Let’s face it: The past few years have been pretty scary for investors. From pandemics to bear markets and inflation, it seems like most people aren’t worried about making huge profits, as they are just trying to protect their assets and stay ahead of anything catastrophic. While there are many ways to achieve this goal, Morningstar analyst Christine Benz has two specific investment options that she thinks can help investors protect their portfolios as the market moves through its current downtrend: Treasury Inflation-Protected Securities (TIPS) and I-Bonds.
To help you figure out how to protect your portfolio, consider working with a financial advisor.
Tips Basics
Treasury inflation-protected securities are a fixed-income investment option issued regularly by the United States Treasury. While these securities are similar to a traditional Treasury bond, the main difference is that the par value of TIPS will increase along with the Consumer Price Index. This is especially important right now, as high inflation rates are making many investors concerned about their exposure to fixed income securities that offer rates that trail inflation, causing them to lose money.
TIPS generally come in terms of 5, 10 and 30 years. You get interest payments twice a year, just like a regular Treasury bond. You can buy them directly from the government at TreasuryDirect.gov or buy them from a bank or investment broker. TIPS can also be purchased by institutional investors, so there are funds that invest in TIPS, meaning you can buy these funds instead of owning the TIPS.
i bond basics
I bonds are also fixed-income products purchased from the government, but they work a bit differently.
I bonds are Treasury bonds that pay two different interest rates – one is fixed at the time of purchase, and the other is adjusted twice a year to keep pace with inflation. Currently, the fixed rate is 0.4%. The composite rate – a combination of the fixed rate and the inflation rate – is 6.89%. The adjusted rate will change again on April 30.
I bonds have a final maturity date of 30 years, but can be redeemed any time after one year. If you redeem the I bond within five years of purchase, however, you will lose three months of interest. It’s also worth noting that institutional investors cannot buy I bonds, so there is no way to invest in these assets through the fund.
One final big difference is that you can only buy up to $10,000 in Electronic I Bonds each year – although if you’re married, both you and your spouse can buy up to the limit. These can be purchased at Treasury Direct, the same place that TIPS are. You can buy an additional $5,000 in Paper I bonds – which can then be converted to digital assets – but only with your tax refund. Explore all the loopholes for purchases over the $10,000 limit here.
I Bonds Vs TIPS: Which Is Better?
The obvious advantage of TIPS is that you can buy as many of them as you want. The typical limit of $15,000 per person (and that’s only if you get a big enough tax refund to cover the $5,000 in paper bonds) means that the amount of money you can save from inflation by using I bonds is far more than other is severely limited without the discovery of complex flaws.
I bonds have high real yields, and you can cash them out whenever you want. However, TIPS can be sold in the secondary market, so there is a possibility of getting cash out of them before they reach the maturity date.
Another disadvantage of TIPS is that they have somewhat unfavorable tax treatment – which can be avoided by investing in a tax-sheltered account such as an IRA or 401(k).
Bottom-line
Both TIPS and I bonds are good investments for people looking for a way to hedge their portfolios against inflation. Both have their merits, and either one — or a combination of the two — can be an effective way to protect your assets during the current inflationary period.
investment tips
- A financial advisor can help you figure out how to best protect your assets. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisor matches for free to decide which is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s free investment calculator to see how your money could grow over the years.
Photo credits: © iStock.com/courtneyk, © iStock.com/Khanchit Khirisutchalual, © iStock.com/Darren415
Ben Geier, CEPF® Ben Geier is an experienced financial writer currently employed as the Retirement and Investment Specialist at SmartAsset. His work has appeared on Fortune, Mic.com and CNNMoney. Ben is a graduate of Northwestern University and a part-time student at the City University of New York Graduate Center. He is a member of the Society for Advancing Business Editing and Writing and a Certified Educator in Personal Finance (CEPF®). When he’s not helping people understand their finances, Ben enjoys watching hockey, listening to music, and experimenting in the kitchen. Originally from Alexandria, VA, he now resides in Brooklyn with his wife.
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