Treasury Inflation Protected Securities to Hedge against Inflation
The government has created achievement in spending which include $108 trillion in unfunded liabilities for social security, Medicare and new universal healthcare benefits. This has put the country at jeopardy. With the rates of interest close to zero, the Federal Reserve are not able to take one conservative step - reducing short-term rates - to restore the weakened economy.
In this hard economic slump or double-dip recession, politicians - with the reluctant guidance of the Fed - could decide to spend even more massively to try to jump-start the economy. The end result could be stagflation: slow growth along with higher inflation.
Inflation is the curse to the debt holders. But it is a blessing to the debtors - and Uncle Sam is the biggest of them - as they can pay the fixed obligations with increasingly worthless currency.
Are you scared of rising inflation? And would like to make sure better returns over inflation from your savings at small amount of risk? In that case Treasury Inflation Protected Securities (TIPS) could be the most excellent investment opportunity for everyone.
Treasury Inflation Protected Securities (TIPS) are often known as Treasury Inflation Index Securities and Real Return Bonds (RRB). TIPS are 'safest of the safe'. There is small amount of downside risk on investment. TIPS are long-term fixed income investments protected against fluctuations in the rate of inflation.
But why employ TIPS as your protect against inflation, rather than a traditional hedge, such as precious metals? You can use both as your hedge against inflation. But always remember, precious metals like gold and silver are less than ideal hedges.
Gold and silver have accomplished exceptionally well over the last 10 years. Gold has more than quadrupled. Silver has done still better. But 20 years before that were a total disasters.
But no matter even if inflation is low or high, TIPS will guard you from the risk on your investment. How?
Here are the advantages of buying Inflation-Protected Treasuries:
Regular Interest Payments: Just similar to a regular Treasury bond, TIPS pay interest regularly once in six months. However unlike traditional bonds, your principal grows every year by the amount of inflation, as measured by the consumer price index (CPI). That is when inflation rate is up; value of TIPS is also increased automatically. In other words, inflation protection is available on both capital and investment. The interest paid once in every six months as well grow by the amount of inflation.
Tax Advantages: The interest you receive from TIPS investments are exempted from state and local income taxes (but not federal).
TIPS are also less volatile when compared to the traditional bonds. The yield on these TIPS funds is currently about 2.5% (plus whatever inflation is going ahead).
Another influential reason to consider adding TIPS to your portfolio is the great portfolio diversification advantages they bring. This reduces the total risk and / or instability of your portfolio over time. TIPS bond yields are little or negative correlation with the performance of many other traditional investments such as shares and normal bonds.
Rising inflation chances are beneficial for TIPS profits, but in the short period are negative for the returns of stocks and bonds and vice versa.
TIPS can be bought in 3 ways:
1. Directly: One can buy TIPS directly from the U.S. Treasury or through a bank, broker, or dealer. You can discover more about buying TIPS directly at http://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_buy.htm
2. Through the Vanguard Inflation-Protected Securities Fund (VIPSX).
3. Through its ETF equivalent - the iShares Barclays TIPS Bond Fund (NYSE: TIP)
Purchasing TIPS through mutual funds offer more flexibility.
There are many advantages of buying TIPS
1. TIPS are very good for long-term investments.
2. TIPS are outstanding ways to diversity your portfolio that minimizes total portfolio risk.
3. TIPS are government guaranteed.
4. TIPS are less unstable than traditional bonds.
5. TIPS are useful when inflation rates are expected to go up plus when financial system slows down.
6. Investment on TIPS requires less active investment management so favor both newbies and skilled traders.
Some investors object that TIPS hasn't done anything exciting recently. This is not correct. We've been in the control of disinflationary forces, not inflationary ones. That will not alter next week or next month.
But as the deficit keeps increasing which makes people sad, pressure will increase on the government to do "something". That "something" could be a result to inflate our way out of this mess, rather than risk the type of deflationary spiral that Japan has suffered over the past 2 decades.
Remember that:
The Fed has by now taken interest rates nearly to zero.
Congress has by now tried a huge fiscal stimulus
The Federal Reserve has already created trillions out of thin air to mop up worthless securities.
There are chances of increase in inflation if the economy stumbles again which forces to the government to take further action, it could be even further reckless.
A few libertarians as well as laissez-faire capitalists will refuse to purchase TIPS. But other inflation hedges sometimes don't work. Hence there is no little risk taking an extra approach.
In total, TIPS is the only investment that ensures a yield that exceeds inflation in the years to come. And it is in fact an necessary component of your portfolio.
In this hard economic slump or double-dip recession, politicians - with the reluctant guidance of the Fed - could decide to spend even more massively to try to jump-start the economy. The end result could be stagflation: slow growth along with higher inflation.
Inflation is the curse to the debt holders. But it is a blessing to the debtors - and Uncle Sam is the biggest of them - as they can pay the fixed obligations with increasingly worthless currency.
Are you scared of rising inflation? And would like to make sure better returns over inflation from your savings at small amount of risk? In that case Treasury Inflation Protected Securities (TIPS) could be the most excellent investment opportunity for everyone.
Treasury Inflation Protected Securities (TIPS) are often known as Treasury Inflation Index Securities and Real Return Bonds (RRB). TIPS are 'safest of the safe'. There is small amount of downside risk on investment. TIPS are long-term fixed income investments protected against fluctuations in the rate of inflation.
But why employ TIPS as your protect against inflation, rather than a traditional hedge, such as precious metals? You can use both as your hedge against inflation. But always remember, precious metals like gold and silver are less than ideal hedges.
Gold and silver have accomplished exceptionally well over the last 10 years. Gold has more than quadrupled. Silver has done still better. But 20 years before that were a total disasters.
But no matter even if inflation is low or high, TIPS will guard you from the risk on your investment. How?
Here are the advantages of buying Inflation-Protected Treasuries:
Regular Interest Payments: Just similar to a regular Treasury bond, TIPS pay interest regularly once in six months. However unlike traditional bonds, your principal grows every year by the amount of inflation, as measured by the consumer price index (CPI). That is when inflation rate is up; value of TIPS is also increased automatically. In other words, inflation protection is available on both capital and investment. The interest paid once in every six months as well grow by the amount of inflation.
Tax Advantages: The interest you receive from TIPS investments are exempted from state and local income taxes (but not federal).
TIPS are also less volatile when compared to the traditional bonds. The yield on these TIPS funds is currently about 2.5% (plus whatever inflation is going ahead).
Another influential reason to consider adding TIPS to your portfolio is the great portfolio diversification advantages they bring. This reduces the total risk and / or instability of your portfolio over time. TIPS bond yields are little or negative correlation with the performance of many other traditional investments such as shares and normal bonds.
Rising inflation chances are beneficial for TIPS profits, but in the short period are negative for the returns of stocks and bonds and vice versa.
TIPS can be bought in 3 ways:
1. Directly: One can buy TIPS directly from the U.S. Treasury or through a bank, broker, or dealer. You can discover more about buying TIPS directly at http://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_buy.htm
2. Through the Vanguard Inflation-Protected Securities Fund (VIPSX).
3. Through its ETF equivalent - the iShares Barclays TIPS Bond Fund (NYSE: TIP)
Purchasing TIPS through mutual funds offer more flexibility.
There are many advantages of buying TIPS
1. TIPS are very good for long-term investments.
2. TIPS are outstanding ways to diversity your portfolio that minimizes total portfolio risk.
3. TIPS are government guaranteed.
4. TIPS are less unstable than traditional bonds.
5. TIPS are useful when inflation rates are expected to go up plus when financial system slows down.
6. Investment on TIPS requires less active investment management so favor both newbies and skilled traders.
Some investors object that TIPS hasn't done anything exciting recently. This is not correct. We've been in the control of disinflationary forces, not inflationary ones. That will not alter next week or next month.
But as the deficit keeps increasing which makes people sad, pressure will increase on the government to do "something". That "something" could be a result to inflate our way out of this mess, rather than risk the type of deflationary spiral that Japan has suffered over the past 2 decades.
Remember that:
The Fed has by now taken interest rates nearly to zero.
Congress has by now tried a huge fiscal stimulus
The Federal Reserve has already created trillions out of thin air to mop up worthless securities.
There are chances of increase in inflation if the economy stumbles again which forces to the government to take further action, it could be even further reckless.
A few libertarians as well as laissez-faire capitalists will refuse to purchase TIPS. But other inflation hedges sometimes don't work. Hence there is no little risk taking an extra approach.
In total, TIPS is the only investment that ensures a yield that exceeds inflation in the years to come. And it is in fact an necessary component of your portfolio.
Source...