Counting on the stock market to preserve a nest egg has become a more difficult act of faith lately.
Wild swings in the Dow, the "flash crash," lingering memories of the 2008 meltdown - all the heightened uncertainty is enough to keep some investors lying awake at night worrying.
Treasury inflation-protected securities might help them sleep better.
TIPS are a type of Treasury bond whose payout is adjusted every six months for inflation. TIPS pay a fixed interest rate, but the principal amount of the bond increases during periods when the inflation rate rises.
Even though inflation remains extremely low, a closer look at TIPS shows they are worth considering as a safe haven for a chunk of your portfolio:
• What are TIPS' main appeal in this market?
• They are a secure place for your money if the stock market tanks or inflation is significant.
"You're getting the security and safety of U.S. Treasuries, but they also come with this inflationary protection kicker," said Jeff Tjornehoj, a fund analyst at Lipper Inc.
They also generated very good returns over the past decade, when inflation was not particularly high.
The average TIPS fund returned 6.4 percent annually over the last 10 years, a period in which stocks declined.
The only funds to fare better were emerging market bond funds at 11.24 percent.
• What are their disadvantages?
• Rates are low at the moment. TIPS yield significantly less than regular Treasury bonds (1.27 percent for 10-year TIPS versus 3.26 percent for regular Treasuries of similar maturities).
"If income is important, TIPS would not be a good choice," said Linda Williams, director of fixed income investments for Minneapolis-based private wealth management firm Lowry Hill.
• What's the risk of losing money?
• Investing in a product issued by the government essentially means zero risk of default.
But that doesn't mean TIPS are immune from declines if you buy at the wrong moment. They also are vulnerable to rising interest rates.
• How can I buy TIPS?
• They are available directly from the U.S. Treasury at www.treasurydirect.gov without brokerage fees.
You also can purchase them through banks and brokers.
If you'd rather not rely on keeping the bond until maturity or having to manage your investments, it might make more sense to buy into a mutual fund or exchange-traded fund that focuses on TIPS.
From Business Lansing.com published on June 27, 2010