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Inflation-fighting alternatives to I bonds

Safe TIPS won't balance portfolio
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Treasury inflation-protected securities, or TIPS, are similar to I bonds, but instead of their interest rate fluctuating with inflation, their principal adjusts. When inflation occurs, the value of the security rises, causing the yield, calculated as a percentage of the asset's value, to rise. If deflation occurs, the opposite happens.

Upside: TIPS' value being tied to the rate of inflation allows them to provide some protection for investors in times of rising inflation. And for security, it's hard to beat the full faith and credit of the U.S. government.

Downside: A recession-driven flight to safety of historic proportions means TIPS are being offered at very low interest rates. Those low rates and the current low inflation rate famously led to the issue of TIPS in October 2010 that were projected to have a negative real return, says Richelson.

Worse still, TIPS returns tend to follow the movement of stocks and the general economy, Loeper says. When the economy tanks and the inflation rate drops, TIPS yields go along for the ride.

Bottom line: TIPS aren't a big improvement over I bonds right now for the average investor and could be riskier, Loeper says.


 

 

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