What am I not getting about the value of TIPS funds?

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nbseer
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What am I not getting about the value of TIPS funds?

Post by nbseer » Sat Dec 08, 2018 5:07 pm

To be honest I've never understood why retired folks should load up on TIPS funds/etfs. Not much inflation right now, short-term one year CDs paying close to 3 percent, TIPS seem to be hit by interest rate hikes just as badly as bonds, and such wimpy returns!

Average annual returns

VAIPX Inflation-Protect Sec Adm*

One year -1.07%
Three years 1.52%

Can someone please tell me why I should load up on TIPS at this time, when returns are negative? :confused

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Kenkat
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Re: What am I not getting about the value of TIPS funds?

Post by Kenkat » Sat Dec 08, 2018 5:12 pm

They are insurance against something that hasn’t come to pass - inflation. Inflation can be a big threat to things retirees depend on - fixed pensions, savings accounts, etc. The question is whether inflation is the last war or is it just sleeping, waiting to re-awaken at some point?

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Re: What am I not getting about the value of TIPS funds?

Post by kolea » Sat Dec 08, 2018 5:37 pm

I am one of those retirees who has loaded up on TIPS, although I go for the bonds, not the funds. My withdrawal rate is about 2.5% so I don't really mind that TIPS have very little real return, what's important to me is they are almost risk free. I avoid TIPS funds because they can and do lose value from interest rate changes. I avoid that by laddering. So, all of my risk is in equities and the fixed income side has minimal risks, it is my ace in the hole.

BTW, if you don't think inflation is insidious, an inflation rate of 2.5%, which is close to what it is now but below historical average, will cause a loss of 28% in real value over a 10 year period to a non-TIPS bond's principal.
Kolea (pron. ko-lay-uh). Golden plover.

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Re: What am I not getting about the value of TIPS funds?

Post by UpperNwGuy » Sat Dec 08, 2018 5:44 pm

I am retired, and I do not hold TIPS. I don't see the need to do so. Although we can't predict the future, I think that we have learned a lot about how to manage inflation rates in the last few decades, and it is not unreasonable to assume that we won't see a repeat of the inflation rates of the 1970s in my lifetime. Call me a Pollyanna if you will, but that's how I see it. And, yes, I lived through the ugly days of high inflation. I entered the workforce while Nixon was President.
Last edited by UpperNwGuy on Sat Dec 08, 2018 6:23 pm, edited 1 time in total.

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Re: What am I not getting about the value of TIPS funds?

Post by oldcomputerguy » Sat Dec 08, 2018 6:06 pm

Any investment question of the form “should I (fill in the blank) right now” smacks of market timing. If your plan says not to invest in TIPS, that’s okay (I don’t), but you should not be making investment decisions solely on what the market is doing “right now”.
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beyou
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Re: What am I not getting about the value of TIPS funds?

Post by beyou » Sat Dec 08, 2018 6:39 pm

It is a hedge against a risk. If you believe there is no risk, don’t buy the insurance. But that is the decision you are making, to go without insurance.

Of course there other inflation hedges, if you do care about this risk. The relative merit of options are one discussion, the need for insurance is a different one. So which are you questioning ?

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Re: What am I not getting about the value of TIPS funds?

Post by jalbert » Sat Dec 08, 2018 7:06 pm

To be honest I've never understood why retired folks should load up on TIPS funds/etfs. Not much inflation right now,
Future inflation is a risk, past inflation is not. TIPS outperform when future inflation exceeds market expectations, which is a significant risk for retirees.
Risk is not a guarantor of return.

PoppyA
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Re: What am I not getting about the value of TIPS funds?

Post by PoppyA » Sat Dec 08, 2018 7:23 pm

The question becomes how does the government calculate the inflation rate and is it accurate.
“Your labor income makes you rich, not your investments.”

cloneman33
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Re: What am I not getting about the value of TIPS funds?

Post by cloneman33 » Sat Dec 08, 2018 7:53 pm

jalbert wrote:
Sat Dec 08, 2018 7:06 pm
To be honest I've never understood why retired folks should load up on TIPS funds/etfs. Not much inflation right now,
Future inflation is a risk, past inflation is not. TIPS outperform when future inflation exceeds market expectations, which is a significant risk for retirees.
Do all the brokerage firms sell TIPS? Vanguard Fidelity etc...does the price fluctuate daily?

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Re: What am I not getting about the value of TIPS funds?

Post by deanmoriarty » Sat Dec 08, 2018 9:30 pm

PoppyA wrote:
Sat Dec 08, 2018 7:23 pm
The question becomes how does the government calculate the inflation rate and is it accurate.
That’s a very interesting point, and one of the reasons why I never believed in government-calculated inflation rates. They seem too watered down and too average, they don’t exactly cover the specific area where I might find myself living in as a retiree.

I live in CA, and basically over the past 10 years everything has inflated at a rate of roughly 10% a year or more. In particular rents, salaries, groceries, restaurants, bars, transportation, airfares, all went up at least of 10% a year. You can even see on yelp when you review a restaurant and see their menu pictures taken by diners over the years, a 15$ sandwich was likely 13$ last year (typical example).

Had I been retired with tips I would still have lost significant purchasing power.

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Re: What am I not getting about the value of TIPS funds?

Post by nisiprius » Sun Dec 09, 2018 9:35 am

PoppyA wrote:
Sat Dec 08, 2018 7:23 pm
The question becomes how does the government calculate the inflation rate and is it accurate.
The Bureau of Labor Statistics is transparent about how it calculates the inflation rate, there is no black-box secrecy involved.

During the time period when the MIT Billion Prices Project, which estimates inflation by scraping price information from the web, its estimate was reasonably close to the official estimate. I've not yet heard serious challenges to the integrity or independence of the BLS, and during the 1970s price freeze it was willing to publish CPI figures that embarrassed the administration by showing that the price freeze was ineffective.

If CPI figures were seriously off, you would hear loud yells from unions with COLA provisions in their contract, from AARP (lobbies for Social Security). In fact, you do not. AARP has published papers from time to time advocating that Social Security be switched from the index it currently uses--CPI-W--to an experimental index the BLS has been calculating for a decade or so, CPI-E, which is supposed to better represent the spending of the elderly. The difference is small, and AARP does not suggest that the BLS is fudging the CPI-W index, merely that the CPI-W index is not the most appropriate index to use.

(There is a website I choose not to publicize by naming, that asserts that inflation is 8% per year higher than official estimates. Their calculations are a black box. They assert that they are calculating it the same way the government used to, for example when it used actual house prices instead of "owners' equivalent rent," but they cannot be doing what they say they are doing because their data shows no visible effect of the 2006 housing price crash. Many years ago the website owner promised to have an academic review their methodology and publish the results of the review, but never did so. I actually emailed the site's proprietor asking if the review had been done, and whether I could get a copy, and my email was not answered. In 1998, the average price of a new car was $17,000. If the website were correct, the average price of a new car today would now be over $80,000.)
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

ionball
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Re: What am I not getting about the value of TIPS funds?

Post by ionball » Sun Dec 09, 2018 10:21 am

I would consider TIPS funds to be available tools for managing unexpected inflation risk. If the characteristics of such funds address risk that is relevant to your portfolio's purpose, such as a floor of future spending, then they might be a useful tool to engage. It would be surprising if anyone were using TIPS for the purpose of maximizing returns "at this time".

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Re: What am I not getting about the value of TIPS funds?

Post by bearcub » Sun Dec 09, 2018 10:31 am

Retired. About 85% of my fixed income is in the two Vanguard TIPs funds. Rest are bonds in my two balanced funds. Also have some EE Bonds from years ago. Best wishes on your choice.

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tooluser
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Re: What am I not getting about the value of TIPS funds?

Post by tooluser » Sun Dec 09, 2018 10:36 am

As a data point:

The State Street Global Advisors Target Retirement funds start adding some TIPS about 12 years out from the target date, maxing out at 10% of holdings a couple of years before the target date. Then to 0% after the target date.

So SSGA thinks they make sense to provide some protection against inflation leading up to retirement, but not after one is retired.
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Phineas J. Whoopee
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Re: What am I not getting about the value of TIPS funds?

Post by Phineas J. Whoopee » Sun Dec 09, 2018 11:23 am

PoppyA wrote:
Sat Dec 08, 2018 7:23 pm
The question becomes how does the government calculate the inflation rate and is it accurate.
The Bureau of Labor Statistics, BLS, part of the Department of Labor, publishes its methodology here.

Here's the basket of goods and services whose prices they measure.

The measurements are nationwide. If prime beef costs more on the coasts, and fresh seafood costs more in the interior, the measure takes account of both higher and lower prices. There should be no expectation that the macroeconomic measure inflation applies directly to any individual.

To repeat an example, if I like to spend my money on genuine aged balsamic vinegar, and its price goes up, that's part of the inflation calculation. If I switch from vinegar to spending my money on cardiac stents, and they cost more, that's not inflation.

PJW
Last edited by Phineas J. Whoopee on Sun Dec 09, 2018 12:29 pm, edited 1 time in total.

longinvest
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Re: What am I not getting about the value of TIPS funds?

Post by longinvest » Sun Dec 09, 2018 12:01 pm

nbseer wrote:
Sat Dec 08, 2018 5:07 pm
To be honest I've never understood why retired folks should load up on TIPS funds/etfs. Not much inflation right now, short-term one year CDs paying close to 3 percent, TIPS seem to be hit by interest rate hikes just as badly as bonds, and such wimpy returns!

Average annual returns

VAIPX Inflation-Protect Sec Adm*

One year -1.07%
Three years 1.52%

Can someone please tell me why I should load up on TIPS at this time, when returns are negative? :confused
Nbseer,

TIPS aren't cash investments; they're bonds. In other words, they're marketable securities which are priced by market participants. Various market participants have different needs or uses for various TIPS securities maturing or distributing coupons on specific dates. The price of each TIPS security is determined by the last transaction, when a buyer and a seller agreed on a specific price.

Some investors don't like the fixed income part of their portfolio to fluctuate in value at all. Such investors shouldn't invest into TIPS and bonds. They can invest into I-Bonds and CDs, instead. Others can tolerate small fluctuations. These investors can invest into short-term TIPS and bond funds. Others can tolerate moderate fluctuations; they can invest into funds of intermediate-term duration.

I suggest that you choose what to invest into according to your own tolerance for fluctuations in value.

Good luck!
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic / international) stocks / domestic (nominal / inflation-indexed) long-term bonds | VCN/VXC/VLB/ZRR

jalbert
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Re: What am I not getting about the value of TIPS funds?

Post by jalbert » Sun Dec 09, 2018 3:32 pm

cloneman33 wrote:
Sat Dec 08, 2018 7:53 pm
jalbert wrote:
Sat Dec 08, 2018 7:06 pm
To be honest I've never understood why retired folks should load up on TIPS funds/etfs. Not much inflation right now,
Future inflation is a risk, past inflation is not. TIPS outperform when future inflation exceeds market expectations, which is a significant risk for retirees.
Do all the brokerage firms sell TIPS? Vanguard Fidelity etc...does the price fluctuate daily?
Yes to both.
Risk is not a guarantor of return.

averagedude
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Re: What am I not getting about the value of TIPS funds?

Post by averagedude » Sun Dec 09, 2018 3:53 pm

I don't believe an investor or retiree needs TIPS in their portfolio. However if you are someone that worries about inflation and it causes you to lose sleep, then you should definitely have them.

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Re: What am I not getting about the value of TIPS funds?

Post by MotoTrojan » Sun Dec 09, 2018 3:59 pm

kolea wrote:
Sat Dec 08, 2018 5:37 pm
I am one of those retirees who has loaded up on TIPS, although I go for the bonds, not the funds. My withdrawal rate is about 2.5% so I don't really mind that TIPS have very little real return, what's important to me is they are almost risk free. I avoid TIPS funds because they can and do lose value from interest rate changes. I avoid that by laddering. So, all of my risk is in equities and the fixed income side has minimal risks, it is my ace in the hole.

BTW, if you don't think inflation is insidious, an inflation rate of 2.5%, which is close to what it is now but below historical average, will cause a loss of 28% in real value over a 10 year period to a non-TIPS bond's principal.
Is there really a difference between holding a fund and building your own via a ladder? Isn’t it just a perceived loss difference?

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Re: What am I not getting about the value of TIPS funds?

Post by BolderBoy » Sun Dec 09, 2018 4:03 pm

nbseer wrote:
Sat Dec 08, 2018 5:07 pm
Can someone please tell me why I should load up on TIPS at this time, when returns are negative? :confused
Grok87 (a CFA) has posted in the past about why TIPS are important in a portfolio. I think he posted a manifesto in the wiki in which he encourages folks to abide by his X# promises. Owning TIPS is one of those.

Hopefully he'll see your subject line and wade in.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

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Re: What am I not getting about the value of TIPS funds?

Post by bertilak » Sun Dec 09, 2018 4:18 pm

nisiprius wrote:
Sun Dec 09, 2018 9:35 am
In 1998, the average price of a new car was $17,000. If the website were correct, the average price of a new car today would now be over $80,000.
Nisi, could it be argued that the average new car today is actually worth more (not just priced higher) than the average car of 1998? For example, is today's car safer? Does it get better gas mileage? Does it last longer? Is it better for the environment? Does it have better features (GPS, rear-view camera, automated climate control)?

Are we more demanding overall than we were in 1998? I know I am (and not just with cars) but don't know how to account for this in a CPI. I can now afford (so expect) a better standard of living but is that part of the average? CPI and TIPS probably don't help with this.

I also expect my investments to keep up with inflation of their own accord. None of them are locked in to a given return, at least over the long term. I therefore do not hold TIPS.
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Re: What am I not getting about the value of TIPS funds?

Post by kolea » Sun Dec 09, 2018 4:51 pm

MotoTrojan wrote:
Sun Dec 09, 2018 3:59 pm
kolea wrote:
Sat Dec 08, 2018 5:37 pm
I am one of those retirees who has loaded up on TIPS, although I go for the bonds, not the funds. My withdrawal rate is about 2.5% so I don't really mind that TIPS have very little real return, what's important to me is they are almost risk free. I avoid TIPS funds because they can and do lose value from interest rate changes. I avoid that by laddering. So, all of my risk is in equities and the fixed income side has minimal risks, it is my ace in the hole.

BTW, if you don't think inflation is insidious, an inflation rate of 2.5%, which is close to what it is now but below historical average, will cause a loss of 28% in real value over a 10 year period to a non-TIPS bond's principal.
Is there really a difference between holding a fund and building your own via a ladder? Isn’t it just a perceived loss difference?
For me there is. I want to keep a low average maturity. VIPSX (Vanguard's TIPS fund) has an average maturity of 8 years. I try to maintain 3 years. It also is a liquidity issue - the fund is harder to meet what I want than a bond ladder.
Kolea (pron. ko-lay-uh). Golden plover.

jalbert
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Re: What am I not getting about the value of TIPS funds?

Post by jalbert » Sun Dec 09, 2018 11:22 pm

VTAPX has a duration of 2.8 years.
Risk is not a guarantor of return.

Mr. Jelly
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Re: What am I not getting about the value of TIPS funds?

Post by Mr. Jelly » Mon Dec 10, 2018 10:59 am

I look on TIPS as I do on all my investments in a well rounded conservative fund. Meaning I won't make or lose much money. They are all insurance as no one knows what is going to happen and when. By the time we find out what is going on and where we should have put our money to catch the latest up or down it's too late. So you have to be bought in before the event.

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