Inflation-protected investments can help your fixed-income portfolio keep up with inflation.
Treasury Inflation Protected Securities, or TIPS,
are one of the best-known inflation fighters. TIPS have been around
since 1997. The Treasury uses the Consumer Price Index as a guide
to adjust the principal for inflation on a semiannual basis. A fixed
interest rate is paid semiannually on the adjusted principal. In
that way, both interest payments and the principal are adjusted
for inflation. At maturity, if deflation has decreased the value
of the security, you're guaranteed to still receive the original
Newly issued TIPS can be purchased without any fee
in the months that they are auctioned directly from the government
through its TreasuryDirect
program. Purchases throughout the rest of the year can be made on
the secondary market through investment professionals, banks and
brokers. Those purchases will involve a fee or commission.
At a glance
Many experts advise individual investors to purchase
TIPS through mutual funds rather than buying individual securities
because you'll benefit from the wide array of TIPS held in the fund.
Buying individual TIPS can be very expensive because the minimum
purchase price is $1,000.
There's an important difference to remember when considering
buying individual TIPS vs. buying a TIPS bond fund. You're always
certain of getting your full principal if you hold an individual
bond until maturity. Sell before maturity and you'll get the current
price and risk losing principal.
On the other hand, there is no maturity date when
you buy shares in a bond fund. While the individual bonds that make
up the fund have maturity dates, the fund itself does not. You should
plan to hold your shares for the long haul and sell them when it's
most advantageous to you.