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Originally Posted by redpoint5
Hmm, so if we assume high inflation for the next 5 years, it would hedge against it.
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Quote:
Originally Posted by JSH
If you bought I Bounds today you would be guaranteed to never lose or gain money compared to the CPI. They will pay that inflation rate.
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The key "word" in that guarantee is CPI which has historically been a pretty decent proxy for inflation, but may not be so in the future.
The consumer price index used to measure changes in the price of a fixed basket of goods, but congress allowed it to become decoupled. There were some legitimate reasons for this - manufactured products generally become better over time so comparing the price of a 1965 Ford Mustang to a 2022 Ford Mustang may not be fair. And often the products people use change over time (no one had televisions or cell phones 100 years ago).
But in giving the government the power to make quality corrections and substitutions, we've also given them the power to game the numbers. So far they haven't done too much of this, but a bureaucrat under pressure to keep inflation below X could, for example, decide that legumes could be substituted in times of rising beef/pork/poultry prices since they also have protein. Or they could say that even though the cost of medical care doubled, with all the medical advancements you are receiving twice as good of care.
Again, they haven't gamed the numbers (much) yet, but they could. For now the biggest complaint is that CPI tends to lag behind inflation a bit.
Quote:
Originally Posted by redpoint5
That said, my preferred hedge against inflation is fixed rate low interest debt (fixed rate mortgage).
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Mine too.
Quote:
Originally Posted by redpoint5
Bonds ... historically underperform the stock market.
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While they usually underperform, bonds have sometimes outperformed the stock market over 10 year periods in the past:
May 1928-May 1938
Annualized S&P 500 Return (Dividends Reinvested) 0.368%
Annualized 10 Year Treasury Return 5.442%
May 1972-May 1982
Annualized S&P 500 Return (Dividends Reinvested) -3.090%
Annualized 10 Year Treasury Return -0.556%
And those are 10 year treasuries - corporate bonds did even better...
May 2000-May 2010
Annualized S&P 500 Return (Dividends Reinvested) -2.859%
Annualized 10 Year Treasury Return 2.397%