Inflation-fighting TIPS make good sense

Dear Mr. Berko: My brother-in-law told me that you recommended he put 20 percent of his $505,000 ROTH IRA into TIPS. We are the same age, have identical ROTH IRAs, earn the same income with the same firm and have the same debts. I've enclosed a completed Investor Profile sent to me by your office and I will retire in 11 years. Would you recommend TIPS? And if so, why would you recommend TIPS instead of common stocks or mutual funds?

-- E.D., Bend, Ore.

Dear E.D: According to the Investor Profile you returned, I'd place 23 percent of your portfolio in TIPS and 67 percent of your portfolio in the following sectors: utilities, foreign infrastructure, natural resources, growth & income, emerging markets, small caps, bonds, gold and asia/far east. I believe that most portfolios are improperly managed if they do not contain Treasury Inflation Protected Securities. Finally, I'd invest the remaining 10 percent of your portfolio in a short-term, intermediate bond fund.

I always recommend TIPS because they are a guaranteed hedge against inflation, and I am inarguably convinced that within the next three to five years, we will have 10 percent to 11 percent inflation, as bad or worse than the inflation of the 1980-1981 period.

TIPS are guaranteed to increase in value with inflation; they are guaranteed to pay interest on the increased values; they are guaranteed to be instantly marketable; and their value is unquestionably guaranteed by the government. I am certain that the Obama health care-plan will (in the coming dozen years) add trillions of dollars to the U.S. deficit. And this enormous addition to the deficit can be the catalyst that may cause inflation of tsunami-like proportions.

Most of us know that the real costs of this health-care bill will exceed projected costs by orders of magnitude. The costs of every government involvement exceeded congressional projections by enormous numbers. The future costs of this health-care bill will explode your tax bill, become a monkey on the back of the national debt and will become the genesis of a virulent inflation spiral. The government could be printing trillions of dollars of new money, and this excess supply of dollars will lead to "demand-pull" inflation, simply defined as too much money chasing too few goods. And the only way this huge debt (soon to be $11 trillion) will be repaid is for the government to inflate its way out of debt. Essentially, this debt will be paid back with newly printed, cheaper dollars. And it's happening now.

My dad used to say, "Don't ascribe short events to long-term consequences." Inflation isn't surging now, but don't for a second believe that inflation will remain low in 2011, 2012 or 2013. Americans are so obsessed with the short term that we ignore long dangers. And that's why I recommended TIPS.

I suspect that when you're ready to hang up your tools in 11 years that those TIPS could at least double in value -- and remember to reinvest the interests. So by 2020, you can cash in your $100,000 TIPS for $200,000 in new dollar chips and put that money to work at current rates that I believe will be significantly higher.

Address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com.