When many of us think about a “safe” place for our investments, we think of cash. While stocks, bonds, real estate, metals, and other investment vehicles tend to exhibit volatility, keeping money in cash tends to evoke thoughts of conservatism and protection versus losses, at the expense of falling behind inflation.
That latter part sure is a boring aspect of cash, right? No risk, no reward. If there is inflation, your cash holdings lose purchasing power. Remember, a dollar today is worth more than a dollar tomorrow, in normal times of rising prices. One might be thinking about high yield safe investments as an option. With myself lately, I have been giving some thought to this, and have considered the limited use of TIPS in my portfolio.
TIPS are “Treasury Inflation Protected Securities”. These instruments are principal-adjusted, based on the changes in the Consumer Price Index. If there is an increase in the index, thus reflecting inflation, the principal increases. If there is a decrease in the index, thus reflecting deflation, the principal decreases. Interest is paid at a fixed percentage rate, every six months.
Here are some reasons why TIPS are a good place for funds you simply don’t want to lose, and don’t want to vary in their purchasing power:
- Hedge vs Inflation: If the cost of living goes up, they will increase in value. Thus, the risk is minimized that your savings won’t hold purchasing power
- Safe: The government pledges to protect TIPS principal by repaying them at maturity, so default risk is very low
- Non-Correlated: Tips aren’t highly correlated with stocks, bonds, or real estate
- Deflation floor: This is interesting, as the bonds are repaid based on either the adjusted principal or the original principal, whichever is greater.
For balance, there are a few issues that I see with TIPS:
- Not Growth Investments: As I alluded to, TIPS provide a measure of protection vs purchasing power erosion, but they’re not investment growth vehicle; in other words, don’t expect a high rate of return
- Tax issues: There could be tax issues with TIPS, with the aforementioned adjustments. These inflation-driven increases are considered taxable, even if not realized until the bond reaches maturity or is sold.
As I look at further at the features of TIPS, I might consider purchasing some in limited quantities, perhaps through a fund. I’m not close to retirement (unfortunately!), but when that time gets closer, and it’s time to review investment options, I think I might be more likely to invest in TIPS.
What about you? Have you considered purchasing TIPS? Or, have you actually done so