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Portfolio Insights by Brett Arends Archives | Email alerts
Oct. 18, 2011, 12:00 a.m. EDT
By Brett Arends, MarketWatch
BOSTON (MarketWatch) "” If you're retired, or nearly retired, you probably want three things from your investments: Safety of principal, a reasonable rate of interest, and some security against the risks of inflation down the road.
Good luck with that.
Developments in the financial markets, and the Federal Reserve's policies, have driven down interest rates and closed off most of your options.
What can you do?
Here's something intriguing. Microsoft founder Bill Gates has been quietly taking advantage of a little-known investment on the stock market that may satisfy all three conditions. And it's open to anyone.
Europe's richest are following the words of Warren Buffet, and are willing to pay more in taxes to alleviate growing economic tensions with middle class. Video courtesy Fox News. Photo: Getty Images.
Before we take a look at that, let's look at the conundrum facing millions of older investors.
Stocks don't offer safety of principal (although a basket of high-quality blue chips offer a pretty reasonable amount of security over the course of, say, five or more years).
Certificates of deposit, money-market funds and short-term bonds don't offer a reasonable rate of interest. One-year CDs are paying about 1% "” compared to official inflation currently running at 3.8% "” and shorter-term deposits are paying even less.
And if you buy longer-term bonds instead, to earn higher interest, you are putting yourself at risk from inflation. Even 30-year Treasurys yield little more than 3%.
This problem has been driving many investors into a fourth option: Inflation-protected Treasury bonds, known as TIPS.
Until recently these were among my favorite investments for conservative investors (and indeed for most of us). TIPS are bonds issued by Uncle Sam, but unlike regular bonds their yield rises and falls with inflation. As recently as this spring the so-called "real" yield on long-term TIPS bonds, which means the interest rate on top of inflation, was nearly 2%. That was a pretty good deal.
No longer. TIPS bonds have rocketed in price "” as investors have stampeded into the last lifeboat available.
Bonds are like seesaws. When the price goes up, the interest rate goes down. Anyone buying TIPS bonds today is locking in meager returns "” or worse.
The five-year TIPS bond actually sports a negative "real" yield of half a percent a year. Put another way: Anyone buying that bond today and holding it for five years is guaranteed to lose 3% of their purchasing power.
You have to buy TIPS bonds of at least 10 year's maturity to earn a return ahead of inflation, and even there it's a paltry 0.3% a year.
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Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S... Expand
Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S. He has received an individual award from the Society of American Business Editors and Writers for his financial writing, and was part of the Boston Herald team that won two others. He was educated at Cambridge and Oxford Universities, and has worked as an analyst at McKinsey & Co. He is a Chartered Financial Consultant (ChFC) and Accredited Asset Management Specialist (AAMS). His latest book, "Storm Proof Your Money," has just been published by John Wiley & Co. Collapse
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