While the sky-high inflation is on everyone’s lip, we have been asked about how to hedge inflation perfectly with funds for roughly a thousand times. Sadly, there is no such thing as a perfect hedge for
The Perfect One isn’t Perfect
If we have a perfect hedge against inflation, that means the purchasing power of our wealth would remain intact no matter how high the inflation is. In
EUR Inflation-Linked Bond category is an unloved category in our long list of Morningstar categories, and its name suggests that funds within this category are born to hedge inflation perfectly. Unfortunately, they are not, at least to
The Myth of the Yellow Metal
As the price has risen along with the inflationary trend over the past several years, gold sounds like a final hope for investors. The latest launches of two gold ETFs – SPDR Gold Trust (2840.HK) and Value Gold ETF (3081.HK) – also add appeals to the yellow metal since this “final hope” has become more accessible to general investors than ever.
Indeed, gold offers plenty of reasons for investors to invest. For example, gold has been regarded as the best capital protection vehicle despite all the pandemonium, especially when the greenback has lost its shine after two desperate rounds of quantitative easing. Emerging market central banks (
Interestingly, when equities and almost commodities fall during wartime, gold is always a beneficiary of anxiety. For instance, when George W. Bush, a hawkish republican, waged war in
I am not saying that investors should get away from gold, but investors should think outside inflation when making investment decisions.
Far Water and Near Fire
Many investors also believe that real estate can act as a hedge against inflation. It is very true that housing price has moved up as fast or faster than inflation over the long run, but actually they do not always move hand by hand. For example, while the consumer price index in US rose 3.56% yoy as of June this year, housing price still fell 4.3% in the same timeframe according the Federal Housing Finance Agency index. Simply put, buying a house to hedge against inflation is similar to using far water to put off near fire.
The conclusion sounds discouraging – there is no such thing as a perfect hedge. However, do investors really need one? Actually, CPI is one of the most notorious indicators to be forecasted, and thus reshuffling the portfolio for hedging may lead to ill-timed moves. When setting strategy asset allocation, investors should always look at real return instead of nominal return. In the fund universe, investors should have no difficulties to find plenty of vehicles that are able to surpass inflation over the long run. In other words, setting the long-term strategy asst allocation right is the perfect way to live against inflation.
