Is There a Safe, Smart Investment These Days?

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What types of investments are "safe" these days?
— Dot Daniel Dickinson

Zvi Bodie, the great pension expert at the Boston University School of Management and a Friend of Making Sen$e, has written extensively on this subject, including here on Making Sen$e. His latest book, with co-author Rachelle Taqqu, is Risk Less and Prosper: Your Guide to Safer Investing.

There's a useful Q&A with the authors here and a lot of Zvi's advice is online at his YouTube page.

His standard answer to the "safest investment" question is inflation-protected U.S. government bonds: savings bonds like I-bonds, which Zvi wrote about recently, and Treasury Inflation-Protected Securities (TIPS) linked to the Consumer Price Index (CPI).

Investing in TIPS for Retirement

I began to invest in TIPS for retirement when Zvi first told me about them 15 years ago and now own them via a mutual fund from Vanguard (Vanguard Inflation-Protected Securities Fund Admiral Shares), which charges a measly 14 basis points (0.14 percent) 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.

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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 CPI as well as the interest rate that the government agreed to pay until "MATURITY," the date 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" or $1,670. 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).

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The last column tells you what happened to PRICE and YIELD during the day.

One Warning About TIPS

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 I first suggested TIPS [and here Andy links to an earlier column], they yielded a ridiculously good 4.25 percent above inflation. Today, depending on their maturity, they 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.

Full disclosure: my wife and I still have more than half our retirement money in TIPS. They're risky, all right, 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.

Paul Solman is a member of the Twitterati and can be followed at Twitter@paulsolman. His daily blog can be followed, well, daily at Making Sen$e by linking here, or just Googling the words: "Making Sense."