- Deflated interest rates have been a boon for equities in this bull market for the ages.
- But short duration bonds have less real interest rate risk over several market cycles.
- Although we cannot predict market gyrations forced by the irrational sentiment of traders and investors, we can protect our portfolio from unexpected inflationary pressures.
- Thus, our favorite hedging instrument is the Vanguard Short-Term Inflation-Protected Securities ETF.
Historically, the stock market’s most significant threat is inflation or the unexpected spike in the price of goods, services, and interest rates. As contrarians, we like to think of hyperinflation as the market’s second worse menace after illogical investor sentiment.
Nonetheless, we do not have reasonable control over trader and investor behavior beyond taking an opposing stance to the herd’s irrational investing or divesting. However, inflation is something we can manipulate when managing our portfolio with thoughtful, disciplined, and patient conviction.
In the third installment of our series on index ETF hedging, we offer research on our favorite inflation fighting vehicle: the Vanguard Short-Term Inflation-Protected Securities ETF (VTIP).
First, let's revisit the general concept of portfolio hedging and why it is essential to any long-term investment strategy.