Q: I took your advice and read Daniel Solin's "The Smartest 401(k) Book You'll Ever Read." Then I took his advice and contacted Fidelity Investments about buying index funds for my 403(b) because my employer/school district discontinued my TIAA-CREF option after 1/1/09. Because I have only four years until retirement, the adviser at Fidelity suggested that managed funds might be a better option for me (fees: .67 percent). Do you agree? — J.E., by e-mail

A: According to the Morningstar fund database, Fidelity offers 270 distinct mutual fund portfolios. Of that number, only 12 are index funds. Fidelity is in the managed funds business. That is what it has to sell, so that is what it will recommend. While its managed funds have expense ratios that are lower than all but a handful of mutual fund companies, the performance reality is that you are likely to do better investing in index funds.

There is no connection between the time to your retirement and the decision to invest in managed or index funds. Most managed funds continue to trail their appointed index. The most recent SPIVA report from Standard and Poor's — a regular report that measures the percentage of managed funds that fail to beat their index — shows that the majority of managed funds failed to beat their index over both of the last two market cycles. It also shows that the majority of managed funds failed to beat their index in the most recent bear market. You can read this report at http://assetbuilder.com/CFKETC.

Q: My husband and I have $2 million we plan to leave to our daughter at our death. We are in our late 70s. She is 44. We have pension income that is adequate for our modest lifestyle, so we do not have to count on this money for living expenses. We want to place it where it will be safe for the years until it is left to our daughter. We think we would like to put $1 million in TIPS.

Which would be better? Purchase five-year TIPS with a coupon of 1.25 percent and a yield to maturity of .866 percent and that will mature on 4/15/14 — or purchase 10-year TIPS that are to be auctioned in October? I don't think our daughter would need the money before 10 years.

We have the opportunity to purchase TIPS originally issued at $230,000 on 4/30/07 with a 2 percent coupon, maturity on 4/15/12 at $103.753; yield to maturity: 0.631 percent; accrued interest: $1,110, principal: $250,931.29; net money: $252,041.44. This is a three-year TIPS. Would we be better off to purchase this or to purchase only TIPS at the original issue?  — C.A., Austin, Texas

A: You may be a bit over-focused on TIPS. Let me explain why. Unless that $2 million is all in tax-deferred accounts, purchasing TIPS could backfire in a strange way. The income from TIPS comes in two forms, the actual coupon which you receive and the inflation adjustment to principal, which you don't receive. Even though you don't receive it, however, it is considered taxable income.

Now consider how that could work. Suppose you buy a TIPS with a 1 percent coupon and the inflation adjustment is 3 percent. You'll have to pay taxes on 4 percent income out of that 1 percent coupon. If you are in the 25 percent tax bracket, you'll just be able to cover the taxes. If you are in a higher tax bracket, you'll have to find the money to pay the taxes from another source — such as your pension. So, unless that $2 million is in a tax-deferred account, the idea of delivering real purchasing power to your daughter through TIPS has a clay foot.

Unless you are a seasoned buyer of fixed income securities, don't buy your TIPS in the after-market. There are just too many ways to get skinned. Instead, buy them at issue.

Finally, I'd like to suggest another possibility. Rather than focus on a single type of investment, why not do what others do? Put your nest egg in a diversified portfolio. It won't give you certainty of future value, but it will give you the benefit of diversification, and you may find that other asset classes, such as REITs and energy, may give you more true inflation protection than TIPS.

On the Web

"Invest for Your Future, Not the Financial Services Industry" (7/11/08):