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Hi Diehards: Try as I might, I have never been able to completely understand our TIPS fund. The February edition of the AAII Journal has a six page article about TIPS by Annette Thau, author of "The Bond Book": Here are interesting passages: "At the present time, the Treasury is selling TIPS only in 10-year maturities, although initially 5-year and 30-year maturities were also sold." "Since the time TIPS were introduced (1997), interest rates on the 10-year TIPS at auction have varied from a high of 4.25% to a low of 1.87%." "In 1999, interest rates rose, but TIPS experienced significant price declines. During 2002 and 2003, interest rates generally declined, but TIPS and TIPS funds soared." "But what is evident is that, over the short term, market forces such as investor demand, as well as anticipation of future inflation, may play a larger role in the price performance of TIPS than the inflation adjustment." "Which is the better buy, the 10-year TIPS or the conventional 10-year T-note? The only statement that can be made with certainty is that ultimately, over very long holding periods (10 or more years) the total return of TIPS will parallel the inflation rate. -- Over short periods of time (say one or two years), there is no way to predict which will have the higher total return." "Only five TIPS funds have histories that go back as far as three years." "TIPS bonds and consequently TIPS funds are more volatile than conventional bonds and conventional bond funds." "If there is a long period of several years or more with rising interest rates and rising inflation, over time, returns of TIPS bonds and TIPS funds should track the rate of inflation. But if interest rates begin to rise some time in the future, and continue to rise, then during that initial period, which might last for a number of years, returns of TIPS bonds and TIPS funds could be significantly lower than those of conventional bonds and funds." "Whatever the size of your bond portfolio, it would appear prudent to place a portion of that portfolio in one or more inflation-protected investment." "Because of their tax consequences, TIPS and TIPS funds are best held in tax-deferred accounts." "Timing, as always is an issue. But if you are purchasing any of these instruments as a long-term hedge for part of your bond portfolio then timing ceases to be an issue." (Annette Thou) ------------------------------------------------------------------ In Conversation 9792 I recommended 50% TIPS and 50% Total Bond Market for the bond allocation of many portfolios. I still feel the same. Best wishes. Taylor Originally posted in thread: 33336

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