Does the three fund portfolio provide adequate protection from inflation?

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mookie
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Does the three fund portfolio provide adequate protection from inflation?

Post by mookie »

If we enter a period of high inflation, is there a better portfolio to hold than the three fund?
typical.investor
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by typical.investor »

mookie wrote: Sat Sep 26, 2020 9:22 pm If we enter a period of high inflation, is there a better portfolio to hold than the three fund?
Of course there is.

Not sure I’d want to optimize my portfolio for a single possibility though.
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David Jay
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by David Jay »

There is almost always a better portfolio than the portfolio you hold when viewed in retrospect. The problem is knowing in advance what challenges one’s portfolio will face.

Author William Bernstein has written a short booklet entitled “Deep Risk” where he looks at his “4 horseman of the apocalypse”: Inflation, Deflation, Confiscation and Devastation.

Bill suggested that a stock-heavy portfolio performs better than fixed income assets during periods of hyper-inflation. So holding a stock-heavy 3-fund portfolio is probably one approach to inflation risk.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by inbox788 »

That's a future question that's hard to answer. How would we judge or measure? Or even begin to define the beginning and end? Is it a yes/no question or a matter or degree? Or is there a best protection for small, medium, and high inflation that's different?

A more answerable question is, how did the 3 fund portfolio perform during periods of high inflation, such as during the 70's and others?
The periods of highest inflation in the United States in the twentieth century occurred during the years after World Wars I and II, and in the 1970s.
https://opentextbc.ca/principlesofecono ... Depression.

Portfolio visualizer only goes back to 1985.

We had the great depression and stock market crash in 1929 between WWI and WWII.

This wikipedia SP500 graph isn't too helpful, but you can see growth in the 1950's (roughly from 20 to 60) vs flat in the 1970's (up/down around 100). A zoom in on the time periods would provide better detail. Though I don't think there is daily inflation data available.

Image

Same difficulty in gathering data on the bond side. Bloomberg Barclays US Aggregate Bond Index only goes back to the 70's. Is there another suitable index?
Criticism
Some investors have criticized the use of the Agg as a representation of the performance of the entire US fixed income universe. Because the benchmark was founded in the 1970s, and some of its data dates back to only 1986, a time when interest rates began to decline from all-time highs, the index has only seen a few years of negative returns.
https://en.wikipedia.org/wiki/Bloomberg ... #Criticism

The conversation often turn to gold as an inflation hedge, but I've yet be convinced or to try to act on it.
Image
https://www.richdad.com/will-price-of-gold-rise-fall

[any way to resize these large images?]
000
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by 000 »

IMO:
Moderate inflation: yes
Stagflation: kinda sorta maybe
Hyperinflation: no
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by Forester »

mookie wrote: Sat Sep 26, 2020 9:22 pm If we enter a period of high inflation, is there a better portfolio to hold than the three fund?
Instead of 60% global stocks, 40% bonds

55% global stocks, 5% precious metals equity, 30% bonds, 10% gold would be more robust to high inflation and not give up any CAGR. Easy enough to add GDX & IAU.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by Forester »

inbox788 wrote: Sat Sep 26, 2020 10:09 pm That's a future question that's hard to answer. How would we judge or measure? Or even begin to define the beginning and end? Is it a yes/no question or a matter or degree? Or is there a best protection for small, medium, and high inflation that's different?

A more answerable question is, how did the 3 fund portfolio perform during periods of high inflation, such as during the 70's and others?
Global 60/40 portfolio (including ex-US bonds) lost 1.98% a year real terms, 1973-1980. US 60/40 lost 4.56% a year in that period. Emerging equities, commodities & gold all had positive real returns.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by Kelrex »

There is always a short to medium term strategy that will be more optimal for any given scenario. The challenges of timing it right are twofold, like any market timing strategy:

-Knowing exactly when to implement it
-Knowing exactly when to cease implementing it

The second is actually the much harder to nail because if the plan is successful in the short-to-medium term, it will give so much positive feedback that it will be difficult to walk away from.

Granted, I'm rereading Taleb's Fooled By Randomness at the moment, so I'm looking at everything with an Incerto-tinged perspective.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by Blue456 »

Forester wrote: Sun Sep 27, 2020 4:25 am
Global 60/40 portfolio (including ex-US bonds) lost 1.98% a year real terms, 1973-1980. US 60/40 lost 4.56% a year in that period. Emerging equities, commodities & gold all had positive real returns.
Where did you get these numbers from?
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by 000 »

Moving some of the nominal bonds to Series I bonds and/or TIPS is easy.

Adding a little Gold or other hard assets like real estate may also offer some ballast.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by alex_686 »

Bonds are a poor hedge.

Equities are a good hedge. Stocks are a claim on real assets, those real assets should increase in value with inflation.

However, you need to ask why there is inflation. If it is because of poor economic conditions and mismanagement then the real return of equities are going to be low regardless of inflation.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by aristotelian »

Yes. Stocks beat inflation over time. You could substitute TIPS for bonds (as in Swensen Portfolio) if that helps you sleep at night.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by nisiprius »

alex_686 wrote: Sun Sep 27, 2020 8:13 am Bonds are a poor hedge.
Nominal bonds are a poor hedge. TIPS exist, and I have never been able to figure out why those with professional involvement in investing never mention them. It's as if they literally didn't exist. They are not the answer to life, the universe, and everything, but they do exist. I believe the reason why e.g. Warren Buffett never mentions them is that they complicate the simplistic story that he likes to tell about stocks vs. bonds.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by Robot Monster »

mookie wrote: Sat Sep 26, 2020 9:22 pm If we enter a period of high inflation, is there a better portfolio to hold than the three fund?
Can't answer your exact question, but...

A 60/40 portfolio of US Stock Market / Intermediate Term Treasury portfolio, during the high inflationary period of Jan 1973 - Dec 1980, had an inflation-adjusted CAGR of -1.91%.
Source

***

Also of possible interest,

Average performance when inflation above 4% (during 1960-1990)
Image
Source
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Forester
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by Forester »

Blue456 wrote: Sun Sep 27, 2020 7:22 am
Forester wrote: Sun Sep 27, 2020 4:25 am
Global 60/40 portfolio (including ex-US bonds) lost 1.98% a year real terms, 1973-1980. US 60/40 lost 4.56% a year in that period. Emerging equities, commodities & gold all had positive real returns.
Where did you get these numbers from?
Global Asset Allocation by Meb Faber. It might be available as a free download from his site.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by nisiprius »

Past statistics, specifically the SBBI data back to 1926, show that over longish periods of time, stocks, bonds (long-term Treasury, long-term corporate, and intermediate-term Treasury), and Treasury bills (i.e. "cash") have all had a positive real return--they have all beaten inflation. Therefore, by arithmetic, over 1926-present, and over any period of time in which all three had a positive real return any portfolio of those five assets in any proportions would have beaten inflation.

"Adequate" is always a matter of opinion. And 1940-1980 is the elephant in the room, the period of time over which bonds made money but cumulatively lost roughly half of their buying power to inflation.
Last edited by nisiprius on Sun Sep 27, 2020 9:28 am, edited 2 times in total.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by reln »

mookie wrote: Sat Sep 26, 2020 9:22 pm If we enter a period of high inflation, is there a better portfolio to hold than the three fund?
Probably.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by dbr »

mookie wrote: Sat Sep 26, 2020 9:22 pm If we enter a period of high inflation, is there a better portfolio to hold than the three fund?
You will have to define better. As a generalization yes, of course, there could be a better portfolio. Whether such a portfolio would be better in the sense of doing that and also doing all the other things an investor needs to worry about at the same time is a different question.

If your question is that you want to invest now in a portfolio that will give you some particular outcome in the event of higher future inflation than we have now, then you will have to be more specific regarding what that outcome is, your circumstances, what sort of future hazard you imagine will happen, and what your other requirements are.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by Robot Monster »

nisiprius wrote: Sun Sep 27, 2020 9:21 am [Something you edited out, wondering how assets like real estate performed during the 70's.]
Okay, so I dug something interesting up about how real estate performed. From 1970-1979, average compounded real returns (US$):

Global market portfolio-----1.65%
Equities broad---------------0.33%
Real estate----------------5.10%
Nongovernment bonds-----2.04%
Government bonds broad--1.72%
Commodities----------------22.02%
Source

Which was embedded in the paper, Historical Returns of the Market Portfolio
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by Blue456 »

Robot Monster wrote: Sun Sep 27, 2020 10:18 am
nisiprius wrote: Sun Sep 27, 2020 9:21 am [Something you edited out, wondering how assets like real estate performed during the 70's.]
Okay, so I dug something interesting up about how real estate performed. From 1970-1979, average compounded real returns (US$):

Global market portfolio-----1.65%
Equities broad---------------0.33%
Real estate----------------5.10%
Nongovernment bonds-----2.04%
Government bonds broad--1.72%
Commodities----------------22.02%
Source

Which was embedded in the paper, Historical Returns of the Market Portfolio
Very informative. I will be reading this paper. Thank you.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by Ben Mathew »

If your allocation is mostly stocks, I would not worry too much about inflation. If it's bond heavy, make sure a good fraction is in TIPS rather than nominals.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by whereskyle »

mookie wrote: Sat Sep 26, 2020 9:22 pm If we enter a period of high inflation, is there a better portfolio to hold than the three fund?
Arguably an all-stock portfolio is better than one that holds bonds in periods of high inflation
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by nisiprius »

The big question here is probably whether a balanced portfolio with both stocks and bonds provides adequate protection.

Balanced index funds don't go back to the last period of double-digit inflation, and neither do balanced funds with international exposure. I don't like to play fantasy football backtesting with paper numbers for hypothetical investments that were not really available to retail investors. So, I looked at three actively-managed balanced funds. They are all US-only, and the actual stock allocations in them have fluctuated ("tactical asset allocation," I suppose).

VWELX, the Vanguard Wellington Fund, allocation varies but has tended to be roughly 60/40
DODBX, the Dodge & Cox Balanced Fund, not sure about history but they benchmark it to a 60/40 benchmark
VWINX, the Vanguard Wellesley Income Fund, roughly 40/60 so more conservative than the others.

I used two 100%-stocks benchmarks: the S&P index itself (and its predecessors), and, for a real-world 100% stock investment, the Massachusetts Investors Trust, MITTX.

I looked at overlapping ten-year (120-month) periods starting with the earliest data I could find, up through 2019.

9/1929-12/2019, available data for Wellington:

In 117/965 = 12.1% of those periods, Wellington lost to inflation. The worst period was 10/1964 - 9/1974.
In 132/965 = 13.7% of those periods, the S&P 500 lost to inflation.
In 165/965 = 17.1% of those periods, Massachusetts Investors Trust lost to inflation.

2/1961 - 12/2019, earliest data I could find for DODBX although it's much older than 1961.

In 99/588 = 16.8% of those periods, Dodge & Cox Balanced lost to inflation. The worst period was 3/1972-2/1982.
In 124/588 = 21.1% of those periods, the S&P 500 lost to inflation.
In 140/588 = 23.8% of those periods, Massachusetts Investors Trust lost to inflation.

Over the time period 9/1970-12/2019, available data for Wellesley

In 28/473 = 5.9% of those periods, Wellesley lost to inflation. The worst period was 10/1971 - 9/1981.
In 57/473 = 12.1% of those periods, the S&P 500 lost to inflation.
In 62/473 = 13.15 of those periods, Massachusetts Investors Trsut lost to inflation.

In my opinion the differences are not huge and fall within the zone of "endless inconclusive argument," but, for ten-year periods, it is not the case that stocks have given investors a bulletproof guarantee of beating inflation, nor that they have given them a better chance than a balanced portfolio.

It is also worthwhile here to quote Benjamin Graham (Warren Buffett's mentor). In The Intelligent Investor, 4th ed., 1973, Benjamin Graham wrote:
(p. 20) On this point we can be categorical. There is no close time connection between inflationary (or deflationary) conditions and the movement of common-stock earnings and prices. The obvious example is the recent period 1966-1970. The rise in the cost of living was 22%... but both stock earnings and stock prices have declined since 1965. There are similar contradictions in both directions in the record of previous five-year periods.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by nedsaid »

It is a myth that stocks are a good hedge against inflation, they are longer term but shorter term inflation spikes are very hard on stocks as they are on bonds. If you get sustained higher inflation, it would take time for the markets to adjust. You will get your inflation adjustment eventually, with stocks it could take 10-15 years and with bonds it could take a generation, that is 40-50 years. As Nisiprius suggested, look at bonds from about 1940-1980, a very tough period to own bonds. My suggestion is to look at how stocks did during the Stagflation years of the 1970's. Stocks were essentially flat from 1968-1984. We had the oil shocks, inflation spikes, and bear markets of 1973-1974 and it took stock investors until at least until the mid-1980s or even later to get their inflation adjustment.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by mookie »

OP here. I guess my original question really is in two parts:

1. If you held the three-fund portfolio and found yourself in a time of high inflation, would you alter the portfolio at all? Overall, it seems like the responses above were to shift asset allocation towards stocks and replace some of the total bond market index fund with TIPS.

2. If you hold the three-fund portfolio and predict that there will be high inflation in the near future, would you alter your portfolio now? But that is really a question of market timing, which I try not to do.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by nedsaid »

mookie wrote: Sun Sep 27, 2020 12:16 pm OP here. I guess my original question really is in two parts:

1. If you held the three-fund portfolio and found yourself in a time of high inflation, would you alter the portfolio at all? Overall, it seems like the responses above were to shift asset allocation towards stocks and replace some of the total bond market index fund with TIPS.

2. If you hold the three-fund portfolio and predict that there will be high inflation in the near future, would you alter your portfolio now? But that is really a question of market timing, which I try not to do.
The older Boglehead portfolio of Total Stock Market, Total Bond Market, Total International Stock Market, TIPS, and REITs might be a place to start if you are concerned about inflation.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by alex_686 »

mookie wrote: Sun Sep 27, 2020 12:16 pm 2. If you hold the three-fund portfolio and predict that there will be high inflation in the near future, would you alter your portfolio now? But that is really a question of market timing, which I try not to do.
This is not a question of market timing, which is based on if the market is over/under valued. It is about market expectations, and creating a AA that matches you risk tolerance and goals. The world evolves and so should you AA.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by 000 »

mookie wrote: Sun Sep 27, 2020 12:16 pm OP here. I guess my original question really is in two parts:

1. If you held the three-fund portfolio and found yourself in a time of high inflation, would you alter the portfolio at all? Overall, it seems like the responses above were to shift asset allocation towards stocks and replace some of the total bond market index fund with TIPS.

2. If you hold the three-fund portfolio and predict that there will be high inflation in the near future, would you alter your portfolio now? But that is really a question of market timing, which I try not to do.
No, I would (and have) bought my inflation protection before the inflation happens or is even expected.

FWIW, for me the inflation protection is precious metal, hard asset REITs, and even cash (which does better during inflation than bonds).

I will also note that the "insurance cost" of TIPS or Series I bonds over Treasuries is not high.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by garlandwhizzer »

nedsaid wrote:

The older Boglehead portfolio of Total Stock Market, Total Bond Market, Total International Stock Market, TIPS, and REITs might be a place to start if you are concerned about inflation.
1+

I believe this to be a reasonable position especially if inflation is your primary concern. In an inflationary scenario, where rates are rising, shortening average bond duration will reduced the real losses on nominal bonds. TIPS provide safety of principal, preserving capital from principal losses unlike nominals, but they are likely in such a scenario to have negative real yields because of their popularity. Real assets in general do better than stocks in general if inflation becomes brisk. US stocks provide long term protection but you may have to wait a decade or more for that to show up if inflation is constantly rising. International stock exposure is very likely to be helpful because inflation is often country specific. Money market fund with essentially zero duration tend to outperform nominal bonds when inflation is significant and rising.

The problem is that when you align your portfolio maximally to prepare maximally for inflation, it winds up costing you money if inflation does not occur. Commodities tend to underperform stocks, bonds tend to outperform money market funds, long duration nominal bonds outperform short duration, and nominal bonds tend to outperform TIPS in the absences of inflation. The market is not in the habit of giving away any risk protection free.

The problem is that none of us know in advance where the next black swan risk or market risk in general is going to come from, whether it be from unexpected inflation, unexpected deflation, international political upheavals like war, or even things like global warming. In the absence of such knowledge, I believe a very widely diversified diversified portfolio which includes US and INTL equity, nominal bonds of multiple durations averaging to intermediate plus some TIPS offer significant risk adjusted protection from whatever happens. If you're especially concerned about inflation perhaps consider slight or modest overweight to REITS, PM, or commodities, but in the absence of marked inflation or severe economic upheavals they are expected to underperform. There is no simple fixed cookbook answer to this question that works for all. You have to carefully balance risk and returns and choose the solution that fits your own circumstances.

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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by mookie »

So if the way to protect from inflation is to add REIT's, TIPS, and precious metal to the three-fund portfolio, why not just wait until you're in a period of high inflation to add those things, instead of trying to predict when it will happen or incurring the cost of making them a permanent part of your portfolio?
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by Robot Monster »

nedsaid wrote: Sun Sep 27, 2020 12:19 pm The older Boglehead portfolio of Total Stock Market, Total Bond Market, Total International Stock Market, TIPS, and REITs might be a place to start if you are concerned about inflation.
Wait...there was an older Boglehead portfolio? Never knew that. What ever happened to it? Was it taken behind the barn and shot, like Old Yeller?
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by Robot Monster »

mookie wrote: Sun Sep 27, 2020 1:38 pm So if the way to protect from inflation is to add REIT's, TIPS, and precious metal to the three-fund portfolio, why not just wait until you're in a period of high inflation to add those things, instead of trying to predict when it will happen or incurring the cost of making them a permanent part of your portfolio?
Cuz it will be too late by then, the higher expected inflation will already be priced in by that point.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by mookie »

Robot Monster wrote: Sun Sep 27, 2020 1:52 pm Cuz it will be too late by then, the higher expected inflation will already be priced in by that point.
The prices of REITs, TIPS, and precious metals rises significantly during periods of high inflation? So it's a matter of determining whether the cost of making those items a permanent part of one's portfolio is greater than the potential gain from buying into them during periods of high inflation?
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by Blue456 »

Robot Monster wrote: Sun Sep 27, 2020 1:42 pm
nedsaid wrote: Sun Sep 27, 2020 12:19 pm The older Boglehead portfolio of Total Stock Market, Total Bond Market, Total International Stock Market, TIPS, and REITs might be a place to start if you are concerned about inflation.
Wait...there was an older Boglehead portfolio? Never knew that. What ever happened to it? Was it taken behind the barn and shot, like Old Yeller?
Probably...
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by columbia »

Blue456 wrote: Sun Sep 27, 2020 2:47 pm
Robot Monster wrote: Sun Sep 27, 2020 1:42 pm
nedsaid wrote: Sun Sep 27, 2020 12:19 pm The older Boglehead portfolio of Total Stock Market, Total Bond Market, Total International Stock Market, TIPS, and REITs might be a place to start if you are concerned about inflation.
Wait...there was an older Boglehead portfolio? Never knew that. What ever happened to it? Was it taken behind the barn and shot, like Old Yeller?
Probably...
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by KyleAAA »

Inflation under 4%, probably. Inflation much over 4%, probably not. Allocating half your bonds to TIPS would go a long way, IMO.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by dbr »

There is a big difference between "adequate protection from inflation" and "if . . . is there a better portfolio."

I think the posts make clear that there is always a better portfolio in hindsight or if you have a crystal ball or if you isolate everything to only one single risk with no concern for other objectives.

I also think the three fund portfolio does work well enough to suit most objectives in the presence of the typical overall run of inflation over time. Notice I finessed the definition of adequate to something more objectively relevant. Notice for retirees that SWR studies or the operation of models such as FireCalc always recognize the existence of inflation. If people want to take the extraordinary period of late 70's/early 80's as a case, they can study that at will. I am not sure thinking of instances such as Weimar Germany or Zimbabwe or even Argentina is helpful.

Disclaimer: My bonds are 50% a TIPS fund, but I don't imagine there is anything all that special there regarding "protected from inflation."
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by Zardoz »

mookie wrote: Sat Sep 26, 2020 9:22 pm If we enter a period of high inflation, is there a better portfolio to hold than the three fund?
From David Swensen, in his book "Unconventional Success" (emphasis added):
"Investors give up expected return to defend portfolios against unanticipated inflationary or deflationary economic conditions. U.S. Treasury Inflation-Protected Securities protect against inflation with certainty, while real estate holdings guard against inflation with reasonable assurance. In the long run (in which, as John Maynard Keynes famously and correctly said, “we are all dead”) domestic equities add to the inflation-hedging characteristics of a portfolio, but in the short run domestic equities prove notoriously unreliable as inflation hedges."
Swensen recommends 15% TIPS and 20% REITs in his reference portfolio, but he also notes the importance of creating a portfolio that aligns with your goals and philosophy:
"Personal preferences influence asset allocation in important ways. Investors who desire more certain protection from inflation increase the U.S. Treasury TIPS allocation. Investors who require greater protection against financial crises expand U.S. Treasury bond exposure. Investors who lack confidence in emerging markets avoid emerging markets investments. Sensible portfolios reflect individual preferences."
And:
Unless an investor embraces wholeheartedly a particular portfolio structure, failure awaits. Lightly held positions invite casual reversal, exposing vacillating investors to the costly consequences of market whipsaw. By adopting asset-allocation targets that dovetail with personal risk tolerances, investors vastly increase the odds of investment success.
Last edited by Zardoz on Sun Sep 27, 2020 5:48 pm, edited 1 time in total.
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nedsaid
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by nedsaid »

Robot Monster wrote: Sun Sep 27, 2020 1:42 pm
nedsaid wrote: Sun Sep 27, 2020 12:19 pm The older Boglehead portfolio of Total Stock Market, Total Bond Market, Total International Stock Market, TIPS, and REITs might be a place to start if you are concerned about inflation.
Wait...there was an older Boglehead portfolio? Never knew that. What ever happened to it? Was it taken behind the barn and shot, like Old Yeller?
It is, as I recall, in the Bogleheads Book on Investing. I also own the Bogleheads Book on Retirement Investing. Anywho, it is in one of the two books or maybe both of them.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by Robot Monster »

mookie wrote: Sun Sep 27, 2020 2:45 pm
Robot Monster wrote: Sun Sep 27, 2020 1:52 pm Cuz it will be too late by then, the higher expected inflation will already be priced in by that point.
The prices of REITs, TIPS, and precious metals rises significantly during periods of high inflation? So it's a matter of determining whether the cost of making those items a permanent part of one's portfolio is greater than the potential gain from buying into them during periods of high inflation?
Sorry, unsure what you mean. Can say this:

The prices of REITs and precious metals could rise in the face of high inflation, but this is not a sure thing, depending perhaps on other forces at work.

TIPS do protect you from unexpected inflation. (Though the market price is a bit more complicated, since it is affected by not just changes to expected inflation, but also interest rates.) If I buy a 10yr TIPS right now I'll get a yield of -.93%. Then, no matter how high inflation goes, I'll only be -.93% behind (tax issues aside). If I were to wait for inflation to rise, I might no longer be able to get that yield. Let's say expected inflation changed to 2.58% from what it is now, 1.58%. The yield on the 10yr TIPS could in response change to -1.93%.

Hope that helped if only somewhat.
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typical.investor
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by typical.investor »

Robot Monster wrote: Sun Sep 27, 2020 5:52 pm
mookie wrote: Sun Sep 27, 2020 2:45 pm
Robot Monster wrote: Sun Sep 27, 2020 1:52 pm Cuz it will be too late by then, the higher expected inflation will already be priced in by that point.
The prices of REITs, TIPS, and precious metals rises significantly during periods of high inflation? So it's a matter of determining whether the cost of making those items a permanent part of one's portfolio is greater than the potential gain from buying into them during periods of high inflation?
Sorry, unsure what you mean. Can say this:

The prices of REITs and precious metals could rise in the face of high inflation, but this is not a sure thing, depending perhaps on other forces at work.
I think the same can be said of TIPS
Robot Monster wrote: Sun Sep 27, 2020 5:52 pm TIPS do protect you from unexpected inflation.
Maybe. For the retirees I know, the CPI doesn't seem to match their expenses real well. Particularly those who own their primary residence, aren't often purchasing new vehicles and have much in the way of medical expenses they need to pay. Maybe it'll all average out. Maybe.
Robot Monster wrote: Sun Sep 27, 2020 5:52 pm (Though the market price is a bit more complicated, since it is affected by not just changes to expected inflation, but also interest rates.) If I buy a 10yr TIPS right now I'll get a yield of -.93%. Then, no matter how high inflation goes, I'll only be -.93% behind (tax issues aside). If I were to wait for inflation to rise, I might no longer be able to get that yield. Let's say expected inflation changed to 2.58% from what it is now, 1.58%. The yield on the 10yr TIPS could in response change to -1.93%.

Hope that helped if only somewhat.
That makes little sense to me. Inflation now is maybe 1.3% and 10 year treasuries are yielding about 0.65%.

Obviously this is a result of inflation and rates dropping and coming in under expectations for some period of time.

If 10 yr inflation expectations start to exceed the Fed target, I would expect the inflation premium in nominals to reflect that.

I mean real yields have gone negative as rates and inflation have dropped, and now you are saying they will go more negative as rates and inflation increase. Anyway, the last time inflation expectations ran around 2.58%, TIPS were nowhere near that negative (-1.93%) were they? Why this time?
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by TheDDC »

Stocks (VTSAX) with a growth tilt (VIGAX) will be a good inflation hedge.

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Rules to wealth building: 90-100% VTSAX piled high and deep, 0-10% VIGAX tilt, 0% given away to banks, minimize amount given to medical-industrial complex
typical.investor
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by typical.investor »

TheDDC wrote: Sun Sep 27, 2020 8:24 pm Stocks (VTSAX) with a growth tilt (VIGAX) will be a good inflation hedge.

-TheDDC
Why are growth stocks good? I understood they have longer duration with future earnings that are priced in today being more susceptible to reduction via inflation. https://www.investopedia.com/articles/i ... eturns.asp
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by Northern Flicker »

well, you could replace total bond index with a bond portfolio that is 50% intermediate treasuries and 50% intermediate TIPS.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by fredflinstone »

mookie wrote: Sat Sep 26, 2020 9:22 pm If we enter a period of high inflation, is there a better portfolio to hold than the three fund?
Modest inflation (e.g. 5-10 percent increase in prices per year): nominal bond prices will fall. TIPS would do well. Stocks may or may not do OK.

Hyperinflation (e.g. the price of an egg rises to a billion dollars): Inflation-adjusted price of stocks and nominal bonds will collapse. It is unclear if TIPS would keep up with inflation in this scenario. I doubt it. Cybercurrency and gold probably would perform extremely well. Guns and ammo would be highly coveted.
Stocks 28 / Gold 23 / Long-term US treasuries 19 / Cash (mainly CDs) 22 / TIPS 8
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by Chip »

nisiprius wrote: Sun Sep 27, 2020 8:27 am TIPS exist, and I have never been able to figure out why those with professional involvement in investing never mention them. It's as if they literally didn't exist. They are not the answer to life, the universe, and everything, but they do exist.
I believe that they are the answer if you allocate 42% to them.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by garlandwhizzer »

Zardoz wrote:
Swensen recommends 15% TIPS and 20% REITs in his reference portfolio, but he also notes the importance of creating a portfolio that aligns with your goals and philosophy:
Correct me if I'm wrong about this but I believe that Swensen has changed his portfolio recommendations in recent years, lowering REIT exposure. After very good US REIT performance in the 2000s, REITS have substantially underperformed TSM for about 7 years. All pension fund/endowment fund money managers, even ones with outstanding long term records like Swensen, are on performance leashes. When they underperform for a significant time period their jobs can be in peril so they cannot afford to wait too long for promised outperformance to show up. Swensen due to his success is on a long leash not a short one, but even he cannot ignore recent market setbacks. If indeed he did adjusted his REIT exposure it may be for this reason.

Also it's important to note that his 20% allocation to REITS as posted above is unlikely to be in a REIT Index like VNQ which is available to us, but rather to a selection of individual REITS carefully picked by him and his team. Investing skill is very rare but it does exist. I personally believe that Swensen has it. Even highly skilled investors experience setbacks from time to time. The active investor who claims that he/she has never erred in investment decisions is either very inexperienced or a liar.

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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by vineviz »

garlandwhizzer wrote: Mon Sep 28, 2020 3:34 pm Also it's important to note that his 20% allocation to REITS as posted above is unlikely to be in a REIT Index like VNQ which is available to us, but rather to a selection of individual REITS carefully picked by him and his team.
Or even more likely, actual (i.e. directly held) real estate holdings.
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by hackingdragon »

Robot Monster wrote: Sun Sep 27, 2020 5:52 pm Hope that helped if only somewhat.
This was helpful!
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by hackingdragon »

garlandwhizzer wrote: Mon Sep 28, 2020 3:34 pm Also it's important to note that his 20% allocation to REITS as posted above is unlikely to be in a REIT Index like VNQ which is available to us, but rather to a selection of individual REITS carefully picked by him and his team.
I'm sure that's true for Yale but didn't he write Unconventional Success for personal investment? He made the same recommendations there. In "Table 11.3 Core Asset Class ETFs Provide Useful Portfolio Management Tools" (page 318) he lists two REIT ETFs: RWR and ICF
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