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Balanced Asset Allocation: How to Profit in Any Economic Climate by Bill Lee, Alex Shahidi

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Chapter 6Why TIPS Are Critical to Maintaining Balance (Despite Their Low Yield)

In the previous two chapters I recommended that you view equities and Treasuries through a balanced portfolio framework as opposed to seeing them through the conventional lens and discussed how to do that. You may have noticed that equities and Treasuries tend to complement each other well when considered within the context of a balanced portfolio. Equities outperform when economic growth is increasing, and Treasuries do well in the opposite environment of decreasing growth. The reason you can't end there and construct a balanced portfolio using just these two asset classes is because there are two key economic inputs into asset class price fluctuations. Stocks and Treasuries successfully cover you for different growth outcomes, but what about unexpected shifts in inflation? Both equities and Treasuries are biased to underperform during rising inflation (and outperform during falling inflation). In order to adequately build a truly balanced portfolio, you need to include additional asset classes in your tool kit that are biased to outperform during rising inflationary climates. In this chapter I discuss the benefits of incorporating TIPS into a balanced portfolio. TIPS are the first of two major asset classes offering inflation protection that will be analyzed (commodities will be covered in the next chapter).

Most investors do not fully appreciate the benefits of TIPS. In fact, this asset class ...

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