Sponsored By
One of the nicknames the rapper T.I. has is Tip. T.I. also shares his name with a famous financial vehicle called Treasury Inflation Protected Securities also known as TIPS. TIPS are bonds that are issued by the Treasury Department for financing debt. TIPS are bonds that provide the owner fixed income payments. TIPS pay twice a year and can also increase in value. What makes TIPS unique is the fact that TIPS pay an income stream that adjusts for inflation.
Inflation is when the price of goods increase due to oversupply of money. Inflation can occur in times of economic growth and during economic recovery. When inflation occurs, one’s money basically loses its value and the price of the same goods you bought before, will have increased. As a result, you must make more money to purchase the same product.
TIPS help investors deal with inflation by increasing the interest rate and principle when inflation is happening. Inflation is measured based on CPI or the Consumer Price Index. TIPS readjusts based on the changes in the CPI. The investment returns for TIPS have been interesting. The stock market, as measured by the S&P 500, had the following returns:
1 Year: 2.44%
3 Year: 13.43%
5 Year: 0.20%
While TIPS had the following returns:
1 Year: 14.50%
3 Year: 10.98%
5 Year: 8.08%
As the above figures show, TIPS have outperformed stocks in the one and five year returns. So, how do you invest in TIPS? There are two ways you can directly buy TIPS; from the treasury department or through a mutual fund. TIPS can be an alternative if you are concerned about inflation and diversification.
Related posts:
