There are some government backed investment vehicles that can help protect a portfolio in these uncertain times. These vehicles are called Treasury Inflation-Protected Securities or TIPS. This article will cover why this might be something to look at and just exactly what these particular asset classes are all about.
Just by looking at the history of inflation, an investor can easily see the big impact it can have on returns. One study in particular analyzed how inflation has impacted stock returns over the past hundred-plus years. The study found that when adjusted for inflation, stock returns are today overstated by a factor of 10, based on the Dow Jones Industrial Average. This means that for every dollar earned in the stock market, it is only yielding the investor an additional 10 cents worth of increased earning power since 1900.
However, no matter how high inflation might end up going the investor can take some proactive measures that will prevent their savings, especially their retirement assets, from withering away.
One terrific way to inflation-proof assets is to use U.S. government backed and sponsored securities that guarantee that every dollar invested will outdistance inflation, no matter what. This investment is a special type bond, as was mentioned earlier, and are commonly referred to as TIPS. Basically, these instruments are issued by the Treasury Department and they guarantee that your investment will increase in value whenever the Consumer Price Index or CPI increases.
In addition, TIPS pay the investor interest every six months, just like typical bonds; however, these payments are adjusted for inflation as it rises and falls—so essentially you get a nice bit of income on the side. The investor can purchase TIPS with maturity periods ranging from one to 30 years. The par value of each TIPS is $1,000. When these investment vehicles mature, the U.S. government pays an adjusted principal or the original principal, whichever is greater.
Other beneficial attributes of TIPS include:
- An asset guaranteed to preserve purchasing real buying power over time,
- Low volatility with good returns,
- Higher correlation with inflation than can be received from real estate and even commodities over the long-term,
- Protection against the risk of deflation, because the investor is guaranteed to receive at least the par value of the bonds, or the par value adjusted for the CPI, and
- TIPS are exempt from state and local taxes, although dividends are subject to federal income tax. The investor should consider TIPS because protecting one's wealth or portfolio is just as important as building new wealth.
Happy Trading.
Jeff Neal
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
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