Increasing inflation risk, time to increase bond/stock ratio?

Most of us have probably not missed the talk about increasing inflation. Central banks, both on this side of the pond and in the US, also seem to be a bit more careful now in their phrasing about not being worried and not intending to raise interest rates.

Personally, most of my investements are in directly owned RE with currently relatively little debt remaining. Increased interest rates will reduce value on paper, but probably not income for the mid to long term. However, appart from a small emergency fund, my cash reserves are invested in stocks (VOO, SPYD, VT & VTI – so mostly S&P500).

I’ve been wondering whether it would make sense to start moving some money into bond ETFs, maybe ~ 25% of my portifolio. Evidently, yields are currently misserable, so I am rather hesitant. I’d be curious to hear some other opinions!

Hi Fliss

I also heard a lot about inflation recently and am thinking about it.

Could you expand on your reasoning for moving into bonds because of inflation expectations? Stocks and RE are more resistant to inflation than bonds so with your current allocation you are rather in a good position to do well if there is inflation. But bonds lose value when interest rates go up.

There are reasons to have bonds in your portfolio (I do) but this is not because of inflation, it is because of risk management since 100% of stock is not appropriate for all.

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Make sure to understand what will happen to those ETFs once inflation (and yields) climb up.

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About a bond ETF, you can elaborate some scenarios

  • No serious price inflation, central banks do nothing → same miserable yields
  • Serious price inflation but central banks do nothing → your ETF is toasted by inflation
  • Serious price inflation and central banks try seriously to fight it → your ETF is toasted by rising yields
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The most terrible way to prepare for inflation is to invest in bonds. It’s the one asset (with cash) that does poorly in inflationary environment.
Non-cyclical Consumer goods (consumer staples) companies might be your best bet, since they can raise prices in accordance to inflation and people can’t stop buying what they sell. Rents also follow inflation so REITs might be an option as well.

Some inflation (around 2-3%) isn’t bad actually: it encourages people to consume because if they know that something they want will be more expensive tomorrow, they might as well buy it today. People spending money today is good for companies and ultimately for shareholders.

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If anything, move into inflation-linked bonds.

Have you seen that Michael Burry’s strategy?
He is buying PUTS for Long Term Bonds, meaning that he expects bonds to really go down!

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