Ask TIAA-CREF: Inflation

I am concerned that the stimulus money being pumped into the U.S. economy may lead to inflation. Which TIAA-CREF investments serve as the best hedge against rising inflation?

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Assets which have traditionally been viewed as inflation hedges include inflation-linked bonds and commercial real estate. TIAA-CREF offers options in both these areas.

 

Treasury Inflation Protected Securities

Similar to conventional bonds, U.S. Treasury Inflation-Indexed Securities, also known as TIPS (Treasury Inflation Protected Securities), pay interest at fixed intervals and return the principal, or face value of the investment, at maturity. Unlike the principal of conventional bonds, however, the principal of U.S. TIPS is adjusted each month to keep track with general price inflation, as measured by the U.S. Bureau of Labor's Consumer Price Index for All Urban Consumers (CPI-U). Interest is paid twice each year. The interest rate paid does not change, but the amount of each interest payment varies because the rate is applied to a principal that is changing to keep up with inflation.

Investing in TIPS can provide diversification to a portfolio that also includes stocks, conventional bonds and other types of investments. The inflation protection feature of TIPS means the investment returns generally have low correlation to, or move in the opposite direction of, the returns of stocks and even some types of bonds.

You can read more about TIAA-CREF's Inflation-Linked Bond mutual fund.

 

Investing in Commercial Real Estate

Investing in commercial real estate, which includes office buildings and shopping malls, can also provide some inflation protection. However, the links between inflation and commercial real estate are more indirect than with TIPS. One such link is that most leases include a clause where a tenant's rent will increase each year to track either the increase in CPI or by some stipulated amount per year (often similar to or in excess of the CPI increase). Another link is with construction costs, as changes in the costs of new buildings have been moderately correlated with the inflation rate over the longer term. When inflation drives up "replacement costs,'' or the labor, materials and land costs associated with new construction, existing properties become more valuable. Savvy investors seek to acquire properties at less than replacement cost in the hope of benefiting when the difference between purchase cost and replacement cost shrinks.

Similar to TIPS, there are reasons to invest in real estate outside of simply seeking an inflation hedge. Real estate has historically delivered attractive risk-adjusted returns relative to those of stocks. Also, real estate provides added diversification to a typical stock/bond/cash portfolio, as real estate returns also have low correlation to the return of those investments.

You can invest in commercial real estate through the TIAA Real Estate Account1, which seeks to invest between 75% and 85% of its assets directly in real estate, such as office, industrial, retail and multifamily residential properties, or real estate-related securities. The Account may also hold other real estate or real estate-related investments through joint ventures, real estate partnerships or real estate investment trusts, and in conventional mortgage loans, participating mortgage loans and mortgage-backed securities.2

Learn more about the TIAA Real Estate Account.
 

Consider Risks Before Investing

Investing in the Inflation-Linked Bond fund involves a number of risks. Interest-rate increases may cause bond prices to decline, while falling interest rates may cause the account's income to decrease. The market values of inflation-indexed bonds can be affected by changes in investors' inflation expectations or changes in real rates of interest (a security's return above the inflation rate). For a detailed discussion of risk, consult the prospectus.

Investing in the TIAA Real Estate account involves a number of risks including real estate risks, valuation and appraisal risks, financial risk, market risk, income volatility risk and foreign investment risks. For a detailed discussion of risk, consult the prospectus.

1 This product is only available to eligible plan participants. Speak with a TIAA-CREF Consultant for more information.
2 Annuities are designed for retirement savings or for other long-term goals. They offer several payment options, including lifetime income. Payments from TIAA-CREF variable annuities are not guaranteed, and the payment amounts will rise or fall depending on investment returns.
3 This product is only available to eligible plan participants. Speak with a TIAA-CREF Consultant for more information.
4 Any guarantees under annuities issued by TIAA are subject to TIAA's claims-paying ability.

TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products. Annuity products are issued by Teachers Insurance and Association (TIAA), New York, NY.

© 2014 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017