Investment choices for an inflation pessimist?

MX5huggy

What’s his name?

Ramin

https://pensioncraft.com/ 

[Deleted User]

MX5huggy said:

What’s his name?

Ramin

https://pensioncraft.com/ 

“ Physics degree and doctorate ”.  Good man.  

Good idea as well - to provide videos with training material.  I prefer books, but younger people may prefer YouTube

michaels

So any fund/etf recommendations for short linkers/tips?

Thrugelmir

michaels said:

So any fund/etf recommendations for short linkers/tips?

I've held 

INXG.L ~

ISHARES II PLC GBP IDX-LNK GILTS UCT ETF

for a few months. 

michaels

Thrugelmir said:

michaels said:

So any fund/etf recommendations for short linkers/tips?

I've held 

INXG.L ~

ISHARES II PLC GBP IDX-LNK GILTS UCT ETF

for a few months. 

Any reason for choosing UK?  Also full market rather than short term?  Short term seems to be the best true CPI hedge (or be it at a cost in long term overall returns).  I have been holding cash rather than bonds to reduce vol as I see it as lower risk than bonds without too much cost but higher anticipated inflation, even if it is only temporary, makes this strategy more expensive.

[Deleted User]

michaels said:

So any fund/etf recommendations for short linkers/tips?

VTIP or STIP, if you want USD.  

I wouldn’t buy a lot though. Unless GBP drops vs USD, you are guaranteeing a loss in real terms.  

michaels

Deleted_User said:

michaels said:

So any fund/etf recommendations for short linkers/tips?

VTIP or STIP, if you want USD.  

I wouldn’t buy a lot though. Unless GBP drops vs USD, you are guaranteeing a loss in real terms.  

Ye but as we are expecting 5% inflation here in the next few months my cash holding is also guaranteed a loss, possibly bigger and I don't think bonds will do any better over the next year or two and I don't want any more equities....

JohnWinder

Linton said:

Index linked gilts are expensive, they have 2-3% inflation already included in the price.  So they wont provide protection against "normal" inflation. 

Well, it’s not only linkers that have inflation already included in the price; it’s all nominal bonds also. When anyone buys a bond they are handing over their money for a defined period, and they expect compensation for that for the risk of their money never being repaid and also for the likely loss of purchasing power when they get their principal returned; so all bonds have anticipated inflation baked into their price.

The second point is that linkers do protect against ‘normal’ inflation; they protect against all and any inflation whatever its level is: 'Index-linked gilts differ from conventional gilts in that both the semi-annual coupon payments and the principal payment are adjusted in line with movements in the General Index of Retail Prices in the UK’ https://www.dmo.gov.uk/data/gilt-market/index-linked-gilts/

I think we've been through this before, and wonder if we're saying the same thing many times in these forums rather than many things once.

Couple of other issues to consider: if you’re going to up-end your portfolio to something that suits an inflationary period, and therefore by definition doesn’t suit a different period so well, then you’d better be sure there’s going to be problematic inflation or you’ve got the wrong portfolio. 

Secondly, if unexpected damaging inflationary periods can crop up, it means they can do that unexpectedly, so one’s portfolio always needs to be positioned to deal with it. Lastly, different asset classes have higher and lower returns as a characteristic eg stocks higher than bonds, but those relationships seem not to have changed enormously during periods of high or low inflation. The big impact is that all real (after inflation) returns either scale up (with falling inflation) or down (with rising inflation). See this chart: https://www.firstlinks.com.au/inflation-impacts-different-types-investments

michaels

JohnWinder said:

Linton said:

Index linked gilts are expensive, they have 2-3% inflation already included in the price.  So they wont provide protection against "normal" inflation. 

Well, it’s not only linkers that have inflation already included in the price; it’s all nominal bonds also. When anyone buys a bond they are handing over their money for a defined period, and they expect compensation for that for the risk of their money never being repaid and also for the likely loss of purchasing power when they get their principal returned; so all bonds have anticipated inflation baked into their price.

The second point is that linkers do protect against ‘normal’ inflation; they protect against all and any inflation whatever its level is: 'Index-linked gilts differ from conventional gilts in that both the semi-annual coupon payments and the principal payment are adjusted in line with movements in the General Index of Retail Prices in the UK’ https://www.dmo.gov.uk/data/gilt-market/index-linked-gilts/

I think we've been through this before, and wonder if we're saying the same thing many times in these forums rather than many things once.

Couple of other issues to consider: if you’re going to up-end your portfolio to something that suits an inflationary period, and therefore by definition doesn’t suit a different period so well, then you’d better be sure there’s going to be problematic inflation or you’ve got the wrong portfolio. 

Secondly, if unexpected damaging inflationary periods can crop up, it means they can do that unexpectedly, so one’s portfolio always needs to be positioned to deal with it. Lastly, different asset classes have higher and lower returns as a characteristic eg stocks higher than bonds, but those relationships seem not to have changed enormously during periods of high or low inflation. The big impact is that all real (after inflation) returns either scale up (with falling inflation) or down (with rising inflation). See this chart: https://www.firstlinks.com.au/inflation-impacts-different-types-investments

So I think we know that in the long term equities are the best hedge against inflation.

However history also shows us that due to increased volatility, SWR with all equity portfolios are lower than those with a mix of other assets to basically dampen some of that volatility.

Historically there has been some degree of inverse correlation between stocks and bonds which has made bonds the ideal tool to reduce some of that volatility risk.

However historically low inflation and thus high bond prices would make it seem less likely that this pattern will hold in the future. The low inflation environment along with very low bond risk premia has also made holding cash not seem an excessively expensive way to reduce the equity volatility risk.

Rising inflation makes holding cash more expensive, alternatives are short bonds (to avoid capital risk) or short index lined bonds which better address the risk of unexpected inflation and are less impacted by central banks manipulating short term interest rates downward.

So I guess the question is, do short bonds price in whatever 'blip' in inflation you are anticipating or are short index linked bonds a better bet? With the index linked bonds you are paying an insurance premium for reduced risk - as this holding is to reduce the risk of equity volatility I would argue that it is worth paying this premium.

Thrugelmir

michaels said:

Thrugelmir said:

michaels said:

So any fund/etf recommendations for short linkers/tips?

I've held 

INXG.L ~

ISHARES II PLC GBP IDX-LNK GILTS UCT ETF

for a few months. 

Any reason for choosing UK?  Also full market rather than short term?  

Currency.

Uncertainty.