In October 2008, as a hedge against inflation, I purchased a 5 year, $25,000 Treasure Inflation-Protected Security (TIPS) at a discounted price of 89.114 with an interest rate of .625%. As of last October 2009, its inflation-adjusted value was $25,497.25. So in 12 months, it has increased in value by $3,188.75 [25,000 - 22,278.50 (25,000 x .89114)] but most due to the discount. I only bought one because they were new to me as an investment vehicle but I thought that the best way to test out the waters is to get your feet wet. Recently there was a bit in the AICPA's CPE Direct studies (Journal of Accountancy, April - June 2009) that laid out why TIPS could be a reasonable investment in either an inflationary or (not so much) in a deflationary market, the last market not so likely to happen, right? The main selling point to TIPS is that, at maturity, you receive the face amount ($25,000) adjusted (most likely up) twice a year over the term (in my case, 5 yrs x 2 =10 times). So you can pick up the accrued inflation adjustment for (a particular) TIPS (1.02348 for my TIPS at February 1, 2010) plus interest (you get paid half twice a year). Even if you have deflation (what is the chance of that happening, realistically?) during the full term, you are guaranteed the face amount ($25,000) and some reduced interest. But since I purchased the TIPS at a discounted price, I still would have made money. But, keep in mind that you will have to pay federal income tax on both the interest and inflation adjustment.
In October 2008
Jan 19th 2010