Gyroscopic Investing

My pension has no inflation protection whatsoever for five long years.  All hell could break lose in that period, drastically reducing the real value of the pension.  And even after 5 years, only about half of the pension has a COLA, limited to half the inflation rate up to 5%.

What can I do with my portfolio to protect the pension from erosion by inflation? Increase the gold component? If so, by how much over the standard 25%, as is PP doctrine? I know Craig R. has a low opinion of TIPS.

Your advice would be appreciated.

I'm confused, is this a defined benefit plan where you get an annuity? Or a defined contribution plan where you control your own investments?

Not Craig obviously, but I personally would increase my gold, decrease cash and possibly sub half of my equity for REIT's which track inflation better than stocks.....

http://realestate.wharton.upenn.edu/res ... ll/716.pdf

I would be tempted to hold something like this:

30%- Gold
15%- REIT
15%- Total Stock Market
20%- Cash
20%- LTT

Because you would actually benefit from some mild deflation as your purchasing power would be relatively increased, you could stand to shift some of your dollar denominated bonds into increase gold, REIT and equity.  That will help with inflation, IMO.

You may also think about putting half of your cash into short term TIP's (ticker STPZ). 

KevinW wrote: I'm confused, is this a defined benefit plan where you get an annuity? Or a defined contribution plan where you control your own investments?

It is a defined benefit plan.

As for the suggestion about adding REITs to my portfolio, I used to own TIAA-CREF's widely praised real estate fund, until it went down like the Titanic in 2008. In fact, it sank faster than the Titanic.

To this investor, a PP newbie, adding gold as a percentage of my portfolio would seem to be the way to go, unless others advise otherwise. But I don't have a clue as to how much more gold to buy, if this indeed a good way to proceed.

IMO annuity products are so dissimilar from total-return portfolios that it's impossible to mix and match them like this. I would keep a mental firewall between your pension and PP and manage them separately.

Maybe that means buying some gold or short term TIPS, but mentally account for them as fortifications for the pension, not part of the PP. Also you could look into buying an annuity with a really strong inflation adjustment, or maybe one of the new managed payout funds, to balance out the pension.

KevinW wrote: I would keep a mental firewall between your pension and PP and manage them separately.

Perhaps I should have explained that my PP is pretty well set. What I need is advice on how to configure my Variable Portfolio as a precaution against inflation damaging future income from a depreciating pension.

Since gold is included in the standard PP to counteract inflation, it stands to reason (at least to this newbie) that some gold in my VP is advisable. But I don't have a clue how much gold to place in the VP. Again, advice would be welcome regarding this dilemma.

I would just advise not to make it too difficult or to have unreasonable expectations.  You have to keep in mind that you'll never know the perfect portfolio allocation until after the fact.

Here is a list of assets that offer some inflation protection in no particular order:

Precious Metals
REIT's
Natural Resource Stocks
Swiss Franc (historically, but this may have changed with the peg to the Euro)
TIP's
Commodities
Fine Art
Investment Grade Diamonds

You have to keep in mind that these will perform well relatively to inflation, but will not have a perfect correlation by any means. 

Look at the white paper that I linked above.  Gold is actually not always a great inflation hedge, but IMO it is crucial to hold some because in hyper-inflation it will save your skin.  Also, in negative real interest rate environments it does very well. 

I guess where I'm going with this is that not all inflation is equal. You have hyper inflation, severe inflation, moderate, low, etc.  It also makes a difference if inflation is rising or falling.  Supply and demand factors also impact these assets and their correlation to inflation, especially in the commodity and metals.

TIP's, metals and REIT's are highly sensitive to interest rates as well.

A way to make it very easy, IMO would be just to hold PRPFX in your VP (or duplicate it with your own ETF's).  PRPFX is not the same as the PP, and is more tilted towards inflation.  If that doesn't offer enough protection to your liking, you could do something like 50% PRPFX and 50% in a commodity mutual fund (or substitute an energy linked fund like VGNEX).

You know you have a defined benefit each month, so I agree with your thinking that it's wise to add some additional inflation protection.

By the way, I would recommend reading the paper that I linked, even though you aren't interested in REIT's.  It provides inflation correlation for TIP's, commodities, gold and stocks as well.  I'm sure there are a large amount of free research papers on inflation protection that you might look into online in order to ease your mind.  It's hard to make investment decisions based on some anonymous/random internet poster such as myself.