Treasury Inflation Protected Securities

The term may be misleading, especially to middle-aged people who aren't market-savvy and only starting to plan for their retirement

. Treasury Inflation Protected Securities aren't actually investments that protect your capital from the effects of increasing interest rates. Newer investors can make costly mistakes if they don't know what TIPS are, and risk the stability of their nest eggs.

The Consumer Price Index shows inflation as the cost of long-term investments, and determines how much your profits are really worth. Treasury Inflation Protected Securities were developed to counteract inflation, and work much like regular securities. The main difference between TIPS and other similar investments is that it grows as the CPI does, protecting you from lower returns when inflation rears its ugly head.

If trading activity is low, the said scenario of proportional growth happens with investors receiving decent gains. However, since everybody seems to want in on the TIPS action due to the guaranteed protection offered by these securities, yield is only around 1.5%, compared to 4% when it was relatively unpopular ten years ago.

Seniors looking for stable and guaranteed investments to fund their retirements should purchase Treasury Inflation Protected Securities, although they should buy into the shortest possible terms. TIPS have a larger chance of dropping in value the longer the duration before maturity. Because interest rates are invariably expected to go up, and inflation tags along with interest-rate increase, you may be able to see the signs and move on before you lose money. TIPS are a great addition to an already diversified portfolio and can help protect against loss of purchasing power due to high inflation.

Want to know more about TIPS? Your investment planner can help you manage your TIPS and cash out way before the markets turn unfavorable, as well as educate you on how these securities work.

by: Carina Smith

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