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I have saved some money that I would like to use in the next 1-3 years to start a company. In the meantime I would like to make sure that inflation does not eat up into my accumulated capital. I am fine with any configuration that just tracks inflation i.e. perfectly fine with 0% real returns if I can really lower my risk (not more than 5-10% real capital loss).

Given the current environment however I am a bit at a loss at how to achieve that. Two main risks I worry about are inflation and rising rates.

Cash - will get crushed by inflation Bonds - will get crushed by inflation && rising rates Stocks - might survive inflation but will get crushed by rising rates

Something like VTIP seems ideal, short term bonds that are inflation-protected. Avg. maturity is 2.7 years which will incur some capital loss under rising rates, but losses would be limited. A couple of questions:

  1. Does this actually satisfy my constraint i.e. 0% real return in next 0-3 years with very minimal risk or am I missing something?

  2. What are good EUR/GBP/JPY equivalents? I want some more currency exposure. IBCI is going in that direction, but the avg. weighted maturity is almost 9 years which I'm not comfortable with (significant capital loss for e.g. a 2% yield increase).

  3. I have around 15% of my money in gold. Should I raise or lower this given the objective above?

  4. Is there any way to get exposure to commodities in a simple way (e.g. not get USO crushed as so many retail investors got last year when they wanted to bet on oil).

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    Inflation isn't going to "crush" your savings in 1-3 years. If you need money short term, put it in the bank and don't worry about it. If inflation goes up then banks should start paying interest again. – gaefan May 2 at 20:19
  • Yeah, get short-term inflation-protected bond ETF's or open-end funds. For a long-term TIP bond fund consider U.S. ticker WIW which uses both leverage and hedging. However, the closed-end-fund does not trade at net-asset-value but trades at stock market valuation. – S Spring May 2 at 20:20
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    The odds of suffering a 5-10% inflation-adjusted loss in a couple of years, even with the money just sitting in a savings account, seems quite low. The fed has been trying desperately to achieve sustained 2% annual inflation for years and has pretty consistently failed to achieve even that level of inflation. – Daniel May 2 at 22:35
  • You can't really want "exposure to commodities" at the same time as "pure inflation-proof preservation of capital"; there is a lot of different levels of risk associated with your plans. How well-thought out is your current strategy? Is it something you have already put in place? – Grade 'Eh' Bacon May 3 at 15:45
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You seem to have a lot of conflicting ideas of what risks you are concerned about. What risks matter most to you should be driven primarily to your financial goals, which in your case is the startup costs for your future company. But what do you know for sure about those costs? Also, what level of $ are we talking about? If you plan on saving $20k over a few years to start a small business, losing a hypothetical 1-2% / year might just mean $1000 lost over 3 years, or $0.80 a day.

(1) Do you know how much $ you will need? How have you defined those costs? Is it rental space for an office or retail front, or salary costs for employees, or perhaps simply living expenses while you get a consulting business off the ground? Signing a 3 year lease to lock in your living expenses might be the best short-term hedge against inflation you can get. Buying a house can do a similar thing, but only over a longer term (typically 5+ years), because closing costs make mobility very expensive, so there is a risk associated with that.

(2) Related to #1, what currency will those costs be in? You mention covering yourself in multiple currencies, but if you are saving for a specific cash outlay in one jurisdiction, then saving money in multiple currencies is simply adding currency risk to the equation.

Why are you trying to get invested in commodities? Commodity trading is not at all related to a low-risk investment plan.

Gold also is not really a proven 'hedge' against inflation or anything else; there is an element (pun) of speculation there that you might consider as being 'prudently risk-averse', but isn't necessarily anything of the sort.

Inflation adjusted bonds could be a fine way for you to get a more guaranteed real-value return, as long as you know the timing of maturity (you mention starting a business in 1-3 years, and that doesn't quite line up with getting a 2 year bond, for example).

In short - determine what exactly you are most concerned with - you can't address every financial opportunity and safeguard at once.

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  • Thanks Grade Bacon. Replying to your question above, my strategy currently is mostly VTIP (inflation protected, 2.5 yr avg. maturity). Some other currencies like CHF and EUR in cash because I couldn't find short term inflation protected bond instruments for those. Gold is a small percentage that is sort of a legacy holding which I don't mind selling. Commodities I have never touched but had just heard it was a good inflation hedge as well. So it's not as contradictory as it sounds, those were mostly just probing questions. – David Karam May 3 at 18:56
  • I'd like to start a tech company for which I'd like to defer raising money to retain equity for myself. I don't mind plugging my entire savings in it (minus rent and food for ~3 years) so my main concern is retaining enough purchasing power for myself and the startup to have a longer runway. The reason I seek currency diversification is because I worry about USD devaluation given the current monetary and fiscal policies. Of the major currencies, US has the most aggressive stance and it's a real concern for me and not sure there are good ways to hedge it other than holding different currencies. – David Karam May 3 at 19:03
  • If I can find a EUR equivalent to VTIP, I'd probably be done. I'd then hold 70/30 or something like that in VTIP and its EUR equivalent. As mentioned above though, IBCI has way longer maturities and I feel I could be left holding the bag. EUR cash could be an option given I'm less worried about inflation in EU vs. the US. In all cases, thanks for sharing your thoughts. If I were in a position to lock in rates via a lease or a house mortgage I agree that would have been the best hedge. I cannot though. So I'm just seeking some safety from any potential storms. – David Karam May 3 at 19:06
  • Do you live in the US? Are your expenditures in USD? If so, the USD going up or down (short of hyperinflation) is of little importance to you. You are trying to hedge against your own personal living expenses - the success / failure of the EUR vs the USD has little bearing on your rent in Ohio, or wherever. – Grade 'Eh' Bacon May 3 at 19:40

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