Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Investors Turn to TIPS as Warren Buffett Warns on Inflation

Interest-Rates / Inflation Feb 16, 2012 - 09:23 AM GMT

By: Money_Morning

Interest-Rates

Best Financial Markets Analysis ArticleDon Miller writes: Warren Buffett last week did more than warn investors on the dangers of low interest rates and inflation.

The Oracle of Omaha also had harsh words for traditional bonds.

In a Fortune article Buffett went so far as to say, "Right now bonds should come with a warning label."


"They are among the most dangerous of assets," Buffett wrote, "Over the past century these instruments have destroyed the purchasing power of investors in many countries."

To prove his point Buffett labeled inflation as the primary threat to bond investors, noting it takes no less than $7 today to buy what $1 did in 1965.

Instead of bonds, Buffett recommends "productive assets," including farmland and real estate.

But he saved his highest praise for stocks, especially the stocks of companies like The Coca-Cola Co. (NYSE: KO) and International Business Machines Corp. (NYSE: IBM), that consistently deliver inflation-beating returns.

But what if you're not comfortable betting most or all of your chips on stocks? And if traditional bonds are out, where else can investors turn for inflation beating returns?

TIPS Insure Wealth Against Inflation
Enter Treasury Inflation Protected Securities, or TIPS.

Unlike regular bonds, TIPS are designed to protect your principal against the ravages of inflation.

In fact, TIPS zig when other securities zag, providing diversification and safety to your portfolio.

TIPS are considered to be an extremely low-risk investment since they are backed by the U.S. government, and their par value rises with inflation while their interest rate remains fixed.

Here's how they work.

Like conventional bonds, TIPS pay interest twice a year at a fixed rate. But the principal of a TIPS bond is periodically adjusted to offset any increase in inflation as measured by the Consumer Price Index (CPI).

When a TIP matures, you are paid the adjusted principal or original principal, whichever is greater.

Investors should note the principal will also adjust to fall with deflation and the interest is subject to federal income tax, but exempt from state and local income taxes.

There are two main benefits of TIPS.

The first is that they're essentially Treasury bonds indexed to inflation. That eliminates one of the key risks for bond investors - rising interest rates. By buying TIPS you're essentially betting on higher interest rates and inflation.

And with governments around the world unleashing untold amounts of fiscal stimulus, there are plenty of investors who are buying TIPS to get insurance against an inflationary cycle.

Second, debt sold by the Treasury Department is guaranteed by the full faith and credit of the federal government. It's fairly inconceivable that the folks who actually print the money will default on their debt.

And if you hold TIPS to maturity you know exactly what you are going to get: all of your money back, with interest, and with both principal and interest adjusted for inflation.

How to Invest in Treasury Inflation Protected Securities
TIPS are also easy to buy.

You can buy new-issue TIPS directly from the TreasuryDirect system in 5-, 10-, and 20-year maturities. Or you can get them from a broker, an exchange traded fund (ETF) or a mutual fund. More than 20 fund companies offer TIPS funds.

Most analysts say TIPS are appropriate for most investors.

"TIPS should be part of every fixed-income portfolio," Donald Ellenberger, a government bond manager at Federated Investors Inc. told Business Week.

So how do you know what to buy?

If you're extremely concerned about a near term spike in inflation you might consider buying a short term TIPS or the PIMCO 1-5 Year U.S. TIPS Index (NYSE: STPZ).

The yield is extremely low but it is almost a pure play on inflation. They are also less risky than longer term TIPS. The ETF returned 6% over the last 12 months.

The sweet spot in terms of risk and return on TIPS is probably around five years. Buy-and-hold investors should do well by purchasing TIPS in those maturities or the iShares Barclays TIPS Bond ETF (AMEX: TIP). The fund returned 13.38% in 2011.

A long-term buy-and-hold investor could purchase 20-year TIPS or the PIMCO 15+ Year US TIPS Index ETF (AMEX: LTPZ). The ETF returned 25.32% in 2011, slightly below the return on long-term Treasuries.

You might want to consider owning all three.

By laddering a mix of ETFs with variable maturities, an investor could both diversify and restock his portfolio with a reasonable alternative to bonds.

After all, Warren Buffett is right about inflation. That makes TIPS a great hedge against the power of the printing press.

Source http://moneymorning.com/2012/02/16...

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in