Every investor needs a benchmark. Picking a relevant one is a challenge, in part because the menu is crowded. The good news is that there’s a great starting place for everyone: the yield on the 10-year inflation-indexed Treasury Note, a.k.a., the 10-year TIPS.
As guaranteed payouts on Mother Earth go, this one’s about as solid as they come. Not only can you sleep easy knowing that your principal will be returned, the payout in the years ahead will be immune from inflation. Yes, one can argue that the underlying inflation yardstick–the consumer price index–is flawed, but we’ll leave that glitch aside for the moment.
Accepting the 10-year TIPS at face value gives us a robust benchmark for comparing and contrasting our investment strategies. It is, in short, the true risk-free benchmark for investors considering the rainbow of risks in the world to embrace or avoid. Yes, we could quibble and cite the 5-year or 20-year TIPS. But we’ll split the difference and use the 10-year span, in part because much of bond investing revolves around decade-long maturities as benchmarks.
As of last night, a 10-year TIPS yields 1.69%. The question before the house: can you beat it? That is, will your investment strategy generate more than a 1.69% return–after inflation–when you crunch the numbers on September 3, 2018?
No doubt some, and quite probably many investors will answer in the affirmative. But the task ahead is tougher than it appears. Why? Several reasons, starting with the fact that buying and holding a 10-year TIPS is a strategy with no moving parts. As such, there’s no chance for error in executing the strategy and grabbing the yield as stated. But as history suggests, a fair share of investors who try to excel at the money game will end up being stumbling, perhaps dramatically.