safe investment for maintaining purchasing power

Question

I have $100,000. I am going to need the money over the next year.

I want to protect its purchasing power relative to inflation and also have some reasonable low risk return.

What would be a good investment option?

I had heard that inflation protected treasury bonds are good for this, but I see that the price of TIPS index fluctuate over time based on inflation expectations.

I want something that I can withdraw easily in a few months as cash (with 30 day notice), and the purchasing power of it cannot decline relative to inflation. In addition, I am assuming I can make some real gain over the period.

Other than ETFs like TIPS, is there a way to get inflation protected treasury bonds for retail investors like me (not a sophisticated investor with experience with complicated financial instruments)? And would that be positive net profit over the time I own them?

What is the real return I can expect under these conditions?

Answer 1

One year is very short term in terms of investment horizons. Depending on your anticipated distribution/spending pattern, the most appropriate choice is likely either a high-yield savings account, CD, or combination of both. A CD will lock the money up for some months (I think you can find some for shorter terms than a year, but the rates probably aren't much better than a HYSA), so is only advisable if you know for sure what your schedule is for using the money.

This approach, over the long term, will likely lose purchasing power to inflation. You're not concerned about the long term, though; you want to use all this money within the next year. If inflation is high enough that it eats all your gains (from HYSA/CD interest) in this time, you're probably looking at several dozen dollars at most.

Inflation-beating investments, like stocks/ETFs, will (most likely) outperform in the long-term, but have higher volatility; if you use such vehicles for your 100k now, then 6 months from now you may only have 60k. This type of risk is not appropriate for such a short-term plan.

Answer 2

You can certainly buy US federal inflation-protected bonds directly from the government. See https://www.treasurydirect.gov/savings-bonds/i-bonds/i-bonds-interest-rates/ . Note that the interest rate on this kind of bond DOES inherently vary over time.

However, these bonds have a minimum holding period. "Can cash in after 1 year. (But if you cash before 5 years, you lose 3 months of interest.)" If you may need the money in less than 12 months, they probably aren't a good choice. And there are limits on how many of these bonds an individual can hold, so they aren't a solution for to parking $100k.

What bond funds (ETF or traditional) give you is the ability to buy and sell at any time, for some approximation of the pro-rated value of the bond at that time. They may also be able to cheat past the per-individual purchase limit; not sure. But you pay a bit for that convenience, and you are subject to market forces as people try to guess what the rates will be in the future and set their buying and selling prices accordingly. So they aren't as much of a guaranteed bet.

Wherever you put your money, you are always trading off between safety, returns, and convenient access.

Answer 3

The only secure investment which guarantees a yield at the inflation rate are I Bonds. Unfortunately, they have a minimum hold time of 12 months (not what you say you want), and maximum purchase amount per year of $10K (not nearly your $100K).

Purchasing TIPS bonds (not a fund, but actual bonds) maturing in July 2023 are only yielding 2.5%!

On the other hand, Treasury Bills are yielding more than 4.6% at this time. You can buy them from your broker (if you don't have one, Fidelity, Schwab and Vanguard will be happy to have you open an account with them). What I'd do is determine when I need each chunk of the money, and buy that much of "52 week" T-Bills maturing just before you need the money.

Answer 4

Nobody knows what the inflation rate will be in the next year. There are estimates, but there are no guarantees. Even people who think they have a good model can't predict the political events, or disasters that can destroy all the estimates.

Investing in stocks involves risk that not only can you lose against inflation, but you can also lose money. Even instruments that have a guaranteed return can't guarantee that they will beat inflation. This is even more so when you want to be able to spend some of the money during the year.

Many of the guaranteed return instruments either have a fixed time period you have to be invested, or a maximum investment amount. Neither of these work in your situation.

While there are risks in stocks, there are even greater risks in crypto. Even precious metals can't guarantee they will beat inflation.

Answer 5

A Treasury Direct account can tie your bank account into an investment in three-month Treasury Bills. Or ticker BIL is available in a stock brokerage account but that ETF could produce small capital gains or losses that need to be reported on taxes.

Well, a six-month Treasury Bill might match the forward inflation rate with the problem being that no one knows what the forward inflation rate will be.

Otherwise, ticker STIP at this point still needs hedging but a hedged STIP would be an expert solution to unknown forward inflation at a time of rising interest rates. For instance, hedge STIP with a sell of a 2-year Treasury future or with a buy of a two-year Treasury rate futue.

Answer 6

You should seek professional advice.

Failing that, investing large amounts that might need to be withdrawn at short notice generally means putting it on over-night inter-bank deposit.

Why not seek professional advice?