Investment Strategy; The Best Inflation Hedge? A mix of holdings may beat relying only on Treasury inflation-protected bonds
Author: Michael A. Pollock</br></br>As rising prices of oil and other commodities fan fears about inflation, many investors have been stocking up on U.S. Treasury inflation-protected securities or shares of mutual funds that invest in those securities.</br></br>The principal value and interest payments of TIPS rise along with any increase in the consumer-price index. And, of course, Treasury debt of all kinds is considered to be among the safest of investments, an advantage over alternative ways of buffering a portfolio against inflation.</br></br>But some investment managers argue that TIPS alone aren't the ideal solution in an environment, like the current one, in which interest rates could be poised to rise significantly as inflation accelerates. That's because sharply higher interest rates would eat into the value of TIPS in an investor's portfolio.</br></br>A better approach, they say, is to mix TIPS with other assets that also have inflation-protection benefits but won't be as sensitive to interest-rate movements. These may include such things as riskier bonds that offer yields far above the current inflation rate, and natural-resources stocks and real-estate securities, which may appreciate further as economic growth heats up.