Annuities are a popular insurance contract that provides guaranteed returns for a set period or for a lifetime. In this article, financial experts discuss whether or not annuities represent a good investment for inflation protection.
Carefully Evaluate Any Annuity And Pay Special Attention To The Inflation Riders And How It is Calculated
“Single-Premium Annuities are not designed to be inflation protection, they are insurance product designed so that you don’t run out of money. Annuities are simply a promise to pay you and income for the rest of your life how long or short that may be. Annuity companies usually offer the opportunity to purchase or not purchase an inflation rider when you purchase one of these contracts. An annuity is not really an investment to protect against inflation because your actual return, that is how many and long you receive payments- is primarily delivered by how long you live!
An inflation rider might be purchased and in this case, inflation might outpace the contract terms and your payment would be adjusted upwards to keep up with the rising costs of goods and you would see your real income keep up with the rising costs. Inflation may be similar to historical averages and your income would be similar throughout the term of the contract.
Currently, we are at near-historic low rates of in inflation and if an example consumer purchased an SPIA and then saw a run-up in inflation, the real income of the annuitant could be significantly reduced. Inflation may be very low and you may have paid a premium for inflation protection, but if the inflation rate was very low you may have been better off not purchasing the option.
This only covers single-premium annuities, there are also period certain annuities, return of premium annuities and many more. The main point is to carefully evaluate any annuity and pay special attention to the inflation riders and how it is calculated, as well as understand the pros and cons of
the contract you are evaluating.”
Jason B. Ball, CFP®, ChFC®, CLU®, Ball Comprehensive Planning, LLC
When Setup Properly Annuities Can Provide A Lifetime Income Stream
“I am an independent insurance broker specializing in annuities – and yes – I believe annuities are a good investment.
When setup properly, annuities can provide a lifetime income stream for individuals and couples. That income stream can also increase each year based on moves in the CPI index. And once the income stream increases, it can’t go back down.
A guaranteed lifetime income annuity that increases payments based on moves in the CPI (or other inflation indexes) can be a valuable piece to any retirement plan. It acts as a pension plan and can reduce the financial strain that comes along with the overall market volatility we’ve experienced the last decade and a half.”
Adam M. Hyers, President, Hyers and Associates, Inc.
Annuities Are A Great Way To Make Sure Your Money Grows
“Annuities are a great way to make sure your money grows at a rate that outpaces inflation. Annuities are also often guaranteed not to go down when the market goes down. This means they are protecting you against losing everything in a crash as well, making them ideal for people who need to have a certain amount of money each month to live on when they are no longer working.”
Stacy Caprio, Financial Blogger, Fiscal Nerd
They Come With Several Costly Caveats That Do Not Make Them Worthwhile For Most Investors
“Annuities are not a great buffer against inflation. They provide guaranteed returns, but they come with several costly caveats that do not make them worthwhile for most investors.
Annuities typically have several fees (including administrative or death benefit costs) associated with them above the cost of investment fund management fees. Inflation-protected annuities have additional fees for this benefit as well.
Annuities payments are not guaranteed. If the insurance company an investor purchased from goes bankrupt, it is possible that the individual might lose their payments.
If the investor decides they no longer want to the annuity, there is usually a penalty fee to cancel it and withdraw the money.
In general, a better strategy would be to invest in low-fee options that return healthy dividends. Over time the stock market historically outperforms what an annuity can offer, so investors with many years to go will do much better putting their available funds into 401K and IRA options than to purchase annuities now.”
Isaiah Goodman, Becoming Financial
Good Investment For Inflation Protection But Should Not Be Used As Pure Inflation Protection Vehicles
“Annuities can be a good investment for inflation protection but should not be used as pure inflation protection vehicles. They should only be used as inflation protection vehicle if the investor has an additional concern such as running out of money too quickly, having a stable income for peace of mind, or having some form of downside protection. Most annuities offer a cost of living adjustment rider which allows the income to scale based on one of the economic inflation metrics. However, annuities are primarily insurance for running out of money too fast. The way this happens is that you either live too long, you can’t budget to save your life, or you panic every time the market gets volatile.
If you don’t think you experience one of these core problems than there are a variety of better investments, you can make to protect your self from inflation concerns. If you are conservative in nature you can buy Treasury Inflated Protection Securities. Not only are they guaranteed by the federal government, but they are very stable investment. Their payments adjust directly based on inflation, so it is a direct hedge for inflation. However, if you want the best inflation-adjusted investments then look no further than the stock market. Equities are the best available investment when it comes to inflation. The cost of your day to day goods will directly be represented in the cost of goods these companies sell.”
Alex Caswell, CFA CFP, Wealth Planner, RHS Financial
Annuities Are A Very Misunderstood Product
“Annuities are a very misunderstood product. Annuities are a popular choice for investors who want to receive a steady income stream in retirement. There are different types of annuities that can play a beneficial part in anyone’s holistic strategy. As an industry professional, I believe that annuities serve a purpose for anyone, and can’t fall into a lump-sum of good or bad.”
Danita M. Harris, Managing Member, Guice Wealth Management
Fixed And Indexed Annuities Will Almost Certainly Beat Inflation With No Risk Of Loss
“Most long-term instruments will likely beat inflation, and therefore are good for inflation protection; however, most individuals who are looking for inflation protection are also just as concerned with the safety of principal and long-term liquidity. Fixed and indexed annuities will almost certainly beat inflation with no risk of loss, offering significantly higher interest rates than most fixed instruments. Additionally, annuities are tax-deferred, resulting in an even higher effective rate of interest. Once the surrender period has expired (usually between about five and ten years), most annuities are completely liquid provided the account owner is age 59.5 or older, unless of course, the account is annuitized (set to pay out a guaranteed income stream, usually for life or beyond).”
Rob Drury, Executive Director, Association of Christian Financial Advisors
It Depends What Type Of Annuity You Choose To Invest In
“I think it depends on what type of annuity you choose to invest in. Inflation can be unpredictable, and since annuities tend to be long-term investments, they may not be the best way to protect your finances from inflation. Even in a fixed annuity, you would guarantee the same amount of capital in return, but inflation could potentially negate any capital gains from this type of investment.
However, you could take out an immediate annuity that would start paying out in the short-term, making it a very viable option. This way you could start receiving your investment in small parts over the course of time, which is better than receiving a lump sum in the distant future. Smaller short-term capital gains will help you hedge against rising inflation, and you can always halt your annuity in the event inflation rises unexpectedly in the future.”
Igor Mitic, Co-Founder, Fortunly.com
It Is Generally Not The Top Of Mind Reason One Would Purchase An Annuity
“Annuities CAN have a place in someone’s overall financial planning for part of someone’s overall assets. Inflation protection could be a component of the reason why one would purchase an annuity, although the more common reasons found involve potential guarantees of income for life and the death benefit…always for additional fees. There are step-up features whereby the income benefit base steps up each year, or where the death benefit base steps up annually…or both. The increasing income base can mitigate the effects of inflation, depending on the specifics of the particular feature. There is not a one-size-fits-all, in that annuities can be tied to the stock market [variable annuity], a fixed rate of return [fixed annuity], or tied to an index [indexed annuity]. The fees can vary depending on the insurance carrier and the ancillary benefits purchased. The distribution options can vary as well, depending on the income need. All of that said, while inflation protection can be a component of the features of an annuity, it is generally not the top of mind reason one would purchase an annuity.”
Jimmy Masters, AIF(r), CRPS(r), Vice President – Investments, The Alcaraz Fisher Justis Wealth Management Group of Wells Fargo Advisors
Although annuities provide guaranteed payments to investors, there is no overall consensus as to whether or not they provide good inflation protection. If you are thinking about investing in annuities, take into account what the financial experts have discussed in this article, and always do your due diligence.
Inflation protected bonds, or more specifically, Treasury inflation protected securities (TIPS) are Treasury bonds designed to protect against inflation. The principle of TIPS rises with inflation, and pays interest twice a year, at a fixed rate. In this article, industry experts discuss specific things investors should know about inflation protected bonds.
Best For Savings Not Investment
“Treasury inflation protected securities are meant to help protect your principal amount from the effects of inflation. Your invested amounts are adjusted regularly in accordance to changes in the consumer price index – the official inflation indicator in the country. And the inflation-adjusted principal amounts will be used to determine your possible interest earnings. Some important things to note about TIPS include:
It pays less than ordinary government securities: You can expect the interest rate for TIPS to be a few points below that of ordinary bills and bonds. But a TIPS holder stands to benefit in two ways; one is through regular principal amount adjustments in accordance with CPI changes and the second in form of the agreed interest.
Inflation is currently not an issue: TIPs is supposed to caution you against volatile changes in inflation like in the case of 2007/8 economic downturn when the purchasing power decreased by 3.84%.
The Treasury Direct account can be cumbersome: Unlike stocks, you can buy
TIPS directly from the government through a Treasury direct account. But I believe you are better off using a TIPS fund for two reasons. The managers are more experienced and therefore able to tell the best buys and also because it is more effective than using the sluggish Treasury Direct website.
Best for savings not investment: You are better off using TIPs for savings and not for investments because they post lower returns and are essentially designed to protect the principal amount from depreciating at the expense of earning solid incomes.”
Edith Muthoni, Chief Editor, Leanbonds.com
The Current Fed Policy On Interest Rates
“There is no doubt of an accelerating attraction to inflation-protected U.S. government bonds. The key to answering why this is occurring rests with the current Fed policy on interest rates. The facts are that the nominal and inflation-adjusted bond yields have dropped over the past 12 months (i.e., taking the 10-year U.S. government bond yields as an interest rate yardstick.) The economy is still chugging along in full-growth mode, thus exerting pressure on future yields and boosting bond prices still more. At the same time, the Fed’s go-to inflation gauge (measuring inflation over five years starting today) indicates an expected rate of just over 1.8%. We don’t expect the Fed to resume increasing interest rates until we see a small excess over the expectation. The scenario painted above points to inflation-protected bonds outperforming the categories with zero protection (i.e., nominal rate bonds). Even if reality overtakes expectations and the Fed pushes interest rates earlier than expected, inflation-protected bonds like TIPS (Treasury Inflation-Protected Securities) should continue to head the pack. The reasoning is that inflation will be back in play to spur the Fed’s change of direction, and therefore TIPS (indexed to the inflation rate) will continue to thrive. Either way, you are a winner in our view.”
Gordon Polovin, Finance Expert, Serves on the Advisory Board, Wealthy Living Today
These Types Of Investments Are Best Suited For Individuals Who Are In Or Approaching Retirement
“Treasury inflation protected bonds (TIPS) are designed to help investors protect against the effects of rising prices. These types of investments are best suited for individuals who are in or approaching retirement as they are a hedge against inflation and they provide the strongest bond hedge against default risk. TIPS also provide income in the form of coupon payments. These payments are generally paid semiannually and are based as a fixed percentage of the face value of the bond. The fixed-rate is applied to the principal, and like the interest payments, it can rise with inflation and fall with deflation. A couple of important things to note are that once TIPS mature, the investor will receive the greater of their original investment or the adjusted higher principal amount. Meaning the investor can’t lose money during a deflationary period. TIPS are best used in non-taxable accounts (Traditional or Roth IRA, etc.) because the increase in the bond’s value will cause a taxable event each year there is an increase.”
Jordan Sester, Founder/Investment Advisor Rep, J.S Financial Group
You’re Better Off Owning Them In IRAs
“They’re not spectacular. Treasury inflation protected bonds TIPS are government bonds so there’s no default risk. The coupons are small. You run the risk of losing value if you sell prior to maturity. You will lose value in times of deflation. When the face value adjusts each year due to inflation it creates a taxable event. You’re better off owning them in IRAs where you won’t have to report taxes. They do hedge a risk.”
Chane Steiner, CEO, Crediful
Pay investors A Fixed Interest Rate As The Bond’s Par Value Adjusts With The Inflation Rate
“Treasury Inflation-Protected Securities (TIPS) are a form of U.S. Treasury bond designed to help investors hedge against inflation. These types of bonds are indexed to inflation, they have full faith and credit backing of the U.S. government. They pay investors a fixed interest rate as the bond’s par value adjusts with the inflation rate. TIPS pay interest at a rate that is fixed when the bond is purchased. Because the rate is applied to the adjusted principal, however, interest payments can vary in amount from one period to the next. The actual coupon payment (the amount of interest you receive), then, will fluctuate every six months, because it is calculated based on the new inflation-adjusted full value of the bond for the following year. One has to consider whether the variable income is a factor that fits their lifestyle, goals, and needs before purchasing.”
Jimmy Masters, AIF(r) CRPS(r), Vice President-Investments, The Alcaraz Fisher Justis Wealth Management Group of Wells Fargo Advisors
Inflation protected bonds protect investors from the negative effects of rising prices. As with any investment vehicle, there are advantages and disadvantages to investing in Treasury inflation protected securities. If you are interested in TIPS, factor in what these industry experts have discussed, and remember to do your due diligence.
The general consensus amongst economists is that US inflation is low. This was corroborated by favorable reports by the Department of Labor at the beginning of May. Yet, what trajectory will inflation take in the next half-decade? In this article, 5 experts weigh in on where US inflation is heading in the next 5 years.
The Fed Does Not Expect Inflation To Rise Significantly
“Inflation management is one of the primary roles of the Federal Reserve, so you can look to them for indications of inflation expectations.
The Fed will raise interest rates when it expects inflation to get above the 2% target. By raising interest rates, the Fed makes borrowing less attractive so spending and inflation will fall. Most recently, the Fed has announced that they do not plan to raise interest rates through 2021. This means that they do not expect inflation to rise significantly.
The Fed has also said they expect for unemployment to increase slightly. Again, this indicates low inflation. If less people are employed, then less people will have money to spend and create that upward pressure on prices that causes inflation.”
Brandon Renfro, Professor, Financial Planner
Not Much Organic Inflation
“Speaking as a consumer I do not believe there will be much ‘organic inflation’ in the next five years. A lot of people never fully recovered from the Great Recession. They’re saving a little bit more and do not fully trust the recovery. In addition the baby boomers are all approaching retirement age and will be living on fixed incomes. Healthcare costs are a major concern. According to statistics the economy is booming and yet a lot of people do not feel that is the case in their personal life.
Many people are working in Gig Economy jobs, which are in essence temporary assignments with no health benefits. Examples include driving for Uber, Lyft, Grub Hub, Door Dash, or Amazon delivery. These are not the type of positions, which fueled the economy in past generations.
Inflation is generally caused by consumers pumping a lot of money into the economy and taking on large amounts of debt. The wounds of the Great Recession have yet to heal. People are not automatically assuming they will be better off a year from now. Whenever one feels uncertain about the future they are reluctant to spend lavishly. Any spending they do is usually measured.
Having said that world affairs such as tariff wars and instability in the Middle East could cause inflation without any assistance from consumers. A major rise in oil costs could ripple through the economy causing prices to rise in other sectors of the economy. However, fear has a way of causing people to spend even less which leads to higher unemployment and recession. That would eliminate any inflation bubble.
We’re not likely to see any real inflation until the average working person believes the backbone of the economy is solid with good paying jobs. Right now adults are taking jobs from teenagers such as delivering newspapers, cutting lawns, snow removal, and working in fast food restaurants. This explains why there is a sudden push to make the minimum wage $15. We may not see historically high inflation for another 10 years!”
Kevin Darné, Author, Continuing Education Instructor
Rates Must Creep Back Up To Historic Levels
“Where’s US inflation heading in the next 5 years? – This is impossible to pin down precisely, but I believe that short of a recession, rates must creep back up to historic levels.
In spite of trade wars, government shutdowns and the resultant delay in statistics, the business cycle goes on. That said, corporations have used all the cost-cutting tricks in the world. Now is the time for increasing prices on the ground level as well as at the Fed Open Market Committee.
Complicating matters is that persistently low inflation and low rates hamstring the options that central banks have historically used to address crises. Again, in order to relieve this psychological pressure rates and inflation must creep up.”
Robin Lee Allen, Managing Partner, Esperance PE
A Modest Stagnation Of Growth Rates Can Be Expected
“Considering the latest development in trade and monetary policy, it can be expected that the U.S. inflation rate will remain at modest levels.
Given the uncertain outcome of the ongoing trade war, as well as highly leveraged corporate debt levels, which weigh on the outlook of the world economy, a modest stagnation of growth rates can be expected.
Another point to consider is the Fed’s shift in interest rate expectations. The expected monetary easing is an indication of concerns about low growth and geopolitical tensions.
Since the conundrum about the missing effect of the last quantitative easing programs still prevails, especially the question why full employment did not yield to higher inflation, it remains at least questionable if another round of quantitative easing would lead to higher inflation. The Federal Reserve Bank of St. Louis 5-Year Forward Inflation Expectation Rate (T5YIFR) dropped in the last year from 2.16% to 1.94% and from 2.47% to 1.94% within the last 5 years, even though the Fed deployed massive quantitative easing programs.”
Dr. Stephan Unger, Assistant Professor of Economics, Saint Anselm College
A Recession Within The Next 5 Years
“I predict inflation will stay around 2% for the next 3 years unless a recession hits sooner in which case I think the government will print more money and drive up inflation at a drastic rate. I think there will be a
recession within the next 5 years, so when that hits inflation may be as high as 10% in just one year.”
Stacy Caprio, Financial Blogger, Fiscal Nerd
Given economic indicators, the Fed has projected that there will be no real threat of skyrocketing inflation in the coming years. However, there are numerous variables that can shift which would alter that forecast. Ultimately, only time will provide the definitive answer.
Inflation and deflation can have a significant impact on the performance of a portfolio. It is crucial for investors to understand investment strategies to weather these two economic factors. In this article, experts provide valuable tips and insight into what investors need to know when investing during inflation and deflation.
Avoid Having High Cash Balances
“A top rule for investing during inflation is to avoid having high cash balances. Since money loses it’s purchasing power during such phases, investors should aim at investing into assets which are immune against devaluation, such as physical goods, e.g. gold, silver, other commodities, real estates, etc.
But also an investment into stocks would be good advice since stock prices tend to increase in times of inflation. The reason is that investors flee out of cash and are looking for any types of investment.
In times of deflation, investors should consider to hold cash and to invest in bonds, especially long-term bonds, since interest rates are likely to decline and therefore bond prices.”
Stephan Unger, assistant professor of economics, Saint Anselm College
Utilize The Power Of Diversification
(Credit: Richmond Quantitative Advisors)
“The above illustration details global asset classes that tend to outperform during rising inflation and falling inflation. You can further delineate if the economy is in a declining stage or growth stage to provide four full quadrants of global asset performance.
The four quadrants include:
* Inflation with Growth – Inflationary Boom
* Inflation with declining Growth – Inflationary Stagnation
* Deflation with Growth – Deflationary Boom
* Deflation with declining Growth – Deflationary Bust
Based on the illustration, there are ways to position one’s portfolio for certain environments the US encounters. The main focus for investors should be to utilize the only free lunch in investing which is the power of diversification. By diversifying across assets within these four quadrants, one has the highest likelihood of weathering the storm (even if it is not clear where it may occur across the quadrants). Investors need to know those asset classes that have the ability to outperform in each quadrant and then assess their personal asset allocation decisions accordingly.”
Andrew S. Holpe, Managing Member, Richmond Quantitative Advisors
Investors Need To Generate After-Tax Returns
“Most people create investment portfolios to invest their assets to outpace the rate of inflation. The financial markets and governments prefer an environment with low, controllable inflation growth. These conditions allow for expansion while enabling governments to repay current debt with future-value currency.
According to Morningstar, a consensus of financial analysts predict that long-term inflation will grow at 2.48% per annum. Simply put, an investor needs to generate an after-tax return above this inflation rate to stand still and protect the purchasing power of their money.
The most prudent way to ensure success is to build a highly diversified portfolio of stocks, bonds, real estate, commodities, and cash-like liquidity. Limit your single-name stock concentration per issue to not more than 5%. Construct a bond portfolio focusing on credit-quality and that the current yield of your bond portfolio exceeds the effective duration of your portfolio. Effective duration is the sensitivity to a change in interest rates. The combination of these factors allow for growth and provide additional protection during a recession and deflationary environments.
During deflationary environments, consumers defer purchases because they expect lower prices in the future. That reality convinces more people that prices are falling and induces more deferral of purchases, etc. This virulent feedback loop is difficult to change and often requires extraordinary policy measures by central banks. During the credit crisis, the Federal Reserve (FED), Bank of Japan (BOJ) and the European Central Bank (ECB) all implemented radical policy measures to fight deflation. A flight to safety…underweight stocks, overweight cash, foreign exchange (FX), insured CDs, and sovereign bonds are prudent positioning during deflation of asset values. Your cash is worth more in terms of purchasing power as time goes on so there is some inherent return to cash even if there is little or no interest income.”
Paul Bowers, Managing Director, Compass Family Offices
Invest in Commodities And Real Estate
“Typically, assets that an investor would invest during inflationary times would be hard assets such as commodities and real estate. Commodities would include energy such as oil and gas as well as industrial and precious metals (not necessarily gold), You would NOT want to invest in bonds since interest rates rise during inflation and would result in declining bond prices. Many investment advisors recommend gold but I view it as more of a crisis manager rather than an inflationary hedge. In fact, one could argue that gold might be better used as a hedge during deflationary times since deflation tends to occur in a rapidly deteriorating economy when investors flock to protect their assets.
Stocks tend not to do well in deflationary environments. One reason often provided is that revenue and earnings are under duress as prices decline, which would eventually translate into lower stock prices.”
Cliff Caplan, CFP(r), AIF(r), Neponset Valley Financial Partners
Two Sides Of The Same Coin
“Economic factors such as inflation and deflation have a direct bearing to investors’ portfolio. Both are two sides of the same coin. Inflation is the rate at which general prices for goods or services are increasing while deflation is the decline in prices.
Investors need to know how these two factors can affect their investment portfolio. In certain situations, both inflation and deflation can occur at the same time, and this poses a more difficult prospect of protecting your investment. But whether it’s deflation or inflation, there are steps you can take to avert this threat.
If it’s inflation, investors can use the stock market to protect their portfolio. Normally, rising prices are good for equities. International bonds can also provide a solution in this case. Investors can buy international bonds in countries that are not experiencing inflation and hence reduce the impact of razing inflation.
In times of deflation, the most appropriate way to deal with it is to acquire high-quality bonds rather than stocks. Bonds tend to perform well during these times. Government-issued bonds and foreign bonds provide excellent options.”
Edith Muthoni, Chief Editor, Leanbonds.com
Investments Need To Beat The Rate Of Inflation
“It’s important to consider your real rate of return when you expect inflationary markets. Your investments need to beat the rate of inflation in order to make any real progress. If inflation is 8%, you need to make at least 8% on your investments just to break even. If your investments only earn 5% during an 8% inflation period, your real rate of return is roughly -3%. You made money, but not enough to keep up.
There are ways to invest specifically in anticipation of inflation. The simplest is to invest more aggressively in stocks. Since equity investments do better over longer horizons they are often a good inflation hedge. One drawback though is you do need to plan to hold the stocks for a long time. Since stocks tend to be more volatile, you’ll need to plan for a longer investment term. In the short-term, your stock values could fall.
A direct way to invest for inflation is to purchase securities that have explicit inflation terms. The most common of these is the Treasury Inflation Protected Security, or TIPS. These are government bonds whose par value, and therefore interest you receive, adjusts with changes in the consumer price index. You can get these in terms as short as five years.
Another way to invest for inflation is to buy rental real estate. The reason rental real estate is an inflation hedge is because of the rent payments. You can adjust those for inflation when your tenant’s lease expires. If your terms on an annual basis, you would be able to make the adjustment every year.”
Brandon Renfro, Professor, Financial Planner
Regardless of the economic climate, a diversified portfolio is essential. Diversification is crucial when factoring both periods of inflation and deflation. When making investment decisions, take into account these expert tips and always do your due diligence.
More and more investors are growing alarmed at what they see as the steady attack on the value and stability of the dollar. Between rising annual federal deficits and the over $21 trillion total U.S. federal debt time bomb, the future of the dollar and dependably low inflation is no longer a sure and certain ultimate outcome. This is why sensible investors are hedging their portfolios against both dollar devaluation and risks of significantly higher inflation. Here we look at seven solid choices to accomplish both of these goals.
Gold and Silver Bullion
It often comes as a shock to many investors to learn that studies on investments outperforming inflation show gold only outpaces the inflation genie some 54 percent of the time. This is not a fair result though. In cases where hyperinflation or substantial currency devaluation becomes the order of the day, gold (and silver too) massively outdoes inflation. In environments with high and continuous inflation, you need a prolonged depth of exposure to gold.
The surest way to reliably own gold is in the physical bullion form of it. The key is to obtain and store it in the least expensive way possible. What you need when you opt for this most secure form of gold and silver are the most broadly minted, traded, and liquid forms of bullion. This means that your top choices should nearly always be American Eagles, Canadian Maple Leafs, Vienna Philharmonics, or the British Britannia. All are popular, easy to sell in nearly all countries around the world, and come with low premiums (and discounts) over spot bullion prices.
When you are looking to make some of the smartest investments in gold, you should consider a Gold IRA. It is critically important to use a reputable Gold IRA company. These three companies will steer you in the right direction and help you to pick out the best tax-advantaged gold products possible for your situation.
Gold and Silver ETFs
Some people are more concerned about low entry and exit fees, highest liquidity, instant saleability, and split-second diversification. In these cases, Gold and Silver ETFs may be your best option for hedging against devaluing dollars and inflation. The truth about these various ETFs is that not all of them were created equal.
The best performing ETFs are those that are most closely correlated to the underlying price of gold. The least desirable ETFs have baskets of gold miner stocks, which consistently do not closely match up in performance to the underlying price of gold (or silver). Individual gold company stocks introduce a variety of risks to the equation, such as possible corporate quarterly losses, financial bankruptcy potential, and strikes at or seizure of mines and other valuable assets around the globe. All of these risks can lead to a wide divergence between the performance of gold and the price of a Gold ETF made up of gold mining stocks.
Analysts generally recommend one of two Gold ETFs that deliver the goods. These are the SPDR Gold Trust ETF trading under the appropriate symbol of GLD and the ETF iShares Gold Trust trading as IAU. These two ETFs are not dealing in any shady derivatives or even futures contracts on the underlying metals. They actually purchase the appropriate physical quantities of their commodities to match the trading price of underlying gold (and silver) as precisely and safely as possible. Since the two funds own their physical gold outright, their performances nearly mirror gold and silver price movements. The two companies boast nearly the same risk to return profiles and ratios. Their ten year betas amount to .47 and .49 respectively.
As inflation rises and accelerates, commodities’ prices tend to rise apace. This makes them an ideal protection from the inflationary effects. There are not that many assets which gain from higher inflation, especially inflation that is unexpected. Commodities are a notable exception. As demand for services and goods rise, this typically pushes the costs of the services and goods higher, along with their underlying commodities prices for those goods utilized within them. It is the commodities futures markets that serve the role as ongoing clearing houses and auction markets for latest supply and demand information.
One thing to keep in mind with commodities is that they remain among the most volatile asset classes on the markets. They do provide higher returns in inflationary and devaluation environments, but this comes at the cost of a higher risk (in the form of standard deviation) than with standard equity investments (stocks). The key in most cases is to include commodities in an asset portfolio that is already significantly less volatile. This would decrease the all around risk to portfolio from negative correlation while often boosting the overall anticipated return.
Investing in commodities futures requires a great deal of background, some expertise, and ultimately nerves of steel. Generally only accredited or sophisticated investors meet the tests of this harder form of investing. Mutual funds provide a more suitable means of getting involved in them for the majority of investors. Alternatively, natural resources funds purchase firms that are involved with the production or mining of commodities. There are also raw commodities funds that buy into derivatives based upon commodities and back them up with fixed income investments.
The key is to be careful that you are not simply buying into mutual funds full of resource producing companies, which does not give you the real diversification you are seeking away from equities. Two solid ideas for direct commodity investments are the PIMCO Commodity Real Return Strategy Fund and the Oppenheimer Real Assets Fund that trades based upon the GSCI commodities index. There are also a range of new ETFs using the commodities indices as their underlying instruments which will be launched in the future or are imminent to be launched.
Remember that commodities have beaten inflation in an impressive 66 percent of instances. This is especially the case with the iShares S&P GSCI Commodity Index Trust.
The newest way to hedge against inflation and especially against dollar devaluation is using the cryptocurrencies like Bitcoin and Ethereum. The cryptos are a technologically cutting edged way for retaining your purchasing power. They have become particularly popular in two jurisdictions: ones with astronomical or runaway inflation like Venezuela and Argentina, and those that have capital controls like North Korea, South Africa, and China. In countries such as these with prolonged bleak outlooks, cryptocurrencies are an idea that could not come along soon enough.
This is especially the case because cryptocurrency wallets provide 24 hours per day, 7 days per week access to this electronic form of money that knows no borders. Back in Cyprus in 2013, the Cypriot Central Bank announced 100 euros per day ATM withdrawal limits. Greece went harsher with 60 euros per day in 2015. No matter how great your personal savings may have been, without access to your funds, it is irrelevant. You could lie helpless in a hospital room unable to be discharged for not paying a bill as you can not gain access to your own money.
The dawn of cryptocurrencies changed this. Citizens of crisis-stricken national economies finally found a credible and viable means of escaping from their national borders that had served as financial prisons. Farmers in Cuba may not be able to pack up and leave, nor factory workers in Iran or North Korea, but thanks to cryptocurrencies they can at least rest easy knowing that their money is continuously stored outside of the reach of their country’s central bank and regulatory agencies.
In this case, we use Real Estate to speak specifically about vehicles for holding commercial properties. This one of a kind investment class is both a hard asset that holds its intrinsic value well in inflationary and devaluation periods as well as an income-producing asset in the form of office spaces being leased out to tenants. The income-producing element pays out regularly in the form of dividends to the investors. This is why real estate has a long-term historical appeal to investors who are seeking a credible means of hedging their holdings against prolonged periods and bouts of inflation.
Real Estate equity and real estate investment trusts beat out inflation in an impressive 69 to 71 percent of real-world scenarios. Gaining a well-diversified exposure to such real estate with a reasonable expense ratio is imminently possible even for smaller retail investors, thanks to the Vanguard REIT ETF. For a comparable mortgage property residential REIT, you might opt for the Market Vectors Mortgage REIT Income ETF.
Barclays Aggregate Bond Index
Bonds may not be a vehicle that most investors think of for beating out inflation and currency devaluation, but their track record is impressive. A great barometer of this category is the bell weather Barclays Aggregate Bond Index. It beats out inflation in an impressive 75 percent of cases. You can track the index with an investment in the iShares Core U.S. Aggregate Bond ETF.
Americans have a unique Treasury option in the TIPS. These are Treasury Inflation Protected Securities. Specifically indexed to the American CPI inflation index, these Treasury instruments provide a way to protect your portfolio from inflation and its ravages. TIPS are so effective that they outperform inflation in 80 percent of scenarios. It makes the TIPS the leading out-performing category of investments.
You have three different Exchange Traded Funds to choose from to get involved in these TIPS on a highly liquid scale. Two of them track the Barclays U.S. Treasury Inflation Protected Securities Index. The third follows the iBoxx Three Year Target Duration TIPS Index.
A non-traditional investment that fares very well in periods of inflation is the category of leveraged loans. They provide low duration risk as well as a lower correlation to investment grade bonds.
There are other advantages to leveraged loans, such as comparatively attractive yields, improved diversification, lesser volatility versus equities, and the possibility of producing powerful risk-adjusted returns. Thanks to improved credit conditions, defaults should remain under average for the leveraged loan market for the foreseeable future at least.
These leveraged loans outperform inflation in an incredible 79 percent of cases. A way to invest in them with safety and liquidity is through the PowerShares Senior Loan ETF.
There is no good reason to be a prisoner of either excessive inflation or ruinous currency devaluation. Thanks to these seven credible inflation busting investments, you can both realize gains and sleep easier at night, knowing that your portfolio is effectively hedged. The additional advantage of gaining more effective and comprehensive diversification is only additional icing on your investment cake.
This morning, the Bureau of Labor Statistics released consumer inflation numbers for November. The Consumer Price Index for all Urban Consumers (CPI-U) was unchanged for the month following seasonal adjustments. This is what most analysts had expected. As the chart below illustrates, net inflation since July remains flat. November saw declines in energy and food costs offset by higher prices for shelter and medical care services. For the 12-months ending in November, the headline index rose an unadjusted 0.5%, the highest annual inflation number since 2014.
Excluding food and energy, seasonally adjusted core prices rose 0.2% in November, which was also what most analysts had forecast. Adjusted core prices have increased by 0.2% for three months in a row and have stayed between 0.1% and 0.3% throughout 2015. For the year ending in November, core inflation was 2%.
These numbers point to underlying inflationary pressure and support the Federal Reserve’s highly anticipated rate hike, which will likely be announced tomorrow following their meeting. The Fed has kept interest rates at 0.25% since 2009.
Overall, seasonally adjusted prices were flat in November as declines in the indexes for food and energy were offset by higher prices for shelter, transportation services and medical services. The index for all items less food and energy climbed a seasonally adjusted 0.2% in November, in line with expectations. The more volatile food and energy indexes were down 0.1% and 1.3% respectively, after seasonal adjustments.
Seasonally Adjusted Monthly % Change in CPI-U by Category (2016)
|Fuel Oil (non seasonally adjusted)||-6.5||-2.9||1.7||1.9||6.2||3.7||-1.5
|Utilities (piped gas service)||-0.6||1.0||-0.7||0.6||1.7||-0.4||3.1
|All Items Less Food and Energy||0.3||0.3||0.1||0.2||0.2||0.2||0.1
|Services Less Energy Services||0.3||0.3||0.2||0.3||0.4||0.3||0.2
|Medical Care Services||0.5||0.5||0.1||0.3||0.5||0.2||0.5
The monthly decline in the food index is its first drop in 8 months. The index for food at home fell 0.3% in November. Aside from fruits and vegetables, which were 0.6% higher for the month, every other component of the index for food at home fell. Prices for meat, fish, poultry and dairy products continue to decline. However, the adjusted index for food away from home climbed 0.2% in November.
The decline in the energy index resulted from lower gas prices, down a seasonally adjusted 2.4% in November. Gas prices have been very volatile in 2015, falling over 18% in January and climbing over 10% in May. Shelter costs continue to rise steadily, up 0.2% in November following increases of 0.3% in September and October. Prices are also rising steadily in the service sectors, up 0.3% for the third month in a row. Transportation and medical care services were up 0.6% and 0.4% respectively.
For the 12-months ending in November, unadjusted prices were up 0.5% overall. The increase in overall price levels was largely driven by higher shelter costs, which account for 33.2% of the overall index. Unadjusted shelter costs were 3.2% higher over the 12-month period. The index for rental costs (primary residence) climbed 3.6% during the year, while moving expenses were 7.1% higher.
Food prices, which account for about 14% of the overall index, were up 1.3% for the year ending in November. The index for food at home, which is about 60% of the overall food index was only up 0.3% year over year. This marks its smallest annual increase in over 5 years. The prices for meat, fish, poultry and eggs are all down year over year while the prices for bread, fruits and vegetables are higher. The index for food away from home climbed 2.7%. A significant hike (4.9%) in the index for food at employee sites and schools was the primary reason for higher costs for food away from home.
The energy index makes up approximately 7.4% of the CPI-U and about half of the energy index is energy commodities and the other half energy services. For the year ending in November, the overall energy index fell 14.7% including a 24.2% decline in energy commodities and a 2.8% decline in energy services. Among the energy commodities, the index for fuel oil had the largest decline, down 31.4% for the year. Over the same 12-months, the index for gasoline (all types) fell 24.1%.
It is highly expected that the Federal Reserve will raise interest rates by a quarter of a percentage point on Wednesday. According to the Wall Street Journal, 97% of economists surveyed expect the fed to raise rates this week. This would be the first rate hike in nearly a decade as the economy and employment appear to finally be returning to solid ground.
What remains largely an unknown at this point is the pace of future rate hikes. This will largely be a function of inflation expectations. With overall inflation continuing to lag well below the Fed’s target, the pace of future rate hikes may likely be slow. According to David Jones, chief economist at DMJ Advisors:
“The stronger dollar and falling oil prices [may] have masked some underlying inflation[ary] pressures which could surface quickly as we move closer to full employment.”