Should You Add Inflation Protection to Your Portfolio?
Another note: TIPS, are exempt from state and local tax, but because you’ll owe federal taxes on the interest income, they are best held in tax-sheltered retirement accounts, says Benz.
As an alternative, she adds, iBonds and certain target-date mutual funds, which are designed to become increasingly conservative as investors approach retirement, can also provide an element of inflation protection, noting Vanguard’s Target Retirement Income has about a third of its fixed-income portfolio in a TIPS fund.
I-Bonds are savings bonds issued by the U.S. Treasury.
Its rate adjusts to track inflation and is guaranteed to never lose value, but they only pay income when you sell so you won’t be getting an income stream as you would with TIPS.
I-Bonds also come with an income limit of $10,000 per person per year (and likely to go lower), which can be a drawback for those looking to insulate their portfolios sufficiently against inflation, says Benz.
How Much Should You Own?
It depends on your time horizon and appetite for risk, of course, but DeRose suggests an allocation of 5 percent to 10 percent in TIPS should be “more than enough protection” for the average investor.
Darst says a moderate high net worth investor may want less, somewhere on the order of 3 percent, while a more conservative investor can err higher, in the 6 percent to 8 percent range.
He notes the secret to building a well-balanced portfolio is being prepared for whatever the market may deliver.
“It’s important to educate yourself on what TIPS are and how they work today, rather than waiting until after inflation picks up,” says Darst.