Want to Hedge Inflation?

Worried about inflation and wondering if you should put your money in Treasury Inflation-Protected Securities (TIPS) or gold? You’re not alone.

You can’t get away from hearing about stubbornly higher prices anywhere you go these days. It makes sense since the rate of inflation remains persistently high. We’ve all felt the ramifications—in the grocery stores, at the pump, and even when buying a car or a house. Things are simply more expensive!

Investors are likewise concerned about their portfolios.

As a result, some are exploring ways to protect against the rising price environment by buying TIPS or gold.

But what’s surprising to some investors? U.S. equities (as measured by the S&P 500) are a more effective hedge for inflation than gold or TIPS.¹  In other words, you would have to allocate more to gold and far more to TIPS than to stocks to get the same level of protection.

For example, 63% of your portfolio would have to be put in TIPS compared to only 34% in U.S. stocks to shield against inflation.¹ That’s a big difference.

Here’s another thing to consider: In 2022, when inflation was at 40-year highs, the real yield on TIPS was negative.² (Real yield is the stated yield minus inflation.) So while you may be striving to fight against unexpected inflation by purchasing TIPS, you also may be "locking in" a loss of purchasing power.

However, if you buy equities for the long term, you have the potential to combine better inflation protection PLUS an equity premium (the additional return that may result from investing in stocks instead of treasury bonds).³ Historically, the equity premium has been a positive real number^, and we believe it should continue to be positive over the long term.

So as long as you can withstand some short-term volatility, we believe you should get higher returns in the long run and better inflation protection in the short run with equities over fixed income or gold.⁵