Would You Buy TIPS Now?

chisueJune 9, 2009

Inflation looking any closer through your windshield? Can you see how far it is down the road? Time to consider buying TIPS?

All other investment ideas for idle cash are welcome. LOL We're Seniors, retired, comfortable, with another 20 years to go according to the tables.

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fandlil

There are 2 components to the earnings on TIPS: the first is the rate of interest that's fixed at the time it was issued; and the second is the inflation rate that is added periodically (I think, once or twice a year) based on the published inflation rate.

Prevailing rates for each of the 2 components are very, very low right now. So TIPS are not paying very well. When interest rates return to "normal" in some unknown time in the future, they may be a reasonably good investment. Then it might be a good idea to consider a TIPS mutual fund but for a tax-deferred account, because they are not tax efficient. But I do not think we are anywhere near that right now.

You might consider incurring just a little more risk than with a Treasury-backed instrument -- something like an index mutual fund of short term bonds. (Stay away from fund that include long-term bonds because they will lose a lot of value when interest rates go up.) Their yield will be better than TIPS but they will fluctuate some. If you plan to hold on to them for a few years, you will likely come out ahead with such an investment.

    Bookmark   June 9, 2009 at 4:37PM
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chisue

Thanks, haus_proud. The mutual fund of short term bonds sounds good to me.

I'm seeing inflation at the grocery store, but aren't mortgage rates rising too? I know the official "Inflation" is a different animal -- one that seems to ignore Seniors on fixed incomes.

    Bookmark   June 10, 2009 at 1:14PM
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fandlil

you are right, chisue. Seniors are vulnerable to the cost of health care, which rises faster than the official inflation rate. And of course they are vulnerable to possible catastrophic health costs. It comes with the territory.

But the good news is that if you take good care of yourself and follow the guidelines for health maintenance to promote good cardiovascular fitness and reduced risk of cancer, even if you haven't done it for a long time, you can definitely benefit even if you start late.

    Bookmark   June 11, 2009 at 7:03PM
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behaviorkelton

Some are predicting rampant inflation as a possibility in the upcoming years. If that's the case, I'm wondering if TIPS will easily keep up with that kind of inflation.

Sometimes, t's not a matter of making money so much as it is keeping up with inflation. If that occurs, you will be doing well to preserve capital!

Right?
BK

    Bookmark   June 15, 2009 at 9:33AM
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fandlil

It's hard to deal with these questions in isolation. You have to know the affected person's financial situation, what their objectives are, how and when they plan to use their money, etc.

Generally speaking, unless you have a long time horizon until you reach retirement age, say, at least 10 years, I think you should think in terms of "wealth preservation" rather than "wealth accumulation." That means don't expect any large increase in your nest egg. Try to hold on to what you have and to get the best use out of it.

To return to the original question in this thread, I still think that buying I bonds right now is probably not a good idea. We bought some about 6 years ago, when their base rate was 2% plus the inflation part that is adjusted every 6 months. For quite a while, it paid a reasonable interest. Now the inflation part pays zero, but we still get 2% because the base part does not change. So we're keeping it because the interest will get adjusted upwards when inflation reappears. I hope it doesn't spike too high. Back in the early 1980s (or late 70s), to fight inflation that got out of control, the Fed raised interest rates sky high, so investing in CDs was a no-brainer. They paid better than any stocks. There were 20 year CDs that paid over 10%. Only time will tell if that happens again. I hope not.

    Bookmark   June 16, 2009 at 10:05PM
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dreamgarden

behaviorkelton-"Some are predicting rampant inflation as a possibility in the upcoming years. If that's the case, I'm wondering if TIPS will easily keep up with that kind of inflation."

Kiplingers published an article about this subject two days ago (June 15th,). It is titled 'Don't Count on TIPS'.

A link that might be useful.

www.kiplinger.com/columns/value/archive/2009/va0615.htm

    Bookmark   June 17, 2009 at 12:04PM
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chisue

Just to follow up, we did buy a TIPS mutual fund. I really couldn't find any other 'wealth preservation' hole for some cash sitting in a brokerage money market account paying zilch.

In three months I'll have the same problem: Where to put maturing CD's? Do I see a slight creep upwards in CD APY's? (Still really low rates, but maybe a teensy movement?)

Hmmm...we are now down to two municipal bonds. Maybe time to look at those again? I think we have another 20 years left in us. LOL I've been leary of muni's during this stressful time for cities and states.

    Bookmark   June 23, 2009 at 1:44PM
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