In Part I, we summarized the design, history, and appeal of TIPS fixed income securities. In particular, following the disastrous impact of the Financial Crisis on the investment market between 2007 and 2009, TIPS drew special attention as a potentially “safe, steady, dependable” investment.
For example, during 2009, the well-known university professor (and financial expert), Dr. Zvi Bodie, suggested that investors should put 100% of their retirement assets into TIPS!
However, during 2013, TIPS investors experienced the disappointment that our economy is still (apparently) far off from truly significant inflation! No matter how inevitable it may be that recent Federal Reserve monetary easing will breed a powerful wave of inflation – all we can say with certainty about inflation is that it will come “eventually”. Meanwhile, it isn’t here yet!
Therefore, during 2013, investors found that the principal values of their TIPS were not raised and (making matters worse) secondary market prices for TIPS were falling (due to rising interest rates). The result was that investors were caught off guard by the fact that what they had assumed was a “safe” investment in TIPS left them with an abysmal annual return for 2013!
The 2013 price chart for the iShares Core Total US Bond Market ETF (AGG) is shown on Slide 3. The large actively managed fixed income fund run by Bill Gross [Pimco Total Return ETF (BOND)] performed only marginally better. In disappointing contrast, the $12.5 billion size iShares TIPS Bond ETF (TIP) lost almost 10% in market value during the year. Adjusted for interest earned, the "Total Return" reported for TIP in the iShares website was -8.65%.
So should investors take a pass when it comes to investing in TIPS? Based on investment performance since January 1 of this year, the answer is a very firm: “No!”
Take a look at the performance of TIP since the start of this year (on Slide 4) – from below $110/share to almost $114!
In order to help you see an even more compelling reason to keep on eye on TIPS, look at this graph of the market price of TIP relative to that of the S&P 500 Index and the NASDAQ Index. (On Slide 5).
So the optimal place of TIPS within an investment portfolio remains a significant issue of discussion among financial experts, but I can’t think of any such expert that chooses to rule out TIPS altogether!
In our next article, we’ll hear from Merrill Lynch’s Wealth Advisor, Shankar Iyer, CFP about the place of TIPS in an investor's portfolio!