So you believe my Hyperinfaltion theory - what do you do with your money? (Option 1)
I had a bunch of people e-mail me after my hyperinflation post titled “AIG expected to report a $60B loss. What does that mean to you?” to tell me that they have the same fear and asked if I had any suggestions where to invest in that kind of an evironment.
First, I asked them why they e-mailed me instead of adding comments to my blog (which is exactly what I was hoping for) and then I reminded them that I have neither the expertise nor the qualifications to give them any kind of financial advice.
Then again, lack of expertise or qualifications has never stopped me from giving advice before so here is the first of a series of new posts which will be aptly titled: “So you bought into my hyperinflation theory - what to do with your money”.
The advice that follows is exactly as intended - it is unqualified at best.
Option 1. TIPS
TIPS are “Treasury Inflation-Protected Securities”, sold by the government to provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation. The principal is pegged to CPI - the consumer price index. The instrument also pays interest twice a year, your principal gets adjusted based on the CPI and you get paid a fixed interest rate over the adjusted principal so the interest dollars also go up with inflation and down with deflation. At maturity you get paid either adjusted principal or original principal, whichever is greater.
So this is actually a pretty good instrument to buy if you are worried about your money loosing value - if you beleive CPI correctly reflects inflation, in real terms you don’t loose any value. I personally think CPI is 1bps to 2bps lower than reality (I follow the McDonalds Index which I think now is more relevant than ever) but it comes very close.
You can buy TIPS directly from the government (TreasuryDirect) or you can buy a TIPS fund from any of the mega mutual fund companies out there - Blackrock has a pretty good TIPS fund, so does Fidelity.
TreasuryDirect is the cheapest option, since you don’t pay a fee but redemption is a bit difficult I think. It seems you have to hold the instrument to maturity.
The TIPS mutual funds got hit a lot the latter part of 2008 although they are up anywhere from 8% to 11% since the beginning of the year and have caught up. I looked into why, it looks like most fund are almost 75% in TIPS from the Treasury, 5% in cash and 20% in equities to goose up returns which worked very much against them with the sharp drop in the market.
The surprise in all this for me is how large these mutual funds are and they seem to be growing rapidly so I am not alone.
In the spirit of taking my own medicine, I pledge to move whatever little money I have to TIPS in the next few days and report back on the experience.
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