Darla Mercado at CNBC covered how to prepare a portfolio for inflation risk at a moment when June's CPI had eased slightly but crude was up nearly 23% since the Iran conflict began. She asked me what I actually use.
My answer was Treasury inflation-protected securities. TIPS are the cleanest direct hedge against inflation that exists, and they are the most misunderstood. The principal adjusts with the consumer price index, so the purchasing power of the bond is protected by design rather than by hope. They are a standing part of the fixed income allocation for my clients, not a trade I put on when the headlines get loud.
The flexibility is the part people miss. You have the ability to adjust how much duration you are going to take depending on which TIPS you buy, whether it is a 5-, 10- or 30-year term. A retiree who needs inflation protection over the next five years does not have to accept 30-year interest-rate risk to get it.
The piece also covers dividend growers and REITs as partial hedges. Those can help, but they are equity risk with an inflation story attached. TIPS are the only tool in the list whose contract is the hedge.
Read the full article at CNBC →
