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Subject:  Re: TIPS: To Protect Yourself Date:  12/8/2008  10:11 PM
Author:  imuafool Number:  25267 of 36218

Continuing my DD in bonds and fixed income investments, I found this article "Inflation - Not Deflation - is the Threat, Now Here's What to do About it" which dovetails with the Seeking Alpha article "TIPS to Protect Yourself from Future Inflation" that loveoldcars posted above:

This article presents its case that There has not been a recession in history that wasn't followed by inflationary pressure. And that, in turn, suggests that investors would be wise to shore up their defenses now while everybody is looking the other way ... at deflation.

With regard to what to do, the Money Morning article proposes:
The best way to capitalize on this in the long term is through Treasury Inflated Protected Securities, or TIPS. Right now they're comparatively cheap because investors have fled to straight Treasuries, preferring their immediate liquidity. But TIPS are rising nicely and are likely to rise much further and faster with the first whiff of inflation.
Speaking of which, we think there is a 50-50 chance of so-called "core inflation", which excludes food and energy prices, rising to 4.0%. That doesn't sound all that bad, but that's 2.3% more than the recent 1.7% yield on five-year U.S. Treasuries, which means TIPS are a better bet today.

Like the Seeking Alpha article, Money Morning's favorite is the iShares Lehman TIP (TIP), which sports an attractive 8.21% yield and plenty of upside; it's up 14.35% from the low of $84.14 set Oct. 10; that's something most investors are not focused on right now, but they should be.

Several questions come to my mind. How to invest in TIPS (advantages/disadvantages)? and how much to allocate to TIPS?

I know the TIPS are sold in TreasuryDirect and Legacy Treasury Direct and through brokers, dealers and banks. I remember reading a post on this board or another board that recommended buying direct or going the fund route rather than through brokers and dealers for reasons that I cannot recall. Some of the funds that I'll be looking at include TIP, IPE, VIPSX, HARRX, and PRIPX. I would appreciate any words of advice or experience here.

Concerning how much to allocate, I've read various recommendations. Kenneth Volpert, manager of Vanguard Inflation Protected Securities (VIPSX) suggests that investors/retirees split Treasury holdings between conventional bonds and TIPS. John Brynjolfsson, who ran the granddaddy of TIPS funds, Pimco Real Return Institutional, advises splitting a diversified portfolio into three categories: stocks, bonds and such assets as TIPS, commodities and real estate that help offset rising prices and says, "Bonds protect against deflation. TIPS protect against inflation."

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