Buy Treasury Inflation-Protected Securities (TIPS)

by Brian Johnson on August 4, 2009

wb_chartGiven the recent economic upheavals, as well as the unprecedented manner by which the government is handling these dilemmas, a lot of people are worried about what inflation will do to our savings and investments.  One option that investors have to safeguard against inflation is to put money into Treasure Inflation-Protected Securities or TIPS.

Basically, the principal investment for TIPS is adjusted by the Consumer Price Index (measures inflation) + A Fixed Yield that is unique for each TIPS (recently it has been around 2%).  This means that your investment primarily rises or falls along with inflation.   To use a simplified example, if you put in $100 in a TIPS that has a 2% ‘Fixed Yield’ and the nation goes through 5% of inflation in a year, then the value of the TIPS will raise from $100 to $105 over that year (as a result of the 5% inflation)+ 2% of $105 to a total value of  $107.1. 

Based on the current economic conditions, if you buy TIPS you should invest for the long term, given that the recession creates a downward pressure on inflation.  However, in the long term, all this money being printed by the government to deal with the recession is likely to create inflation, and it is in that inflated economy when TIPS prove most valuable.

TIPS can be purchased from the US Treasury, or the Secondary Market, or as part of a Mutual Fund (which can be purchased from companies like Vanguard, PIMCO, and Fidelity).  When purchased as part of a mutual fund, investors receive the advantages of professional managers who are constantly looking for opportunities to increase the value of the fund.  They also have the ability to buy and sell shares of the fund immediately and to reinvest income into the fund.

Discussion

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