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TIPS Revisited

One year ago, I wrote an article that discussed Treasury Inflation-Protected Securities (TIPS). TIPS are important because they provide the best protection against inflation among the universe of fixed-income securities.

TIPS, however, are not perfect. In fact, several prominent investment professionals have publicly addressed TIPS-related issues over the past year. In this article, I’ll discuss some of these issues and relate them to the concerns of sensible long-term investors.


TIPS, Inflation, and Your Portfolio

Inflation is a fixed-income portfolio’s silent enemy. Someone who invests $10,000 in 10-year treasury bonds with a five percent coupon per year receives two payments of $250 per year until the bond matures. Unfortunately, inflation can quietly erode the real value of those fixed interest payments.

What if there was a way to make fixed income less fixed? Treasury inflation-protected securities (TIPS) do just that: they adjust an investor’s principal to keep pace with the Consumer Price Index, a common inflation indicator, and investors earn interest on that inflation-adjusted principal.