MAKING SENSE -- July 13, 2012 at 1:40 PM ET
Where Is a Safe Place to Invest?
Today we add a new wrinkle to Making Sen$e. The NewsHour has partnered with Next Avenue, a PBS site "that provides in-depth information, perspective and inspiration to help those 50 years old and older navigate their next life stage."
I'll still be trying to answer questions pretty much every day, but some will now come directly from those of you Next Avenue readers puzzled or vexed about your maturing finances and how what's happening in the larger world of business and economics might relate.
Friday, we start with an inquiry about safety.
Question: What types of investments are "safe" these days?
-- Dot Daniel Dickinson
Paul Solman: FOM$* Zvi Bodie, the great pension expert at the Boston University School of Management, has written extensively on this subject, both here on the Making Sen$e page and in real life. His latest book, with co-author Rachelle Taqqu, is "Risk Less and Prosper: Your Guide to Safer Investing."
His standard answer to the "safest investment" question is inflation-protected U.S. government bonds: savings bonds like I-bonds, about which Zvi has written here recently, and Treasury Inflation-Protected Securities (TIPS).
I began to invest in TIPS for our retirement when Zvi first told me about them 15 years ago. We now own them via a mutual fund from Vanguard (VAIPX) which charges us a measly 14 basis points as a management fee. But as I pointed out recently, TIPS are at or near their all-time high in price, which means their return is at an all-time low.
Go to this Bloomberg market page and scroll down to "Inflation Indexed Treasury" and you'll see the current numbers for 5-Year, 10-Year, 20-Year and 30-Year TIPS. The first column, "COUPON," lists the interest rate, in addition to the CPI, that the government agreed to pay until "MATURITY," the date of which is listed in the second column. Next comes "PRICE/YIELD." "PRICE" reflects what you currently have to pay on the secondary market for bonds of this vintage, as a percentage of the nominal price. So a $1,000 bond maturing in 20 years, issued on April 15 of this year, is now selling at about "167": $1,670 dollars. Since the interest rate was the 3.375 percent (in addition to the CPI), as listed in column two, the effective interest rate or "yield," given that price, is actually just below zero (-.02 percent; remember, though, that you're also guaranteed an interest rate equal to the Consumer Price Index in addition). The last column tells you what happened to PRICE and YIELD during the day.
A warning. Here's what the nonpareil investment writer Andrew Tobias wrote about TIPS on February 28:
"I own no bonds...I'm even out of the TIPS that have appreciated so nicely -- because they have appreciated so nicely. When first suggested [and here Andy links to a column of his from the year 2000, I think], they yielded a ridiculously good 4.25% above inflation. Today, depending on their maturity, [TIPS] yield little or nothing above inflation (and, because they sell at a premium, may actually carry a small negative yield). Going forward, they may not hedge inflation as well as stocks or real estate."
Since Andy's post, however, TIPS have risen nearly 3 percent in value, while continuing to pay interest. But of course their higher price just makes them even more expensive if you buy them today -- with a lower yield. Caveat investor.
But full disclosure: my wife and I still have more than half our retirement money in TIPS. They're risky, alright, but as far as I can tell, every other asset category is riskier still, should catastrophe strike again. And that's what we're trying to protect against.
*Friend of Making Sen$e