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consumer price index
credit crisis
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Why Treasury Inflation Protected Mutual Funds Are Not Effective
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The reason why treasury inflation protected mutual funds are not effective in reducing your exposure to purchasing power dilution is simple. It has to do with flaws in the measurement on which the insurance against price increases are based, and the timing of those yield changes. It is because of the inherent flaws in the measurement of the CPI, or consumer price index and when it is applied to your investment.

Treasury Inflation Protected Mutual Funds Buy Flawed Assets

TIPS based mutual funds really are a nice idea. The government saw a demand for bonds which were insulated from the dilution of value caused by inflationary monetary policy. It stands to reason then that a company that establishes treasury inflation protected mutual funds is investing in these assets whose rate or yield will vary with the level of prices. An investor in this type of fund would naturally think that their income and purchasing power will not diminish with this type of investment. After all, the interest rate on the investment is supposed to rise and fall with the price level, right?

Sadly, not all prices change equally, and this is the disasterous flaw within the CPI and as a result, treasury inflation protected mutual funds as well. The sad truth is that while the index upon which all treasury inflation protected mutual funds are based fluctuates with a broad range of prices, including some very long term durable assets such as housing and rents, the prices for the goods most of us buy on a regular basis are rising much more rapidly. This is causing a disconnect between the purchasing power promised by an inflationary insured asset like a TIPS security and the actually realized purchasing power delivered by the income generated.

What Assets Are Wise Investors Using to Retain Wealth?

Smart money has been moving into gold for years, beginning long before the credit crisis in 2008. Today's spot price in the neighborhood of $1500/ounce is six times what it was just a few years ago at the turn of the millenium. Investors began jumping in the precious metal in 2002 and it has been rising ever since. The problem for late-comers however is that prices have sky-rocketed, leaving people searching for alternative protection. Many have turned to silver, considered the poor man's gold - but even this precious metal has come within a dollar of all time highs.

Finding effective protection against inflationary monetary policies is very difficult once the pricing spiral has begun. Treasury inflation protected securities are flawed and react to changes incorrectly and far too late to be of any use. By the time most people think about the problem and seek other stores of wealth like stocks or bullion the damage has been done.

Earning Your Way Through High Inflationary Times One other way to combat the falling dollar foe is to earn (rather than invest) your way toward purchasing power (if not wealth) protection. It won't necessarily protect your savings but it can keep you ahead in the race. Knowing how to beat inflation once dollar printing is under way can make a difference for families unable to get ahead by buying gold.

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