Good question! I see the point you raised about tips being asked quite often. And it's a reasonable one too! "Why did the
Inflation Protected Securities lose value when inflation occured?" TIPS bonds, like all bonds, have an interest rate risk. Which means if you buy tips, and then the interest rate goes up, the
market value of your bond goes down because new bonds can be bought that are yielding more than yours.
How much does it drop? For every percentage point interest rates go up or down, your bond will lose or gain 1% multiplied by the average duration. So if your ETF has an average duration of 2 years and interest rates go up 2%, your bond will lose 4% value. And if your ETF has an average duration of 25 years like EDV then you're lose
50%. This is what people mean when they talk about longer term bonds being "risky". So your TIPS fund lost value not because of inflation, but because the rising interest rates increased and newer bonds came out that had better yields.
Now what you're missing is the yield or interest payments on your TIPS bonds. Normally bonds have their yield reduced by inflation. If you buy a 5 year bond at 2% yield and then inflation is 3% on average for those 5 years, then you technically had -1% yield.
TIPS are the opposite. They get the inflation rate paid to them in addition to their agreed about yield. So in the previous example, if you had a 5 year tips bond at 2% yield and then inflation is 3% on average for those 5 years, then your real yield is still 2%, but your total yield (nominal) is 5%
Something important to note is that the market is always pricing in inflation even with normal bonds. For example, if you look at the current bond yields for 10 year:
https://www.bloomberg.com/markets/rates ... t-bonds/us
Nominal 10Y bonds are yielding 4.33% while 10Y TIPS bonds are yielding 1.98%. What does that mean? The market is pricing in an expected average annualized inflation of 2.35%. But this is only a prediction and it fluctuates daily. So what TIPS bonds do is protect you from
unexpected inflation. Like from a pandemic or war.
Another example, if you go here:
https://seekingalpha.com/symbol/SCHP/dividends/yield
and compare SCHP (total TIPS market) to BND (total nominal bond market) you'll see that the yields for SCHP spiked pretty dang high. That was the inflation protection. The holders were being given increased dividend payments to compensate them for inflation. And it was unexpected inflation that nominal bonds didn't price in. Hence the big spike difference. So you hold tips to get that payout during unexpected inflation when prices are increasing.
Also "why do hold bonds" is a lengthy topic but I will say this, the equity premium that comes with stocks pretty much guarantees that over the long term they will always outperform bonds. Which makes sense if you think about it, the whole reason people are raising money by selling bonds is because they expect to make money from this loaned amount, more than they are willing to pay their bond holders. Otherwise, if bonds made more, they'd just go hold bonds.
Which is exactly what happens when the central bank raises rates. Increasing the yield on bonds means that it becomes more expensive to raise money for economic activity and the less profitable ventures become less profitable than just holding bonds. Hence why stock growth and economic growth will slow, cooling the economy.
60% Stocks (global market weight) 40% TIPS (long term in retirement, total market in HSA and brokerage)
