Getting Real With TIPS

TIPS are Treasury Inflation Protected Securities that are issued by the federal government and pay a fixed amount plus inflation, as defined by the Consumers’ Price Index. They were smokin’ hot early last summer when gas was $4 per gallon and the gurus were predicting an increase to $10 by the end of 2008. The demand for TIPS drove the real yield down to less than 0.50 percent annually.

By October, guru talk turned to predicting deflation. Investors left TIPS, driving their real yields up to more than 3.5 percent, because people expected the amounts paid by these instruments to decline significantly. They have now moderated, and the yields are somewhere just below 2 percent annually.

I might be guilty of committing the ultimate investing sin by thinking I’m smarter than Mr. Market on this one, but I believe investors tend to think in nominal terms rather than in real, inflation-adjusted returns.

Much like CDs, I’d rather get a 2 percent total return with no inflation than a 12 percent return with 10 percent inflation. That’s because the government taxes us in nominal dollars so, if we earn 12 percent, we are likely to under-perform the 10 percent inflation after paying those taxes.

Buying TIPS when the real yields are high (and prices are low) and selling some when real yields plummet (and prices are high) meets every definition of active investing via market timing.

My Gambling Portfolio

I’ve previously “shared” that daring to be dull in my investing doesn’t immunize me from the occasional bout of gambling fever and having my own gambling portfolio. A recent Citigroup purchase clearly demonstrates I am capable of some risky business. It’s not that I’m proud of my gambling habit, but it is satisfying to that thrill-seeking part of my brain that wants to see my money double or triple in just a few weeks. You know, the delusional part.

So these are the strategies that have defined me as an active investor by my students. I’m OK with that.

Investing isn’t a religion, after all. Investors don’t need to blindly pledge an active or passive oath.

Some of these strategies might work for you. Just be sure to implement the first three with focus and discipline, and the fourth one only with fun money.

Allan Roth, a CPA and Certified Financial Planner, is the founder of Wealth Logic LLC, an hourly based financial planning and licensed investment advisory firm. He also is the author of “How a Second Grader Beats Wall Street.” He can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it . His firm's Web site is http://www.daretobedull.com/. This article first appeared in the Colorado Springs Business Journal.

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