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Now's The Time For Inflation Index Bonds

- Alan Lavine

Hedge your bets against inflation.

Standard & Poor's Outlook, a New York-based newsletter, recommends that conservative investors who own bonds should keep part of their investments in inflation-indexed securities.

Because U.S. Savings I bonds are tax-deferred, you might keep them in your taxable accounts. Treasury Inflation Protection Securities (TIPS), which are taxed on earnings, belong in your tax-deferred retirement accounts.

I bonds are sold in denominations of $50 to $10,000 and earnings may accrue as long as 30 years. They currently yield 4.4 percent. The yield is adjusted every six months--on Nov. 1 and May 1. You can't buy more than $30,000 in any given year. If you sell the bonds within the first five years, you lose three months interest on the investment. You can get I bonds at your bank or at www.savingsbonds.gov.

Treasury Inflation Protection Securities, which require a $1,000 minimum investment, are a bit different because their principal adjusts. Right now, they yield 3.4 percent. You can buy them with maturities ranging from 10 to 30 years. But don't forget. With TIPS, your principal will rise with inflation. You can buy TIPs through your broker or directly from the U.S. Treasury at www.publicdebt.gov.

You can also invest in TIPS mutual funds. The funds are professionally managed to take advantage of changing interest rates. But the funds charge an ongoing expenses equal to about one-half-of-one percent. These expenses are deducted from fund earnings.

The Vanguard Inflation Protected Securities Fund has the lowest expense ratio of just .25 percent, reports Standard & Poor's. The fund gained 4.1 percent over the past year ending in March. This year it's up 1 percent.

"We are recommending a 20 percent portfolio allocation to bonds," says Standard & Poor's Outlook.

Why is Standard & Poor's recommending inflation-indexed bonds? Over the past 10 years we've had low inflation. This year, the Federal Reserve says inflation should run about 1.9 percent.

David Wyss, chief economist with Standard & Poor's, believes that several factors could trigger higher inflation--including a rise in oil prices, terrorism or rapid economic growth.

"The likelihood of inflation remaining at the current low level for the next 10 years is negligible," he says. Retirement savings need to be shielded from the corrosive effects of inflation."


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).

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