Spending-Matched Inflation Tracking Portfolio.

[TripleB]

It seems as though if one were to build a portfolio of commodities that matched their spending, one could hedge against inflation in that way using ETFs.

This wouldn't work as part of the PP but maybe it could be alongside the PP. You put money in the PP for long term, and you put 2 years of living expenses in this customized breakout portfolio. I'm throwing out some rough numbers that will need to modified for personal use and to polish the dilution factors.

For example, suppose you have $2k of living expenses each month. The breakdown is:

$1k Apartment Rent (50%)
$200 Gas (10%)
$200 Discretionary (10%)
$600 Food (30%)

Then for your inflation-adjusted portion, you could invest:

Housing (50% of your budget, matched by 50% of your investment):
10% Apartment REITs
40% Cash
Split this way because REITs are leveraged to so you need to dilute them if you want to match apartment rent fluctuation

Food (30% of budget):
10% Food Commodity ETFs
20% Cash - again diluted for the same reason as REITs - just because Corn prices drop 50% doesn't mean your food price will drop 50%

Gas (10% of budget):
10% Oil ETF - since it essentially does match gas prices at the pump on a nearly 1:1 basis. Crude oil goes up 10%, gas price go up 10%.

Other: 10% of budget - discretionary
Vanguard Consumer Discretion ETF - it makes sense that when companies are hurting, they put things on sale. Look at Abercrombie and Fitch in the last few months. Their stock has tanked and they've been giving out 30% to 50% sale on nearly everything to make quarterly revenue numbers. So if this ETF goes down, you lose money, but stuff goes on sale. If this ETF goes up, you make money but there's less stuff on sale, so you are hedged to your spending.

I'm also thinking of hedging your employment. If you work for a company, the SEC usually frowns upon shorting their stock, however you can probably get away with shorting the sector. For example suppose you worked for Lehman Brothers in 2006. You're making $200k per year on Wall Street.

You know that if the housing bubble pops and the financial sector goes to shit, then you will lose your job. Even worse, since this is a specialized sector, you won't be able to find another job because lots of people will be out of work in that field. The hedge would be to go short on the financial sector. If the sector booms, then you lose money on the short, but you get a $50k bonus at the end of the year, so no big deal.

If the sector crashes, you lose your job, but you make a ton of money on your short position. Then again if you do work in the financial sector and short it, and it crashes, then you have counterparty risk on your short position that may never pay off because the position is based on the stability of the financial sector. If you worked in another sector, then it would likely be safer.

Another "strategy" I like to use, that some may find unethical, is to borrow money on CCs for living expenses, at 0% deals that usually last about 12 months. Then I roll over those 0% into a new 0% offered by a different CC company. I've done this with about $20k over the last few years, and I've always been able to find a new 0% to 3% deal. Even at 3% it's worth it, because I can make over 3% on IBonds, risk-free ignoring taxes.

What I'm doing is pushing my living expenses forward by 12 months. I'm investing my paycheck today, and banking on the ability to pay this week's living expenses in 12 months when the 0% deal comes through. That gives me an additional 12 month exposure to the PP. If I lose my job, I have the option to default on the CC 0% deal if necessary. It's not a primary option, but it's an option all the same, and I am paying for that option. The 0% deals come with 3% BT fees, and my total cost of loan is based on default risk. There might be a 1 in 100 chance I will default (due to my high credit score), so the bank charges 1% on top of their profit, in order to pay for this risk. If I happen to be the 1 person in 100 that defaults, then I don't "feel bad" because it's already in their business model.

I do everything in my power to avoid defaulting, but if the economy hits Great Depression Levels, and inflation jumps to 20%, then default it is. It will be impossible to get $20k at 3% borrowing rates post-massive depression, so I'm hedging for it, by borrowing it in advance. And I'm investing that $20k in the PP at what should be >3%, or at least matching it, so I break even, make a little, or worst case I lose a little.

[sophie]

Interesting.  This is something like the CPI ETF's strategy for getting a return that at least tracks inflation:

42% SHV (T-bills)
27% BIL (short term treasuries)
12% stock index funds
10% TLT
8% DGL (gold fund)
remainder = foreign currencies

Which is the equivalent of about 1/2 PP, 1/2 cash.  So you could also split your emergency fund between PERM or PRPFX, and cash (including I Bonds), and then you'd have much less chance of watching your funds evaporate while keeping enough of a safety margin.

[Figuring It Out]

Complicated, but interesting.

If you could find investments that paid dividends, that would be super cool. i.e. buy $30,000 of Vanguard utility fund and use the nearly 4% dividend to pay your utility bill. Long ago, I thought about doing something like that with APPL stock - buy some and then use the appreciation to buy my Apple products. Damn, I wish I'd done it!