TIPS is short for Treasury Inflation Protected Securities. TIPS are government bonds that have their principal indexed to inflation. The coupon rate remains unchanged, but as the principal adjusts according to the rate of inflation, the actual interest payment--which is paid twice per year--changes. In this way, the owner of Treasury inflation protected securities is shielded from the erosive effects of inflation. While the principal is adjusted upwards in inflationary conditions, it does not fall below its original amount, even in deflation. TIPS interest is exempt from state and local taxes, but is subject to federal tax. TIPS are issued in 5, 10 and 30 year maturities and can be purchased direct through a Treasury auction or in the secondary market. It is important to note that the consumer price index (CPI) is the inflation benchmark used to adjust TIPS principal.
The notion that stocks are risky in the short-run but safe in the long run is a dangerous financial fallacy according to Boston University professor Zvi Bodie.
Professor Bodie has been communicating this view consistently for many years, and the financial crisis has provided strong support for his argument.
The gist of Bodie's view involves that impact that equity market...
This is a super important question and consideration--particularly given the financial crisis and our current economic environment. There are some comments on this topic throughout the site including this blog post.
