I know it seems strange that on another day when it seems like stocks are destined for infinite glory that I am adding to my existing holdings in TIP, the iShares Barclays TIPS Bond Fond (TIPS = Treasury Inflation-Protected Securities). I also remain overall bearish so a steep correction in the stock market will probably bring out deflationist fervor all over again. (The kind of rampant speculation that has descended upon the market this month has two potential outcomes whose relative likelihood I dare not guess: a deflationary (and temporary) contraction or an explosion of inflationary pressure). However, a friend forwarded to me an excellent article that convinced me to almost double my holdings.
The article is called “You can’t handle the truth about stocks.” Joe Light interviews economist Zvi Bodie who reminds us that we cannot save for retirement without risk in some aspect of our lives, contrary to the cookie-cutter advice that is typically doled out to retail investors. More importantly, he makes the great point that if you are a big saver then you have already chosen to accept a lower standard of living now for a higher standard of living during retirement. This higher rate of saving means you can take much less risk in your retirement portfolio and keep more assets in true inflation-protected holdings like the TIP. Stock investing is often promoted as the only way to protect your nest egg from the ravages of inflation, yet, during periods of high inflation, stocks have performed terribly (particularly the 1970s). So, given I fear inflation in the future much more than deflation, and given I am a high saver, it makes sense to carry a larger percentage of my portfolio in TIPS than I currently do. Trade executed…
Be careful out there!
Full disclosure: long TIP