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Are TIPS a Good Investment?

A review of the pros and cons of Treasury Inflation Protected Securities

Investing Beyond the Stock Market

If you're like many investors, you probably know something about stock market investing - but how familiar are you with investing in bonds and other fixed-income strategies?

Smart investing starts with asset allocation: deciding what percentage of your assets should be invested in bonds, stocks and other investment vehicles. If your investing education is heavily weighted towards stocks, not fixed income, don't worry: most people's personal finance investing approach develops and changes over time. For many investors fixed income becomes more important as they begin to develop their retirement income strategy. This page offers a few investing basics as you seek more successful investing.

Fixed income strategies: an overview

Fixed income investments can take on many forms - from investing in government bonds (municipal bonds) to CDs. One product that's much discussed in investing news of late are Treasury Inflation-Protected Securities, or TIPS. These are market securities whose principal is tied to changes in the Consumer Price Index, or CPI. TIPS principal increases with inflation (rises in the CPI) and decreases with deflation (decline in the CPI).

TIPS pay a fixed interest rate twice annually, and that interest also fluctuates with current inflation levels. If inflation does increase, your TIPS principal would increase accordingly. Then you'd be paid a fixed interest rate on a higher principal, resulting in a higher interest rate.

TIPS pose significant risks should deflation occurs. Deflation, or a drop in the CPI, means your principal would be correspondingly adjusted downward, so your interest payments would be lower than if the CPI had stayed flat or increased. At TIPS maturity, though, a useful safeguard is activated: if the adjusted principal is less than the security's original principal, you'll still be paid the original principal.

TradeKing offers great investing tools to make online investing quick and painless. Just check out our Fixed Income Center for a wide variety of fixed income tools, products and education to meet your long-term investing needs.

Stocks, mutual funds, ETFs, and more

Of course, personal finance-investing involves much more than just stock investing and bonds. For self-directed investing, for example, it may be effective to learn how to invest in mutual funds. In a mutual fund, investors with common investing goals pool their assets; the "mutual fund" is then managed on their behalf by a mutual fund manager. Whether you lean towards value investing, international investing, Christian investing (also known as "biblical investing", "ethical investing", "manifest investing", or "sound mind investing"), even socially responsible investing, there's probably a mutual fund out there to match your needs and values.

"Sector investing" is another point to keep in mind. If you've read investing articles that suggest a specific industry (or "sector") may be on the rise soon, you may want to invest in mutual funds targeting that sector. As you can see, mutual fund investing offers plenty of flexibility. Carefully read a fund's prospectus prior to investing. Mutual Funds are subject to market risk and may carry significant fees.

Give TradeKing a call. We're happy to help.

TradeKing makes it simple to research your investing choices - and we're happy to answer your questions and take as much time as you need to figure out your plan. We don't offer investing advice, so ultimately the decisions are up to you, but we do offer plenty of investing guidance to help you use our investing tools knowledgeably. Whether you're looking into Roth IRAs or other forms of retirement investing, or curious about investing for kids, a TradeKing representative would be glad to help you navigate your choices.

Try TradeKing today

A nationally licensed stock and options broker, TradeKing empowers self-directed investors like you every day to become smarter traders. At TradeKing we offer the same fair and simple price to all our clients - just $4.95 per trade, plus 65 cents per option contract. You'll trade at that price, no matter how often you trade, or how big or small your account may be. That's what we like to call "fair and simple".

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