{"id":12631,"date":"2023-08-17T15:23:47","date_gmt":"2023-08-17T15:23:47","guid":{"rendered":"https:\/\/zacksim.com\/blog\/?p=12631"},"modified":"2024-01-10T17:12:45","modified_gmt":"2024-01-10T17:12:45","slug":"tips-treasury-inflation-protected-securities-a-good-investment-now","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/tips-treasury-inflation-protected-securities-a-good-investment-now\/","title":{"rendered":"TIPS (Treasury Inflation Protected Securities) A Good Investment Now?"},"content":{"rendered":"\n

Raul G. from Galveston, TX<\/em> asks: Hello Mitch, I\u2019m considering investing some money in bonds since interest rates are higher. I\u2019m curious about the Treasury Inflation Protected Securities (TIPS) that I understand will provide a buffer over inflation. What are your thoughts on this type of bond? Are they a good investment now?<\/p>\n\n\n\n

Mitch\u2019s Response:<\/strong><\/p>\n\n\n\n

Thanks for sending your question. There are a few important factors to consider in answering your question.<\/p>\n\n\n\n

The first is categorizing TIPS or any asset class as a \u2018good investment now.\u2019 Whether or not an asset class is a good investment depends on how its risk\/return characteristics align with your goals. Since I don\u2019t know your goals specifically, I can\u2019t tell you whether TIPS will work in your portfolio the way you want or need them to.1<\/sup><\/p>\n\n\n\n

4 Steps to Prepare for Retirement Amid Inflation and Volatility<\/a><\/strong><\/p>\n\n\n\n

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Instead of falling into the trap of focusing on short-term decision marking, here are some important factors that investors should consider before retirement:<\/p>\n\n\n\n

\u2022 Determining your expenses
\u2022 Determining your income
\u2022 Matching your income source with your goals and time frame<\/p>\n\n\n\n

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Speaking more generally, TIPS pay around 2% plus the inflation rate over the life of the bond. If inflation ends up being much higher than most expect, then your principal at maturity will also be nicely higher. If the opposite occurs, you likely won\u2019t receive much above your original principal. So, what you\u2019re assuming with a TIPS is that inflation is going to run hotter for longer, which is not necessarily a foregone conclusion. As seen in the chart below, market expectations for inflation in the next 2- and 10-year periods are relatively low:<\/p>\n\n\n\n

2-Year and 10-Year Expected Inflation<\/em><\/strong><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis3<\/sup><\/em><\/figcaption><\/figure>\n\n\n\n

There\u2019s another risk of TIPS that you should be thinking about. It relates to the \u201creal rate\u201d on Treasuries, which is the nominal rate minus the inflation rate. If the real rate turns out to be higher than expected, then nominal bond yields will also go up, which means the underlying price of the bond will go down. We saw this happen in 2022, as you can see in the chart below with the real rate swinging from about -1.15% to +1.75%. In this scenario, TIPS took a significant hit in terms of annual returns.<\/p>\n\n\n\n

Real Rate on 10-Year U.S. Treasury Bonds<\/em><\/strong><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis4<\/sup><\/em><\/figcaption><\/figure>\n\n\n\n

If inflation is your primary concern, and you have a relatively lengthy time horizon of over 10 years, then I do not think investing in TIPS or fixed income in a vacuum is likely the wisest course of action. In my view, you\u2019d be better off owning a more broadly diversified portfolio that includes stocks and different types of fixed income, like corporates and municipals in addition to Treasurys. Historically, stocks have been a very effective hedge against inflation over long periods of time.<\/p>\n\n\n\n

To help better manage your portfolio, I recommend taking a look at four steps that will help give you some ideas on how to transition into retirement with confidence. In our exclusive guide, \u201c4 Steps to Managing Your Retirement Assets5<\/sup><\/a><\/strong>,\u201d you will also get insight on:<\/p>\n\n\n\n

\u2022 Determining your expenses
\u2022 Determining your income
\u2022 Matching your income source with your goals and time frame<\/p>\n\n\n\n

If you have $500,000 or more to invest, click on the link below to get your copy of \u201c4 Steps to Managing Your Retirement Assets5<\/sup><\/strong><\/a>.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"

With interest rates higher than they have been for years, investors are considering bonds\u2014including TIPS, which are tied to the inflation rate.<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[66,71],"tags":[],"class_list":["post-12631","post","type-post","status-publish","format-standard","hentry","category-mitchs-mailbox","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12631","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=12631"}],"version-history":[{"count":2,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12631\/revisions"}],"predecessor-version":[{"id":12635,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12631\/revisions\/12635"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=12631"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=12631"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=12631"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}