17 Inflation hedging is a provide the best probability of beating inflation. multidimensional problem Investors with a shorter investment horizon may There is no one-size-fits-all solution to inflation prefer to maintain their purchasing power by hedging—it depends on an investor’s objectives, matching inflation. To this end, traditional investment horizon, and risk tolerance. inflation hedges such as TIPS and commodities Figure II-16a breaks down the inflation-hedging are useful. These securities, however, can introduce properties of major asset classes across these a real-return drag on the portfolio if they are held three dimensions. For investors looking to for extended periods. Commodities can also generate a positive real return over a very long introduce high volatility, which could be incongruent horizon, equities—especially nonlocal ones— with a shorter investment horizon. FIGURE II-16 Commodities are not an investor’s only tool to fight inflation a. There is no one-size-fits-all solution to inflation hedging  Global ex-U.S. equities  ) s  r a  ye REITs t  x U.S. equity e n n ( r  u t e U.S. bond Commodities l r Global ex-U.S. bonds a e  R Short-term TIPS
TIPS  ­

  Inflation beta Notes: The chart compares real (inflation-adjusted) annualized return projections over the next 10 years to the inflation beta for various asset classes. Inflation beta is the slope coefficient of a linear regression of the year 30 return forecast on a constant and the year 30 inflation forecast. The size of each bubble represents the forecasted median annualized volatility over the next 10 years. See the Appendix section titled “Indexes for VCMM simulations” for further details on asset classes. Source: Vanguard calculations, as of September 30, 2022. IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from VCMM are derived from 10,000 simulations for each modeled asset class. Simulations as of September 30, 2022. Results from the model may vary with each use and over time. 17 As long as local and nonlocal inflation correlation is less than 1, nonlocal equities will serve as an effective inflation hedge. This is because higher local inflation should cause the local currency to depreciate, which would raise nonlocal equity returns, all else equal (Rodel, 2014). 54