Whether Uncle Sam will be able to keep inflation under control is debatable. But some advisers say it's not a bad idea to start picking up inflation protection for your portfolio.
"I don't think it's today's dragon to slay, but I think it's going to be over the next 12 to 18 months," says Herb Hopwood, president of Hopwood Financial Services in Great Falls, Va. "We're nibbling at some TIPS. We've participated in a couple of the recent auctions, and that's the way I'd recommend most people do it. Buy when there's a Treasury auction."
TIPS, or Treasury Inflation-Protected Securities, can be bought as individual bonds or in mutual funds and exchange-traded funds, or ETFs. The following chart shows a few of the mutual funds, ETFs, CDs and bonds that can buffer your portfolio against a weakened dollar and ballooning prices. If you buy a mutual fund from a company other than your own, you may be charged a transaction fee. If you sell an individual Treasury bond before maturity, there is a $45 fee.
Ways to buffer your portfolio
|Treasury Inflation-Protected Securities (TIPS)||Form: Bond||Minimum Initial Investment: $100||Expense Ratio: None||Load: None|
|Fidelity Inflation-Protected Bond Fund (FINPX)||Form: Mutual fund||Minimum Initial Investment: $2,500||Expense Ratio: 0.45%||Load: None|
|Vanguard Inflation-Protected Securities Fund (VIPSX)||Form: Mutual fund||Minimum Initial Investment: $3,000||Expense Ratio: 0.20%||Load: None|
|Schwab Inflation-Protected Fund (SWRSX)||Form: Mutual fund||Minimum Initial Investment: $50,000||Expense Ratio: 0.50%||Load: None|
|PIMCO Real Return Fund (PRTNX)||Form: Mutual fund||Minimum Initial Investment: $1,000||Expense Ratio: 0.90%||Load: 3.00%|
|iShares Barclay TIPS bond (TIP)||Form: Exchange-traded fund||Minimum Initial Investment: 1 share||Expense Ratio: 0.20%||Load: None|
|I Bond||Form: Savings bond||Minimum Initial Investment: $25/electronic
|Expense Ratio: None||Load: None|
One of the benefits of buying an individual bond is that there's a specific maturity that protects your principal. If you wait until maturity to cash the bond, you'll get your entire principal. You don't have that protection with a bond fund.
The yield on TIPS is set at auction and interest is paid every six months. Your principal is adjusted according to the Consumer Price Index, or CPI, and the interest paid on the principal rises or falls accordingly. Inflation increases your principal, deflation decreases it. Hold the bond until maturity and you're guaranteed to receive your full principal even if a lengthy period of deflation actually eroded its value. If inflation predominated during that period, you'll receive at maturity more than your initial investment.
Be aware that the distribution yield shown for TIPS mutual funds and ETFs isn't necessarily what you'll get. For instance, on the day this article was written, iShares Barclays TIPS bond (TIP) showed a yield of 5.06 percent.