hand, we asked readers: What strategies and/or investments do you use in your portfolio to guard against inflation? You can read the entire discussion--and add your own insights--here.

No One-Size-Fits-All--But a Common Theme
Admittedly, there's no one-size-fits-all solution to inflation protection. As Benz outlines here, the amount of inflation defense an investor needs depends upon several factors, including his or her investing life stage, what the rest of the portfolio looks like, whether the investor's retirement income streams are inflation-protected, and what the investor's consumption habits are.

That said, most readers said they expect the long-term total returns of their diversified equity funds to outpace inflation over time. Reader rforno focuses on "quality dividend-payers and growers," with "emphasis on diversified but consistently performing sectors that provide real products/services whether there's inflation or no inflation."

Diversified equities are the inflation-fighters in Crimson84’s portfolio, too. "Keeping all of my assets in pure equity broad-market index funds with enough cash to handle short-term needs. I think everyone should go back and read Warren Buffett's 2011 letter to shareholders, pages 17-19, for a concise argument on selecting asset classes, the effect of inflation on returns, and the danger posed by owning bonds over the long-term--that is, the real probability of losing purchasing power, which is, in a nutshell, the definition of inflation."

A Little Help from Some Friends 
Even though they expect their equity funds to offset inflation over time, many readers nevertheless assemble a small supporting cast of securities that are meant to expressly hedge against inflation. Hedges mentioned most frequently: Treasury Inflation Protected Securities and real estate investment trusts. "In tax-deferred accounts I use real estate, TIPS, and a broadly diversified selection of equity funds," writes lionsgate. "I have some TIPs and some REITs in my Vanguard Roth," admits Chief K.

"Equities and REITs, no bonds or cash," advocates BMWLover. "With equities and REITs sooner or later price inflation catches up to their earnings and their P/Es expand to reflect the inflationary environment. With that you get the growth in the share prices."

Darwinian posits that value stocks offer inflation-resistance--"better than the overrated REITs, much better than growth stocks"--but rounds out a value-focused equity position with some inflation-protection. "Even value stocks typically fall for a year or two, when inflation is high or surging. To assure cash flow during this time, I have about 15% of my portfolio in TIPS through  Vanguard Inflation-Protected Securities (VAIPX)." 

Others look to commodity-related investments as inflation guards. "First and mainly we own stocks and stock funds which are good long-term protection against inflation," writes retiredgary. "Then, and less important, we invest in funds tied directly to commodities such as  SPDR Gold Shares (GLD) or a mining company fund." 

"I have packed away physical gold over the past two years," says richard7, who also holds equities and expects them to beat inflation over time.

Rathgar suggests, "Staying diversified with about 5% in REITs and 5% in  PIMCO All Asset (PASAX). This is a diversified inflation hedge and more conservative than a commodity-only fund. If retired, I would add 5% to short-term TIPS."

Home Ownership and Other Tips
Home ownership--either owning a primary residence, a secondary residence, rental properties, or all three--received several mentions from readers. Says retired at 48: "Own real estate…. Real estate has staying power, generally priced at what prevailing costs to live are. A storage of value." 

Reader wrjz13 and his wife own a rental home, where rents cover all related expenses and generate $12,000 per year in free cash flow. "Rental increases tied to inflation, sort of, should preserve the purchasing power of the $12K free cash flow and cover any inflation related increases in the expenses."

Finally, readers shared a few non-portfolio-related pointers for minimizing the toll inflation can take on their finances, in general. "When we buy durable goods we try to buy good ones which will last a long time before needing to be replaced at inflated prices," says retiredgaryChief K says, “My inflation adjustment ... started decades ago when I stopped spending 101% of my income. I keep mental track of the difference between spending on my Needs (really hard to cut those) and my Wants (really annoying to cut those).”

Further Research

Morningstar’s Top Picks for Inflation Protection 

Inflation Protection: How Much Do You Need?



Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.