Treasury inflation-protected securities, or TIPS, seek to blunt the effects of inflation. They basically allow you to lock in an amount in real terms without reducing your purchasing power.
The U.S. Treasury uses the consumer price index to adjust the principal for inflation semiannually, while a fixed rate is paid semiannually on the adjusted principal. TIPS are sold with maturities of five, 10 and 20 years and can be purchased for a minimum of $1,000.
"TIPS are backed by the government, making your principal ironclad," said Mark Balasa, certified financial planner with Balasa Dinverno & Foltz LLC in Itasca, Ill. "The face amount of TIPS moves up and down with inflation, which makes them different from traditional bonds."
Consult the Treasury Web site (www.treasurydirect.gov) regarding direct purchases of TIPS and other related information.
Balasa doesn't recommend putting more than 20 percent of an individual's portfolio into TIPS because in years of low inflation you're better off with a regular bond paying a higher rate. Rather than actual TIPS, he often puts clients in TIPS mutual funds of Vanguard, Pimco and TIAA-CREF or exchange-traded TIPS funds of Barclay's iShares.
Andrew Leckey writes for Tribune Media Services.