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In the Intelligent Investor, Benjamin Graham recommends diversifying one's portfolio by hedging against inflation. In the book, he mentions REITs/real estate investments and investing in gold.

I read the book a couple years ago and it has recently come to mind when speaking with friends about I Bonds. Doing some research, I understand that I Bonds and TIPS are inflation-protected -- I Bonds because their fixed rate changes with inflation.

Most debates I see are usually I Bonds vs. TIPs, but I'm not sure how REITs compare. Looking at the numbers, I saw that currently (October 20th 2022) I Bonds have an interest rate of 9.62% which seems like a pretty good deal. REITs, on the other hand, vary widely. However, I'd like to have a better understanding of how the trade-offs compare to each other in terms of risks. Also, how do those trade-offs compare when already in a time of inflation?

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The REITs don't actually vary all that widely, overall they show around 2-4% average return over the last 5 years quite consistently (and that's including the significant drop in the last 12 months).

When you consider a long term fixed income investment, you need to consider... long term. I-Bonds provide high rates when the inflation is high, but they provide very low rates when the inflation is low. You're not locked into the 9.6% rate for the lifetime of the bond, only for the next 6 months.

REITs by their nature provide more consistent and predictable returns, which may be lower than IBonds during the initial inflation bursts but will inevitably catch up as rents and property values rise. But they will provide you the stable 2-5% dividend over the invested value, even if the fund shares values go up and down.

So if you want to do a short term hedge against inflation - go with IBonds (be aware of the redemption rules and holding periods though). If you're interested in a longer term hedge and fixed income - REITs would probably be more consistent in the long term.

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  • For what it's worth, my advisor considered REIT a reasonable choice for the "income" porting of my investment mixture I should also note that REITs often take longer to produce their yearly tax statement than other investments as they wait for some transactions to finalize; not a big deal but something to not be surprised by.
    – keshlam
    Commented Jan 5, 2023 at 15:57
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REITs go up, REITs go down. Ditto TIPS.

I Bonds always go up at approximately the rate of inflation.

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