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INFLATION HAS BEEN
a risk that investors, particularly long-term investors
such as those saving for retirement, have always faced.
Over time, inflation can reduce significantly the buying
power of a participant’s portfolio. For example, a 3%
annual inflation rate over twenty years erodes the
purchasing power of a dollar by almost half.
Inflation-protected securities have become an
increasingly desirable portfolio component, especially
amongst retirees or those nearing retirement, since they
generally seek a stable, real rate of return over the
investment horizon to protect their fixed source of
income. You and your client may want to consider adding
an inflation-protected securities fund as an investment
option to help participants manage inflation risk.
Like
conventional fixed income securities,
inflation-protected securities generally pay interest at
fixed intervals and return the principal at maturity.
However, with inflation-protected securities, the
principal is adjusted periodically to reflect changes in
a specified inflation index. So while the coupon
remains constant, the adjustment in principal results in
a change in the percentage earned as interest income.
What
are the potential advantages of inflation-protected
securities?
·
May
provide a better protection against inflation than other
inflation-hedging asset classes such as real estate,
equities or cash.
·
Allows for greater diversification within an asset
allocation framework – inflation-protected securities
have a low correlation with stocks and conventional
bonds.
·
Under
normal market conditions, inflation-protected securities
would be expected to outperform conventional securities
during periods of rising inflation.
What
are the potential disadvantages of inflation-protected
securities?
·
Market values can be affected by changes in the market’s
inflation expectations or changes in real rates of
interest.
·
May
not perform as well as traditional fixed income
securities in a deflationary environment.
For
more information about Diversified Investment Advisors,
please contact Peggy Santhouse at 888-401-5342 or via
e-mail at
psanthouse@divinvest.com.
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