Bonds: The Perfect Inflation Hedge (with One BIG Caveat)
Bonds: The Perfect Inflation Hedge (with One BIG Caveat)
Abstract
If they're giving us a 9.2% yield right now, that really is the nominal return, right? That is kind of what is your return in terms of actual dollars you'll receive. Shane: The big question is, what is that yield that I'm earning, that is kind of what's my return going to be, and really how does that compare to the inflation rate is a great question, right? Purchasing a US Treasury bond, a nominal bond at even 3% today, with an inflation rate of 8%, 9% is definitely not a good deal, right? That implies a quite significantly negative real yield, where the income you earn from the bond is not keeping up with inflation. Where's the least bad place to put the money? Shane: Part of the trouble is they're all kind of bad right now, right? That is if you think about it like this, as that interest rate on Treasuries come down, if you could earn seven, 8% on a Treasury today, that'd actually be pretty good, right? As that yield comes down, people start allocating money away from Treasuries over into things like the stock market. I'd say the number one thing that you would need to believe is that you have the ability to execute a future plan, right? That is, he could be absolutely right that 70% cash is a good standing right now because we're going to see the markets collapse as we enter in recession and inflation's going to respond. People could follow that advice and still be worse off, right? Because what you need to know is, when do I buy back in? Shane: What is my plan for buying back in? You got to be willing to say, "All right, well, the stock market just sold off another 30%. Am I going to buy now? Sold off another 40%. When do I step in? What if I'm wrong? What if the market goes up?" Let's say that the market recovers and the economy seems to do okay from here on out, and we're 15% higher six months from now. It's a hard thing to do, right? Scott: I think that's where you come in and say, "What's your plan," right? I think that that has to be the answer. No one knows for sure what's going to happen over the next five, right? Somebody will be right.