| TIPS -- Enough return for your money? |
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"TIPS are a very risk-averse investment option.
Over a 20-year period the investor would be settling for a very
modest return," says Bankrate.com financial analyst Greg McBride.
"With a long-term goal you can take on more risk. Other asset
classes, such as stocks or real estate, provide the potential for
higher returns that more than compensate for the risk."
Chris Cooper, CFP, of Chris Cooper & Company in
Toledo, Ohio, says TIPS are government bonds and the government
is in cahoots with itself.
"The Fed, for the last 10 or 12 years, has artificially
kept the CPI very low, and TIPS are tied to the CPI. Since the government
keeps manipulating it down, it won't come into play and pay off.
Why buy them? The government can say it can't afford to pay the
interest on these bonds, so they'll just manipulate the CPI."
Benjamin Tobias of Tobias Financial Advisors in Plantation,
Fla., agrees that the government manipulates the CPI, but Tobias
says it evens out over the long haul. The decline of the dollar
has Tobias pumping clients' fixed-income money into TIPS.
"There's something very strange going on in the
world economy, and the devaluation of the dollar is just the beginning
of it. If it continues, it almost has to lead to inflation. Our
currency will take on the characteristics of emerging market currency.
So, TIPS, in the event of that happening, are a great protection
to maintain purchasing power."
Mutual funds can be the best way for individual investors
to purchase fixed-income securities because you get diversification
and funds often have lower investment minimums. But there is no
guarantee that you'll get back your entire principal when you sell
your shares. The Treasury's promise that you'll never lose principal
when buying TIPS is only for those who buy individual TIPS and hold
until maturity.
T. Rowe Price's Shackelford notes that his fund has
the flexibility to maneuver between fixed-rate Treasuries and TIPS
opportunistically when values favor one over the other.
"We can also explore inflation-protected securities
outside the U.S. that may offer better prospective returns than
U.S. inflation-protected securities."
TIPS aren't just for older investors looking to protect
their nest egg from inflation's erosion. Just about anyone with
a specific goal, especially a short-term goal such as buying a car
in five years where preserving principal is a priority, will benefit
from a TIPS investment.
TIPS are not subject to state or local taxes, but
you will have to pay federal tax on the semi-annual interest payments.
In addition, you'll pay tax on the periodic increases in principal
even though you don't receive those increases until maturity. Having
to pay tax on so called "phantom income" can be a problem
for people who rely heavily on fixed-income payments.
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