Treasury Inflation-Protected Securities

A little story. Back in 1999 I was at a cocktail party, and of course, the conversation drifted toward the red-hot stock market, as  it always did in 1999. What were you buying? Cisco? AOL? Something-or-other.com?

I said, “I’ve been looking at TIPS, Treasury Inflation-Protected Securites.”

Blank stare from the group standing around me, which included several investment professionals.

“No really, TIPS are paying 4% above inflation and are rock-sold safe. Where can you find another investment like that?”

Blank stare. Oh well, change subject.

I did end up buying TIPS that year, and every year since, directly through TreasuryDirect.gov. Those TIPS I bought in the late 1990s were fantastic investments, returning 3 to 4% above inflation while the stock market had a negative real return over the same time.

Sure, I had money in the stock market, too. But the TIPS investments were sort of ballast for my financial ship. That investment was not going down. That investment was 100% safe.

So today, TIPS are nowhere near as appealing, paying around 0.9% above inflation for a 10-year issue. And this is at a time that the stock market seems pretty fairly valued. And yet TIPS are now massively popular — go figure.

The reason is: The risk of inflation is lurking. If it strikes, and I think it will, your regular bond investments (especially in mutual funds) are going to take a big hit. TIPS mutual funds will also be hit — be sure of that.

My premise is to buy and hold TIPS directly from the Treasury and hold them to maturity. It is not a sexy strategy. But is a safe strategy, if you build a collection of these investments over time. And you invest only up to 25% of your portfolio this way, meaning you keep stock market exposure, and some CDs, bond funds, etc.

The big negative is that you pay tax on the inflation-adjusted principal — I’ll talk about that later.

NOTE: I am just an investor, not a financial professional. I am not selling anything, and my financial advice is just my personal opinion. I am sure many will disagree, and I hope you make your voices heard.