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George Divel Investment Tips #6

A Tip About TIPS

If the threat of inflation is making you nervous and your investment timeline is one the short side – for example, if you are retired or nearing retirement. Here’s a tip:

Consider TIPS. (Treasury Inflation Protected Securities) Tips are treasury securities that are indexed for inflation. The mere prospect of facing inflation justifies a place for TIPS in the portfolio of retirees who are concerned about maintaining the purchasing power of their nest eggs.

TIPS perform well even in periods of rising inflation coupled with stagnant economic growth (known as stagflation), a condition that we may be experiencing right now.

If you buy a conventional Treasury, you receive the same interest payment semiannually for the life of the bond. With TIPS, the Treasury adjusts the principal value of a bond each month (with a two-month lag time) to keep pace with inflation. A higher principal value also lifts interest payments.

Of course you pay a little more but it could be worth it.

When experts compare Treasuries and TIPS, they study the break-even inflation rate. In mid-January, 10-year Treasuries yielded 3.8 percent, and 10-year TIPS yielded 1.6 percent. That implies a break-even inflation rate of 2.2 percentage points. If inflation over the next 10 years tops 2.2 percent annually, you’ll do better with TIPS than with the equivalent Treasuries.

So if Inflation is on your mind, ask your investment advisor to explain TIPS to you.

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March 11, 2008 - Posted by | Uncategorized

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