A.I.M. Users Bulletin Board

[ls7550]

A friend called the other day and asked what he should be buying now. He thought there would be big bargains available.

Currently I have NO buy signals, most of my investments are at or above their 26 week eMA values and farther away from their "next buy" than their "next sell."

So, sadly I had to tell him I didn't have any great ideas right now.

Hi Tom.

In the absence of anything else, some, as a risk hedge, in long dated inflation bonds (TIPS) - directly bought (not a fund).

In some historical crises times, treasury yields have been suppressed to relatively low levels, either due to threats by Treasury's to buy such bonds to keep yields low, or by actual Treasury's buying bonds (as of more recent). After a while, inflation had then 'unexpectedly' spiked, into double digit levels where it stayed for a few years, eroding the value of most other assets/investments (highly negative real yields).

Inflation bond prices move in reflection of changes in unexpected inflation and long dated versions of those more so. Purely as a portfolio hedge, having some assets that spike sharply up in value should such 'unexpected high inflation' occur when nominal yields are artificially kept low are possibly worth holding purely for such risk hedge qualities. Bought and held to maturity current US 10 year versions are paying 0.43% real http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield so whilst an overhead compared to other real returns, at least its not an overall cost.

I don't know what the US longer dated modified durations are, but might be up at 10 levels (10% price change for each 1% change in (real) yield). Such that a little, might go a long way if/when nominal yields are (kept) low and inflation is raging at double digit levels.

If/when real yields move positive, such bonds will lose capital value, but might be continued to be held to maturity for no loss assuming a relatively light allocation that you don't mind bearing.

Debt erosion via low nominal yields (perhaps 2%) and high inflation (perhaps 15%) for several years in a row can erode debt substantially - at the expense of investors/savers, potentially wiping out years of investment/savings. Some insurance against that risk is akin to bearing the cost of house insurance. Whilst you hope that you wont have to claim, if you ever do need to claim you'll be glad you had the insurance.