Time to Add Some TIPS

Posted by Madison on April 8, 2010

When I decided to make our Asset Allocation Update to Include More International Exposure I spent a lot of time reevaluating our entire portfolio.

Currently our non stock holdings are split between cash and the total bond market. The cash is actually in CD Ladders, but I’ve found the ladders renewing at such low rates, that I’m tempted to rethink that strategy.

I first considered the Ally Bank 5 year CD strategy with low early withdrawal penalties, before researching TIPS.

Treasury Inflation Protected Securities

A lot of my research and reading on treasury inflation protected securities (TIPS) started with the academic papers on the inflation-protected securities (TIPS) site on Bogleheads (one of my favorite investing forums).

The rationale behind including TIPS as part of the bond holding is for inflation protection. Here is a more detailed description from the Boglehead wiki:

Because unexpected inflation is the biggest enemy of fixed income securities and because TIPS offer unique inflation protection, investors should consider including TIPS in their investment portfolio.

Adding TIPS

I decided that I still plan to hold 12% in non-stock holdings, but I’ll be splitting it 50/50 between the total bond index and TIPS.

Of course it complicates things somewhat with trying to include the new emerging market ETF, but I think I found a way to make it work.

Another alternative to TIPS are I bonds, which you can now Use Your Tax Refund to Purchase I Bonds.

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