What Is the Hedge Against Stagflation?

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DLRCohasset
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What Is the Hedge Against Stagflation?

Post by DLRCohasset »

Having lived through the 1970's I have a fear, probably inordinate, but nagging none the less, about a condition of little economic growth and high inflation, a periord that I remember as bad for both stocks and bonds.

If one were to hedge against it what would one use? Thanks.
Call_Me_Op
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Post by Call_Me_Op »

TIPS didn't exist in the 1970's. TIPS should do reasonably well during inflationary periods.
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SP-diceman
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Post by SP-diceman »

Probably whats needed is an inverse stagflation ETF
or an Inverse Keynesian ETF.


Thanks
SP-diceman
Indices
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Post by Indices »

Didn't gold do extraordinarily well during this period?
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Czilla9000
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Post by Czilla9000 »

I'll be the contrarian here: Wide-moat dividend paying stocks. In inflationary times you want companies that can raise prices and increase dividends accordingly. Similarly, these same companies could take advantage of a lax labor market to reduce payroll. Their shareholders win both ways.

Vanguard has an ETF called Vanguard Dividend Appreciation that tracks these kinds of companies. Keep in mind these stocks will still fall if the market falls, but during stagflation they should still outperform the aggregate market.
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Post by EO 11110 »

gold. not silver, not platinum -
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baw703916
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Post by baw703916 »

Indices wrote:Didn't gold do extraordinarily well during this period?
Yes, but U.S. citizens weren't allowed to own it for most of that period.

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Opponent Process
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Post by Opponent Process »

social security.
30/30/20/20 | US/International/Bonds/TIPS | Average Age=37
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stratton
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Post by stratton »

Small value did well in the 70s. Doesn't mean it will again if we have a similar situation, but I tilt to small and value a little bit so I'll take any benefits that show up! :)

Paul
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nisiprius
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Post by nisiprius »

1) There isn't necessarily a "hedge against" everything.

2) Hedges are never a free lunch. They always cost money, usually quite a lot of money, enough to create significant pain if the hedged-against event doesn't come to pass.

3) If you try to hedge against everything, by the time you've cancelled out all risk you have cancelled out all above-riskless reward. You end up with something like the Vanguard Market Neutral Fund, which manages to obtain Treasury-like performance with stock-fund-like volatility.

I don't go in for that sort of investing, but I imagine the proper use of a hedge is to take a very risky investment that includes very rare but utterly catastrophic possibilities, and, buy paying a significant "insurance premium" that will usually be lost, protect against a rare contingency that probably won't occur. Stagflation isn't that sort of thing.
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White Coat Investor
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Post by White Coat Investor »

Having a good job and working longer.

Sometimes we forget that most people in the world work until they can't any longer. It's not a bad plan B for the rest of us.
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soaring
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Post by soaring »

EmergDoc wrote:Having a good job and working longer.

Sometimes we forget that most people in the world work until they can't any longer. It's not a bad plan B for the rest of us.
How true that over half of Americans live paycheck to paycheck.

http://www.businessinsider.com/22-stati ... ica-2010-7

Click on "view as one page" at bottom of article for visual of all statistics in one screen.
61 percent of Americans "always or usually" live paycheck to paycheck, which was up from 49 percent in 2008 and 43 percent in 2007.
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Re: What Is the Hedge Against Stagflation?

Post by Valuethinker »

DLRCohasset wrote:Having lived through the 1970's I have a fear, probably inordinate, but nagging none the less, about a condition of little economic growth and high inflation, a periord that I remember as bad for both stocks and bonds.

If one were to hedge against it what would one use? Thanks.
TIPS guarantee you a real return (before tax).

Otherwise not much. Stocks and bonds both did poorly 1968-1980.

Timber maybe. Real estate perhaps. Gold the data is not good (because there were restrictions on ownership of gold by US citizens).

Might be worth reading John Neff's book, as I recall Windsor (large and small cap value) did well in that period.
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Post by WiscSooner »

nisiprius wrote:1)
3) If you try to hedge against everything, by the time you've cancelled out all risk you have cancelled out all above-riskless reward. You end up with something like the Vanguard Market Neutral Fund, which manages to obtain Treasury-like performance with stock-fund-like volatility.
Wow, I didn't think you were serious at first... This fund (VMNFX) has an ER of 2.80%!!!
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SSSS
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Post by SSSS »

WiscSooner wrote:Wow, I didn't think you were serious at first... This fund (VMNFX) has an ER of 2.80%!!!
By pure coincidence, it's also the ONLY Vanguard fund or ETF that's negative over the past 1 year. If you make a list of the ten worst-performing Vanguard funds over the past 1 year, #2 through #9 are all Money Market funds (+0.04% to +0.21%); Market Neutral is dead last at -1.51%.
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stratton
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Post by stratton »

SSSS wrote:
WiscSooner wrote:Wow, I didn't think you were serious at first... This fund (VMNFX) has an ER of 2.80%!!!
By pure coincidence, it's also the ONLY Vanguard fund or ETF that's negative over the past 1 year. If you make a list of the ten worst-performing Vanguard funds over the past 1 year, #2 through #9 are all Money Market funds (+0.04% to +0.21%); Market Neutral is dead last at -1.51%.
Market neutral funds have managerial risk. Sh*t happens and they make mistakes.

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Quasimodo
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Post by Quasimodo »

Gold mining stocks did well during the 1970s. So did junk silver US dimes and quarters. I remember buying some gold Krugerrands, so it became legal at some point for US citizens to own physical gold. (can't remember exactly when)

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Post by kjm »

REITs seem like the obvious choice. People always need places to live, and lease rates will go up with inflation.
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stratton
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Post by stratton »

Real return would be:

Timberland
Gold and gold miners
TIPS and other real return bonds
Real estate
Energy
Commodities and commodity indexes
Exchange inflation futures

See Robert Greer's The Handbook of Inflation Hedging Investments.

Paul
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zblongladder
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Re: What Is the Hedge Against Stagflation?

Post by zblongladder »

DLRCohasset wrote:Having lived through the 1970's I have a fear, probably inordinate, but nagging none the less, about a condition of little economic growth and high inflation, a periord that I remember as bad for both stocks and bonds.

If one were to hedge against it what would one use? Thanks.
+1 for TIPS. At least that way you won't lose money if inflation doesn't take off. You won't make much, but they don't have the risk of collapsing in value if the economy recovers well, like gold does. (Also, I mistype "god" for "gold" almost every time--is my subconscious trying to give me investing advice?)
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