Why TIPS are a Bad Inflation Hedge
In the last few months, we’ve written exhaustively about inflation. The last article published on inflation explained the three stages of inflation, and we offer a 16-part course on inflation completely for free. A common question I receive is, “Are TIPS safe ways to beat inflation?”
TIPS are Treasury Inflation Protected Securities — essentially investments in which you give the government your cash, and they promise to make the investment keep up with inflation over the course of its term — they base their understanding of the inflation rate on the CPI, an index they completely manage. The investments are offered with 5, 10, and 30-year terms.
So are these good investments? The answer is: absolutely not. There are three reasons why TIPS are shoddy inflation hedges, as I’ll explain below:
- Misreported Inflation. As I’ve written over at Current Inflation Rate, the United States Federal Government simply misreports inflation. TIPS will earn only as much as reported inflation — meaning if inflation is 7%, and the government is reporting it’s 3%, you’re still losing 4% per year.
- Mis-Allocated Trust. If hyperinflation hits, there’s no telling what the government will do to protect itself. The idea of putting your anti-government-induced inflation strategy in the government that’s causing the problem is completely foolish. They’re intentionally creating inflation to move money around — they’re not going to honestly let you skip out of the process. That defeats the point of causing inflation in the first place.
- Paper Assets are Risky. When it comes to TIPS, they’re paper assets. If your goal is financial security, inflation is only one of many concerns. TIPS probably don’t beat the real inflation rate, and if things get economically iffy, paper assets are always the riskiest. TIPS aren’t ownership in any “real” thing — not even like paper stocks. If an economic shakeup occurs, paper assets are the least safe assets possible.
We talk a lot about financial security at Stand Strong Research, because we care more about risking ruin than making a few extra bucks. In the end, a safe portfolio that’s also a smart portfolio is often much more profitable than high risk moves.
When it comes to beating inflation, go back to our inflation course and check out the other articles on beating inflation — TIPS shouldn’t be your decision.
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