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Inflation hedges: what does and doesn’t work

High and rising inflation threatens our standard of living for the first time in more than 30 years. How can we stop this invasive financial rot? What are the best inflation hedges to defend our portfolios?

The only way to separate fact from fiction is to dig into the long-term evidence. We’re looking today for asset classes that actually do hedge against inflation. 

  • Do these investments always work? (Sneak preview: no.)
  • Do they work for everyone regardless of where you are on your investing journey? (No again.)

Well, when do they work and for who?

Let’s find out!

Note: All investment returns quoted in this article are annualised real returns.1 

How to hedge against inflation 

A good inflation hedge should:

  • Respond quickly to high inflation, with correspondingly high nominal returns. 
  • Work reliably across many different time periods, countries, and inflation regimes.
  • Deliver reasonable long-term returns over time.

On that last point: we’re not excited about investing in an asset class that’s a deadweight if high inflation doesn’t materialise. 

The chart below from the FT summarises the inflation-hedging playing field. It draws on data from a 2021 research paper: The Best Strategies For Inflationary Times:

A chart showing the best inflation hedges according to the 2021 research paper: The Best Strategies For Inflationary Times

Look at energy commodities go! Do we already have a winner? The best hedge against inflation? 

The trend-following strategy also looks excellent. Gold shines, too. And few of us would mind stocking up on wine. This seems easy.

Sadly it’s not.

Inflated expectations

Reading the 2021 paper in detail reveals inflation-hedging to be (yet) another investing minefield.

None of the inflation hedge ‘winners’ in the chart above prove to be no-brainers: 

  • Each asset class comes with more baggage than Ryanair
  • Few work consistently
  • Some have poor long-term returns

Alas, there is no magic bullet answer to the question: “what is the best hedge against inflation?”

Taken together, the top inflation hedges resemble a ragtag crew of mercenary misfits. Sometimes they’ll come through for you: unleashing a spectacular display of inflation-busting pyrotechnics. Other times, they’ll fall on their face like a drunk, trousers round their ankles. An embarrassing mistake. 

These complications mean we believe deliberate inflation-hedging makes less sense for early- to mid-stage accumulators than for near-retirees and decumulators.

When you’ve decades to go, concentrate on beating inflation over the long-term. That makes more sense than hedging against a short-term risk.

As for near-retirees and decumulators, let’s consider which of the reputed inflation hedges you may want on your side.

Inflation hedge: commodities 

Energy commodities delivered an average 41% return across the eight high inflation episodes that haunted the US from 1926 to 2020. That’s according to The Best Strategies For Inflationary Times paper.

Sounds great – bar three devilish details:

  • Returns were negative during three of the episodes. 
  • Returns averaged -1% outside of the inflationary periods. The average return was 3% across the entire timeline.
  • Six out of eight episodes were calculated using spot prices. But private investors can only invest in commodity future funds.2

The fact that energy commodities didn’t hedge against inflation every time doesn’t bother me. Hardly any asset class does. 

My concern is that while many papers make the inflation-hedging case for energy commodities, I’ve yet to find one that tests the hypothesis using actually investible assets. 

Researchers work with spot prices or commodity future indexes. But indexes don’t include costs. Also, commodity index-tracking funds such as ETCs are vulnerable to exploitation by major-league investment firms.

Financial players with superior information can trade against the ponderous and predictable ETCs.

Known as ‘front-running’, this strategy enables active investors to profit at the expense of passive commodity vehicles.

The commodity rollercoaster

To add to the gloom, long-term studies of broad commodities suggest you can expect to get bond-like returns allied to equity-like volatility. 

That’s the worst of both worlds. Like two drunks in a storm.

Just look at the 10-year returns of Energy ETCs available to UK investors:

A table of annualised return data for Energy ETCs.

Source: Trustnet Multi-Charting tool

These energy ETCs all had a great past year – on cue – as unexpected inflation concerns emerged in 2021. 

But could you take annualised losses of 4% plus for ten years straight? (Trustnet’s returns are nominal, so you have to add inflation to those losses, too.)

It gets worse. Go to WisdomTree’s website and check some of its ETC’s records since 2007. The losses make them look like Monty Python’s Black Knight. Amputated arms and legs strewn about, while a stumpy torso squirts blood. 

Diversifying across all commodity sectors sometimes outperforms energy in different inflation regimes. But my wider concerns remain. 

Iffy investment vehicles and a poor expected risk-reward profile begs the question: are commodity inflation-hedges worth it when you could go for simple inflation-beating equities instead?

I believe commodities rack up unnecessary risk for ordinary investors.  

Inflation hedge: gold

Gold has gained a reputation as a hedge against inflation. Supposedly it can buy about the same amount of bread in the modern era as it could in 562 BC. 

I’m not sure how many sourdough baps my local baker offers for an ounce of gold. But the next graph does not show a strong correlation between UK inflation and the yellow metal:

This table shows that gold is not an inflation hedge over timeframes shorter than centuries.

Source: Elroy Dimson, Paul Marsh, and Mike Staunton.
Credit Suisse Global Investment Returns Yearbook 2012. Page 12.

The purchasing power of gold is indicated by the dark blue line. It should be flat if gold is a sound short-term inflation hedge. Instead it’s all over the show. 

That’s true for the gold standard era and also for the fiat money era post-1971.

The next graph shows gold’s performance during different inflation regimes across multiple developed countries:

A chart that shows gold's ability to hedge against inflation is hit and miss.

Source: Elroy Dimson, Paul Marsh, and Mike Staunton.
Credit Suisse Global Investment Returns Yearbook 2012. Page 12.

Now we’re getting somewhere! Gold outperforms cash when the inflation rate is above 8%. It also beats the equity and bond returns we saw in our inflation and the stock market post. 

True, when inflation hits 18% or more, gold’s return is slightly negative. But that’s preferable to the -21% average returns of cash. (Not to mention equities -10% or bonds -25%, as per our previous article).

Golden years

Gold turned in average returns of 13% during the four inflationary regimes post-1971, according to The Best Strategies For Inflationary Times. 

But the paper’s authors then break our hopeful hearts by warning:

Looking at averages over all regimes could be misleading because of one influential regime. For example, Erb and Harvey (2013) show that gold’s seeming ability to hedge unexpected inflation is driven by a single observation.

And here is that single observation. The gold price shot up near 200% in 1980:

Gold's reputation as an inflation hedge is based on one outstanding year: 1980 according to this chart.

Source: Claude Erb and Campbell Harvey. The Golden Dilemma. 2013. Page 9.

Even Erb and Harvey say of gold’s relationship with unexpected inflation:

There is effectively no correlation here. Any observed positive relationship is driven by a single year, 1980.

Meanwhile, the academics Dimson, Marsh, and Staunton put gold’s long-term average return at around the 1% mark. That’s about the same as cash, but with much higher volatility. 

That return disguises a 20-year slump from 1980 to 2001. Gold lost 75% of its value in pounds and 80% in dollar terms.

Not all that glitters

Somehow I always end up in the same ambivalent place with gold. The charts show it soaring like a NYC pencil-tower in the ‘70s and during the Great Recession. 

You’d always want gold in your portfolio if you could rely on it doing that.

But that 20-year horror show where the price went down and down is a cautionary tale. 

Accumulators can happily skip the quandary. Decumulators who want to ward off sequence of returns risk may want to use gold sparingly as disaster insurance. 

But the case for it as an inflation hedge is weak. 

Inflation hedge: real estate

Dimson, Marsh, and Staunton found that commercial real estate returns are negatively impacted by high inflation, though less so than broad equities. 

However, that could be an artefact of sluggish property prices. In other words, the inflation effect is simply delayed in comparison to liquid equity markets. 

Because REITs have reasonable long-term returns but a negative relationship with inflation, commercial property is best thought of as an inflation-beating strategy. As opposed to an inflation hedge. 

The trio tentatively suggest that residential property is quite resistant to inflation. But returns still have a negative relationship with high prices.

However the verdict in The Best Strategies For Inflationary Times is a little more encouraging. 

UK residential property delivered a 1% average return during high inflation periods. Returns were positive in 57% of the 14 periods examined between 1926 and 2020. 

Incredibly, Japanese residential property delivered 12% average returns with a 100% positive return across six high inflation episodes from 1926 to 2020. 

But US residential property returns were -2% during inflationary bouts. It only mounted a positive response a quarter of the time.

Location, location, location

Keep in mind that unique factors could be at play in each of these markets.

We also can’t ignore the fact that historical records of property prices are notoriously problematic.

Long-term data typically fails to capture high-resolution details such as ownership costs, rental assumptions, taxes, default risks, transaction costs, and illiquidity.

You have to put a peg on your nose every time you lend credence to historical property returns.

UK homeowners conditioned by a 30-year property bull market have long thought of their castles as a bastion against inflation.

And residential property did deliver a positive return in two out of three episodes during the ‘70s, according to The Best Strategies For Inflationary Times

But that’s little comfort for anyone struggling to get on the housing ladder.

Moreover, it’s difficult to diversify residential risks. Even a portfolio of rental properties is prey to local market conditions. These can swamp any inflation effect.

Inflation hedge: stocks and equity sectors

Can individual stocks or sectors serve up inflation hedging salvation where the broad equity market cannot? 

Dimson, Marsh, and Staunton sound dubious: 

It is tough to find individual equities, or classes of equities, or sectors that are reliable as hedges against inflation, whether the focus is on utilities, infrastructure, REITs, stocks with low inflation betas, or other attributes.

Meanwhile, Neville et al investigate the performance of 12 US stock sectors. Every sector except energy stocks posted negative returns during high inflation periods. 

The energy sector did manage a 1% average return during those periods. But the return was only positive 50% of the time.

Notably, average returns were -19% during the 1972-74 recession that was infamously fuelled by the OPEC oil embargo. 

Ultimately, equity prices are subject to a swirl of forces beyond inflation. These can confound a simple thesis, such as high oil prices must be good for oil firms. 

Looking for the X factor

Three other equity sub-asset classes posted positive returns during high inflation regimes. These are three of the risk factors:

Momentum looks especially hopeful with 8% average returns, and positive returns in three-quarters of the scenarios considered in The Best Strategies For Inflationary Times.

The snag is these compelling results tested the long-short version of cross-sectional momentum.

But us ordinary UK investors can only access long-only momentum ETFs. They offer a diluted version of the pure form examined in the paper. 

Once again our hopes are stymied by the gap between back-tested theory and investible reality. 

The authors also say they’re cautious about momentum’s results, due to its low statistical significance and its sensitivity to their chosen dates:

For example, January 1975 was a very negative month for cross-sectional momentum, and our inflationary regime stops in December 1974. Equally, late 2008 through early 2009 was catastrophic for momentum, and our inflationary period ends in July 2008.

However, the authors do make encouraging observations about the benefit of straightforward international equity diversification:

Equities really only struggle when two or more countries are suffering. This is consistent with a global bout of inflation being very negative for equity markets. 

The results also suggest benefits to international diversification. For example, taking the UK perspective, US and Japanese equities generate +6% and +9% real annualized returns during UK inflation regimes, respectively. This is perhaps one of the drivers behind the large international equity allocations run by some of the major UK pension funds coming out of the inflationary 1970s and 80s.

Inflation hedge: crypto

There’s no evidence one way or the other that crypto protects against inflation.

Any other conclusion is speculative given we’re experiencing our first dose of unexpected inflation since the dawn of these assets. 

You can check the price returns of various crypto assets right now. They’re characterised by extreme volatility, not stickiness to monthly inflation. 

Neville and chums considered Bitcoin in their study. In their opinion, the limited evidence points against so-called digital gold being an effective inflation hedge: 

…bitcoin is a speculative asset and it has a positive beta against the U.S. market. Our analysis shows that unexpected high inflation is negatively related to U.S. equity returns. The correlation of U.S. equity and bitcoin returns suggests that bitcoin may not deliver positive real returns in periods of unexpected inflation.

We won’t really know for years.

Crypto – like any exciting, emergent cultural space – is virgin territory upon which people are projecting their hopes and dreams.

This is not a phenomenon from which we can draw reliable conclusions. 

Inflation hedge: index-linked gilts

Index-linked bonds hedge against inflation by pumping up your coupon3 and principal payments so that they match an appropriate official rate.

That rate is RPI for the UK government’s index-linked gilts.

If you buy individual index-linked gilts and hold them to maturity then they will act as an inflation hedge. 

This is the best inflation hedge you can get in the sense that it will reliably protect your purchasing power against official inflation. 

But – of course – I can’t just leave it at that and let us all sleep soundly in our beds. 

What a downer

The main problem is that index-linked gilts are very expensive. Demand is so high that they are on negative yields to maturity (YTM).

For example, a 10-year index linked gilt currently yields -2.8%. Inescapable bond maths means you’ll take a loss of -2.8% per year if you buy and hold it to maturity. 

So why would you ever do that?

Well, because if you invest, say, £10,000 then you may decide that £280 a year is a price worth paying to ensure your money isn’t consumed by runaway inflation. 

Essentially, the -2.8% yield is an insurance premium you pay to protect your money against inflation. 

It’s an expensive business, but by buying and holding individual index-linked gilts, you could ensure regular inflation-hedged payouts from now until 2050.

Building a bond ladder like this is a complicated area that needs another post to cover.

Until then, Barcap published a PDF a while ago with more details on investing in individual index-linked gilts (and much more).

Duration and interest rate risk

Normally we’d recommend funds or ETFs as a one-stop shop for passive investors.

But interest rate risk is a big problem with index-linked bond funds and ETFs right now. That’s because managers constantly sell their holdings to maintain the fund’s duration. 

Depending on how the interest rate market goes, you could find your linker fund registering a capital loss when you sell. You’d thus fall short of the liabilities you hoped your index-linked gilts would cover. 

As an accumulator you needn’t be a forced seller. But the game changes in decumulation.

The usual advice is to match your bond fund’s duration to your future liabilities to avoid shortfalls.  Then gradually move to shorter duration funds as your liabilities close in like zombies. 

But that’s next to impossible with publicly available index-linked gilt funds because they have very long durations.

Such funds expose you to the possibility that capital losses inflicted by rising real yields will overwhelm the inflation protection you first sought.

Short-term global index-linked bond funds hedged to GBP do exist. They’re more palatable, but they still embed some real yield risk.

Ineffective bonds

Dimson, Staunton and Marsh sum up index-linked bonds nicely when they say:

As a safe haven for investors concerned with the purchasing power of their portfolio, index-linked bonds offer a highly effective means of reducing real risk.

In today’s market, however, they can make little contribution to achieving a positive real return over the period from investment to maturity.

Accumulators are probably better advised putting their faith in an inflation-beating strategy than paying the inflation insurance embedded in index-linked bond prices. 

Two final points:

  • Index-linked gilts will be linked to CPIH not RPI from 2030. CPIH typically estimates inflation to be 0.5% to 1% lower than RPI.4
  • Official rates like RPI and CPIH may not match your personal inflation rate. That’s another reason to consider prioritising an inflation-beating strategy above hedges.

Inflation-hedge: timberland

Timberland enthusiasts describe it as the dream package. Who wouldn’t want an inflation hedge that offers good risk-adjusted returns, plus low correlations with equities and bonds?

But even fund managers selling timber investments confess the asset class has been a moderate inflation hedge at best.

Alternative investment firm Domain Capital states:

Timber has been found to be positively correlated with unanticipated inflation. During periods of high inflation, as in the 1970s, timber provided a partial inflation hedge. With a correlation of 0.34 to inflation during the 1970s, timber prices tended to outpace unexpectedly high inflation. 

Timely correlation recap:

  • 1 = Perfect positive correlation: when one thing goes up so does the other
  • 0 = Zero correlation: the two things being measured have no influence upon each other 
  • -1 = Perfect negative correlation: when one thing goes up, the other goes down

A correlation of 0.34 during the stagflationary 1970s is not great.

The timberland / inflation correlation then drops to 0.29 between 2003 to 2017. 

Between 1987 and 2010, the correlation was 0.64 according to Barclays Global Inflation-Linked Products – A User’s Guide.

That compares with inflation correlations of 0.80 to commodities and 0.84 to short-term index-linked gilts.

The bigger problem I encountered when trying to stand up timberland is that sources tend to use data from the NCREIF Timberland Index. 

This US index has two main issues:

  • It only tracks timberland’s performance from 1987. That’s a pretty short timescale. Especially given that inflation has been quite benign since the late 80s.  
  • The index is dominated by private equity companies that invest in timber and forestry. Those companies are inaccessible to retail investors like us. 

Instead, we can invest in publicly-traded timber REITs and forest product companies.

Barking up the wrong tree

The S&P Global Timber & Forestry Index is the most popular index covering public timberland firms. 

You can gain exposure to it using an iShares ETF: ticker WOOD. (Do you see what they did there?)

But we’re stumped again! Public timber stocks are much less effective inflation hedges than their private equity brethren, according to the paper Assessing the Inflation Hedging Ability of Timberland Assets in the United States.

Its authors concluded:

Private-equity timberland assets can hedge both expected and unexpected inflation, and the ability becomes stronger as the investment time increases.

In contrast, public-equity timberland asset is not effective in hedging either.

As for timberland’s diversification benefits, they say:

​​In summary, private-equity timberland assets have a negative correlation with the market and are a good hedge against actual inflation. On the other hand, public-equity timberland assets behave more like common stocks and have a high correlation with the market.

The study covers the period 1987 through 2009. But it chimes with my anecdotal experience of keeping an eye on iShares’ WOOD. 

WOOD’s returns have been closely correlated to MSCI World ETFs. Ultimately, I’ve not been able to justify branching out into timber. [Ed – fired!

Trendy hedging

You’ll remember that the trend-following strategy looked great in the FT’s Inflation winners and losers chart we saw many leagues above. 

Trend-following scored average returns of 25% in inflationary periods according to The Best Strategies For Inflationary Times. It also worked reliably in all eight scenarios. 

Returns for the entire 1926 to 2020 period were an astounding 16%.

At this point, I wish I knew how to execute a proprietary trend-following strategy using futures and forwards contracts associated with commodities, currency, bond, and equity prices.

Because that’s what the authors backtested.

They name check their methodology. But I’d guess this strategy is beyond the ken of most people.

Other inflation hedges  

Our final inflation hedging candidates are collectibles: wine, art and stamps. The Best Strategies For Inflationary Times suggests they have game:

Collectible Inflation episode average return (%) Anti-inflation reliability (%)
Wine 5 50
Art 7 63
Stamps 9 75

But once again the academics are building a case on an index you can’t invest in. The underlying data ignores transaction fees, storage, and insurance costs. All of which would chomp down those returns. 

But more importantly, the average punter is going to struggle to put together a diverse basket of Old Masters. 

Right now there’s no ETF tracking the market for Picassos, Warhols, and Cézannes. 

If you can profitably swim in those waters then best of luck to you. Hopefully you’re not just sticking this treasure in a vault for the purpose of inflation hedging. 

The Investor covered some of the pitfalls of investing in illiquid and opaque markets in this piece on alternative asset classes.

Beating inflation

So where does that leave us, except more disillusioned than ever? 

As previously stated, because inflation hedging is so problematic I’d skip it if I was still an accumulator. I’d rely on straightforward global equities to beat inflation instead. 

But decumulators and retirees are highly vulnerable to unexpected inflation. 

The most reliable buy-and-hold method to hedge inflation is to create a ladder of individual index-linked gilts. (More on that in a future post, or see that Barcap report).

The less reliable method is a short-term global inflation-linked bond fund or ETF hedged to GBP.5

Other hedges embed drawbacks that can go into buckets marked ‘investibility’ and ‘reliability’.

Those spectres may well be enough to chase you off like visitors to a haunted theme park.

But it’s only fair to say that asset classes like gold and commodities have had their moments. 

Hedging your hedging bets

You may consider inflation to be such a threat that it justifies a small percentage to each of the assets we’ve covered. This way you have a diversified hedge against inflation. 

Is it worth it? Only you can decide what’s right for you. 

I’ll give the last word to Dimson, Staunton, and Marsh. Their peerless work acts as a shining light for us ordinary investors in search of answers:

Inflation protection has a cost in terms of lower expected returns. While an inflation-protected portfolio may perform better when there is a shock to the general price level, during periods of disinflation or deflation such a portfolio can be expected to under-perform.

Take it steady,

The Accumulator

  1. Annualised is the average annual return accounting for gains and losses. Real return is the amount the investment grows (or shrinks) over a period after inflation is stripped out. []
  2. Commodity futures data isn’t available before 1987. []
  3. Bond interest payout. []
  4. In a characteristic sleight of hand by the government, it looks like index-linked gilts will still link to RPI from 2030. But RPI will be officially calculated using CPIH from the switchover date. Hence linkers will align to CPIH in reality. []
  5. Hedging to GBP neutralises currency risk. A good thing for retirees. []
{ 37 comments… add one }
  • 1 jim April 27, 2022, 1:03 pm

    Gold and 40 year period 1980-2001 ?!

  • 2 Brod April 27, 2022, 1:06 pm

    @TA – well, that was depressing! But thanks anyway 🙂

    I guess the only thing to do is hunker down. I’ve got a hedged intermediate index linked bond fund (GISG, duration about 5 years) and gold (too much for comfort, plan to glide path into Equities) and that’ll have to do. My best inflation hedge is the state pension and my small civil service pension. but I’m 11 years away from them.

    I’m about to pull the trigger but maybe another year wouldn’t hurt… It’ll boost my civil service pension and reduce what I’ll need to draw down, though I’ve got plenty of non-equity to bridge the gap. I suppose in a year, we’ll also see just how “transitory” this inflation is.

    Btw, wine is an excellent inflation hedge! It’s also an effective hedge against deflation, unemployment, employment, small children, annoying bosses, objective setting, performance mismanagement, and all other corporate bs. These guys clearly don’t know what they’re talking about!

  • 3 Jonathan B April 27, 2022, 2:05 pm

    @Brod, while my stash of vino plonko won’t hedge against inflation, it at least makes the end of a day feel better. I fear I enjoy wine too much to be able to maintain large stocks of Cru classé en primeur – which are the ones the articles talk about.

  • Mogul
    4 The Accumulator April 27, 2022, 2:14 pm

    @ Jim – thank you! I seem to have found a couple of extra decades there. Weird because normally I lose them. Also, The Monevator subbing department wants sacking #4,096

    @ Brod – agreed. The academics have dramatically underestimated the upside of wine. Especially as a hedge against depressing news like there aren’t many good inflation hedges.

  • 5 Brod April 27, 2022, 3:04 pm

    @TA – yes, well if we weren’t all dead in the long run, maybe we’d come out ahead…

    @Jonathan – I’m well aware of the types of “investable” wine. And, of course, not any old cru classé. It’d have to be one of the Premier or maybe a super-second. Not the waters I dip into.

  • 6 Martin White April 27, 2022, 5:47 pm

    You are too hard on linkers. If I buy at current real yields, c.-2% pa say on 10y, then yes that’s expensive (tho they were recently on -3%) but the maturity payout is guaranteed to match inflation (at least as measured by RPI/CPI/whatever) minus that cost. So in a 10% inflation scenario at least I know I’ll get 8%. This is the rationale behind institutional pension fund LDI strategies, widely denigrated by many traditional active managers who don’t really understand the importance of a guarantee. And while 2% may seem outrageous it’s probably what a lot of punters are paying Rathbones, SJP etc for the privelege of expert active management with no guarantees whatsoever.

  • 7 Brady April 27, 2022, 8:34 pm

    My inflation hedges are having a really big mortgage and not overpaying it (debt will get inflated away as long as salary keeps up with inflation), real estate both physical and REITs like RECI or SUPR (c85% rents linked to inflation, although many are capped at max 4%), Energy eg, TRIG (benefits from higher energy costs and also many contracts still inflation linked and gov backed) and have just bought a little bit of a windfarm cooperative (Ripple Energy) which will take the edge off any electricity bill rises for the next 25 years 🙂

  • 8 Accidentally Retired April 27, 2022, 10:31 pm

    The best way I could figure to hedge against inflation and to manage cash flow in a down market was to buy a web business. So I went out and did that last October, and so far seems to be doing the trick. My cash flow is going up, and inflation risk is going down as I can keep more of my cash in the market. So fingers crossed that this strategy continues to pay off, because it sure has been WORK.

  • 9 Al Cam April 28, 2022, 10:02 am

    Nice post and as you say: this horse has long bolted!
    In general: the best time to buy linkers, etc is when nobody else is buying them.

  • 10 Neverland April 28, 2022, 10:39 am

    Way back in the mists of time (pre-Monevator) the UK government offered index linked savings certificates offering guaranteed inflation protection plus a premium to ordinary people via NS&I

    The index linked savings certificates were offered pretty much annually in 3 and 5 year durations with a maximum individual subscription since 1975

    By subscribing to successive issues you could build up up to six figures in these products

    Naturally the tories felt these useful products were too good for plebs and discontinued them in 2011

  • Mogul
    11 The Accumulator April 28, 2022, 11:12 am

    @ Neverland – Yes, the dearly departed index-linked saving certificates would be an ideal way for regular punters to hedge against inflation. I read that they were put on ice because the government could get a lower interest rate from the bond market. In other words, ordinary saving folk could go do one.

  • 12 Al Cam April 28, 2022, 11:52 am

    @TA, @Neverland:

    No new index-linked saving certificates (ILSC’s) were available after Sept 2011, see also:

    Existing certificates can be renewed albeit that from 2019 indexing is to CPI (rather than RPI) and the premium is now 0.01% – but they are tax free.

  • 13 The Investor April 28, 2022, 12:03 pm

    We covered NS&I index-linked certificates back when they were still a live thing:


    The following line jumps out from 2011 🙂

    Run, don’t walk, to put some money into the new five-year index-linked certificates from National Savings & Investments.


    With that said, the return would have been absolutely trounced by a world tracker over the next ten years…

  • 14 Hague April 28, 2022, 12:18 pm

    Baked beans.

  • Mogul
    15 The Accumulator April 28, 2022, 12:43 pm

    @ Al Cam – I know! I’ve got one tranche from that final issue which I will never stop rolling over (hopefully). Point is, nobody has been able to save into new issues ever since. I don’t have enough but I know people older than me who’ve got a shed load.

    @ Hague – very good point 😉 Though I shudder to think what post-apocalyptic wasteland I’d be trading my last tin of baked beans in.

  • 16 Brod April 28, 2022, 2:59 pm

    @Hague – No, wine! 🙂

  • 17 Sean April 28, 2022, 6:38 pm

    @ The Accumulator

    I’m an “older person” (66) and have getting on for £120k (current value) of index linked savings certificates. I still wish I’d started buying earlier than I did and also bought more than the £15k (original value) I hold in my wife’s name. During times of low inflation with above inflation interest rates there were plenty of people suggesting they were probably not worth keeping (including, I think, Martin Lewis on MSE). I must admit I was tempted to cash in at times. When I look at the growth shown on recent annual statements I thank my lucky stars I held on to them. If it wasn’t for the fact that I remember the very high inflation rates in the 70s I probably would have cashed them in and now be kicking myself.

  • 18 DavidV April 28, 2022, 7:54 pm

    I managed to buy two £15k tranches of ILSCs before they were canned. I agree with Sean (17) that the sentiment around them at the time was that the returns they gave were not very attractive. Accordingly I only committed to a three-year term when I bought the first tranche in 2010. No real harm was done as I was able to roll them over to a five-year issue when they matured. I bought the five-year term at the outset for the last issue in 2011.

  • 19 G April 29, 2022, 12:30 pm

    Yes, I have an originally £15K sum in ILSC too (now over 20K). I wish I’d been able to afford more way back when.

    I installed solar panels as a hedge against inflation around 10 years ago (and recently put a chunk in Ripple Energy) – and this together successive energy saving measures means my energy bills have barely moved in the last five years.

    I also tend to buy in bulk when it comes to long life food and other goods. I’m still using end of line/highly discounted washing powder from around five years ago. It has also proved useful with bicycle parts which have gone up astronomically over the last few years due to pandemic shortages and the public’s renewed interest during lockdown.

  • 20 Andrew April 29, 2022, 6:32 pm

    There’s one hedge that will always work: cut back on discretionary spending and get a higher paying job.

  • 21 Al Cam April 30, 2022, 6:21 am

    Re “personal inflation rate”:

    The ONS recently revived their personal inflation calculator, see: https://www.ons.gov.uk/economy/inflationandpriceindices/articles/howisinflationaffectingyourhouseholdcosts/2022-03-23

  • 22 The Accumulator April 30, 2022, 10:33 am

    @ Sean – I had a similar experience with relatives who couldn’t see the point of keeping index-linked certs when inflation was so low. They lived through the 70s too. It’s funny how memory fades.

    @ Al Cam – Thank you for that link. Very timely!

  • 23 Keith April 30, 2022, 11:02 am

    Great article really made be think, paints a bleak picture if your retired and concerned about inflation.

    As a decumulator I hold gold as it has increased the safe withdrawal rate and lowered the worst drawdown of a 60/40 portfolio quite a bit, see portfolio charts.

    Linked is a problem for a UK investor, a short term active alternative that may be worth considered is MG inflation linked corporate bond which includes government short liked bonds. performed very well over the last 6 months compared with government nominal and linked index bond funds

  • 24 DavidV April 30, 2022, 2:35 pm

    @Al Cam (21) Thanks for the link to the ONS personal inflation calculator. It threw up an answer of 9.2% for me. The two biggest categories contributing to my personal inflation were car purchase and holidays. The calculation is a little arbitrary as I own a low-cost three-year old car that I bought new outright and will keep until I have run it into the ground. I entered the amount that I earmark from my cash savings each year to go towards its eventual replacement. As for holidays, I entered the amount that I could have imagined spending if we hadn’t been in a pandemic!

  • 25 Al Cam April 30, 2022, 3:00 pm

    @DavidV (#24):
    I have been doing a similar calculation for some years now – and our inflation rate has usually been a tad below that reported by the ONS. However, this year (so far at least) the divergence versus CPIH is noticeably larger than versus CPI.

    A few weeks ago we talked about an LDI paper. I did eventually find a link. However, both times that I have tried to post this link for you via Monevator comments it has failed to show up. If you type: “Idzorek T & Blanchett D LDI” into google then the second hit should be a link to a Journal of Investing magazine. Page 31 onwards is IMO a minor tweak of the original 2017 LDI paper.

  • 26 DavidV April 30, 2022, 4:30 pm

    @Al Cam (25) Thanks for the search suggestion. I tried it and, from the first few results, without having a subscription I could only get as far as the abstract for the article . I had a further look down the search results and at about number eight I came across the full Feb 2019 issue of the journal, which was accessible. It is now clear that this is what you found, as at page 31 is the article in question. Needless to say, at over 20 pages, I haven’t read it yet. I’ll report back when I have done.

  • 27 The Accumulator April 30, 2022, 4:44 pm

    @ G – sorry, forgot to acknowledge the 5-year-old washing powder Tenth Dan mastery. This is the kind of Personal Finance speakeasy where that kind of effort deserves a hat tip 🙂

  • 28 DavidV April 30, 2022, 8:28 pm

    @Al Cam (25) I’ve now been able to have a quick read of the LDI for Individual Portfolios article. I thought this conversation may be in danger of being severely off-topic, but was heartened to see Exhibit 9 in the article where they use an optimisation analysis to determine the allocations for different liabilities and risk appetites. As one of the liabilities is inflation, this brings the conversation right back on topic! Even where the liability is represented directly by inflation, only the most conservative portfolio has any significant allocation to short-term TIPS and this is less than 20%. In each of the portfolios, nominal bonds and even long-term nominal bonds seem to have a much larger role than I would expect when the liability is represented by inflation. I remain dubious whether anyone would actually set their asset allocation in accordance with what this optimiser spits out.

  • 29 Al Cam May 1, 2022, 12:48 am

    The disclaimer towards the end of page 37 probably applies and “For all three splits for comparison, the asset-only allocations are significantly different from the liability relative optimizations. In general, the asset allocation differences are greater among the fixed-income asset classes.”

  • 30 Valiant May 2, 2022, 10:53 pm

    I bought some index linked gilts, and ordinary gilts (VGOV), hundreds of thousands of each about 6 months ago.

    VGOV has dropped 12%. I’m beside myself with misery about why I ever did this.

    The index-linked ones (the two suggested in Monevator) have dropped about 0.1%.

    So whilst the index-linked ones haven’t been a great inflation hedge, there a damned sight better than p***ing money away on VGOV (mixed UK gilts of average duration 13.5 years) 🙁

  • 31 The Investor May 3, 2022, 10:10 am

    @Valiant — Yes, it’s miserable isn’t it. Was bound to happen one day though, and after 10 years of it seeming to be in the next six months the day finally came.

    I don’t know what your overall financial position is — and obviously it’s no consolation to you — but I’ve been buying government bonds with the intention of holding them for the first time in years in 2022. We’re talking about 12% of my total portfolio so far (and that includes corporate and active high yield funds, the latter of which @TA would say are from my equity allocation).

    Of course I bought some INXG (UK index-linked) despite understanding the duration risk, and am down just over 10%. However this is still barely a 2% position, and I expect to add to it over time.

    TLDR: at least bonds getting cheaper means bonds (and their benefits) are getting cheaper for new money…

  • 32 dawn May 3, 2022, 11:25 am

    That was a very good ,detailed run through of options i appreciated reading. through. thanks
    lets hope high inflation dos’nt last too long.
    Still got a large slug in cash ,thinking i would like to enter the gov nominal bond market tracker fund, once interest rates settle , and things normalise abit would that be a good time?.

  • 33 Valiant May 3, 2022, 12:14 pm

    @The Investor. Thanks for sharing my pain ;-). My Gilt and Index Gilt holdings each represent about 12% of my portfolio, which is: Equities: 59%, Gilts 22%, Gold, 12%, Cash 7% temporarily, with the intention to move the cash into equities over the course of the next year.

    I had never previously owned Gilts and only bought them because 6 months ago I entered the decumulation phase. What a dreadful mistake. I blame Lars Kriojer :-).

  • 34 SemiPassive May 3, 2022, 4:49 pm

    I still think it is too soon to buy into intermediate to longer duration bonds, but by the end of the year they will be looking a lot less risky (especially vs equities) as the yields climb further to at least get closer to inflation than they are presently.
    My rough targets to start buying at are US Treasuries and UK investment grade corp bond funds at 4%, EM $ bond funds at 7%+. At least they then start earning their keep within an income portfolio, and keep paying out while equities can have dividend cuts.

    The Investor, TwentyFour Select Monthly Income Fund Limited (SMIF) is currently displaying a 7.36% dividend yield if you are into that sort of thing, it is sort of a mix of GBP junk debt. It does jump around a bit though.

    I didn’t like US high yield bond ETFs after the Fed started buying them and drove the yields so low (sold out and took some profits). But once yields on them climb much over 6% they might be interesting again and less volatile than US equities. As you say this high yield stuff can behave closer to equities than treasuries, but I think it can have a place if you are after income and trying to keep up with inflation. Maybe only at 10 or 15% of a portfolio though.

  • 35 The Investor May 3, 2022, 6:21 pm

    @SemiPassive — Thanks, I’ve jumped in and out of that a bit. Currently out. I do have a couple of other high-yield ITs currently, which I’m carrying at a very small loss.

    As I always stress my positioning is extremely fluid typically, so nobody should take my comments above as some sort of ‘call’ on whether it’s time to buy government bonds or not. 🙂 I could have no bonds in a fortnight, though I do think that’s unlikely. I am trying to force myself to de-risk a bit in my old(er) age, and hence I want to get and keep a foot in the government bond camp.

    Since everyone hates them it feels like a good time to get started haha, but baby steps given the regime change seemingly going down.

  • 36 Mark Meldon May 15, 2022, 3:17 pm

    Unless I have missed something above, there is one true inflation hedge available to UK investors of ‘mature years’ if they have a private pension, and that is a ‘real annuity’. This is a single premium pension lifetime annuity pegged to any increases in the RPI (some have a ‘no reduction’ floor, too, were the RPI to fall, when they become static). Around 95% of pension annuities bought in the UK are fixed in payment. That might be a sensible choice in the context of the individual’s other retirement income, but I do meet people who face a decline in living standards in old age as they put too much faith in low inflation and dying early! Most of us underestimate our life expectancy but living well beyond age 80 isn’t so unusual nowadays, so having at least some ‘real annuity’ income makes good sense.

  • 37 Valiant May 15, 2022, 4:54 pm

    @Mark Meldon: thanks for flagging this up. I looked into this a year or two back, as an option to put some of my deaccumulation money into. At that time the RPI on the leading products was capped; not sure if this is still the case?

    Also, per Lars Kroijer, you are, unlike your public-sector counterparts, taking a counter-party risk on the viability of annuity issuer. Of course it’s quite small – no-one expects Legal and General to go bust – but no-one expected Scottish Amicable to either!

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