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Treasury Inflation Protected Securities

Last week we promised you a single, and here it is.  This investment is a back-up for the fixed-income section of your portfolio, the portion that is traditionally exists to reduce volitility, which you need more and more of the closer you get to retirement.   When you’re 28, the 2008 market crash was a blip on the radar, but when you’re 64, it’s devestating.   

But that reduction in volitility comes at a price.   Traditionally, your fixed-income securities carry a significant portion of inflation risk in that if you receive a 2% return over the course of a year, but that year brought with it 3% inflation, your investment actually went down in value.

But not with Treasury Inflation Protected Securities, or TIPS.

TIPS are a type of fixed-income investment that carry two types of income.  The first, the normal interest rate you expect to find with any traditional bond.  The second, and key type, is that the principal value of the bond increases with inflation based on the consumer price index.

For example, let’s say you bought a $10,000 bond with a 2% interest rate.   Now, for the sake of easy math, let’s say that inflation had a early-80s kind of spike and came in at 10%.   The value of your TIPS increases from $10,000 to $11,000 to compensate for the loss of dollar value (something you wouldn’t get with a traditional security).  Then, you get your interest rate paid out on that amount.  In this case, that would be $22, instead of the $20 you would have gotten off of the $10,000 value.

They can be purchased directly from the Treasury, a broker, or through a mutual fund or ETF.

It doesn’t offer much from the perspective portfolio growth, but it is the only investment gauranteed by the US gov’t to provide you with a post-inflation positive return.  And for those of us who need to be dialling down the risk in their portfolios, that’s a great place to start.

2 Comments

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