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
I do not own any TIPS, but I can see where they have their place. I should probably look at investing less in stocks and more into more secure investments since we are about 15 years from retirement. I guess I feel so young that I don’t really think about more conservative investments. However, I need to.
Thanks for the info!
Everyday Tips – good point on being close to retirement. That’s the thing, as we get older, we want to bring in an element of safety into our portfolios. This is part of my thinking here.
I don’t know anything about TIPS either. I’ve only been concentrating on growth so far. I am planning to quit the rat race pretty soon, but the goal is to not draw on the nest egg for another 20-25 years. TIPS doesn’t have a place in my plan, it sounds too conservative. Maybe when I’m 64.
I’ve been wondering about TIPS, but haven’t bought any yet. I’d love to see a Tips vs savings bond vs CD comparison of pros and cons but have been too lazy to do it myself.
I too feel like I have too much in stocks and need to do something a little less volatile but haven’t decided on what yet.
I have not paid much attention to TIPS. Read about them a little but as it sounded too conservative I thought I will first figure out the mutual funds/ETFs and then come back to it. This is for long term? I mean are these good for short term as well (like saving the down payment money). No I am not going to quote one you ;P I will go read about them more, but if you say they are for long term anyways, I will postpone reading about them 🙂
I’m just beginning to research alternatives for investment vehicles. I’ve never heard about TIPS, so this information is helpful in deciding where I might want to place some of my money.
That’s interesting, I didn’t know that they had a deflation floor. I do think it’s unfair that we are taxed on inflation, which is a tax in and of itself.
Instead of TIPS I am going with precious metals. Problem is they are more correlated due to flows of easy money from the fed, but something’s gotta be said for a shiny maple leaf. I aim for 5%-10% of my investments in here.
Think of TIPS for IRA accounts so you don’t get burned by the taxman. The real yield on 5-yr TIPS has been negative for more than a month now, and the 10 year TIPS are approaching zero. They are not attractively priced at the moment. As Kevin says, precious metals are a more volatile alternative, and if you believe in world scarcity maybe a more profitable alternative.