TIPS: Treasury Inflation Protected Securities

TIPS: Treasury Inflation Protected Securities

People love to give financial tips, but taking them can be risky. There are, however a different kind of TIPS that can have a place in many portfolios: Treasury Inflation Protected Securities. So let's take look at some tips about TIPS.

What are TIPS?

TIPS stands for Treasury Inflation-Protected Securities. Just like they sound, TIPS are investments backed by the US Treasury that protect you against inflation. As inflation occurs, the principal in your TIPS investment raises by the inflation percentage. As deflation occurs, though, your TIPS principal is decreased by the inflation amount. Upon your TIPS maturity, you receive either your original principal (in the case of continued deflation) or your principal plus the inflation rate (in the case of inflation). This means you will not lose the principal amount you originally put into the account, but you will not gain any principal amount above the inflation rate.

What are the Advantages?

The advantage here is obviously that you reduce one of the primary dangers of investing in treasuries: inflation. Most simple bank accounts pay below the inflation rate. For example, right now, most money markets are hovering at 1% whereas the inflation rate sits around 2%. If you were to leave your funds in a money market account, you would lose 1% of your money’s spending power. But if you left the money in a TIPS account, you would break even with inflation. Additionally, since you do receive bi-annual interest payments, you will receive a small amount of income from the account.

What are the Disadvantages?

The primary disadvantage of TIPS is that they usually have low yields. In fact, when people are expecting severe inflation, they sometimes actually have a negative yield before inflation. TIPS are primarily an instrument for keeping your money intact, so you are generally only going to do slightly better than inflation with TIPS.

How do I Buy TIPS?

TIPS are sold as 5-, 10- and 30-year investments in multiples of $100 through banks, investment firms and One easy way to invest in TIPS is through an Exchange Traded Fund (ETF). The ticker symbol TIP is the most popular ETF for TIPS.

As a measure to protect yourself from inflationary risks of standard cash investments, a TIPS account allows you a secure, government-backed investment that will pay you a small interest income every six months. This financial "tip" could provide you a win-win product for your investment portfolio.

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retirebyforty's picture

retirebyforty wrote:

Mon, 01/31/2011 - 21:19 Comment #: 1

I don't like the low yield part of TIPS. I'd rather invest in the stock market in general. For inflation protection, I also invest in rental properties. The two prongs approach works for me.

MoneyCone's picture

MoneyCone wrote:

Mon, 01/31/2011 - 22:05 Comment #: 2

If inflation raises its head, nothing like Tips and iBonds!

Money Reasons's picture

Money Reasons wrote:

Tue, 02/01/2011 - 05:52 Comment #: 3

I don't own any TIPs (although I think we bought one for my son), good presentation.

Kevin's picture

Kevin wrote:

Tue, 02/01/2011 - 06:55 Comment #: 4

I think TIPS definitely have a place in the fixed income slice of a portfolio; the quantum will depend on the risk profile of the investor relative to his/her goals.

Christa Palm's picture

Christa Palm wrote:

Thu, 02/03/2011 - 16:43 Comment #: 5

Retirebyforty, I like your two-prong approach. I agree the TIPs pays a low yield, but it's better than a money market!

Agreed -- TIPs and I Bonds are excellent for fighting high inflation, MoneyCone!

Money Reasons -- great way to get your grandson on track for saving :)

Great point, Kevin -- TIPs should be adjusted to a person's risk profile -- thanks for the comment!

Weekend Reading 2/5/2011 — Dividend Monk's picture

Weekend Reading 2/5/2011 — Dividend Monk wrote:

Sun, 02/06/2011 - 03:27 Comment #: 6

[...] TIPS: Treasury Inflation Protected Securities Christa from Momvesting discusses TIPS. [...]

CJ's picture

CJ wrote:

Sun, 03/13/2011 - 16:11 Comment #: 7

With the recent earthquate in Japan should I transfer my Sable Value Funds to TIPS?

Christa Palm's picture

Christa Palm wrote:

Mon, 03/14/2011 - 13:13 Comment #: 8

CJ, welcome! I'm glad to hear you have liquid funds in a Stable Value Investment -- some liquidity in your portfolio is ideal. As for any advice on transfers in light of the earthquake and tsunami, please speak to your financial advisor, who will have a lot of information about the affects of the disaster on your individual accounts. Good luck and thanks for stopping by!

Why Inflation Hurts More Today? 's picture

Why Inflation Hurts More Today? wrote:

Fri, 03/25/2011 - 10:22 Comment #: 9

[...] else until the interest rates improve. An alternative that will keep up with inflation is the Treasury Inflation Protected Securities (Mom [...]

Carnival of Financial Planning | Control Your Cash: Making M's picture

Carnival of Financial Planning | Control Your Cash: Making M wrote:

Fri, 04/22/2011 - 15:18 Comment #: 10

[...] single dividend payment.” We trust you’ll find the list honorable too.Jessica presents TIPS: Treasury Inflation Protected Securities at MomVesting. She acronymically puns, “people love to give financial tips, but taking them [...]

FinancialPlanningSite » Blog Archive » C's picture

FinancialPlanningSite » Blog Archive » C wrote:

Mon, 04/25/2011 - 21:13 Comment #: 11

[...] presents TIPS: Treasury Inflation Protected Securities at MomVesting. she acronymically puns, “people love to give financial tips, [...]