Are Index funds a hedge against inflation?

[pecunia]

There seems to be more and more people out there saying the financial sky is falling.  They have lots of good reasons, facts and figures.  Some of them go into their pitch to sell gold and silver.  The spiel goes on that there is only so much gold and silver and it will hold it;'s value.

So I got to think.  You can own a little bit of one thing, gold.  Or - You can own a little bit of everything, index funds.

If the economy took went bad for a while, I expect we'd have big inflation for a while and then following that a lot of people would be out of work.  So, I'd expect the index funds to go up with the inflation, then crash with the economy, but always hold their relative value in comparison with everything else.  They would then rise as the economy got better.  It seems like they would be as good as gold.

Is my thinking incomplete?

[tralfamadorian]

I say, no, index funds are not a good inflation hedge. Are they a great investment? Definitely.

IMO, the best inflation hedges are leveraged real estate and TIPS. 

[MustacheAndaHalf]

pecunia - I don't think you're looking for an inflation hedge, but a way to equal or exceed inflation - which is something different.  Something that tracks inflation reliably would be a better hedge, while the broad stock market tends to grow much faster than inflation.

There's many types of index funds - including bond index funds.  But total stock market index funds tend to track the stock market performance quite well.

[Interest Compound]

You tell me:

[pecunia]

Good information.

Good point about gold.  Other than gold plating contacts so they resist corrosion, I can't think of a single use where I've seen gold used.  Silver is the best electrically conductive metal and is used frequently.  I see that investing in future productive activities is better than the static world of gold.  History has taught me that silver was once worth more than gold.  Then discoveries like the Comstock load changed that.

the best inflation hedges are leveraged real estate

Not sure what "leveraged" real estate is, but home prices can certainly go up and down with the economy.  All those homes, they've been bulldozing and burning down in Detroit don't look to be too good of an investment.

http://business.financialpost.com/real-estate/toronto-luxury-home-sales-tank-from-last-years-record-pace

Sometimes it is overpriced when you buy.

These answers have given me more faith in index funds.

[tralfamadorian]

Not sure what "leveraged" real estate is, but home prices can certainly go up and down with the economy.  All those homes, they've been bulldozing and burning down in Detroit don't look to be too good of an investment.

Leveraged real estate. Yes, real estate prices can fluctuate, thus why a fixed rate mortgage that does not adjust with inflation is such a gift to those looking for an inflation hedge.

Detroit is actually the darling of the moment with real estate investors. This link is from a company looking to procure housing for investors so obviously biased but that their data on appreciation and cash flow is still useful in the context we're talking about.

But hey, I'm not trying to talk you into anything. I think sticking with index investing is a good decision. May we all wish we had more investments that were geared towards protection from inflation if there's a trade war that leads to 10%+ inflation rates? Sure. But precious metals are not going to get us there despite what the scummy advertisers say. 

[pecunia]

tralfamadorian:

No I won't invest in Detroit unless I can be unstuck in time and do it many years ago.  In addition the link said that the headquarters of Whirlpool was there whereas they are in Benton Harbor.  When you see mistakes are made, you have to wonder.

This site and others are certainly selling me on the goodness of Index Funds.