In creating the various kinds of mechanical strategies that we offer, there occasionally comes a time when an established one is superceded by a newer one. That may be the case with our Optional Inflation Hedges strategy. When we introduced OIH in January 2010, many readers were concerned (as were we) about the potential for renewed inflationary pressures in the U.S. brought about by the massive money-creation strategies the Federal Reserve was using to fight The Great Recession. We said at that time:
We're adding this set of options — to be used in conjunction with Upgrading — not because we're convinced inflation will necessarily be a problem this year, but because we want to put a portfolio mechanism in place that offers specific suggestions for those readers who want to take defensive steps sooner rather than later.
Who should consider using these optional recommendations? Just as the experts don't all agree on the seriousness of the threat, neither do all of our readers. These recommendations, which would be expected to hold up well even in a highly inflationary economy, are offered primarily for the benefit of those readers who wish to bolster their portfolios in this area. If the inflation concerns prove correct, the recommendations should do better than using Upgrading alone; if not, they may well do much worse.
Three years later, in January 2013, we introduced our Dynamic Asset Allocation strategy. In the editorial included in that issue, I pointed out that:
DAA incorporates many of the virtues of our other Premium Strategies, but does so in an extremely effective fashion. Here's what I mean....
As compared to OIH, [DAA provides] protection against inflation only when it's needed. The OIH recommendations were offered to provide investment vehicles that would do well in an inflationary environment. DAA does that as well, but does so in a more efficient way. Look at it this way. The OIH funds are like an insurance policy to protect you against the higher consumer prices expected to result from the federal government's massive deficit-spending policies. A debased U.S. dollar, it is anticipated, will eventually lead to higher inflation. The problem is one of timing—no one knows when this will happen. Whereas the OIH funds have you prepared at all times, the DAA recommendations are designed to kick in when needed, not years before.
That last sentence is an apt explanation of why OIH has faltered in recent years. The year it was introduced, 2011, it did quite well, returning 28.4% versus 17.8% for Upgrading (and 17.2% for the U.S. stock market). However, gold peaked that year and has generally been moving lower ever since. OIH always has a gold component, and it has been a consistent drag on performance. The strategy has lost money in three of the past four years, and is down 11.9% through July this year. (Gold isn't the only culprit... energy prices have also been falling in 2014-2015.)
OIH is a three-legged stool, made up of gold, real estate, and energy funds. The first two are also present in DAA (in ETF form), and have the virtue of being owned in DAA only when they are showing superior relative strength. The performance of the past few years has dramatically demonstrated how important an advantage this is, and raises the question if the time has come to retire OIH from our list of strategies.
The questions we ponder when considering this are: How many of our members are currently using the strategy, and how can we provide them with the data they need to continue on their own if they wish to? I'm not worried about that second part... we can adapt either the FPR or Tracker to provide the momentum rankings. But if you are currently using our OIH recommendations, it would help if you used the Comments section to let me know how you use them, whether you also use DAA (or would switch to it), and any other views you may have on the matter. Thanks for helping us get a better handle on how our members regard the OIH strategy.