Protect Your Retirement Portfolio From Inflation: Buy TIPS
The Treasury offers bonds that can protect your investment from inflation.
May 19, 2009 — -- Investors who can recall double-digit inflation in the late 1970s are worried.
For the past nine months, they note, the federal government has pumped trillions of government dollars into the nation's financial bloodstream. Sooner or later, they figure, an inflationary fever is sure to strike.
If you are in agreement and wish to immunize your portfolio, then you should be giving a close look at TIPS -- or Treasury Inflation-Protected Securities. Forget about gold. TIPS are the one investment guaranteed to keep pace with inflation.
Backed by the full faith and credit of the U.S. government, TIPS are as secure as any other U.S. Treasury security and are designed to ensure investors do not lose ground to rising consumer prices. They won't make you rich over the long haul, but they will protect you against lost purchasing power.
They may be particularly appropriate for investors who worry about inflation but remain skittish from the past year's market losses and are reluctant to make a major commitment to stocks again.
As with any investment, just be sure you don't go overboard with TIPS. These government bonds should be one piece in the fixed-income side of your portfolio. An appropriate TIPS allocation might be around a quarter of your overall bond allocation.
So what are TIPS and how do they work?
TIPS are federal government bonds whose principal and interest payments are adjusted for inflation as the Consumer Price Index for Urban Consumers (CPI-U) rises and falls on a monthly basis. They are issued in terms of five, 10 and 20 years through a competitive auction that sets the fixed interest -- or coupon -- rate.
