Is protecting your nest egg worth paying the government for the privilege? A split is forming among advocates of these ultra-defensive investments, writes MoneyShow's Howard R. Gold, also of The Independent Agenda.

For 16 years, Treasury Inflation Protected Securities (TIPS) have been an investment of choice for
Americans saving for retirement.

TIPS are US Treasuries whose principal adjusts along with the Consumer Price Index, giving investors protection against inflation without the volatility of stocks or commodities. No wonder investment heavyweights such as Pimco’s Bill Gross and Yale University’s chief investment officer David Swensen have recommended TIPS for individual investors.

But TIPS have become victims of their own success. The Federal Reserve’s extraordinarily loose monetary policy and investors’ desperate flight from risk have propelled TIPS to new highs in price—but new lows in yields.

The iShares Barclays TIPS Bond ETF (TIP) hit an all-time closing high of $123.30 last December. It closed at $121.24 Wednesday. The ETF racked up gains of 33% from its October 2008 trough, an enormous advance for a bond fund.

Yields of some TIPS have fallen into negative territory. That’s caused many pros to dump TIPS completely, as I wrote a couple of weeks ago.

One prominent long-time supporter of TIPS, Prof. Robert Shiller of Yale, now recommends investors sell them and buy some stock instead. Another strong advocate, Zvi Bodie of Boston University, thinks investors should stick with TIPS and stay out of stocks.

It’s a disagreement that symbolizes the tough choices many investors face as they try to decide what to do with their money in a confusing world.

Ten-year TIPS yielded -0.602% at their most recent auction. That means you paid the US Treasury for the privilege of holding its paper and getting inflation protection. Isn’t that what they used to call taxes?

And when interest rates rise (notice that I didn’t say “if” rates rise), TIPS’ principal will fall, along with ordinary Treasuries.

Read Howard’s analysis of President Obama’s 2014 budget proposal in The Independent Agenda.

It’s the negative yield that really bothers Shiller. “Right now, they’re yielding a negative return over the long run, and over the short run it might be even more negative if interest rates go up again,” he said in a recent interview on PBS’s Consuelo Mack WealthTrack.

 “Ten-year TIPS are negative substantially, even now to 15 years...which means you’ll get less back in real terms 15 years from now than you have today."

That’s why he recommends putting some money to work in the stock market, even though the S&P 500 index changes hands at 23 times its ten-year average earnings, the “cyclically adjusted price-to-earnings ratio” (CAPE) which Shiller helped formulate.

He acknowledged that level was “high, but it’s not super high,” so investors could put a small amount of their money into stocks, he said. I tried to find out how much, but Shiller didn’t reply to my e-mails.

NEXT: The Case for TIPS and Against Stocks


Any amount of stock is too much for many people, said Zvi Bodie, whose research suggests investors should take less risk than most financial advisors recommend. He also strongly defends TIPS.

“Are TIPS overpriced? Compared to what?" he asked. TIPS, he said, are much better bets than conventional Treasuries, because at least they’re indexed for inflation, and rates adjust upward as inflation rises.

“TIPS guarantee a known return in terms of consumer purchasing power—regardless of the actual rate of inflation, and even when real interest rates are negative,” he wrote in his 2012 book Risk Less and Prosper, written with Rachelle Taqqu.

“TIPS have downside risk, but only if you sell them before maturity,” he told me in an interview.” Do I think TIPS are the best hedge against long-term inflation and increases in interest rates? Yes.”

But Bodie likes I Bonds even more. I Bonds are savings bonds issued by the US Treasury whose accumulated principal can never decline in value, and whose interest rate is always at least equal to inflation.

“I Bonds are insured not only against inflation, but against deflation,” he told me. “‘The real rate adjusted for inflation can never go below zero.” He called them “unquestionably the safest investment in America.”

But I Bonds are difficult to purchase for your IRA. Individuals can buy only $10,000 worth per year, and like savings bonds the interest accrues over time, so you can face a hefty tax bite when you cash them in.

Stocks, however, are even worse, said Bodie.  “For most people it’s a lottery ticket,” he told me. “The threshold in this is, can you take the hit?”

As we learned in 2008-2009, lots of people can’t. That’s why so many who sold then are just getting back into the market now—four years and 120% later, with the Dow and S&P 500 hitting new highs every day.

I believe most people should have some of their assets in stock—and I emphasize the word “some”—but not more than 40% if you’re within ten years of retirement.

Yet I don’t think this is a good time for most people to buy stocks. Shiller’s own numbers show the timing isn’t right. Sometimes, investors need to admit they missed the boat and hold out for a better opportunity. I’d wait for at least a correction and maybe even the next bear market before putting more money into stocks.

As for TIPS, I’ve been selling since I wrote a column last September calling them one of the three most overvalued asset classes. I’ve switched that money into short- and intermediate-term bond funds and cash. You should consider doing the same.

Howard R. Gold is editor at large for and a columnist for MarketWatch. Follow him on Twitter @howardrgold and catch his blog on politics and the economy at