How to beat Inflation
March 1, 2018
Any investor has a demon that needs slaying: inflation. Since 1933, US inflation has averaged 3.56%, meaning that prices are higher by 1783%. While inflation has been unusually low in the past 20 years, there is no guarantee it will stay that way. So what’s the best way to beat inflation?
Here’s the list.
No. 9: Gold
Gold only beats inflation 54% of the time. However, this isn’t going to dissuade gold bugs, and it shouldn’t — in an inflationary environment. If you want broad exposure to gold in the future, consider SPDR Gold Shares (GLD).
No. 8: Commodities
Commodities is a broad category, but there is a way to invest in them in a broad manner. Considering commodities beat inflation 66% of the time, a possible choice is the iShares S&P GSCI Commodity-Indexed Trust (GSG).
No. 7: 60/40 Stock/Bond Portfolio
A 60/40 portfolio beats inflation 69% of the time. This can be achieved with 2 funds (VFINX stocks, VUSTX bonds).
No. 6: REITs/Real Estate Equity
Real estate equity/real estate investment trusts also beat inflation 69% of the time. If you want broad exposure to real estate to go along with a low expense ratio, then look into Vanguard REIT ETF (VNQ).
No. 5: S&P 500
Stocks offer the most upside potential. Interestingly, if you pull up a max chart comparison for VNQ and the S&P 500, you will see that they almost trade in tandem, with the S&P 500 leading the way by a slight margin most of the time. This makes sense since the S&P 500 beats inflation 70% of the time, which is slightly better than VNQ. If you want to invest in the S&P 500, or if you want an ETF that tracks it for your watchlist, look into SPDR S&P 500 ETF (SPY).
No. 4: Real Estate Income
Real estate income beats inflation 71% of the time. For future exposure, consider Market Vectors Mortgage REIT Income ETF (MORT).
No. 3: Barclays Aggregate Bond Index
The Barclays Aggregate Bond Index beats inflation 75% of the time. Logically, if you want exposure, consider iShares Core U.S. Aggregate Bond ETF (AGG)
No. 2: Leveraged Loans
Leveraged loans outpace inflation 79% of the time. If interested in this approach at some point down the road, look at PowerShares Senior Loan ETF (BKLN)
No. 1: TIPS
No surprise here. TIPS — Treasury inflation-protected securities — are indexed to inflation to protect investors from the negative impact of inflation — beat inflation 80% of the time, making it best of breed in this category. If you want to use an ETF as your vehicle, here are two which track the Barclays U.S. Treasury Inflation Protected Securities Index (iShares TIPS Bond (TIP), Schwab US TIPS ETF (SCHP)). For inflation protection internationally, look at SPDR Citi International Government Inflation Protected Bonds ETF (WIP)
