In this time of volatility, many are concerned about investing in the stock market. What some are most interested in, especially those nearing retirement, is capital preservation. Unfortunately, inflation can erode returns on cash products and even many bond investments. Indeed, if the rate of inflation exceeds your yearly return, your buying power could be eroded.
If you are interested in relatively low risk investments, U.S. Treasury securities that protect against inflation might be the way to. The two main types of bonds that individuals can invest in to protect against inflation are:
- TIPS: Treasury Inflation-Protected Securities are indexed to inflation, with their value rising as the Consumer Price Index does, while the interest rate remains fixed.
- I-Bonds: Like TIPS, I-Bonds follow the Consumer Price Index up or down, while paying a fixed interest rate, depending on when you bought them. The CPI component is adjusted every May 1 and November 1, and the fixed rate is set for a six month period.
If you are of the belief that inflation will always be a part of our monetary system, then TIPS and I-Bonds can be good choices for those who want to add a little safety to their portfolios, without having to worry about inflation eroding their real returns.
The U.S. government backs Treasuries, even with the recent deficits, these are still considered the safest investments in the world, backed by the world’s most stable taxpayer base. You do not pay state and local tax on TIPS and I-Bonds, but you will have to pay taxes on distributions for TIPS (but not I-Bonds).
Points to Consider with TIPS and I-Bonds
You should realize, though, that you are unlikely to see significant returns with TIPS and I-Bonds. Even though you are protected against inflation, you are unlikely to see large returns. These are mainly safety investments, not normally used for growth. You can get a higher rate of return on other bonds, such as corporate bonds and some munis, although by the time you pay taxes and account for inflation, you may not come out ahead. Bond funds may also provide the potential for greater returns (and risks).
Another point of concern for some is that the U.S. government could default. While this is unlikely, it is important to note that TIPS and I-Bonds are still investments, and there is still the potential for loss.
You can purchase TIPS and I-Bonds by visiting Treasury Direct and setting up an account.