5 ms·

Unfortunately I leaned on history to make investment decisions during this period of rising inflation. Gold, stocks, and real estate were historically good hedg

Unfortunately I leaned on history to make investment decisions during this period of rising inflation. Gold, stocks, and real estate were historically good hedges against inflation and cash holdings should be minimized. But that conventional wisdom has been a bad strategy this time. As a reminder one ~sure bet is iBonds (the i is for inflation). Last I checked the yield is little shy of 10% and your money only needs to be locked up for 1 year. Too bad there's a $10k annual deposit limit.

go_elmo 4y ago
Afaik inflation devaluates stock relative to bonds and its small 101 of economics but Im no expert
- voisin 4y ago
  I think you have this opposite. Bonds have a fixed nominal return, so if inflation picks up unexpectedly, that nominal return erodes in real (inflation adjusted) terms, so investors flee bonds. That said, stocks don’t tend to perform well either because of expectations over interest rates increasing to combat inflation and an ensuing recession.
- wahern 4y ago
  The Econ 101 is the complete opposite. Bonds usually have fixed rates, whereas stock prices are in principal tied to revenues, and nominal revenues should increase with inflation--companies increasing prices is literally how most people experience inflation. But Econ 101 also suggests that in the short term things will be more complex than all that because price adjustments won't be instantaneous. Fear and volatility will create demand for bonds, which could offset to some extent the clearly diminishing nominal value of fixed-rate bonds. Note that a key factor here isn't inflation, per se, but the rate of change in inflation. From an Econ 101 perspective 2% inflation is no different than 20% inflation if things are otherwise steady-state. Stocks are the better bet because in principal they should respond more quickly to changes in the inflation rate. If inflation is steady, bonds in principal are the simpler, cheaper instrument.
  - mrep 4y ago
    I like your thought process on the "rate of change in inflation" but BND and VTI are both down 15% in the past year when inflation has had the greatest change in decades. I would have thought BND would have fallen a lot harder considering how much higher new bonds are paying but maybe the market is pretty good at pricing bonds based on their associated risk per length of bond time with inflation? IDK, what do you think?
- merely-unlikely 4y ago
  Depends on the sector. You would expect consumer staples (ie food stuffs) to perform well since higher prices can easily be passed to consumers who can't cut back (hence inflation). You would expect money losing tech stocks to suffer as interest rates (and thereby discount rates) rise. You would also expect bonds to perform poorly as their prices need to decline to make their yields competitive with those of new bonds issued at higher interest rates. Term loans should outperform since their interest rates are variable, making them safer in a regime of raising/fluctuating interest rates. Conversely, sometimes US treasuries will outperform if investors are fleeing to a safe haven against potential recision risks. There's always another variable.
koolba 4y ago
> Too bad there's a $10k annual deposit limit. It’s $10K per tax identifier, so if you’re married you just doubled it. If you have kids, each of them can buy $10K as well (though be sure to understand that you’re permanently transferring the assets to them, you can’t take it back it’s effectively an early inheritance). You can also buy $10K as a corporation, LLC, or anything else with a tax identifier.
- btbuildem 4y ago
  So you could technically open N LLCs and stick $10k in each of them?
  - Victerius 4y ago
    No.
bob_theslob646 4y ago
Here are a few things about i-bonds that the average joe may not know. Series I bonds with issue dates prior to February 2003 became eligible for redemption six months from the issue date. Bonds with issue dates of February 2003 and later are eligible for redemption one year from the issue date. However, if a bond is cashed within the first five years after its issue date, interest earned during the three months prior to cashing will be forfeited. Once a Series I bond is five years old, there is no interest penalty for redemption. Another problem, you will owe federal tax on the I bond interest when you cash it in. In general interest on treasury bonds is not taxable at the state level. I am not sure about local taxes, which have all sorts of one off rules. But the thing most miss about the I bonds is you receive no interest until maturity/cashing it in. So no compound interest. Hope that helps!
- goldfish3 4y ago
  >But the thing most miss about the I bonds is you receive no interest until maturity/cashing it in. So no compound interest. That's incorrect. I bonds compound semi-annually. https://www.treasurydirect.gov/savings-bonds/i-bonds/i-bonds-interest-rates/ https://www.treasurydirect.gov/savings-bonds/i-bonds/i-bonds...
  - bob_theslob646 4y ago
    Technically you are correct, but it is only when you cash them in. Please see this for other questions. >3). Tax Deferred - I-bonds do not throw off interest. You only owe tax on the internally compounding interest once the bonds are cashed in, which means you control when you pay tax. Always a good thing! https://www.reddit.com/r/personalfinance/comments/qprqpy/ibond_questions_answered/ https://www.reddit.com/r/personalfinance/comments/qprqpy/ibo...

go_elmo 4y ago

Afaik inflation devaluates stock relative to bonds and its small 101 of economics but Im no expert

voisin 4y ago
I think you have this opposite. Bonds have a fixed nominal return, so if inflation picks up unexpectedly, that nominal return erodes in real (inflation adjusted) terms, so investors flee bonds. That said, stocks don’t tend to perform well either because of expectations over interest rates increasing to combat inflation and an ensuing recession.
wahern 4y ago
The Econ 101 is the complete opposite. Bonds usually have fixed rates, whereas stock prices are in principal tied to revenues, and nominal revenues should increase with inflation--companies increasing prices is literally how most people experience inflation. But Econ 101 also suggests that in the short term things will be more complex than all that because price adjustments won't be instantaneous. Fear and volatility will create demand for bonds, which could offset to some extent the clearly diminishing nominal value of fixed-rate bonds. Note that a key factor here isn't inflation, per se, but the rate of change in inflation. From an Econ 101 perspective 2% inflation is no different than 20% inflation if things are otherwise steady-state. Stocks are the better bet because in principal they should respond more quickly to changes in the inflation rate. If inflation is steady, bonds in principal are the simpler, cheaper instrument.
- mrep 4y ago
  I like your thought process on the "rate of change in inflation" but BND and VTI are both down 15% in the past year when inflation has had the greatest change in decades. I would have thought BND would have fallen a lot harder considering how much higher new bonds are paying but maybe the market is pretty good at pricing bonds based on their associated risk per length of bond time with inflation? IDK, what do you think?
merely-unlikely 4y ago
Depends on the sector. You would expect consumer staples (ie food stuffs) to perform well since higher prices can easily be passed to consumers who can't cut back (hence inflation). You would expect money losing tech stocks to suffer as interest rates (and thereby discount rates) rise. You would also expect bonds to perform poorly as their prices need to decline to make their yields competitive with those of new bonds issued at higher interest rates. Term loans should outperform since their interest rates are variable, making them safer in a regime of raising/fluctuating interest rates. Conversely, sometimes US treasuries will outperform if investors are fleeing to a safe haven against potential recision risks. There's always another variable.

koolba 4y ago

> Too bad there's a $10k annual deposit limit. It’s $10K per tax identifier, so if you’re married you just doubled it. If you have kids, each of them can buy $10K as well (though be sure to understand that you’re permanently transferring the assets to them, you can’t take it back it’s effectively an early inheritance). You can also buy $10K as a corporation, LLC, or anything else with a tax identifier.

btbuildem 4y ago
So you could technically open N LLCs and stick $10k in each of them?
- Victerius 4y ago
  No.

bob_theslob646 4y ago

Here are a few things about i-bonds that the average joe may not know. Series I bonds with issue dates prior to February 2003 became eligible for redemption six months from the issue date. Bonds with issue dates of February 2003 and later are eligible for redemption one year from the issue date. However, if a bond is cashed within the first five years after its issue date, interest earned during the three months prior to cashing will be forfeited. Once a Series I bond is five years old, there is no interest penalty for redemption. Another problem, you will owe federal tax on the I bond interest when you cash it in. In general interest on treasury bonds is not taxable at the state level. I am not sure about local taxes, which have all sorts of one off rules. But the thing most miss about the I bonds is you receive no interest until maturity/cashing it in. So no compound interest. Hope that helps!

goldfish3 4y ago
>But the thing most miss about the I bonds is you receive no interest until maturity/cashing it in. So no compound interest. That's incorrect. I bonds compound semi-annually. https://www.treasurydirect.gov/savings-bonds/i-bonds/i-bonds-interest-rates/ https://www.treasurydirect.gov/savings-bonds/i-bonds/i-bonds...
- bob_theslob646 4y ago
  Technically you are correct, but it is only when you cash them in. Please see this for other questions. >3). Tax Deferred - I-bonds do not throw off interest. You only owe tax on the internally compounding interest once the bonds are cashed in, which means you control when you pay tax. Always a good thing! https://www.reddit.com/r/personalfinance/comments/qprqpy/ibond_questions_answered/ https://www.reddit.com/r/personalfinance/comments/qprqpy/ibo...