The Wall Street Journal ran a story this week titled “TIPS Buy Peace of Mind, But at a Steep Price.”
I understand and agree with the “peace of mind” concept but not so much the “steep price.”
This is how the article starts:
Inflation-protected US government bonds are generally a great core holding for ordinary investors. That’s especially true in uncertain times like these, when many worry that a spike in prices is just around the corner.
But here’s the secret of TIPS: You don’t buy them because you know where inflation is headed. You buy them so you don’t have to care.
Shares may boom or slump, inflation may rise or fall, but if you buy a long-term inflation-protected bond that pays 3% a year above inflation, that’s what you get.
Those statements sum up nicely why TIPS are integral to a Failsafe Retirement Income Plan.
But what about the “steep price” contention?
This is what the author says about that:
But their good performance means that many of these bonds are now distressingly expensive. That’s especially true for the shorter-term bonds, which mature within the next five years or so. Today’s bond buyers may not realize it, but they are locking in poor investment returns. With prices at current levels, longer-term bonds, particularly those maturing in 20 years or more, look like better values.
Here is the difference between this writer’s “steep price” concern and the proper use of TIPS in a retirement income plan. He is talking about buying and selling TIPS on the secondary market, either as individual securities or in shares of a TIPS mutual fund or ETF. On the other hand, I recommend buying TIPS from the Treasury at auction (when they are issued) and holding them until maturity. That way you do not have to be concerned about fluctuation in values on the secondary market. These fluctuations are caused by differing interest rates and expectations for inflation.
I don’t want to worry about that. I want to use TIPS for guaranteed retirement income. By purchasing them with the proper maturities, you can buy and hold without any concerns about market value changes in the interim.
That’s what makes TIPS failsafe for your retirement income.