.floatimg-left-hort { float:left; } .floatimg-left-caption-hort { float:left; margin-bottom:10px; width:300px; margin-right:10px; clear:left;} .floatimg-left-vert { float:left; margin-top:10px; margin-right:15px; width:200px;} .floatimg-left-caption-vert { float:left; margin-right:10px; margin-bottom:10px; font-size: 12px; width:200px;} .floatimg-right-hort { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 300px;} .floatimg-right-caption-hort { float:left; margin-right:10px; margin-bottom:10px; width: 300px; font-size: 12px; } .floatimg-right-vert { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px;} .floatimg-right-caption-vert { float:left; margin-right:10px; margin-bottom:10px; width: 200px; font-size: 12px; } .floatimgright-sidebar { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px; border-top-style: double; border-top-color: black; border-bottom-style: double; border-bottom-color: black;} .floatimgright-sidebar p { line-height: 115%; text-indent: 10px; } .floatimgright-sidebar h4 { font-variant:small-caps; } .pullquote { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 150px; background: url(http://www.dmbusinessdaily.com/DAILY/editorial/extras/closequote.gif) no-repeat bottom right !important ; line-height: 150%; font-size: 125%; border-top: 1px solid; border-bottom: 1px solid;} .floatvidleft { float:left; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} .floatvidright { float:right; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} Dear Mr. Berko:

Dear B.R.:

That broker is a disingenuous son of a biscuit, but first, let’s go over what we know about TIPS. (1) They are available in 5-, 10-, 20- and 30-year maturities. (2) The principal value increases or decreases every six months to reflect the increase or decrease in the Consumer Price Index (CPI). (3) The interest rate remains fixed, and that fixed rate is calculated on the increased or decreased principal value every six months. (4) Principal adjustments and interest payments are made every six months. (5) The growth principal is compounded every six months. (6) Interest payments are not reinvested and are credited to your account every six months. (7) You do not have to hold TIPS to maturity, and they can be sold anytime at the prevailing market value. (8) At the end of every calendar year, you must pay taxes on the interest payments and the principal adjustments, which is called “phantom income.” The Treasury Department will send you Form 1099 OID for the phantom income and form 1099 INT for the interest income. (9) You can buy TIPS or a TIPS mutual fund from most brokers, and you can buy TIPS directly from the U.S. Treasury in increments of $100. (10) You will not receive physical possession of the bond; rather, it will be recorded electronically. (11) Every month, the Treasury publishes daily index ratios, which are used to adjust the principal of the TIPS. (12) Five-year TIPS are auctioned every April and October. Ten-year TIPS are auctioned in January, July, April and October. The 20-year TIPS are also auctioned every January, April, July and October, and the 30-year TIPS are auctioned in February and August.

Now the only way you can be “posilutely and absitively” certain of not losing money on your TIPS is to hold it to maturity. At that time, the Treasury will redeem the TIPS at par ($1,000) per bond.

Your brokester has failed to give you full disclosure. You can lose money on TIPS. Suppose at the start of the year, you buy a $10,000 TIPS directly from the Treasury to avoid the 1 percent to 2 percent commission cost your broker would charge. And suppose during the year you bought those TIPS, inflation was minus 2 percent. Well, at the end of that year, the principal value of your TIPS would decline to $9,800. And suppose the following year, inflation was minus 3 percent; the principal value of your TIPS at the end of the second year would decline to $9,506. Now you have an unrealized loss of $496. If you sold the bond, you would receive $9,506 and have a realized loss of $496. So contrary to your brokester’s claim, you either have a loss carry-forward or get to deduct that $496 from any gains you earned that year.

However, if you hold the TIPS to maturity, the Treasury will pay you 100 cents on the dollar, even if the principal value adjusted for “minus” inflation was much lower.

Pimco’s Real Return Fund (PRRIX-$10.88) has a spotty record, and I would not be comfortable owning it. The 4 percent commission is off-putting, and the annual expense ratio of just under 1 percent is too darn high. In the past dozen months, PRRIX paid a 2.45 percent dividend because the fund is required to distribute the increase in principal as a dividend.

I would really rather purchase TIPS direct from the Treasury and avoid the $400 mutual fund commission and the nearly 1 percent annual management fee. Unfortunately, that brokester has a conflict between his commission and his best advice. Sadly, that’s too common in our industry, and the Financial Industry Regulatory Authority gets apoplexy when I expose these conflicts to the public.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, Fla. 33775 or e-mail him at mjberko@yahoo.com. © 2010 Creators.Com