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When it comes to protecting your investments from the erosive effects of inflation, Treasury Inflation-Protected Securities (TIPS) stand out as one of the best options available. TIPS function by offering investors a guaranteed return that adjusts with changes in the Consumer Price Index (CPI), thus safeguarding their purchasing power against rising prices.
Unlike traditional bonds that pay a fixed interest rate, the principal value of TIPS is adjusted for inflation. This means that as the CPI increases, the interest payments on TIPS also increase, providing investors with a hedge against inflation. For example, if the CPI rises by 2%, the principal value of TIPS will be adjusted to reflect this increase, resulting in higher interest payments for the investor.
One of the key benefits of TIPS is that they provide a reliable source of income that keeps pace with inflation. This can be particularly valuable for retirees or those looking to preserve the value of their investments over the long term. Additionally, TIPS are backed by the U.S. government, making them a relatively safe investment compared to other inflation hedges such as commodities or real estate.
Another advantage of TIPS is that they are tax-efficient. While investors must pay federal income tax on the interest payments they receive from TIPS, they are not required to pay taxes on the inflation adjustments made to the principal value of the securities. This can result in significant tax savings over time, especially for investors in higher tax brackets.
In addition to providing a reliable income stream and tax benefits, TIPS can also help diversify a portfolio and reduce overall investment risk. By including TIPS in a well-rounded investment strategy, investors can protect their assets from the effects of inflation and economic uncertainty.
It is important to note that while TIPS are an effective hedge against inflation, they may not be suitable for all investors. Like all investments, TIPS come with risks, including the possibility of interest rate fluctuations and changes in the CPI that may impact returns. Investors should carefully consider their individual financial goals and risk tolerance before adding TIPS to their portfolio.
Overall, TIPS are a valuable tool for investors seeking to protect their investments from inflation while maintaining a stable income stream. With their unique structure and government backing, TIPS stand out as one of the best inflation hedges available in today’s market.
This is an interesting fact. We pay 0.18 cents a kw for electricity in Florida; however my son pays 0.50 a kw in California! His electric bill was $700 and he has to pay more during peak hours. In fact our kw per hour went up 20% YOY. I had no idea until I compared the rates. So yes electric is going up! Everything is!
in the last couple years Tips ETFs have not done that well even with all this inflation. You need to be in the actual bonds
ETF version is TIP ticker symbol.
Looked at the last 3 year return during our high inflation market down -1.49?…. Seems more risky than CDs. Where’s the upside? Educate me please.
Good work, as usual. Any opinion on TIPS ETF's? Would an investor gain greater liquidity with the ETF? What are the drawbacks???
Do you recommend buying individual TIPS or etf?
Grass fed beef is tougher than grain fed beef. The grass fed beef trend is a feel good movement of the modern no nothing society.
In the event that the government fudges the numbers and the CPI goes down for the annual/semi annual period they will adjust the principal balance down as well. They could even go negative so your principal balance goes to $9,000 and your interest that period is $90. The good thing is that provided you're well diversified and not all in TIPS your other investments should be doing well.
The I-Bonds works differently. They have a 30 year duration, but can be redeemed a year after being bought (see restrictions below). They don't pay out the interest as an income stream like TIPS. Instead they reinvest it back to principal and it has a fixed rate or 0% at purchase. Currently the fixed is 1.3%, but that's the highest it has been in 16 years. The current total yield is about 4.62% and will be going down at the end of April. Every six months the variable rate is recalculated from CPI data from last 6 months. The lowest the variable rate can go in a six month period is zero. The interest isn't taxed until redemption (you can request it to be taxed every year by filling out some forms). They do allow tax deduction for education, but I haven't looked into it.
There are other restrictions so it would be better suited for an emergency fund or medium term cash savings. Like TIPS the yield isn't the best. Those restrictions are that you have to buy them directly from the Treasury Direct website. You are limited to $10k per person per year. You cannot redeem them until you have held them for a year and you lose the last three months of interest if your redeem them earlier than 5 years. We don't invest much in I-Bonds, but we do put aside a little in them since they have a fixed rate so the money will stay a little above inflation.
Is EDV (extended duration treasury index) the same as tips? And is it best to hold in a pretax account position, instead of brokerage taxable account? I have to think it would more advantaged in pretax.
I was thinking that the tips could go cash flow negative with taxes when you are building a ladder and that they should be paired with savings bonds and used modestly while buying new issues.
The government turning down using nuclear waste as a fuel and not decoping thoream is a mistake we could go from throwing everything we have at the grid to building it and not caring if the grid is there or not as hydrogen, efuel and various carbon materials are made from air and electricity.
When interest rates were going up over the last two years, my fund (VIPSX) was losing money. I bought to hedge against inflation. Sounded good in theory, did not work for me.
I assume TIPS will be paying interest/dividends? If so, I understood you to say in another video couple weeks ago that to keep taxes down we retirees should be buying growth Index Funds/ETF's instead of assets that produce income? Maybe I misunderstood. My largest assets r IRA's that I have to take RMD's every year. These r the funds that I have to invest each year. I was going to invest in growth ETF's. Now I am not sure???
Is massive home insurance inflation including in housing / CPI .. because that applies even if you have no mortgage…
EVERY kind of insurance (I carry 6 kinds) — EXCEPT LTC insurance, ironically which has been flat for me since 2012! and groceries & restaurants (plus big increase in property tax) has been the very worst parts of inflation for me as a retired individual. Crazy!!!
I’m a long time watcher of of your videos, since 2018. I am also a 45 year employee of a power generation company in the Midwest. You nailed your comment on available power, absolutely. No one sees it and what’s more frustrating to me is very few seem to care.
It seems to me that building a TIPS ladder is a great alternative to buying an immediate annuity. The drawback to the ladder is that you have to have an end date. But for me, I think it's pretty unlikely I'll live to 90, and the premium I would be paid for not being able to cash-in with an annuity just doesn't seem worth it, and I don't know what future inflation will be, so there might not receive any premium. I don't know the future, so, who knows. But at today's rates, a TIPS ladder looks pretty good. I won't be putting all of my eggs in one basket-the ladder gives me guaranteed income until I'm 90, but it's only a relatively small part of my portfolio (20%). Another drawback is the need to deal with individual bonds.
The issue I have with this hedge on inflation, is it depends upon the CPI not being gamed an manipulated to understate inflation… or even if we accept it is “accurate” – it may not reflect the inflation that affects our lifestyles (I see you touch this at 12:30) . So while things like gold or real estate may not explicitly be pegged to inflation, they are just another imperfect approximation of a hedge we can’t really have…
Buy Uranium Stocks.
Last fall, my wife and I bought a 30-year TIPS ladder to take us out to age 85. I felt very unsure about it at first, but once I finished it, I slept like a baby.
As you said near the end, the secret sauce in buying TIPS is that if your personal CPI is lower, you win even more.