Treasury Inflation-Protected Securities (TIPS): The Indispensable Investment

by Alexander Green, Chief Investment Strategist
Monday, May 10, 2010: Issue #1256

Two weeks ago, I wrote a column recommending Treasury Inflation-Protected Securities (TIPS) as protection against potential inflation down the road.

It prompted a flood of questions and challenges. I want to address those, but let me start by briefly re-stating my case:

1. Unprecedented government spending – including $108 trillion in unfunded liabilities for social security, Medicare and new universal healthcare benefits – is putting the nation at risk.
2. With interest rates near zero, the Federal Reserve cannot take one traditional step – lowering short-term rates – to revitalize a weakened economy.
3. In a severe economic downturn or double-dip recession, politicians – with the reluctant assistance of the Fed – could opt to spend even more massively to try to jump-start the economy.
4. The result could be stagflation: slow growth with higher inflation. (And although we haven’t seen it here in almost 30 years, perhaps even hyper-inflation.)

I don’t know what the odds of this happening are – and neither does anyone else. But I think investors would be foolish not to at least consider the possibility…

Inflation or Deflation? Hedge Your Bets This Way…

Respondents who disagreed generally fell into one of two camps…

• They either believed that deflation is more likely than inflation.
• They thought inflation was likely, but since Congress will almost certainly be the culprit, they don’t want to reward the mischief-makers by buying any kind of government securities.

Let me handle the former objection first: Is deflation more likely than inflation? Perhaps. No one can say. You should probably own a good slug of Triple-A insured municipal bonds just in case. (Because future tax rates are almost certainly going higher.)

By all means, make some plans for a deflationary scenario. But plan for the possibility of inflation, too. This is what diversification is all about. Hedge your bets.

But why use TIPS as your hedge, rather than a traditional inflation hedge like precious metals? In my view, you should use both. But remember, gold and silver are less than perfect hedges.

They have both performed exceptionally well over the last 10 years, for example. Gold has more than quadrupled. Silver has done even better. But the 20 years before that were an unmitigated disaster.

But no matter whether inflation is low or high, TIPS will protect you. How?

The Benefits of Buying Treasury Inflation-Protected Securities

• Regular Interest Payments: TIPS pay interest every six months, just like a regular Treasury bond. But unlike traditional bonds, your principal increases each year by the amount of inflation, as measured by the consumer price index (CPI). Semi-annual interest payments also increase by the amount of inflation.
• Tax Benefits: The interest you receive is exempt from state and local income taxes (but not federal). TIPS are also less volatile than traditional bonds and are also excellent diversifiers.

There are three good ways to buy inflation-protected Treasuries:

1. Directly: http://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_buy.htm
2. Through the Vanguard Inflation-Protected Securities Fund (VIPSX).
3. Through its ETF equivalent – the iShares Barclays TIPS Bond Fund (NYSE: TIP).

I recommend TIPS for two primary reasons…

1. I’m not a moralist trying to claim the high ground. I’m just trying to protect myself, my family and my heirs from potentially destructive hyper-inflation. I don’t want to remain true to my free-market principles only to see the net worth I’ve accumulated over a lifetime torpedoed.
2. There is no private-sector alternative here. For good reason, private and public companies don’t want to leave themselves vulnerable to sky-high interest and principal payments down the road if inflation takes off. So they don’t issue inflation-protected securities. That makes TIPS the only game in town.

I know that some libertarians and laissez-faire capitalists will refuse to buy Treasury securities, period. But as I’ve pointed out, other inflation hedges sometimes don’t work. So there is no small risk taking another approach.

In sum, there is only one investment that guarantees a return that exceeds inflation in the years ahead: TIPS.

And in my view, that makes them an indispensable part of your portfolio.

Good investing,

Alexander Green

Editor’s Note:It’s beaten the performance of the S&P 500 every year since 2003.

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It’s been called a “superb, simple, smart, sophisticated strategy.”

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Alexander Green, Bond, Business/Finance, Deflation, Economics, Finance, inflation, Real interest rate, Treasury Inflation-Protected Securities, United States Treasury security

How to Retire Overseas: Why You Should “Think Outside the Borders”

by Alexander Green, Chief Investment Strategist
Monday, April 12, 2010: Issue #1236

It may seem like a dream for multi-millionaires only: Living in a mountainside or seaside villa with a spectacular view. Having a maid, a cook and a gardener take care of your home. Having your personal chauffeur drive you to town…

But it’s not. The dream is already a reality for thousands of middle-class Americans. And as the cost of living, housing, insurance and healthcare in the United States keeps rising, many tens of thousands more will soon follow them.

Whether you’re seeking an idyllic locale, the excitement of a new culture, the adventure of living in a foreign destination, or just a better lifestyle for less money, there has never been a better time to retire overseas.

And you may be surprised to learn that you can do it for as little as $900 a month…

How to Retire Overseas: The Complete A-Z

If you’ve even considered this idea before, you owe it to yourself to pick up Kathleen Peddicord’s superb new book – How to Retire Overseas.

I’ve known Kathleen for well over a decade. As the publisher and editor of International Living for more than 25 years, she understands living and retiring overseas better than anyone I’ve met.

Although she’s an American through and through, Kathleen and her family have lived in Paris, Ireland and now in Panama. She has explored business, investment and retirement opportunities throughout North America, Europe, Asia and Latin America.

In short, she knows her stuff.

She can tell you which countries:

• Have the best year-round temperatures.
• Which ones offer exemptions from import duties (the tax you’re charged when importing personal items or household goods).
• Which ones will allow you to employ a full-time maid for $150 a month or less.
• Which ones allow you to live comfortably on $1,200 a month… or less.

Retiring Overseas: 14 Countries with the Greatest Advantages

Kathleen goes onto list 14 countries that offer the greatest advantages to overseas retirees, including highly desirable locations like France and Argentina. For each country, she reveals the essential facts about:

• Cost of living
• Housing
• Climate
• Healthcare
• Infrastructure
• Language
• Culture
• Recreation and entertainment
• Safety
• Taxes
• Education
• Accessibility to the United States
• Special benefits for foreign retirees

The Benefits of An Overseas Lifestyle Without Giving Up U.S. Citizenship

Can you imagine yourself in a new home – on the front steps leading to a sugar-white beach? Sitting atop a balcony overlooking a bustling city? On a hillside villa with a superb view?

You don’t have to give up your U.S. citizenship. Kathleen shows you how to handle all the visa and passport requirements, as well as how to find or rent your home, establish secure bank accounts, obtain free or low-cost health insurance, make friends in your new hometown and avoid common pitfalls and mistakes.

Some, of course, have no inclination to live abroad. Others – like me – would relish the opportunity.

If you share my passion to really experience the world outside our borders – not just as a tourist, but also as a local – check out How to Retire Overseas. Even with the weak greenback, you can live in paradise for far less than you’d expect.

But you shouldn’t try it without an experienced guide. And I know none better than Kathleen Peddicord.

Alexander Green

Editor’s Note: There’s no better way to yourself on the fast-track to a secure, comfortable retirement than by following the recommendations in The Oxford Club’s Ultimate Retirement Letter. Designed specifically with retirees in mind, the portfolio is geared towards safer income investments that generate reliable, steady income over time. This monthly letter is just one of the many benefits that come with being an Oxford Club member. For the full details, take a look at Alexander Green’s report.

Aging, Alexander Green, Retirement, Social Issues, Termination of employment

Oil and Natural Gas Investments: Why You Should Buy Black Gold Now

by Alexander Green, Chief Investment Strategist
Thursday, December 3, 2009: Issue #1150

Some day in the future, human beings will likely colonize Mars. But if I suggested you invest in its colonization now, you’d rightly think I was a few cards short of a full deck.

The same is true of much-ballyhooed “alternative energy.”

Someday, nano-engineered solar panels and wind turbines may power the nation and the rest of the world. But it won’t be anytime soon. Today, wind and solar combined make up just one-sixth of 1% of American energy consumption.

As for the Cassandras who insist we simply don’t have any choice but to look elsewhere and that our planet is running out of oil and natural gas… well, take it with a whole shaker full of salt.

Here’s why – and how we can play the current oil and natural gas investment situation…

How to “Run Out of Oil” Multiple Times

Consider this from Pulitzer Prize-winning columnist, George Will:

“In 1914, the Bureau of Mines said U.S. oil reserves would be exhausted by 1924. In 1939, the Interior Department said the world had 13 years worth of petroleum reserves.

In 1970, the world’s proven oil reserves were an estimated 612 billion barrels. By 2006, more than 767 billion barrels had been pumped and proven reserves were 1.2 trillion barrels. In 1977, Scold-in-Chief Jimmy Carter predicted that mankind ‘could use up all the proven reserves of oil in the entire world by the end of the next decade.’ Since then, the world has consumed three times more oil than was then in the world’s proven reserves.”

The world’s population is rapidly rising, of course. And so is discretionary income. Nearly 2 billion of the world’s 6.2 billion population don’t have electricity and have never flipped a light switch.

So surely that means nuclear power is likely to play a major role in meeting future energy demand?

Nope.

Forget Nuclear… Oil and Natural Gas Will Still Rule the Energy World

By 2050, there will be more than 10 billion energy consumers. If nuclear power is to supply even 10% of our carbon-free energy, the world would have to build more than 50 large nuclear power plants a year. Currently, five a year are being built.

Our primary energy source for the rest of our lifetimes will be the same one that has dominated for the past 150 years: oil and gas.

Despite all the naysayers and finger-waggers, that’s not an insurmountable problem. The world’s deep-water oil and natural gas reserves are significantly larger than was thought just a decade ago. And higher oil prices have spurred the development of technologies for extracting them.

That means the cost of developing Canada’s oil sands, for example, are quickly declining. Projects that weren’t viable last year now are, with oil at $77 a barrel.

As for natural gas, U.S. known reserves – including the Marcellus Shale, – which contains more natural gas than the North Field in Qatar, the largest field ever discovered – exceed 100 years of supply at the current rate of consumption. And those reserves are sure to become larger.

Two Huge Commodities… And One Investment That Capitalizes on Both

Let other speculators chase the high-risk venture capital investments in alternative energy sources. Oil and gas are here to stay. Bank on it.

Or better yet, pick up a few shares of iShares Dow Jones US Oil & Gas Exploration Index (NYSE: IEO). Here are three reasons why you should…

• It’s well-diversified, holding Anadarko Petroleum (NYSE: APC), Apache (NYSE: APA), Chesapeake Energy (NYSE: CHK), Devon Energy (NYSE: DVN), Noble (NYSE: NE), Occidental Petroleum (NYSE: OXY), Valero (NYSE: VLO) and many others.
• It’s liquid.
• Costs are low – annual expenses are less than half of one percent.

Good investing,

Alexander Green

Alexander Green, natural gas investments, NYSE: IEO, oil investments