According to the Efficient Market Hypothesis, the stocks are always fairly priced. Whatever information and news will be reflected by the stock price almost immediately. The current market capitalization of a given stock to the entire market is the best allocation percentage using all available news and information. This is the philosophy of the passive index investing.
Using the spirit of efficient market hypothesis, a person can invest to hedge inflation of his or her expenses by studying his or her expense budget. Using my budget as an example, my total expenses including property tax, but excluding income taxes and charity contribution is $3805 per month. I categorize expenses roughly into the followings (please refer to the table of my budget):
- Food: $360
- Car: $45 insurance + $40 maintanence = $85
- Housing: $1270 mortgage + $165 HOA + $225 property tax = $1660
- Communications: $16 local + $7 mobile + $20 long distance = $43
- Energy: $45 electricity+ $55 gas + $135 gasoline = $235
- Utilities: $25 water + $13 trash + $17 cable = $55
- Medicals: $127
- Travel: $220
- Consumer Staples/Clothing: $100 (baby) + $300 wife’s + $80 cash + $100 misc = $580
- Education: $440 preschool
Here is the summary table:
|
Expense |
Amount |
Percentage |
|---|---|---|
|
Food |
360 |
9.5% |
|
Car |
85 |
2.2% |
|
Housing |
1660 |
43.6% |
|
Communication |
43 |
1.1% |
|
Energy |
235 |
6.2% |
|
Utilities |
55 |
1.4% |
|
Medicals |
127 |
3.3% |
|
Travels |
220 |
5.8% |
|
Consumer Staples |
580 |
15.2% |
|
Education |
440 |
11.6% |
So if I want to hedge against the inflation of my expenses, I would invest in accordingly the related industries. Of course, you may also want to consider the input factors into a particular industry along with that industry. For example, to hedge against your costs of airline tickets, you definitely want to consider the cost of gasoline energy that goes into airplanes. And for calculating your investment for housing costs, you should take out the mortgage, but do include the rent. Mortgage itself is already your investment into your own housing.At last, you don’t need to over-hedge your expenses. If you assume an operating margin of 10% (or stock return of 10%), you only need to invest $43 * 12 months / 10% = $5160 in the communication industry. If the overall revenue of communication industry grows, most likely so will your expenses and your investment profits.
