T.I.P.S on Beating Inflation

These days it is a harsh reality that your dollar is stretched thinner than the Olsen twins. Just talking about the price of gas makes me start to break out in hives and my trips to the grocery store leave me needing a Zoloft. While there are steps you can take to decrease your expenditures, we are going to address how you can tackle inflation with your investments.

Remember, inflation doesn’t just eat away at your wallet. It deflates the real rate of return on your investments. The money market account that earns 3% annually is dead in the water when inflation is running 4%. Ya dig?

credit: Darren Hester

T.I.P.S. on Beating Inflation

One of the best ways to beat inflation without taking on a lot of risk is by investing in Treasury Inflation Protected Securities, a.k.a TIPS. Like other Treasuries, this bond pays interest every six months and pays the principal when the security matures. The difference is that the coupon payments and underlying principal are automatically increased to compensate for inflation as measured by the consumer price index (CPI).

If U.S. Treasuries are the world’s safest investments then you might say that TIPS are the safest of the safe. This is because your real rate of return, which represents the growth of your purchasing power, is guaranteed. Now before you rush out and buy a truckload of TIPS, here are some things to keep in mind.

• The interest income from TIPS is federally taxable, this includes the CPI adjusted portion.
• In periods of deflation(negative inflation), the return will be less than the return on standard Treasury securities.

While newly issued TIPS can be purchased without any fee in the months that they are auctioned directly from the government through its TreasuryDirect program it is usually most prudent to purchase TIPS through a mutual fund. Mutual funds offer instant diversification, low transaction fees and the ability to buy or sell any random amount in the fund.

We recommend these:
Vanguard Inflation Protected Securities (VIPSX)
T. Rowe Price Inflation Protected Bond (PRIPX)

As always for more info check us out at www.molifeney.com Also the Molifeney Knowledgecast is now available on the site. It is quite possibly the best 30 minutes you will ever spend.