TIPS for Beating Inflation

With prices edging up, consider adding a fund that invests in Treasury inflation-protected securities to your portfolio.

The role that treasury inflation-protected securities (TIPS) play in a diversified bond portfolio got a big boost in 2007. As many investors labored to eke out gains amid crumbling credit markets, the stars aligned for inflation-indexed bonds, and the Lehman Brothers TIPS index returned an impressive 11.7%.

Three developments drove returns. First, TIPS benefited from a flight to quality. Second, a slowing economy and interest-rate cuts by the Federal Reserve boosted results. Finally, inflation (and expectations of further inflation) rose. TIPS are indexed to the consumer price index, which surged from 2% at the start of 2007 to 4% by year's end, mainly because of rising oil and food prices.

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Contributing Writer, Kiplinger's Personal Finance

Andrew Tanzer is an editorial consultant and investment writer. After working as a journalist for 25 years at magazines that included Forbes and Kiplinger’s Personal Finance, he served as a senior research analyst and investment writer at a leading New York-based financial advisor. Andrew currently writes for several large hedge and mutual funds, private wealth advisors, and a major bank. He earned a BA in East Asian Studies from Wesleyan University, an MS in Journalism from the Columbia Graduate School of Journalism, and holds both CFA and CFP® designations.