Transcripts

"Money File"-Inflation Issues & Your Portfolio

SUSIE GHARIB: In the "Money File" tonight, navigating inflation hedges. Here's Eric Schurenberg, managing editor at "Money" magazine.

ERIC SCHURENBERG, MANAGING EDITOR, MONEY MAGAZINE: Inflation is back and inflation is poison for your portfolio. As consumer prices rise, interest rates do, too, dropping the prices of bonds and stocks alike. So it's no surprise that the hottest investments right now are inflation hedges. Let's start with the safest, Treasury inflation protected securities or TIPS. They're Treasury notes that adjust their pay-out to match the rise in consumer prices. Demand has driven up the price of TIPS, so returns will be low. Recently, the yield on five-year TIPS was just 1 percent, compared with 3.2 percent on regular five-year Treasuries. The TIPS do though beat regular notes if inflation exceeds 2.5 percent for five years, which seems plausible. So if you want to have money in Treasuries, it seems safe to have much of it in TIPS. But remember, TIPS won't make you rich. The inflation hedge that has made people rich is commodities. Since 2003, mutual funds linked to commodities have returned 32 percent a year, versus 11 percent for the whole stock market. In fact, commodities have been so strong that some experts believe they're the new bubble, so you probably shouldn't have more than 5 percent of your assets in them. Here's the bottom line. You generally don't make money by chasing hot investments. So think of these two key inflation hedges not as money making brainstorms, but as insurance. They'll protect you if inflation explodes. But for the long haul, most of your money belongs in good, old- fashioned blue chip stocks. I'm Eric Schurenberg.