How to hedge against inflation?

[martin]

I am a simple folk. I work hard, spend prudently and save as much as i can. I already put much into cpf for the higher interest, invest in sti etf, put some in fixed d and also ssb. Very risk averse. However, there is always the niggling fear that unforeseen high inflation in the future may wipe off the hard earned savings. Is investing in sti etf a good hedge against inflation?

 

[Maeda_Toshiie]

I am a simple folk. I work hard, spend prudently and save as much as i can. I already put much into cpf for the higher interest, invest in sti etf, put some in fixed d and also ssb. Very risk averse. However, there is always the niggling fear that unforeseen high inflation in the future may wipe off the hard earned savings. Is investing in sti etf a good hedge against inflation?

Stocks have always been one of the commonly used instruments as a hedge against inflation.

 

[mummy1234]

Property esp if freehold is a good hedge against inflation.

 

[NewInvestor]

In Spore, just buy property to hedge against inflation. No need to worry.

 

[havetheveryfun]

I am a simple folk. I work hard, spend prudently and save as much as i can. I already put much into cpf for the higher interest, invest in sti etf, put some in fixed d and also ssb. Very risk averse. However, there is always the niggling fear that unforeseen high inflation in the future may wipe off the hard earned savings. Is investing in sti etf a good hedge against inflation?

if u are risk averse then u have already done what u can in terms of investment.

gaining more skills and increasing your earned income can also be a tool against inflation.

 

[hwmook]

Stocks have always been one of the commonly used instruments as a hedge against inflation.

2nd that, buying into index ETF is the best.

 

[hwmook]

Property esp if freehold is a good hedge against inflation.

In Spore, just buy property to hedge against inflation. No need to worry.

Nah, inflation go up, interest rate go up and property price go down. Not a good way to hedge against inflation.

 

[Shiny Things]

I am a simple folk. I work hard, spend prudently and save as much as i can. I already put much into cpf for the higher interest, invest in sti etf, put some in fixed d and also ssb. Very risk averse. However, there is always the niggling fear that unforeseen high inflation in the future may wipe off the hard earned savings. Is investing in sti etf a good hedge against inflation?

It's not a perfect hedge, but it's as good as you'll get right now in Singapore.

The ideal hedge would be if Singapore issued inflation-linked bonds, like the US, UK, and Australia all do. These are like regular SGS, but they also pay an extra coupon (or their principal goes up) in line with inflation; so you can save your money in them without worrying about it getting eaten away by inflation.

In the absence of an inflation-linked bond market (and if we have any readers here at the MAS, you should absolutely launch one - you'd get a wall of money from smart retail investors!), stocks are a decent inflation hedge. It's pretty fuzzy, and it certainly won't hold day-to-day or even month-to-month, but over the long term, stocks tend to slightly outperform inflation.

 

[jake peralta]

buy gold...

 

[BBCWatcher]

buy gold...

Oddly enough, gold isn't actually a good inflation hedge -- and there's a lot of good data on that. Fidelity, among others, ran the numbers in a study of inflation fighters.

Gold is not as good as a broader basket of precious metals, which is not as good as a broader basket of commodities, which is not as good as a broad basket of stocks, which is not as good as inflation-linked bonds.

The fundamental reason is pretty simple: inflation is broad, and gold is very narrow. Gold bounces around all the time, in both short and long cycles, so it doesn't really help very much.

Gold has a traditional role as an inflation hedge because it's physically fairly convenient and because there weren't very many other options. Just like leeches had a traditional role in medicine: it was the best choice available among very few choices. Now, there are more choices available. You can do better.

 

[martin]

Just so i understand correctly. When buying sti etf to hedge against inflation, we mean the price of the stock does catch up with inflation over time and not saying the dividends from it offsets the inflation right? In other words, i will be happy if sti etf earns me 2-3% dividend and yet it underlying share price also rises with inflation over the long term, then, yes i will really be happy to keep adding more.

For that matter, to hedge against any potential high inflation in singapore, does it not make sense to buy another etf with component stocks from another country, possibly, US? So instead of adding more sti etf, i could now starting accumulating another foreign-denominated etf?

 

[SBC]

Gold is a hatch against black swan events or mkt crash.

As gold has no dividend or other returns, it is unable to hatch against inflation.

 

[BBCWatcher]

Just so i understand correctly. When buying sti etf to hedge against inflation, we mean the price of the stock does catch up with inflation over time and not saying the dividends from it offsets the inflation right?

The total return is what matters. Assume that dividends are reinvested.

Just think of what inflation is. Let's suppose today you need S$3.50 to buy a hamburger. One year from today you need S$4.00, let's suppose. The value of that hamburger has changed (inflated) as expressed in Singapore dollars. Well, stocks are shares in businesses, and businesses have value. If the real value of those businesses doesn't change, their nominal value -- the value expressed in Singapore dollars -- will perfectly track Singapore dollar inflation. If their real value goes up, then they beat inflation. Stocks are real assets (shares of businesses), and (broadly diversified, preferably appreciating) real assets are excellent inflation fighters.

This is long-run behavior, of course. Stock valuations are volatile. Capitaland might have a bad quarter, or whatever, and so these assets do fluctuate in real value. But in a growing real economy they tend to go up in real value over time.

Stocks can generate dividends, capital gains, or both. That detail doesn't particularly matter for these purposes. Just assume that dividends are reinvested, and focus on total returns (net of costs, such as broker commissions).

For that matter, to hedge against any potential high inflation in singapore, does it not make sense to buy another etf with component stocks from another country, possibly, US? So instead of adding more sti etf, i could now starting accumulating another foreign-denominated etf?

Well, if your goal is to combat Singapore dollar inflation specifically, then in a "perfect" world you'd want 100% Singaporean real assets. But the Straits Times Index (STI) isn't even that since, last I checked, those STI businesses earn over half their revenue outside Singapore. But the STI is as close as you can realistically get to that ideal.

On the other hand, inflation (if it gets moderately high or higher) is rarely the sole problem you would confront, if it happens. There might be other problems in Singapore happening at the same time. So if you want to combat a variety of country-specific risks, then yes, having at least reasonable global diversity in your investment portfolio is important. Over the long-term the currency exchange risks should smooth out, and Singapore imports practically everything a consumer buys day-to-day, so I like global stock index funds at some "reasonable" percentage. (We can quibble about what that percentage ought to be, and it varies depending on individual circumstances.)

It's also possible to buy a basket of inflation-linked government bonds. Blackrock's iShares "IGIL" (symbol code, traded on the London Stock Exchange) is a great example. IGIL holds a variety of developed economy/currency government bonds, and those bonds are inflation-linked, so their yields automatically adjust depending on the consumer inflation rates in those various countries. Just not Singapore and Singapore dollars -- the Singapore government doesn't play in this market. (I'm with Shiny Things: it should, but add this to the list of my criticisms of MAS and its persistent inability to get out of bed, it seems.)

IGIL is an interesting animal, and it's a bit tricky for me to recommend it in general. I think if you're young (or young-ish) and concerned about inflation, just stick to low cost stock index funds which you buy regularly and diligently from your regular income, hold for decades, then start to unwind gradually as you approach retirement, converging to about 30% stocks (total portfolio basis) at age 65.(*) And stocks should include global stocks, although how much global v. STI is "an interesting question." IGIL might work if you're older, very conservative, and you want a partial "backstop" against various local-national risks. I don't think it's a good fund if you're under about age 55. As Shiny Things indicated, it's not going to rock your world in terms of yield, and it is possible (if you're highly focused on Singapore dollars and retiring in Singapore) that you won't like its currency rate risk. But it's not bad.

I'm a big fan of the CPF LIFE Escalating Plan as an inflation fighter. The government really should have pegged the Escalating Plan payouts to actual Singapore dollar inflation (with no nominal decrease allowed in periods of deflation, and with nominal increases only resumed once inflation "catches up" again). But they didn't do that, so the Escalating Plan is the best available payout option for inflation defense purposes. The maximum inflation fighting that you can get out of CPF LIFE is if you and your spouse both max out your Retirement Accounts on your 55th birthdays, to the Enhanced Retirement Sum (ERS), start your CPF LIFE payouts at age 70, and choose the Escalating Plan. So do all that, if you can, if you're concerned about inflation.

One "exotic" possibility you might have is to work for a period of time in a country, or countries, that have social insurance systems with retirement benefits that are paid in inflation-adjusted form (in that currency or those currencies). For example, if you work in the United States and contribute into that system within any 10 calendar years (or into a combination of Social Security treaty countries -- doesn't necessarily have to be all U.S.), then you and your spouse (same or opposite sex!) can qualify for U.S. dollar inflation-adjusted retirement benefits, for life, with a choice to start payouts as early as age 62 or as late as age 70. Those are the current rules which, like CPF, are subject to change, but they've been pretty darn steady. While you're working there you can open a TreasuryDirect account and buy "I Bonds," which are U.S. dollar inflation-adjusted U.S. savings bonds available to retail investors. Some of the past I Bonds have been fantastic, handily beating inflation year after year (I've got a few), but at present they only promise to beat inflation a little. Again, though, this is U.S. dollar inflation fighting. It's the world's #1 currency, but it isn't Singapore dollars. So, day to day, it'll help you with your Amazon.com shopping and Disney World vacations, as examples. Over the long-term, it works pretty well.

Short answer for inflation fighting: stocks.

(*) And really I think that's your inflation protection solution, even at age 65+. If you want more inflation protection then maybe IGIL can help, or maybe you go a little higher than that "rule of thumb," or maybe some of both. But, like I said, IGIL is "an interesting animal."

 

[mummy1234]

For me I lost money in stocks, a small amt fortunately and made a lot more in property.

 

[BBCWatcher]

Gold is a hatch against black swan events or mkt crash.

Only if you physically hold it, only if somebody doesn't seize it or steal it, and only for very specific black swan events that aren't too black. And gold specifically isn't a requirement. Silver, palladium, and a basket of global safe assets (as examples) also work.

We've had a dry run. In the Global Financial Crisis the most highly prized assets were short-term debt instruments issued by high quality governments, such as U.S. T-Bills. Gold was..."Meh."

The "preppers" mostly ignore gold, and they have some reasonable arguments why within their "interesting" world. They hoard nonperishable food, ammunition, and bunkers. And they'd never voluntarily live in Singapore, because Singapore is in so many ways incompatible with their preparations.

 

[peterchan75]

Just so i understand correctly. When buying sti etf to hedge against inflation, we mean the price of the stock does catch up with inflation over time and not saying the dividends from it offsets the inflation right? In other words, i will be happy if sti etf earns me 2-3% dividend and yet it underlying share price also rises with inflation over the long term, then, yes i will really be happy to keep adding more.

For that matter, to hedge against any potential high inflation in singapore, does it not make sense to buy another etf with component stocks from another country, possibly, US? So instead of adding more sti etf, i could now starting accumulating another foreign-denominated etf?

While it's good to focus on yield, but don't forget about capital. Market is a beast most terrible. During the peak of 2008 crisis, it was at 1.50. It's not easy to predict where the price will be in the future. Interest rates is a common tool to fight inflation.
https://www.investopedia.com/investing/how-interest-rates-affect-stock-market/

 

[cheongmanz]

For me I lost money in stocks, a small amt fortunately and made a lot more in property.

I think it is about timing. You made a lot more in property because the amount you pay for the property is much more than stocks so that is why the profit will be more as well.

 

[martin]

The total return is what matters. Assume that dividends are reinvested.

Just think of what inflation is. Let's suppose today you need S$3.50 to buy a hamburger. One year from today you need S$4.00, let's suppose. The value of that hamburger has changed (inflated) as expressed in Singapore dollars. Well, stocks are shares in businesses, and businesses have value. If the real value of those businesses doesn't change, their nominal value -- the value expressed in Singapore dollars -- will perfectly track Singapore dollar inflation. If their real value goes up, then they beat inflation. Stocks are real assets (shares of businesses), and (broadly diversified, preferably appreciating) real assets are excellent inflation fighters.

This is long-run behavior, of course. Stock valuations are volatile. Capitaland might have a bad quarter, or whatever, and so these assets do fluctuate in real value. But in a growing real economy they tend to go up in real value over time.

Stocks can generate dividends, capital gains, or both. That detail doesn't particularly matter for these purposes. Just assume that dividends are reinvested, and focus on total returns (net of costs, such as ."

Ya, i understand about the total return part. Just wanted to know, as an instrument, is the sti etf even hypothetically without dividends, the share price alone would catch up with inflation in the long run?

 

[BBCWatcher]

Just wanted to know, as an instrument, is the sti etf even hypothetically without dividends, the share price alone would catch up with inflation in the long run?

I don't quite understand the question, so I'll answer it two ways:

1. In a hypothetical world in which all STI stocks retained and reinvested 100% of their earnings, even if it's just in the form of stock buybacks or some other reasonable business investments (not beer bashes for the managers), and assuming the real economy is growing, in real terms, then over the long-term STI stock valuations expressed in Singapore dollars (capital appreciation) should beat Singapore dollar inflation.

2. In a hypothetical world in which you mathematically subtracted dividends from the calculation and then assessed whether stock appreciation alone would keep up with (or beat) inflation, it's impossible to answer definitively. Over very long periods of time companies can pay out dividends that exceed net income. That's not usually a great idea, but it's possible. That is, the dividend payout ratio can exceed 100%. As one extreme example, suppose you own shares of stock in a company that has a very simple (too simple) business model: it has S$500 million invested in a basket of Singapore Government Securities with varying maturity dates, and every quarter (or half year) it sells off a few to pay investors a steady 5% dividend. And it does nothing else. The bonds themselves are yielding about 2% (nominal), and after the costs of running the business and paying the "managers," let's suppose. So that's a 3 percentage point spread, with dividends exceeding net income. These 5% dividends can be sustained for decades, and that's a long time.

I've just described a "company" that would not really be a good inflation fighter. Never, never focus (much) on the dividends, especially headline grabbing dividends. They could represent a shooting star, and there are some of them from time to time. (A "shooting star" means the dividend ratio is above 1 for a few quarters or more. That's not the sign of a healthy business in the ordinary sense.) Always focus on the total returns and whether you're investing in quality businesses that are managed well and at least trying to keep pace with overall economic growth in their sector and beyond. Garbage stocks are capable of paying high dividends, really.

If you want a recent example of a dumb business, take a look at Helios and Matheson Analytics. HMA's principle business is called "MoviePass." And here's the deal: for US$10/month you can attend as many movie screenings as you like in any/all U.S. cinemas, as long as you watch each movie title only once. MoviePass pays the full price of your ticket, all your tickets, except if you go back to see the same title again. Since the typical price for a U.S. movie ticket is something like US$8, just go to the cinema twice per month and you come out ahead. Great deal! Millions have signed up.

There's only one little problem with this: HMA pays full price for the tickets. Neither the theater owners nor Hollywood studios are cutting any discounts. HMA is collecting data on its subscribers and their viewing habits, and HMA is selling that data (or trying to). But that data isn't so valuable. HMA is hoping they'll have enough clout that they can figure out how to make money at some point (soon), but investors have now figured out that they are extremely unlikely to make any money ever.

Anyway, that's an example of a high paying dividend business, in a way. If you're a U.S. moviegoer, sign up for MoviePass! (With a zero liability credit card, of course, so you can get your money back when MoviePass folds.) There are all kinds of stupid business ideas like this one, backed by silly venture capital funding and burning through cash. Well, if somebody is burning cash, you might as well grab some of that cash, as a consumer. But as an investor....no, don't buy crap businesses. Some crap businesses dangle shiny dividends in front of investors, but you need to be smarter than that, much smarter. Or just buy a broad index of stocks in a well regulated market, and avoid too small companies that are more prone to these sorts of antics. (HMA is not in the S&P 500.)

 

[flikmy]

It's not a perfect hedge, but it's as good as you'll get right now in Singapore.

The ideal hedge would be if Singapore issued inflation-linked bonds, like the US, UK, and Australia all do. These are like regular SGS, but they also pay an extra coupon (or their principal goes up) in line with inflation; so you can save your money in them without worrying about it getting eaten away by inflation.

In the absence of an inflation-linked bond market (and if we have any readers here at the MAS, you should absolutely launch one - you'd get a wall of money from smart retail investors!), stocks are a decent inflation hedge. It's pretty fuzzy, and it certainly won't hold day-to-day or even month-to-month, but over the long term, stocks tend to slightly outperform inflation.

Not sure if MAS will ever issue inflation-linked bonds. My understanding is that governments issue inflation linked bonds because they can reduce their interest coupon payments (compared to normal bonds). Wonder if anyone else can provide a better reason for why governments issue inflation linked bonds.

Anyway, for MAS, taken from the MAS website:
Unlike many other countries, the Singapore Government does not need to finance its expenditures through the issuance of government bonds as it operates a balanced budget policy and often enjoys budget surpluses.

Currently, SGS bonds and T-bills are issued primarily to:
- build a liquid SGS market to provide a robust government yield curve for the pricing of private debt securities;
- foster the growth of an active secondary market, both for cash transactions and derivatives, to enable efficient risk management; and
- encourage issuers and investors, both domestic and international, to participate in the Singapore bond market.

So unless MAS really wants to help retail investors with hedging inflation, I'm don't think they have any economic reason to issue inflation-linked bonds.