Monday, 15 September 2008

Investments to Protect against Inflation

Inflation has been mercifully tame for years but the recent spikes in gas and food prices has raised the menace of this scourge, which eats away at savings and investments by reducing purchasing power.

What are some ways for an investor to gain protection from inflation in a portfolio?

Real Return Bonds: this is the surest and safest inflation-fighter. Such bonds (in Canada) are issued mostly by the government of Canada with a few offerings by provinces. They are thus ultra-safe. The critical component of inflation-protection is ensured by the continual adjustment of both the interest payment and the principal for Consumer Price Index inflation. RRBs do not pay a high return - the real yield is hovering around 1.6 to 1.7% currently. They are best held in an RRSP or other registered account since the interest is taxable. To buy them you would need to phone the bond desk of your brokerage, as they are likely not available online. Minimum purchases are usually $5000. Get more info from CanadianFinancialDIY, ByloSelhi and current yields at

Equities: in the short term, inflation will harm the stock market, driving down prices but in the long term (i.e. ten+ years) companies can and do increase their prices to restore their profits and stock prices recover accordingly. This is an overall effect and individual companies can suffer lasting harm so the protection is more at a portfolio level. To benefit from this protection you need to have a broadly diversified portfolio, more or less the entire stock market. I believe the best way to achieve this is through market index mutual funds such as these listed on ByloSelhi, or similar ETFs, some of which are traded in Canada on the TSX, such as iShares Canada's and others on US exchanges. Seeking Alpha has a comprehensive list of worldwide ETFs.

Commodities: The agricultural products, industrial and precious metals, livestock and oil / energy goods that make up commodities tend to rise in price along with inflation. Indeed, the current inflation surge comes directly from energy and food price increases. Gaining protection from commodities fortunately does not require storing a big pile of wheat in the garage since there are funds focused on commodities. To invest, there are US-traded ETFs such as:
The Canadian stock market itself, apart from the financial sector, is about two-thirds composed of resource companies and most of the main commodities are represented within those companies. A company's profits do not exactly match resource price swings but there is nevertheless a fair degree of inflation protection from commodities in the TSX. To give more weight, consider these ETFs:
  • iShares Canada - Energy (XEG), Materials (XMD) and Gold (XGD)
  • Claymore Canada - Global Mining (CMW), Oil Sands (CLO) and Global Agriculture (COW ... nice to see a sense of humour with the symbol!)
There are other investments sometimes touted as inflation hedges - tangible assets like fine art, wine, land and real estate. Apart from real estate, such assets can be hard to buy/sell (illiquid) and difficult to diversify. Real estate often doesn't rise with inflation, now being a prime example, so it is not nearly as good protection as the main options above, which should do an effective job relieving you of the worry of inflation. It's annoying enough to drive up to a gas pump these days. Having a little gas in your portfolio can salve the pain.

As usual, these are my thoughts and opinions, not investment advice to you. Make your own choices.


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Before you can decide what types of investments are appropriate from a risk perspective, you need to evaluate your savings goals. Is your goal preservation of principal, generating income for current expenses, or building the value of your principal over and above inflation?
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