Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Investing in the METAVERSE Stocks Universe - 8th Dec 21
Stock Market Sentiment Speaks: I Expect 15-20% Returns For 2022 - 8th Dec 21
US Dollar Still Has the Green Light - 8th Dec 21
Stock Market Topping Process Roadmap - 8th Dec 21
The Lithium Breakthrough That Could Transform The Mining Industry - 8th Dec 21
VR and Gaming Becomes the Metaverse - 7th Dec 21
How to Read Your Smart Meter - Economy 7, Day and Night Rate Readings SMETS2 EDF - 7th Dec 21
For Profit or for Loss: 4 Tips for Selling ASX Shares - 7th Dec 21
INTEL Bargain Teck Stocks Trading at 15.5% Discount Sale - 7th Dec 21
US Bonds Yield Curve is not currently an inflationist’s friend - 7th Dec 21
Omicron COVID Variant-Possible Strong Stock Market INDU & TRAN Rally - 7th Dec 21
The New Tech That Could Take Tesla To $2 Trillion - 7th Dec 21
S&P 500 – Is a 5% Correction Enough? - 6th Dec 21
Global Stock Markets It’s Do-Or-Die Time - 6th Dec 21
Hawks Triumph, Doves Lose, Gold Bulls Cry! - 6th Dec 21
How Stock Investors Can Cash in on President Biden’s new Climate Plan - 6th Dec 21
The Lithium Tech That Could Send The EV Boom Into Overdrive - 6th Dec 21
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21

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


© 2005-2019 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