Shielding Retirement Accounts From Inflation
Because TIPS can prevent portfolios from being eroded by inflation, some academic researchers argued that all long-term investors should hold the securities. But in recent years it has become clear that inflation securities can be quirky. During the market turmoil of 2008, TIPS suffered sizable losses and lagged well behind inflation. Lately TIPS have climbed.
Should you hold TIPS in your retirement account? That depends on your age and temperament. For rough guidance, long-term savers should consider the approaches taken by portfolio managers of three of the biggest providers of target-date funds: Fidelity Investments, T. Rowe Price(TROW) , and Vanguard Group. The managers at all agree that TIPS should play a role in portfolios of retirees and those who are approaching retirement. For younger people, inflation securities may not be the best choice.
Target-date funds are designed for people who will retire around a certain year such as 2020 or 2040. The asset allocations of the portfolios shift gradually, becoming more conservative as investors approach retirement dates. Some 2040 funds start with 80% of their assets in stocks and the rest in fixed income. By the retirement date, the equity holdings decline to less than 50%.
In its funds aimed at young people, Fidelity emphasizes big stock allocations. Fidelity Freedom 2040 (FFFFX) has 71% of assets in stocks and no TIPS. The company introduces TIPS as the retirement date approaches. Fidelity Freedom 2030 (FFFEX) has 2.1% in inflation securities. The figure rises to 10.4% in the 2015 portfolio and 10.9% in the 2010 fund. In its 2015 portfolio, Vanguard allocates 3.5% of assets to inflation securities. The figure climbs to 12% in the 2010 fund.
John Ameriks, head of Vanguard's counseling and research group, says investors of all ages should guard against inflation. But younger people can get protection by holding stocks and bonds. "Over long periods, we expect that the returns of stocks and bonds will be greater than inflation," says Ameriks.
While stocks should outdo TIPS over the long term, there could be temporary periods when equities lag inflation badly. Since retirees may not have time to recover from even brief setbacks, they need to hold TIPS, Ameriks argues.