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TIPS

Question: With our 401(k) and 403(b) accounts having seriously tanked during October, we're becoming more intrigued with TIPS. But we don't really know how to go about investing in this vehicle -- or if we should even consider this as an option. Can you recommend a good resource to learn more about this and how one can get started? Fred and Dana, Omaha, NE

Answer: As you know, I'm a big fan of investors putting their safe, long-term money into Treasury Inflation Protected Securities or TIPS. I have just the recommendation for you, too. It's "Worry-Free Investing " by Zvi Bodie, a leading finance professor at Boston University and Michael J. Clowes, a long-time journalist and editor.

Several years ago I wrote a book review of Worry-Free Investing. The review came out around the time that the stock market was finally doing better following the false rallies in the fourth quarter of 2001 and 2002. Here's an excerpt:

...Bodie and Clowes' investment advice resonates with the harsh lessons of a three year long bear market. Instead of asking, "How much money will I make?" their fundamental financial question is "How much can I afford to lose?" Stocks, they believe, are too risky for many people to achieve financial security even when held for long periods of time. Instead, their idea is to lock in a long-term standard of living while taking as little risk as possible. Their preferred investment is U.S. government inflation protected securities that preserve the purchasing power of a dollar against the ravages of inflation. Other investments they highlight include the value of Social Security, annuities, and a home. "Worry-Free Investing" is simply written, and well illustrated with examples. The authors walk you through the mathematics of their computations so you can do them on your own with a simple calculator.

Still, their basic message is timeless. The economic idea underpinning the book is that most people don't want to get rich, or perhaps more accurately, aren't willing to make the gambles that could just as well lead to bankruptcy as a flush bank account. No, most people want to sustain their standard of living throughout their life. The way to accomplish that goal is to limit downside risk and preserve the value of money set aside today that will be tapped in your golden years. "If you want to sleep nights secure in the knowledge that you will achieve your savings goals, you must invest in a way that eliminates the possibility that inflation will undercut your efforts," say Bodie and Clowes. "If you try to do it by saving less and expecting the stock market to do the heavy lifting, you may not get there at all."

The authors don't dislike stocks. They just think stocks are much riskier than conventional wisdom holds and that it's only sensible to roll the stock market dice after locking in your baseline financial goals...

Check it out. I think you'll find solid financial insight along with plenty of details on how TIPS might work for you.

11/04/08 by Chris Farrell

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TIPS: mutual fund or bonds

Question: I retired early and am over 55. I plan to keep enough money in my 401k to meet my needs until I'm 591/2. To take advantage of things outside of my former employers 401k plan, I'm planning to rollover the rest of the money into an IRA. One of the things I'd like to buy is TIPS (treasury inflation protection securities). When I do this, which is better, buying TIPS via a broker or financial planner where I have the IRA or putting the money into a TIPS mutual fund. So far, I did a quick review of both Vanguard & Fidelity's TIPS fund. P.E., Brandon, FL

Answer: As you know I am a big fan of TIPS--Treasury Inflation Protected Securities--in a retirement savings plan. TIPS are a savvy and safe way to preserve the value of your savings over time. It's a hedge against inflation gnawing away at the purchasing power of a dollar.

The low cost mutual funds you mention are extremely convenient to own and manage. Problem is, bond mutual funds don't have a specific maturity date. The money is always being reinvested in a basket of TIPS. This means that you'll never be quite sure what the payoff from the investment will be in the future. A TIP mutual fund still provides protection against inflation. But it's a more volatile option than owning the securities directly.

The advantage of buying the actual bonds is that you get to control the timing of your inflation-protected investment. You can purchase TIPS with different maturity dates: 5-year, 10-year and 20-year. Fluctuations in the market won't matter so long as you hold them till they mature. It allows for easy financial planning.

However, you can't buy TIPS directly from the U.S. Treasury in an IRA. (When you buy TIPS from the Treasury there are no commission costs.) You'll have to pay a brokerage commission or fee. It's a minimal charge with online and discount brokerage firms.

11/11/09 by Chris Farrell

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