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Learning about TIPS (Inflation-Protected Bonds)

I recently finished reading Explore TIPS: A Practical Guide to Investing in Inflation Protected Securities by fellow blogger The Finance Buff.

It was actually my second time reading it. You see, the author mistakenly thought that I might have something meaningful to add to the book, so he sent me a proof copy during the editing stage.

Instead, I found myself scribbling down several pages of notes. (The second time through the book resulted in two more pages of notes.) The honest truth is that, while I have a pretty good grasp of the basics of how TIPS work, I still had much to learn.

Random example #1: I never would have guessed that, when purchasing TIPS in the secondary market, it’s often more cost effective to place a buy order over the phone rather than online, despite the higher commission. (Reason being that the rep on the phone may be able to find you a better price on a given bond.)

Random example #2: At any given moment, every financial website may be quoting completely different yields for a given TIPS fund. The Finance Buff explains how to figure out what each of the yield figures means, and he provides advice on which figures to pay the most attention to if you’re trying to figure out what yield you’re going to get if you buy the fund. (Hint: Look for something forward-looking that’s inflation-adjusted.)

Explore TIPS covers everything that you’d need to know about investing in TIPS, things like:

  • When to buy individual TIPS and when to use a mutual fund or ETF,
  • How individual TIPS are taxed (and why you might want to consider a fund rather than individual TIPS if you’re investing in a taxable account),
  • How to buy TIPS at auction, and
  • How to buy TIPS in the secondary market (both how to understand the quote screens as well as how to minimize transaction costs).

For as much of our portfolios as bonds–and TIPS–make up, they sure get a lot less coverage than stocks and stock mutual funds. If you’re like me in that you could use a little more background on the other half of your portfolio, I’d suggest picking up a copy of the book. It’s short, it’s easy to understand, and it’s only $10 (and change) on Amazon.

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