Articles by Mike SandyOne year ago, I wrote an article that discussed Treasury Inflation-Protected Securities (TIPS). TIPS are important because they provide the best protection against inflation among the universe of fixed-income securities.
TIPS, however, are not perfect. In fact, several prominent investment professionals have publicly addressed TIPS-related issues over the past year. In this article, I’ll discuss some of these issues and relate them to the concerns of sensible long-term investors.
There are several risks universally associated with investments in fixed-income securities. Some of these risks include default risk, liquidity risk, reinvestment risk and interest rate risk. For United States Treasury securities; however, the market considers these fixed-income securities to be free of default risk.
Investors, therefore, require that bonds issued by entities other than the federal government carry a premium yield-to-maturity so they can be compensated for the added default risk. This premium, called the credit spread, is the extra yield investors require for taking on the added default risk associated with investing in corporate bonds.
There are a few conflicting historical stock market phenomena pertinent to 2005, which is a post-election year and the fifth year of this decade. The S&P 500 index has performed remarkably well in the fifth year of decades since 1881. The index, however, has performed below average in years following an election, except when the incumbent president stays in power or when the post-election year is the fifth year of a decade.
There is an inherent conflict of interest when a person giving investment advice also works for a sell-side investment company (i.e., a brokerage) that manages mutual funds. Often, their advice will include their company’s own mutual fund offerings regardless of the funds’ merits (or lack thereof). This biased advice can diminish investors’ portfolio returns.
In the world of investments, historical data often help investment managers predict the future performance of the markets. My colleagues and I searched for periods with similar characteristics to today to help guide our investment decision-making during this period of almost inexplicably weak equity markets (although the high price of oil seems to have been taxing the markets recently). We found an eerily similar period with many significantly similar characteristics.
Inflation is a fixed-income portfolio’s silent enemy. Someone who invests $10,000 in 10-year treasury bonds with a 5 percent coupon per year receives two payments of $250 per year until the bond matures. Unfortunately, inflation can quietly erode the real value of those fixed interest payments.
What if there was a way to make fixed income less fixed? Treasury inflation-protected securities (TIPS) do just that: they adjust an investor’s principal to keep pace with the Consumer Price Index, a common inflation indicator, and investors earn interest on that inflation-adjusted principal.
The tragedy of Tuesday cast a glaze over me. Immediately following the tragedy, I tried to assess the effects of the tragedy on every scale—the economic implications, the historical implications, and the political implications—but my dominating thoughts were on the now-proven fragile impermanence of our way of life.
I could barely sleep. The anticipation kept me thinking of what it would be like. I changed sleeping positions all night, from side to side, on my back, on my stomach. Nothing was comfortable. Finally, it was morning, and my dad woke me up. I quickly rose, despite the restless night of sleep.
It was here! I was finally going skiing! I had been dreaming of this day for four years.