Market participants have historically invested in commodity futures - based
indices for their inflation protection and diversification benefits, given their low correlation to stocks and bonds.
For this reason though the policy holder may need to pay a higher premium
for inflation protection in their insurance contract, they may consider it wise to do so because in the event of a claim they will want to ensure their standard of care is not compromised in the long - term.
The companies that own hard assets like pipeline master limited partnerships (MLPs) and real estate investment trusts (REITs) are a good
addition for inflation protection though they can pay off in other ways as well.
While inflation - protected bonds sound like they are
great for inflation protection (after all it is in the name), they may not be the best instruments for long / medium term protection.
Given equities are better than
futures for inflation protection, after the roll yield is included, and that small - caps and mid-caps have done best with accelerating growth, the falling dollar and rising inflation, perhaps the strategy might be to underweight large caps.
It is natural to guess commodities can be
used for inflation protection given the same food and energy that are in the Consumer Price Index (CPI) are in the commodity indices.
Browne's Permanent Portfolio was also based on the principle that you should hold asset classes that would thrive during four economic scenarios: stocks for prosperity, cash for recessions,
gold for inflation protection, and long - term bonds for deflation.
There is overwhelming support for small caps followed closely by mid-caps, and
for inflation protection, energy seems to be most sensitive.
One might conclude that
for inflation protection, crude oil is the best bet.