TIPS Can Be Your Best Weapon Against Inflation

Fri, Jun 18, 2010


Many saving for their retirements are afraid that runaway government spending will create severe inflation thus diluting the eventual value of their investment portfolios. Those nearing retirement with investments primarily focused on fixed income are especially vulnerable to rising inflation. When inflation goes up, then the purchasing power of your dollars goes down. Savers and investors alike need to hedge themselves against the risk of rampant inflation, and there are many avenues whereby this can be done.

Some run to precious metals — primarily gold — which are viewed as safe havens from inflation. However, metals like gold can trade based upon many factors other than inflation. A sovereign central bank can sell large volumes of gold depressing its value, or a weak wedding season in India can similarly send gold prices sliding. Furthermore, gold prices are at historic highs, and buying gold now entails significant risk. A safer way to protect yourself from the ravages of inflation are to buy TIPS.

TIPS are Treasury Inflation Protected Securities, and they are issued and backed by the U.S. Government. They work in much the same way as regular T-Bills, except the returns on them are adjustable and go up along with the prevailing rate of inflation. Holders of TIPS receive interest payments twice a year, and payments go up should inflation rise. This presents for a way to ensure your future income has the same purchasing power as do current dollars. TIPS can be bought directly from the United States Treasury, and they are a smart component of any long term portfolio.

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