TIPS

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prk
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TIPS

Post by prk »

i see it suggested that the bond portion of one's portfolio should be 50/50 between TIPS and nominal bonds

what is the advantage of holdings TIPS in addition to, say, TBM?
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fredflinstone
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Re: TIPS

Post by fredflinstone »

TIPS protect against unanticipated inflaton. Regular bonds do not.
Stocks 28 / Gold 23 / Long-term US treasuries 19 / Cash (mainly CDs) 22 / TIPS 8
UpperNwGuy
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Re: TIPS

Post by UpperNwGuy »

Of course, that means you have to anticipate unanticipated inflation.
BigJohn
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Re: TIPS

Post by BigJohn »

I think of TIPS as inflation insurance. I don’t anticipate that my house will burn down but.... it could happen so I carry homeowners insurance. Like all insurance, there is a cost and in this case it’s that the real yield will be lower than nominal US bonds of similar duration. Also, like all insurance, whether you need it and how much you need are a difficult and personal decision.
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Re: TIPS

Post by abuss368 »

prk wrote: Sun Jul 26, 2020 8:51 pm i see it suggested that the bond portion of one's portfolio should be 50/50 between TIPS and nominal bonds

what is the advantage of holdings TIPS in addition to, say, TBM?
Well that’s just it: some folks recommend that and it was a lot more popular pre financial crisi in 2008. Sine then Vanguard investment experts recommend a two fund strategy of Total Bond and Total International Bond.
John C. Bogle: “Simplicity is the master key to financial success."
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abuss368
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Re: TIPS

Post by abuss368 »

Any short or intermediate investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio.

Keep investing simple!
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000
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Re: TIPS

Post by 000 »

BigJohn wrote: Mon Jul 27, 2020 4:45 pm I think of TIPS as inflation insurance. I don’t anticipate that my house will burn down but.... it could happen so I carry homeowners insurance. Like all insurance, there is a cost and in this case it’s that the real yield will be lower than nominal US bonds of similar duration. Also, like all insurance, whether you need it and how much you need are a difficult and personal decision.
I view Gold as better insurance for the case when real inflation hits (see what I did there :twisted:). It does not rely on any institution's calculation of CPI or solvency.
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woolie
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Re: TIPS

Post by woolie »

I’m not a fan of TIPS. Their benefit is narrow. In circumstances where stocks are in decline, nominal interest rates are low, and inflation is high, TIPS would be the one thing in the portfolio that has good returns. That could happen, but it would be unusual for those circumstances to persist for a long time. And in other circumstances, like a deflation trap, TIPS can have much worse returns than normal bonds.
I look at it this way. The purpose of owning stocks is to grow the portfolio faster than inflation (during retirement it is to outpace inflation and offset some of the drag of withdrawals). The purpose of owning bonds is to dampen the volatility of stocks, which can and do drop in value. The job for bonds is just to hold their value over the long term. Plain vanilla (non-TIPS) bonds do this job just fine, without the weird complexity or the downside risk of losses in a deflationary economy.
fatcoffeedrinker
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Re: TIPS

Post by fatcoffeedrinker »

woolie wrote: Mon Jul 27, 2020 10:38 pm The job for bonds is just to hold their value over the long term. Plain vanilla (non-TIPS) bonds do this job just fine, without the weird complexity or the downside risk of losses in a deflationary economy.
But nominal bonds don't do that when inflation is higher than expected. TIPS do.
rockAction
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Re: TIPS

Post by rockAction »

abuss368 wrote: Mon Jul 27, 2020 5:09 pm
prk wrote: Sun Jul 26, 2020 8:51 pm i see it suggested that the bond portion of one's portfolio should be 50/50 between TIPS and nominal bonds

what is the advantage of holdings TIPS in addition to, say, TBM?
Well that’s just it: some folks recommend that and it was a lot more popular pre financial crisi in 2008. Sine then Vanguard investment experts recommend a two fund strategy of Total Bond and Total International Bond.
But that's not entirely true for retirees, correct? Vanguard Retirement Income Fund (VTINX) has 17% of the portfolio (25% of bond allocation) in short-term TIPS.
rockAction
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Re: TIPS

Post by rockAction »

fatcoffeedrinker wrote: Mon Jul 27, 2020 10:51 pm
woolie wrote: Mon Jul 27, 2020 10:38 pm The job for bonds is just to hold their value over the long term. Plain vanilla (non-TIPS) bonds do this job just fine, without the weird complexity or the downside risk of losses in a deflationary economy.
But nominal bonds don't do that when inflation is higher than expected. TIPS do.
And Series I Bonds cover both scenarios.
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jason2459
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Re: TIPS

Post by jason2459 »

rockAction wrote: Mon Jul 27, 2020 11:10 pm
fatcoffeedrinker wrote: Mon Jul 27, 2020 10:51 pm
woolie wrote: Mon Jul 27, 2020 10:38 pm The job for bonds is just to hold their value over the long term. Plain vanilla (non-TIPS) bonds do this job just fine, without the weird complexity or the downside risk of losses in a deflationary economy.
But nominal bonds don't do that when inflation is higher than expected. TIPS do.
And Series I Bonds cover both scenarios.
TIPS bonds will protect against deflation as well.

https://www.treasurydirect.gov/indiv/re ... s_tips.htm

"At the maturity of a TIPS, you receive the adjusted principal or the original principal, whichever is greater. This provision protects you against deflation."
rockAction
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Re: TIPS

Post by rockAction »

I assume not true for TIPS funds, though, correct?
Dominic
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Re: TIPS

Post by Dominic »

rockAction wrote: Tue Jul 28, 2020 12:06 am I assume not true for TIPS funds, though, correct?
The deflation protection works if you hold the TIPS from auction to maturity.

If a short-term TIPS fund buys an aging TIPS that was auctioned off 25 years ago (so it has plenty of inflation built-in already), deflation is going to decrease the payout at maturity. Similarly, when a long-term TIPS sells a bond that has been through deflation, they don't benefit from the deflation adjustment (although some of it is priced in, presumably).

Even if you buy and hold an all-term TIPS fund, you're buying old TIPS, so I think you're still getting imperfect deflation protection.
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Re: TIPS

Post by abuss368 »

rockAction wrote: Mon Jul 27, 2020 11:05 pm
abuss368 wrote: Mon Jul 27, 2020 5:09 pm
prk wrote: Sun Jul 26, 2020 8:51 pm i see it suggested that the bond portion of one's portfolio should be 50/50 between TIPS and nominal bonds

what is the advantage of holdings TIPS in addition to, say, TBM?
Well that’s just it: some folks recommend that and it was a lot more popular pre financial crisi in 2008. Sine then Vanguard investment experts recommend a two fund strategy of Total Bond and Total International Bond.
But that's not entirely true for retirees, correct? Vanguard Retirement Income Fund (VTINX) has 17% of the portfolio (25% of bond allocation) in short-term TIPS.
Correct with Total Bond and Total International Bond.
John C. Bogle: “Simplicity is the master key to financial success."
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FIREchief
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Re: TIPS

Post by FIREchief »

BigJohn wrote: Mon Jul 27, 2020 4:45 pm Like all insurance, there is a cost and in this case it’s that the real yield will be lower than nominal US bonds of similar duration.
Let's compare apples to apples. If we compare TIPS to nominal US Treasuries, than you have no way of knowing if real yield will be lower with TIPS. At today's breakeven inflation rates, it is very likely that TIPS will have a superior real yield. Now, if we're going to add in the risk of corporate bonds, than certainly we would expect a higher real yield. Not because the TIPS is a flawed investment, we've just added default risk in return for a slightly higher yield.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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Re: TIPS

Post by BigJohn »

FIREchief wrote: Tue Jul 28, 2020 9:19 am
BigJohn wrote: Mon Jul 27, 2020 4:45 pm Like all insurance, there is a cost and in this case it’s that the real yield will be lower than nominal US bonds of similar duration.
Let's compare apples to apples. If we compare TIPS to nominal US Treasuries, than you have no way of knowing if real yield will be lower with TIPS. At today's breakeven inflation rates, it is very likely that TIPS will have a superior real yield. Now, if we're going to add in the risk of corporate bonds, than certainly we would expect a higher real yield. Not because the TIPS is a flawed investment, we've just added default risk in return for a slightly higher yield.
I don’t think I said anything that implied it was a flawed investment and my comparison was Intended to be between TIPS and nominal treasuries of similar duration. Hard to predict the future but most discussions of TIPS include some discount to the nominal rate plus expected inflation so you’re insuring against unexpected inflation. If that never shows up, you paid for insurance you didn’t really need. But this is no different than all insurance, it’s only a cost if I never need it. If my house burns down my homeowners insurance is a money maker.
:sharebeer
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FIREchief
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Re: TIPS

Post by FIREchief »

BigJohn wrote: Tue Jul 28, 2020 5:48 pm
FIREchief wrote: Tue Jul 28, 2020 9:19 am
BigJohn wrote: Mon Jul 27, 2020 4:45 pm Like all insurance, there is a cost and in this case it’s that the real yield will be lower than nominal US bonds of similar duration.
Let's compare apples to apples. If we compare TIPS to nominal US Treasuries, than you have no way of knowing if real yield will be lower with TIPS. At today's breakeven inflation rates, it is very likely that TIPS will have a superior real yield. Now, if we're going to add in the risk of corporate bonds, than certainly we would expect a higher real yield. Not because the TIPS is a flawed investment, we've just added default risk in return for a slightly higher yield.
I don’t think I said anything that implied it was a flawed investment and my comparison was Intended to be between TIPS and nominal treasuries of similar duration. Hard to predict the future but most discussions of TIPS include some discount to the nominal rate plus expected inflation so you’re insuring against unexpected inflation. If that never shows up, you paid for insurance you didn’t really need. But this is no different than all insurance, it’s only a cost if I never need it. If my house burns down my homeowners insurance is a money maker.
:sharebeer
That's the ironic thing with TIPS recently. Although it is never possible to discretely identify the inflation protection premium (or liquidity premium for that matter), the numbers for the past several years have strongly suggested that the inflation protection is at, or close to, free. The breakeven inflation for ten year terms is now 1.51%, so if inflation averages anything over 1.51% for the next ten years, than the TIPS buyer comes out ahead. Since the feds target is 2%, the nominal buyer had better hope that the fed doesn't achieve their goals. The TIPS buyer, on the other hand, probably doesn't care.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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prk
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Re: TIPS

Post by prk »

I cannot predict future inflation.

Does the long term expected return of TIPS differ from nominal bonds?
000
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Re: TIPS

Post by 000 »

prk wrote: Thu Jul 30, 2020 7:23 pm I cannot predict future inflation.

Does the long term expected return of TIPS differ from nominal bonds?
Many will say it is less because you are in part paying for an "insurance premium" with TIPS.
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vineviz
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Re: TIPS

Post by vineviz »

prk wrote: Thu Jul 30, 2020 7:23 pm I cannot predict future inflation.

Does the long term expected return of TIPS differ from nominal bonds?
By definition, no.
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