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Financial Literacy - Financial tuneup
OVERVIEW
Investing fundamentals
Here's the lowdown on the pros and cons of the basic types of investments.
Investment tuneup

Building blocks for successful investing
Investments:
Stocks
Mutual funds
Bonds
TIPS
REITs
ETFs
CDs

TIPS
Issued by the government, Treasury Inflation-Protected Securities adjust with inflation as measured by the consumer price index. "Part of the return on a TIP government bond is the interest that they earn. But they will also increase the underlying value of the bond when inflation increases so you get not only the interest income, but also the value of the bond increasing periodically when inflation increases," says William M. Howell, CFP and CPA of Howell Financial Advisors Inc. in Noblesville, Ind.

TIPS pay a fixed interest rate, though the principal adjusts every six months with inflation. Although the value of the investment can go down, at maturity investors are paid either the greater of the adjusted principle or the original investment amount.

Available to individual investors directly, TIPS can be purchased through TreasuryDirect.gov, banks or brokers. They can also be bought through mutual funds.

"There are certain mutual funds, no-load, that concentrate solely on the TIPS market," says Howell. "You can go out and buy individual TIPS if you like, but I prefer to use a mutual fund manager to do that for me. They have more of an idea with their analysts and their background and specialty for that particular slice of the fixed-income market."

Advantages and disadvantages of TIPS
Pro
"It keeps abreast of inflation and is a stabilizer for a portfolio. It's a guaranteed low-risk investment. I think it's a great vehicle for everybody's portfolio," says Brosious.
Con
In a deflating economy, or a recession, the return on TIPS will be even lower, which in the best of times is less than the returns of other bonds.
-- Updated: June 11, 2009
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