With record-high inflation, you’d think the one sure-fire investment would be Treasury ­Inflation-Protected Securities (TIPS), US government bonds designed to keep up with inflation. So how come the Bloomberg US TIPS Index plunged 10% in 2022?* TIPS actually did protect you from higher inflation last year—just not from higher interest rates. If this seems confusing, understand that TIPS are different from regular US Treasuries. Their returns depend on a fixed rate of yield…plus a daily adjustment to the principal amount tied to changes in inflation. In many other ways, TIPS behave like most bonds. When interest rates rise, the bond value falls. Last year, price declines in TIPS were so sharp that they outpaced the substantial inflation adjustment. This doesn’t matter so much if you hold a TIPS bond to maturity. But a TIPS fund, with dozens of holdings, has no maturity date. If you sell shares when the value of the portfolio is down, you’ve locked in losses.

Current outlook: TIPS look attractive. The fixed-yield portion of a new five-year TIPS has risen to 1.6%, its highest level in 10 years. If you believe that inflation will average 2.5% or more over the next five years, this TIPS bond would outperform a comparable US Treasury bond.

What to do: Purchase individual TIPS at TreasuryDirect.gov/marketablesecurities/tips, and hold them to maturity. If you prefer the convenience of a fund but are wary of volatility, stick with a TIPS fund that has shorter maturities and less sensitivity to interest rate changes, such as the Vanguard Short-Term Inflation-Protected Securities ETF (VTIP), which lost only 2.8% last year.

*All performance figures and yield data are through December 12, 2022.

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