5 Tips For Investing in TIPS: Treasury Inflation Protected Securities

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Jeff of PA @ Nov 09, 2009 07:43:12 AM

Tips

There are many advantages of investing in treasury inflation protected securities. TIPS are very good long-term investments. They are government guaranteed. TIPS are excellent ways to diversity your portfolio and to reduce total portfolio risk. They are good option to hedge increasing commodity and service prices and they minimize total portfolio volatility. TIPS require less active investment management and thus favor both beginners and experienced investors. They are useful when inflation rates are expected to move up and when economy slows down.

But there are also some drawbacks. Treasury inflation protected securities offer less interest on capital compared to bonds and other fixed income securities. They offer poor return when inflation rate stays stagnant and in deflation. Earnings from TIPS are taxed unless they are used in non-taxable and non-deferred accounts. Investors cannot actively control their investments, as they aren't traded as easily as equities. And also interest rates are adjusted according to CPI, a switch from CPI to Chain-weighted CPI can cause problems.

Money without intelligence is like a car without a road.

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Joe Duggins of TX @ Sep 03, 2009 05:38:26 AM

TIPS

I still don't get it. Normally a bonds price goes down as the

interest rate at the moment goes up. Are TIPS immune to this

fluctuatiion?

Robert Remick of AZ @ Aug 14, 2009 14:13:42 PM

gas, gas, and more gas

sure, TIPS are a "sure bet", just like target-date funds are (*were*). any article with the phrase sure bet, no brainer, lazy person's guide to, easy way to...always gives me the most profound case of gas. this one in particular had me go through an entire bottle of Beano. suckers.

homeBiscuitsAndGravy of CA @ Jul 13, 2009 22:55:20 PM

TIPS mutual fund / ETF is to apples as TIPS are to oranges

Be careful to avoid an apples-to-oranges error when comparing the total return of TIPS (directly held) with shares in a TIPS fund (or ETF). Both forms of investment will pay interest and payments that adjustments for inflation, but the total return on your initial investment can differ widely. It's easy to understand what will happen if you hold TIPS directly - you are guaranteed to receive all of your principal back if own TIPS directly (i.e. through US TreasuryDirect or a broker) AND you hold them to maturity. However, when you hold shares of a TIPS fund or ETF, can not predict what you will see in the end. While you hold your shares, you will have received some of your initial investment back in the form of captial gains, but most of your initial investment will be returned when you finally sell your shares and that amount will depend on the current share price when you sell. You could receive more or less than your initial investment.

Mike of VA @ Jul 07, 2009 14:59:17 PM

Treasuries are no place for your money

The TIPs program may sound good, but look at who is asking you to trust them. It is none other than the Federal Government. The government does something very convenient when it doesn't want you to know the truth. It lies. Let's look at Treasuries first. We keep reading news reports about how strong the demand is from foreigners. However, it only appears that way because the Treasury Department changed the way it defines "indirect" bidder. They did this on 1 June 2009 without giving it much fanfare...obviously to deceive the investor. If you want to know the real sentiment from foreign investors, look at the amount of money...the net flow...into or out of the country. In March, while the stock market was still reeling from the financial crisis, there was a net inflow of foreign capital of approximately $10-11 Billion. However, during the middle of that month, the Chinese began questioning our government about whether or not it will devalue the dollar. Since then, foreigners are pulling their money out of the US. In April, the net capital outflow was $53.5 Billion. Since then, the BRIC countries (Brazil, China, Russia and India) have all committed to buying IMF bonds...not US Treasuries. This month, they will purchase $70 Billion in IMF bonds. They are also calling for the US Dollar to be taken off as the world's reserve currency. According to the latest news, American investors are shying away from treasuries. According to a Bloomberg news report from 1 July 09, 30 yr treasuries lost 23 percent of their value since the beginning of the year.

You will no doubt point out that the TIPs treasuries are protected against inflation and loss of value. That is only true if government can be trusted to keep its books straight. But the government doesn't like to do this. It no longer reports the real Consumer Price Index. Instead, its reports the inflation figures EXCLUDING Energy and Food costs. Do you honestly believe that the government will be honest with you when they have been so dishonest about everything else that it has done? Look at Social Security. They told the baby boomers decades ago that if they paid into the Social Security system, then when they retire at 65, they will get a retirement check. But when the baby boomers were getting close to retirement age...the government raised the retirement age. After the government got your money the government refused to hold up its end of the bargain. Instead they moved the goal posts in the middle of the game.

Look at Medicare. They told the baby boomers that if they paid into the system, then when they reach 65 yrs of age, they would have adequate health care coverage. Now, as the baby boomers are just about to go into Medicare, we are told that costs are too high and that the government will have to reduce the costs by not paying for grandma's operation.

Bottom line is, don't trust the government with your money. See what it has been doing with the money it has already taken.

R. P. Reitz of FL @ Jul 03, 2009 22:44:16 PM

TIPS

It seems to me that TIPS, even though they don't keep up with real inflation in the family budget, would be a better place to keep emergency money and spare cash than money market funds. The higher yield and inflation protection would offset the cost of the ETF or fund. As far as just protection from inflation, there are far better places to put money, if the added risk is acceptable.

Jack Hart of FL @ Jun 02, 2009 09:50:11 AM

Questionable TIPS

TIPS in theory make sense, especially now with the attempt to reinflate the economy. However, the inflation adjustment is tied to the CPI which grossly underestimates systemic inflation. You do get inflation protection, it's just not all you should get. You can thank Clinton when they pegged TIPS to the CPI.

Randy of AZ @ May 02, 2009 08:06:34 AM