If you are thinking about inflation-hedging investments, you may be led to consider some classics: gold, real estate investment trusts and oil are prime examples. But that kind of thinking may do more damage to your wealth than it's worth, for a simple reason: No two reflation trades are created equal.
Throughout stock market history, there have been bouts of high and low inflation, each time accompanied by factors that were unique to the period.
"Conditions in the real world do not exist in a vacuum," said Mitch Goldberg, president of investment advisory firm ClientFirst Strategy. "In reality, the 'inflation trade' has never been this straightforward, simple formula," he said.
So look before you leap into the tried-and-true inflation-hedging asset classes.
Though considered an inflation hedge, gold isn't necessarily going up. In fact, it's been going down — and by a lot, ever since Trump was elected.
"Gold is supposed to be a hedge against inflation, but investors have dumped gold and other safe-haven assets after Trump's election and piled into riskier assets," said Neena Mishra, director of ETF research at Zacks Investment Research. "A rising dollar has also weighed on gold prices. However, gold could be back in favor if economic or political risks rise due to proposed protectionist policies."
Goldberg said gold is the perfect example of why inflation-fighting conventional wisdom is dangerous. "It's the most popular go-to inflation trade of all, and it has been getting pounded."
Why? Inflation and GDP are rising. That is sending a signal to investors that the Fed is going to raise interest rates too much next year, because it got behind the inflation curve. It also signals that the dollar is getting stronger, which usually hurts the value of gold.
Take a look at the gold and dollar charts this year. For the first half of the year, as the dollar ran out of steam, gold — and the biggest gold ETF, SPDR Gold Trust (GLD) — boomed. But since May, when the dollar resumed its surge, gold has given back half of its 20 percent January-to-May gain.
Gold just suffered its worst month since June 2013, down close to 8 percent in November.
It's not just gold.
Gold, REITs and commodities are "real assets" that feature historic returns (over the past decade) that are compelling, but Morningstar doesn't think that is going to continue.
David Blanchett, head of retirement research at Morningstar Investment Management, said, "While these assets may better track inflation, they aren't expected to perform all that well."
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Morningstar runs annual realized return expectations for major asset classes over the next decade, and gold, REITs and commodities are all projected to do worse than inflation-protected bonds. These assets are all more risky than bonds (in terms of standard deviation).
"Inflation hedges are like rules of thumb," Goldberg said. "They've worked in the past just enough to sucker-punch investors back into old trades."
Investors still need to play some offense to meet their goals, but Blanchett said these riskier, inflation-fighters don't look like such a great option. Morningstar believes that REITs, in particular, are overvalued. Morningstar does not release the precise return projections, but gold is the only of the three for which it projects a return even close to inflation-protected bonds over the next decade.
"Most investors probably need returns over 5 percent per year to accomplish their goals ... so from an 'offense' perspective, the best advice I can probably give is make sure you have a diversified portfolio."
All of this brings Blanchett to TIPS — Treasury inflation-protected securities. He said they are a better natural hedge against inflation and have a higher expected return over the next decade.
But there's a risk that we've been in a low-rate environment for too long. For years investors have heard about the benefit of TIPS and the need to "shorten up on maturity" in a rising rate environment. The problem was that the rising rate environment didn't arrive nearly as soon as pundits thought it would. Still, this is one piece of market conventional wisdom it is hard to argue with.
More investors have received the message that in November, ETFs in this category took in flows from investors that represented 10 percent of total assets under management for the TIPs asset class. Year-to-date, the flows into TIPS funds represent 31 percent of total assets under management, according to FactSet Research.
"It screams inflation protection," said Elisabeth Kashner, director of ETF research at FactSet. "There's been an absolute wave of money coming in."
"Bond prices and interest rates move inversely, and it's the long duration bonds — the ones where it will take longer for an investor to get their money back — that will get hit the hardest," said Sumit Roy, analyst and writer for ETF.com
Blanchett is among the investing experts now advising TIPS because with TIPS the principal an investors is paid back increases with inflation. And these investments make even more sense if the classic inflation hedges, such as gold, don't work in the same way they have historically.
"TIPS is the best pure inflation hedge since its payments are tied to inflation," Blanchett said.
Goldberg said the biggest mistake an investor can make is trying to reconfigure an entire investment portfolio to suit the trend of the moment. An investor that is in these asset classes should be in them for diversification or income, or some other trait that the investor benefits from — not because the investor is scurrying to try and figure out how to trade a Trump agenda or Fed policy.
U.S. inflation as measured by the Consumer Price Index was 1.6 percent for the year ending October 31, and it's expected to surpass 2 percent in the coming months and stay above 2 percent next year. But keep in mind that even if inflation is more likely to rise than not from here, wages have actually climbed over the past year faster than inflation, a trend that could mean the Fed does not raise rates as quickly as some market pundits are now projecting — Goldman Sachs recently said it expects four rate hikes next year.
Ultimately, Goldberg comes back to stocks — and looking to the future rather than the past — as the best long-term bet.
"If investors want an inflation hedge, they should be in innovative companies; the ones that are reinvesting into their future business. Sure, investors need to take inflation into account, especially fixed income investors. But if you are a growth investor, innovative companies are my way to go," he said.
— By Joe D'Allegro, special to CNBC.com