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THE OPEN KITCHEN restaurant has been a fixture in Charlotte, North Carolina for 75 years. The restaurant has an old-time feel, with memorabilia, including menus from years gone by, lining its walls. Those old menus provided David Enna, a financial journalist, with a laboratory for examining the effects of inflation.
What did Enna find? The oldest menu on display is from 1963. To state the obvious, today’s prices make those from the 1960s look quaint. Back then, spaghetti and meatballs cost just $1.10. Today, it’s $15.50. But, as Enna points out, that was more than 60 years ago, so increases are to be expected. Over the past 60 years, the Consumer Price Index (CPI) has averaged 3.8% per year. That isn’t unreasonable, especially since that average includes the 1970s, when inflation sometimes topped 10%.
What’s of more concern, though, is what consumers have experienced more recently. Since 2020, prices across the economy have risen 29%. And though those increases have slowed, the Fed is still struggling to ratchet inflation back to its preferred 2% level. This has given investors renewed interest in strategies to defend against inflation.
At first glance, this doesn’t seem like it should be such a difficult problem. The U.S. Treasury offers an investment specifically designed for this purpose: Treasury Inflation-Protected Securities (TIPS). These are bonds that are guaranteed by the federal government to increase in value with inflation. And though I hesitate to use the words “bond” and “exciting” in the same sentence, today many investors are finding the return on TIPS compelling. The 30-year TIPS is now paying close to 3% on top of inflation. If inflation averages 2.5%, for example, over the next 30 years, this bond will end up returning a total of 5.5% per year, and with minimal risk.
That sounds good in theory, but do these bonds make sense for your portfolio? It’s worth taking a closer look.
The first thing to note is that this seemingly attractive 3% yield only applies to 30-year TIPS. Yields on shorter-term bonds are lower. So unless your investment horizon happens to be exactly 30 years, these bonds may be of limited practical value.
Putting aside the yield question, though, a more fundamental challenge with individual TIPS—and individual bonds in general—is that they’re a cumbersome way to build a portfolio. Even if you didn’t mind the process of buying bonds one by one, which can be tedious, there’s the fact that it’s hard for most people to be able to forecast their cash flow needs each year into the future.
That’s a problem because choosing maturity dates is the foundation on which bond portfolios are built. Ideally, if you can align the maturity dates of the bonds in your portfolio with your future cash needs, then you can hold bonds to maturity, which is when the issuer would promise to pay you back in full. But that redemption value is guaranteed only at maturity. Buy a 20-year bond and sell it after just 10 years, and there are no guarantees. A bondholder could easily lose money selling an individual bond before maturity.
Given these challenges, would a TIPS fund be a better choice? To be sure, bond funds are much simpler to purchase and to manage, but they typically offer even less protection from losses than individual bonds. Most recently, shareholders in TIPS funds were disappointed by how they performed in 2022, when inflation spiked to 9%. Investors expected that to be the year when TIPS rewarded investors, but instead, diversified TIPS funds such as the Vanguard Inflation-Protected Securities Fund (ticker: VAIPX) lost nearly 12%.
Why did funds like this fare so poorly when inflation was running so high? The problem is that, at the end of the day, TIPS are still bonds. And though they receive a bump in value when inflation rises, a countervailing force is that they lose value when interest rates rise. In 2022, the Federal Reserve raised interest rates aggressively to fight inflation. The negative impact from those rate increases far outweighed the benefit TIPS received from inflation being higher.
That puts investors in a difficult position. If TIPS provide inflation protection in theory, but both individual TIPS and TIPS funds carry limitations, what other options are there?
The good news is that not all TIPS funds are the same. Some hold only short-term bonds, and they have historically held up much better than more broadly diversified TIPS funds because short-term bonds are more resilient when interest rates rise. Over the past five years, a fund like Vanguard’s Short-Term Inflation-Protected Securities ETF (ticker: VTIP) has outperformed a comparable fund (ticker: VGSH) holding standard short-term Treasury bonds every year, as well as this year to-date.
It’s important to note, though, that this is relative performance. In 2022, when the entire bond market was under pressure, even short-term TIPS funds like VTIP did still lose money. They just lost less than funds holding conventional bonds.
The bottom line: We should never become too wedded to any one strategy. No investment can promise reliable and complete protection against inflation in every market scenario.
That said, I do still recommend TIPS and would specifically recommend a short-term fund like VTIP. But I also suggest taking a diversified approach to inflation protection. Here are other steps to consider.
If you’re in your 60s and considering when to claim Social Security, that decision offers a powerful lever. Because Social Security benefits increase with inflation and also increase with each year you delay claiming, it’s maybe the most effective way to build additional inflation protection into your plan.
What else can you do? Fortunately, you may already own one of the most effective—and underappreciated—inflation-fighting instruments: stocks. While rising prices in recent years have been frustrating for consumers, the result has been that companies have been able to maintain their profit margins. That, in turn, has helped to support their stock prices through this period of inflation. To be sure, some companies have more of an ability to raise prices than others, but overall, stocks are, in my view, a good way to keep pace with inflation.
The one thing I wouldn’t do is to buy gold. Despite its reputation, various studies have confirmed that gold really isn’t a reliable inflation hedge. In a paper titled “The Golden Dilemma,” researchers wrote: “Over practical investment horizons, gold is an unreliable inflation hedge,” though they acknowledge that it may be more reliable over longer timeframes—“if the investment horizon is measured in centuries.”
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
Here is a balanced article on TIPs from Jonathan’s successor at the WSJ, the esteemed Jason Zweig. https://www.wsj.com/personal-finance/how-to-protect-your-nest-egg-when-inflation-is-ballooning-261df84b?st=xWMd1z&reflink=desktopwebshare_permalink
I located the study referenced at the end of the article. It’s by the National Bureau of Economic Research and it was published in January, 2013. Here is the performance of gold vs inflation from the time it was published to the present according to Gemini AI:
Nominal Gold Price Appreciation: +170.53%
Gold entered January 2013 trading at roughly $1,674.50 per ounce. Following the historic breakout past the $4,300 ceiling earlier this month, spot gold has pushed up to settle near $4,530.00 per ounce. [1, 2]
Cumulative U.S. CPI Inflation: +45.00%
In January 2013, the official U.S. Consumer Price Index stood at 230.28. Driven by post-pandemic stimulus waves and the 2026 energy shock, the macro CPI index has climbed to 333.91, representing a 45% aggregate increase in the baseline cost of living. [1, 2, 3]
Real (Inflation-Adjusted) Net Gain: +86.57%
Because gold’s price grew nearly four times faster than the official rate of inflation, a gold block didn’t just maintain its purchasing power—it expanded your real wealth by over 86% entirely above the inflation waterline.
I guess this is why they call economics the dismal science. With foreign central banks buying gold irrespective of price, at amounts never before seen, I want to skate to where the puck is going. Food for thought.
Thanks for another great article Adam. I think the lesson is inflation is the killer of savings, but compounding is the WINNER. The sooner you understand this the better. Retirement is not cheap, that is why you need to have a Roth or IRA early in your career, like starting at your first job. Save first and all will be fine in your later years.
No one who suggests building a TIPS ladder is recommending them as your only source of retirement income. Instead, you build an income floor to cover your absolutely essential expenses using TIPS + Social Security + pension(s) if applicable + dividends from stocks. The rest of your portfolio can be as close to 100% equities as you feel comfortable with.
Stefan Sharkansky has shown quite conclusively that this strategy leads to much higher spending in retirement than any combination of stocks with nominal bond funds,
You can play around with scenarios using his excellent tool here:
https://www.thebestthird.com/
And if interested you can read his widely-cited academic paper detailing this approach here;
https://www.tandfonline.com/doi/full/10.1080/0015198X.2025.2541567?src=most-read-last-year#d1e115
Sharkansky’s approach treats the TIPS ladder as your “paycheck” and skimming off money from stocks when they do well as your “bonus.” This has the advantage of being similar to the kind of income many of us had during our working years. And it’s important to remember that bonuses are never guaranteed – and neither are stock market returns. It’s the height of foolishness to believe that because stocks have outpaced inflation over long (~30 year) holding periods in the past they will continue to do so in the future. The future is under no obligation to resemble the past – and a typical retiree has a time horizon much shorter than 30 years that is constantly diminishing. Peace of mind from guaranteed income plus stocks for growth and legacy seems to be the best of many imperfect solutions.
Thanks, Adam. This is very good information for me at age 70 because I am struggling with whether I want a TIPS ladder as I age and want more simplicity. I feel that the current general financial advice narrative is perhaps too much in favor of a TIPS ladder.
Thanks Adam for recognizing a Charlotte landmark, The Open Kitchen. I started going there in the 60s and still go there occasionally. When I first came to Charlotte, all the Italian restaurants were run by Greeks, including the Open Kitchen. It still has the 60s feel to me.
I am a strong believer in TIPs and buy mine on the secondary market, targeting intermediates for the reason you cited, although I have no intention of selling before maturity. Currently, 25% of my AA is TIPS.
I echo the applause for David Enna’s website and blog. I’m leery of TIPS (solves the inflation problem, but vulnerable to other long bond concerns), but Enna’s work also discusses Series I bonds brilliantly.
I’m still working in my 60s, and want to gradually increase my bond holdings in my various IRAs. So, when I earn investable cash, I buy stocks in my taxable account with that money and shift a similar portion of my IRAs from stock funds to bonds. Just discovered Schwab’s bond ladder tool. Pretty easy to set up and buy a five-year ladder of Treasury securities. No similar tool for TIPS yet.
That spaghetti dinner went up quite a bit faster than inflation – should’ve only cost $7-8!
We’ve had a rolling five year bond ladder in place for three years now. Initially we focused on buying US Treasuries/STRIPS on the secondary market through our brokerage. We did mix these with MYGAs (multi-year guaranteed annuities), which are a CD-like instrument sold by insurance companies.
We have slowly migrated away from the Treasuries and now four of the five remaining bond ladder rungs are MYGAs, averaging around 5.5% fixed interest, with no additional costs. Current rates on 5-year MYGAs are running at 6-6.3% fixed.
These can be bought directly from A-rated insurance companies or through brokers like stantheannuityman.com where I’ve purchased all of ours.
The reason I like MYGAs over Treasuries is there’s no annual OID (original issue discount) tax due to the IRS every year, and there’s no interest rate risk.
Before you dig in your heels and scoff – “I will never buy an annuity” – I’d encourage you to check these out. They’re something very different from a traditional annuity. What you see is what you get.
And if you are interested in setting up a TIPS ladder, there’s a dead easy way to do that at tipsladder.com.
Thanks for offering other suggestions. Sounds like you have a well throughout solution for your income floor.
BTW, I’d say the spaghetti price should be @$11.50-12.00 ;).
($1.10 x 1.038^63).
Great discussion. I’m struggling to figure out where and if individual TIPS or TIPS funds fit in to my retirement. I’ll be 70 soon and I have an extensive short CD latter maturing this next year. Unfortunately at lower renewal rates.
the spaghetti at 15+ dollars today is way too expensive, has no valid inflation relationship to the 1963 version
I agree with you John. However, their prices are competitive with similar restaurants in that area. Inflation is not the only factor restaurants must consider to set their prices.
My portfolio has been invested in bond OEFs since I retired in 2018.
So how did I make 11.7% annually using only bonds?
Examples:
2023-4: For the first time in my life I noticed that CLO are doing great with very low SD=volatility. I loaded. See a chart https://schrts.co/wkqVVmup
2023-6: EGRIX. See the chart https://schrts.co/ZKDQzGCb
We were burned by TIPS funds.
Also, to reiterate my comment to last week’s two articles about the $40T debt, can we trust the current gov’t to set a fair inflation index on the bonds or will they discount it?
I’m not so sure anymore, now that Treasury is barring some journalists from the G20 finance meeting. WTF?
Thanks Adam for a useful article. Your examples closely match our plan – stocks (index funds), short-term bonds (including VTIP), and delaying my SS. We did turn on my wife’s SS at 65. And we are lucky to have a decent traditional pension. I like the diversity of investments, as well as the diversity of income sources.
Rick, can you elaborate on your mix of short-term bonds (e.g., 50/50 U.S. treasury and TIPS) or some other mix?
I agree with your comment, Rob. I had a different reason for creating my own TIPs ladder, as I wrote about two years ago, but I especially like that the ladder is more of a set-it-and-forget-it solution (like a pension) vs. a TIPS bond fund that I might be tempted to too-easily jettison if it heads south for a stretch. Now I just need to complete my original plan and put more of my sideline cash into the stock market for use after my TIPS ladder has paid off over the next 18 years. I have a belated dollar-cost-averaging investment strategy for that.
Great discussion of this topic, Adam, and a good illustration of the truth that there is no free lunch. Jonathan argued many times that the safest hedge against inflation was the risky environment of stocks.
Thanks, Adam
Excellent, clear article