Friday, September 14, 2012

My Investments - TIPS

Someone just starting out in the world of personal investments may become overwhelmed with all the possibilities; stock, bonds, mutual funds, index funds, money market accounts, CD's, saving accounts, the list goes on and on.  Well, I'm hoping to shed some light on a few investments that I find very valuable for my own portfolio.  

Before you begin, you'll need to have a brokerage account.  Whether you use your current bank or an online brokerage, you need to make sure the company fits your lifestyle.  For me, Schwab was the best choice since when you link a checking account to your brokerage account you will get them both for free with no annual or monthly charges.  Plus, the brokerage account is very user-friendly and the trades are $8, however they are free if you decide to trade Schwab funds.  There are also added benefits in that you can use any ATM in the world for free, and you get free checks whenever you need them.  

After I signed up for Schwab's brokerage account, my wife and I both opened IRA's which allowed us to put up to $5,000/year each into a tax protected environment.  I'll get into the subject on why I chose a traditional IRA instead of a Roth in a future post, but for now, I just want to focus on the type of investments I use.  

For each of our portfolio's, I chose a 60/40 split between stocks and bonds.  This may seem a little less aggressive then some of our other investments, but the whole point of a retirement account is capital preservation.  Within this 60/40 split, I have 5 Schwab funds each making up 20% of the overall portfolio.  Once a year, I go in and rebalance the winners and losers so that I am at 20%/fund again.  Because there are no transaction costs for Schwab funds, I'm not too worried at the low amount of money I put in each one.  

Within the bond fund section of my portfolio, I have one fund called SWRSX (Schwab Treasury Inflation Protected Securities).  TIPS are issued by the federal government and like all bonds, pay a normal coupon rate depending on the length of the bond.  However, unlike normal bonds, the coupon rates are multiplied by the Consumer Price Index (CPI), thereby providing a protection against inflationary concerns.  I chose a Schwab fund for the reasons I mentioned earlier in that there is no transaction fee and the expense ratio (or cost to own the fund) is at .29% which is pretty good.  Besides the coupon payments, the fund increases in value whenever there is concern over inflation in the economy (like there is today).  TIPS are a great way to round out a portfolio and provide some inflation hedging, however they are less likely to provide a great return compared to traditional stocks or an index fund.

I'll review more of my own personal investments in time, however, consider TIPS the next time you are reformulating your portfolio.

Wonderful Moment of the Day: Asking my cat a question and immediately receiving a meow as if he was answering the question.

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