A recent article in The Wall Street Journal by Carolyn Cui, "Inflation Shield Loses It Appeal," detailed how those investing in Treasury Inflation-Protected Securities (TIPS) are presently suffering large losses.  In her Journal piece, Ms. Cui writes that, "Investors are fleeing debt that protects them against inflation, amid signs that the Federal Reserve is preparing to trim its bond purchases."

 She furthers in her Journal piece that, "This rout has sent the yield on 10-year Treasury-Inflation Protected Securities into positive territory for the first time since December 2011.  When bond prices fall, yields rise."

Here is a "TIP" for those being decimated in the "rout" in Treasury Bonds: invest in real estate with a passive approach for the long term instead!

Passive investing in real estate, either the property itself or through private mortgage notes that finances the buy for another party, provides its own protection against inflation and every other economic malady.  During The Great Recession, when stock and bond prices fell, the level of income from rental real estate in the United States actually rose.  As TIPs are being butchered, the real estate market in the United States is soaring, with both prices and rents going higher.

That is due to real estate being its own hedge against inflation, both in the price of the property and the rental income received.  When prices rise, housing will go up, too.  It is a large component of consumer wealth and the American economy, so it naturally increases with other costs, too.

If interest rates rise, so will the rates charged for private mortgage notes.  A "floating rate" component can even be a part of the loan agreement as all of the terms are completely flexible: private mortgage notes are custom documents, negotiated by the lender and the borrower for that deal.  Such a provision hedges against rising mortgage rates eroding the value of the private mortgage note if it is at a lower rate.  This type of agreement is also useful should the funder of the private mortgage note want to profit from rising interest rates, as that can be made part of the loan agreement for the real estate.

Historically, rental income in the United States has increased at about a 5% annual pace.  That means that rental income doubles in less than every 15 years.  As an example, if a property was renting for $1000 a month in year one, by the 15th year it would be going for over $2000 for the same period.  If there were a 15-year mortgage on the property, it would be paid off and the roughly $25,000 annually in investment income would be free cash flow.

Over the last 200 years, real estate has created about 90% of the world's millionaires.  That happened throughout periods of rising interest rates and collapsing asset prices.  If there is one constant in investing, it is that real estate should eventually rise, both in the value of the property and the income received.