I admit the title is a bit hokey and a play on words. However, it also is one great investment alternative. The reading audience is very well aware of the opportunity in real estate investing but may not be aware of the alternatives that actually produce as promised.
Most people know about CDs, annuities, life insurance, stocks, bonds and other investment alternatives. However, not eveybody is familiar with Treasury Inflation Protected Securities or TIPS. The complete dirty lowdown can be found here.
For this post I’ll concentrate on only the cursory details. Simply put, TIPS are simple, inflation-indexed, fixed-income investments that deliver a real rate of return that the U.S. government guarantees will keep pace with inflation. Their measuring stick is the Consumer Price Index (CPI).
TIPS generated interest is taxable only by the federal government. State and local taxing agencies are not allowed to dip their grubby meat hooks into this interest bearing animal. This feature alone alone gives you an advantage over CDs and savings account.
Since they are indexed to inflation -no matter what you think about the validity of the CPI- you get another benefit. Here are some numbers to put TIPS into perspective.
Assuming a person buys a $1,000 TIPS security with a 4% coupon and inflation is at 10% during the first year we own it, the face value of the TIPS would rise to $1,100. Additionally, the coupon rate of 4% would generate $44 in income.
NOTE: In reality, the payments change to reflect shifts in the CPI, and the payments are semi-annual. However, even though the numbers in the above example are static, I think you can get the idea. Heck, if you can figure a CAP rate in your head just from the figures tossed out by the seller, you definitely can grasp the shifting CPI rate.
A point of interest is that since their inception in 1997, TIPS have actually outperformed the U.S. Standard & Poor’s 500 stock market index. Given our current economic debacle, they’re likely to do even better I say editorially speaking.
You can invest in TIPS through your local bank or broker or if not inclined to use either facility, visit the above website and invest directly through the U.S. Treasury.
Diversification Is Still The Name Of The Game
I posted this information because I am a strong believer in diversification. I would bet those of us in the real estate investment arena who lost everything we had (I personally know several as they contacted me to do a short sale on their properties) during this bubble burst would now agree with me.
What we learned is something the investment community has preached for years – don’t put all of your nest egg into one investment vehicle. Spread it around to protect yourself.
I’m not preaching to the choir nor am I recommending TIPS as an investment. Like everything else, give them a look over and make up your own mind. If they fit your portfolio, go for it. If not, you at least learned about an another type of investment vehicle.
Photo Credit: zzzack