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Investing during high inflation

Investment discussion for beginners. Why you should invest your money, get help getting started
scrumpyjack
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Re: Investing during high inflation

#459630

Postby scrumpyjack » November 20th, 2021, 3:45 pm

Dod101 wrote:
dealtn wrote:
Dod101 wrote:... in any case do not get too carried away with investing in banks. If they do well it will be for the first time in 15 years or more that they do.


Really?

They are up 30-40% in the last year. Over the last two years have doubled. Both periods appear to me to be in the last 15 years. How are you defining "do well"?


Historically they have been a very poor investment. Many shares are up significantly in the last year. I want them to do well over a five or ten year period not in one particular year. Short termism or what?

Dod


Quite, on a 15 year view banks have been a catastrophic investment and the rise over the last two years could better be regarded as the proverbial 'dead cat bounce' :D

In times of higher inflation banks are not a good investment. Whilst they may be able to get a higher rate margin, their underlying capital is what? Money! which is being inflated away, so they need ever more money to maintain their business in real terms. They may report, and pay tax on, nominally higher profits but their capital is being drastically eaten away by inflation. A bank with for example £30 billion of equity, if inflation were 8%, would need to retain £2.4 bn of after tax profits just to stand still.

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Re: Investing during high inflation

#459639

Postby BT63 » November 20th, 2021, 4:35 pm

Dod101 wrote:....I cannot believe that the portfolio managers of CGT, Personal Assets and Ruffer are all fools which is what you imply.


I agree, but I cannot find many explanations as to why someone would hold a so-called investment which is guaranteed to lose money.

The only explanation I can come up with is the greater fool theory; that they expect someone else will pay an even higher price for an even worse negative return.

I would be interested in your logic - or anyone else's logic - as to why a negative yielding asset is a worthwhile long-term investment. Please enlighten me.

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Re: Investing during high inflation

#459643

Postby Dod101 » November 20th, 2021, 4:40 pm

BT63 wrote:
Dod101 wrote:....I cannot believe that the portfolio managers of CGT, Personal Assets and Ruffer are all fools which is what you imply.


I agree, but I cannot find many explanations as to why someone would hold a so-called investment which is guaranteed to lose money.

The only explanation I can come up with is the greater fool theory; that they expect someone else will pay an even higher price for an even worse negative return.

I would be interested in your logic - or anyone else's logic - as to why a negative yielding asset is a worthwhile long-term investment. Please enlighten me.


I don't claim that they are a great investment; I simply do not know much about US TIPS but my point is that the managers of these defensive trusts no more than I do and they have all been successful one way or another; So I cannot believe that they are all wrong.

Dod

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Re: Investing during high inflation

#459644

Postby BT63 » November 20th, 2021, 4:46 pm

Dod101 wrote:I don't claim that they are a great investment; I simply do not know much about US TIPS but my point is that the managers of these defensive trusts no more than I do and they have all been successful one way or another; So I cannot believe that they are all wrong.
Dod


I said earlier that I have a lot of respect for the managers of those funds but it seems illogical to have such a large commitment to negative-yielding linkers (about 30% of their portfolios) plus another 10 - 20% cash or fixed bonds which, again, will be negative real yielding.

Half a portfolio with a negative real yield? No, thanks!

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Re: Investing during high inflation

#459660

Postby Boots » November 20th, 2021, 5:48 pm

BT63 wrote:
Dod101 wrote:....I cannot believe that the portfolio managers of CGT, Personal Assets and Ruffer are all fools which is what you imply.


I agree, but I cannot find many explanations as to why someone would hold a so-called investment which is guaranteed to lose money.

The only explanation I can come up with is the greater fool theory; that they expect someone else will pay an even higher price for an even worse negative return.

I would be interested in your logic - or anyone else's logic - as to why a negative yielding asset is a worthwhile long-term investment. Please enlighten me.


I struggled with this myself for many years. When younger I was certain that any sane person would just want the best return, so holding something with a negative yield, or even a lower return than available elsewhere, was just wrong.

More recently, I have come to see that there is a place for a lower return, but a more consistent one. A more reliable income, fewer sleepless nights and fewer "difficult conversations" with Mrs. Boots.

A truly diversified portfolio should generate a slightly lower return, but with a markedly lower volatility.

So, I now am a holder of a range of different asset classes, some of which will suffer in any given year - but I don't know in advance which will do well and which will do badly.

That is my logic. I hope it helps.

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Re: Investing during high inflation

#459664

Postby BT63 » November 20th, 2021, 6:03 pm

Boots wrote:I struggled with this myself for many years. When younger I was certain that any sane person would just want the best return, so holding something with a negative yield, or even a lower return than available elsewhere, was just wrong.

More recently, I have come to see that there is a place for a lower return, but a more consistent one. A more reliable income, fewer sleepless nights and fewer "difficult conversations" with Mrs. Boots.

A truly diversified portfolio should generate a slightly lower return, but with a markedly lower volatility.

So, I now am a holder of a range of different asset classes, some of which will suffer in any given year - but I don't know in advance which will do well and which will do badly.

That is my logic. I hope it helps.


I don't have a problem with holding assets which are likely to achieve a lower return than the portfolio average, but when that lower return becomes a guaranteed loss that's where I draw the line.
Index linked bonds are guaranteed to lose their holders money if held to maturity. If investing is now about being content to lock in a guaranteed loss, then I am definitely out of touch with modern investment theories.

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Re: Investing during high inflation

#459675

Postby NotSure » November 20th, 2021, 6:37 pm

BT63 wrote:
I said earlier that I have a lot of respect for the managers of those funds but it seems illogical to have such a large commitment to negative-yielding linkers (about 30% of their portfolios) plus another 10 - 20% cash or fixed bonds which, again, will be negative real yielding.

Half a portfolio with a negative real yield? No, thanks!


Perhaps because minus 1 or 2% real return will look pretty good if cash is seeing minus 6 or 8 % and equities/real estate is seeing -20%+?

If you are expexting gains in equities, then obvioulsy not a good choice, however, if you are fearful of the outlook, and more worried about preserving than growing your pot, then what alternative do you suggest, other than say gold, which they also hold? And of course, if everything else is tanking, these yields may drop even further and the value of these bonds rise.

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Re: Investing during high inflation

#459678

Postby dealtn » November 20th, 2021, 6:41 pm

Dod101 wrote:
dealtn wrote:
Dod101 wrote:... in any case do not get too carried away with investing in banks. If they do well it will be for the first time in 15 years or more that they do.


Really?

They are up 30-40% in the last year. Over the last two years have doubled. Both periods appear to me to be in the last 15 years. How are you defining "do well"?


Historically they have been a very poor investment. Many shares are up significantly in the last year. I want them to do well over a five or ten year period not in one particular year. Short termism or what?

Dod


I want them to do well over the long term too. I also want a better entry point. Doing well relies on both entry and exit (or long term holding). Why do you think entry points a year or so weren't a good place to invest then, or at least have turned out to be in hindsight?

Very amused to be considered a short termist being near 100% invested in equities* for about 25 years!

*outside of (mainly) residential property

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Re: Investing during high inflation

#459683

Postby Dod101 » November 20th, 2021, 6:48 pm

dealtn wrote:
Dod101 wrote:
dealtn wrote:
Really?

They are up 30-40% in the last year. Over the last two years have doubled. Both periods appear to me to be in the last 15 years. How are you defining "do well"?


Historically they have been a very poor investment. Many shares are up significantly in the last year. I want them to do well over a five or ten year period not in one particular year. Short termism or what?

Dod


I want them to do well over the long term too. I also want a better entry point. Doing well relies on both entry and exit (or long term holding). Why do you think entry points a year or so weren't a good place to invest then, or at least have turned out to be in hindsight?

Very amused to be considered a short termist being near 100% invested in equities* for about 25 years!

*outside of (mainly) residential property


I am the same with equities as a class but the question is how many individual ones have you held for 25 years? We can all pick a period when say banks have done well but over 25 years? Banks have in the main done very poorly. They have times when they do well. In the 1990s HSBC for instance did very well but since then they have done anything but.

Dod

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Re: Investing during high inflation

#459686

Postby BT63 » November 20th, 2021, 6:51 pm

NotSure wrote:
BT63 wrote:
I said earlier that I have a lot of respect for the managers of those funds but it seems illogical to have such a large commitment to negative-yielding linkers (about 30% of their portfolios) plus another 10 - 20% cash or fixed bonds which, again, will be negative real yielding.

Half a portfolio with a negative real yield? No, thanks!


Perhaps because minus 1 or 2% real return will look pretty good if cash is seeing minus 6 or 8 % and equities/real estate is seeing -20%+?

If you are expexting gains in equities, then obvioulsy not a good choice, however, if you are fearful of the outlook, and more worried about preserving than growing your pot, then what alternative do you suggest, other than say gold, which they also hold? And of course, if everything else is tanking, these yields may drop even further and the value of these bonds rise.


So we're probably heading for a crash, bear or prolonged stockmarket stagnation soon.

I find that entirely believable because when US shares were previously at or near the current valuations, the real returns over the next 10 - 20 years were always negative and occasionally as poor as -10% real p.a. average for a decade!

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Re: Investing during high inflation

#459698

Postby dealtn » November 20th, 2021, 8:03 pm

Dod101 wrote:
I am the same with equities as a class but the question is how many individual ones have you held for 25 years?

We can all pick a period when say banks have done well but over 25 years?


One (although you could say none as the purchase decision wasn't mine, and I was prohibited from selling).

Dod101 wrote:Banks have in the main done very poorly. They have times when they do well. In the 1990s HSBC for instance did very well but since then they have done anything but.



Simply not true.

They did well in 2010, also in 2012, 2016 and 2020-21. There are many periods where they have done well, and a claim that since the 1990s they haven't is wrong.

You seem to frame how well something does by what your return would look like if you bought many (many) years ago (in this case the 1990s) and held until now, not if you bought at a certain time and enjoyed the return for a period afterwards. Why is that? Am I wrong?

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Re: Investing during high inflation

#459704

Postby Dod101 » November 20th, 2021, 8:29 pm

dealtn wrote:
Dod101 wrote:
I am the same with equities as a class but the question is how many individual ones have you held for 25 years?

We can all pick a period when say banks have done well but over 25 years?


One (although you could say none as the purchase decision wasn't mine, and I was prohibited from selling).

Dod101 wrote:Banks have in the main done very poorly. They have times when they do well. In the 1990s HSBC for instance did very well but since then they have done anything but.



Simply not true.

They did well in 2010, also in 2012, 2016 and 2020-21. There are many periods where they have done well, and a claim that since the 1990s they haven't is wrong.

You seem to frame how well something does by what your return would look like if you bought many (many) years ago (in this case the 1990s) and held until now, not if you bought at a certain time and enjoyed the return for a period afterwards. Why is that? Am I wrong?


Of course you are not necessarily wrong but yours appears to be a trading strategy whereas I am much more into LTBH. Anybody can pick periods with almost any share where if you get your timing right you can look very clever but I am looking over more like a decade or two of holding.

There is no point in this fruitless discussion so I will not be contributing any more to it.

Dod

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Re: Investing during high inflation

#459719

Postby richfool » November 20th, 2021, 10:03 pm

BT63 wrote:
Dod101 wrote:I don't claim that they are a great investment; I simply do not know much about US TIPS but my point is that the managers of these defensive trusts no more than I do and they have all been successful one way or another; So I cannot believe that they are all wrong.
Dod


I said earlier that I have a lot of respect for the managers of those funds but it seems illogical to have such a large commitment to negative-yielding linkers (about 30% of their portfolios) plus another 10 - 20% cash or fixed bonds which, again, will be negative real yielding.

Half a portfolio with a negative real yield? No, thanks!

With TIPS and index-linkers the principal increases in line with inflation, so they protect against significant inflation.

https://www.investopedia.com/terms/t/tips.asp

https://masterinvestor.co.uk/funds-and- ... portfolio/

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Re: Investing during high inflation

#459720

Postby dealtn » November 20th, 2021, 10:06 pm

Dod101 wrote:
dealtn wrote:
Dod101 wrote:
I am the same with equities as a class but the question is how many individual ones have you held for 25 years?

We can all pick a period when say banks have done well but over 25 years?


One (although you could say none as the purchase decision wasn't mine, and I was prohibited from selling).

Dod101 wrote:Banks have in the main done very poorly. They have times when they do well. In the 1990s HSBC for instance did very well but since then they have done anything but.



Simply not true.

They did well in 2010, also in 2012, 2016 and 2020-21. There are many periods where they have done well, and a claim that since the 1990s they haven't is wrong.

You seem to frame how well something does by what your return would look like if you bought many (many) years ago (in this case the 1990s) and held until now, not if you bought at a certain time and enjoyed the return for a period afterwards. Why is that? Am I wrong?


Of course you are not necessarily wrong but yours appears to be a trading strategy whereas I am much more into LTBH. Anybody can pick periods with almost any share where if you get your timing right you can look very clever but I am looking over more like a decade or two of holding.

There is no point in this fruitless discussion so I will not be contributing any more to it.

Dod


It's not (entirely) my strategy. I'm just refuting your claim that shares haven't done well for a large number of years, when the reality is they (and most shares) go through cycles of doing well, and less well.

If anyone manages to time those cycles they will do extremely well. They can certainly outperform a long term buy and hold strategy, especially for shares that are poor long term performers on your measure.

There are many strategies employed to attempt to do such, one of which is quite familiar to this site in particular (or at least versions of it).

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Re: Investing during high inflation

#459723

Postby dealtn » November 20th, 2021, 10:19 pm

CryptoPlankton wrote:
dealtn wrote:
CryptoPlankton wrote:This isn't the first time you've used the period post the "Covid crash" to suggest equities have done well. A glance at Lloyds and HSBC shows that neither has recovered to their SP pre-Covid. A pedant could argue that any company with an upward movement in SP is doing well but, by that measure, so is just about every other share that took a hammering last year - many of which have done much better by going on to new highs. Basically, if you bought the market at the bottom, you would have done well but there are numerous individual shares out there that have done better than the banks.


No, that's not my claim. I am claiming that there are a number of periods in the last 15 years that bank shares (and it is true also of others, and equities as a whole asset class) have done well.

Another poster is making a claim they haven't.

So, just a pedantic point then.


Not at all.

Thinking that shares, either individually, or collectively, haven't done well, merely by reference to a price a long time previous, is akin to suggesting they aren't worth investing in. Believing such, and following such a mantra, leads to long periods out of the market waiting for the right time to be back in. This is the road to material underperformance.

instead recognising that (individual) shares, and (collective) markets go through periods of under and out performance not only means you are more likely to be in the market longer, but provides opportunities for adding return through adding, or overweighting at periods of underperformance, or switching between shares/sectors when cycles are out of sync.

The OP hints the present time, when inflation is more of an issue than at other times, might suggest certain shares, or certain sectors, may outperform in this environment. Other environments suggest others might outperform in those. Thinking about how environments change, and whether shares chosen in previous ones might no longer be the appropriate ones in the new ones might mean an outcome where a bank share bought in the 1990s, that goes on to be a "bad choice" over the next 25+ years, might have been sold at some point and reinvested in an alternative such that the LTBH disciple wouldn't have suffered (all of) that disappointment.

It's not a pedantic point if such critical thinking leads to meaningful outperformance, relative riches, and earlier retirement for instance.

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Re: Investing during high inflation

#459725

Postby BT63 » November 20th, 2021, 10:33 pm

deleted due to error

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Re: Investing during high inflation

#459746

Postby CryptoPlankton » November 21st, 2021, 2:19 am

dealtn wrote:
Not at all.

Thinking that shares, either individually, or collectively, haven't done well, merely by reference to a price a long time previous, is akin to suggesting they aren't worth investing in. Believing such, and following such a mantra, leads to long periods out of the market waiting for the right time to be back in. This is the road to material underperformance.

instead recognising that (individual) shares, and (collective) markets go through periods of under and out performance not only means you are more likely to be in the market longer, but provides opportunities for adding return through adding, or overweighting at periods of underperformance, or switching between shares/sectors when cycles are out of sync.

The OP hints the present time, when inflation is more of an issue than at other times, might suggest certain shares, or certain sectors, may outperform in this environment. Other environments suggest others might outperform in those. Thinking about how environments change, and whether shares chosen in previous ones might no longer be the appropriate ones in the new ones might mean an outcome where a bank share bought in the 1990s, that goes on to be a "bad choice" over the next 25+ years, might have been sold at some point and reinvested in an alternative such that the LTBH disciple wouldn't have suffered (all of) that disappointment.

It's not a pedantic point if such critical thinking leads to meaningful outperformance, relative riches, and earlier retirement for instance.

Well, if there is anyone who actually does follow the mantra to which you refer then I'm sure they will benefit from your cautionary words. How you made this leap is a bit of a mystery but, like Dod, I think it's best to leave you to it at this point...

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Re: Investing during high inflation

#459760

Postby Aminatidi » November 21st, 2021, 8:32 am

CGAM and Ruffer and Troy publish monthly or quarterly newsletters that outline their thinking.

If people don't/haven't read them I'd honestly suggest doing so as they give some good insight on where and why and what they're positioning and expecting.

Personally I don't have the first clue about TIPS but I think the fact all three have exposure to either TIPS or other index linked bonds gives an indication that they see value in them.

That value may be in recognising that if you're trying to invest for all weathers you might still decide to carry an umbrella even if it weighs you down a bit and it isn't raining right now?

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Re: Investing during high inflation

#459807

Postby RockRabbit » November 21st, 2021, 12:06 pm

You can check the approx. real yield for various debt instruments via ishares etfs. For example US TIPs with around 8 years duration yield approx. -1.5% pa (real).

For example: https://www.ishares.com/uk/individual/e ... -ucits-etf

While this may seem nuts, that represents at current US inflation rates a nominal yield of approx. +4.5%, ie way better than cash.

But to answer the point as to why some investors would 'lock in' guaranteed real losses over the long term, look at some future investment house forecasts for other assets eg GMO

https://www.gmo.com/europe/research-lib ... ober-2021/

So TIPs bad, equities awful! (according to some). So, pick your poison.

For further explanation on TIPs and why they might represent a 'good' investment even though they 'guarantee' a loss, see:

https://tipswatch.com/

Oh, and don't forget the currency risk on USD TIPs if you are UK based. You can of course buy Sterling index linkers but they are on significantly bigger negative yields compared with their US cousins. Again easy to check and compare on ishares.

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Re: Investing during high inflation

#459840

Postby BT63 » November 21st, 2021, 2:21 pm

RockRabbit wrote:So TIPs bad, equities awful! (according to some). So, pick your poison.


My poison, as mentioned in an earlier post, is precious metals and their miners.
At least they're not guaranteed to make a real loss and in theory my chances are 50/50 of making a real gain vs a real loss.

Even the theoretical 50% chance of making a loss on PMs might not end up as bad a loss as the guaranteed annual -1% to -2% with TIPS.

In reality, if inflation is bad, if real rates are negative and if equities are bad, gold has historically had a much better than evens chance of a real return.


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