Introduction to Treasury Inflation Protected Securities (TIPS)

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siamond
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Introduction to Treasury Inflation Protected Securities (TIPS)

Post by siamond » Mon Apr 09, 2018 2:02 pm

Here is a presentation that was assembled for our Bogleheads chapter (Metro-Boston) by a local volunteer (thank you, thank you). It provides a great introduction to Treasury Inflation Protected Securities (TIPS), discussing mechanics, pros, cons, etc. Format is Powerpoint, but you can see the content on a Web browser.
https://goo.gl/iTrE9U

The Financial Literacy wiki was updated accordingly, see the "Member supplied material section" in: https://www.bogleheads.org/wiki/Boglehe ... cy_project

This presentation was advertised on the financial literacy primary thread, but it seemed useful to give more visibility and more opportunity for discussion by opening a dedicated thread about it, as this is quality material. Note that I am not the author of the presentation, but I'll make sure the author chimes in as needs be! :wink:

Feedback welcome!

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by ReformedSpender » Mon Apr 09, 2018 2:55 pm

Very nice presentation, thank you

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by Barry Barnitz » Tue Apr 10, 2018 3:32 am

Hi:

The TIPs presentation is also linked in the Boston Bogleheads® page in our site's affiliate blog.

regards,
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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by Valuethinker » Tue Apr 10, 2018 4:45 am

siamond wrote:
Mon Apr 09, 2018 2:02 pm
Here is a presentation that was assembled for our Bogleheads chapter (Metro-Boston) by a local volunteer (thank you, thank you). It provides a great introduction to Treasury Inflation Protected Securities (TIPS), discussing mechanics, pros, cons, etc. Format is Powerpoint, but you can see the content on a Web browser.
https://goo.gl/iTrE9U

The Financial Literacy wiki was updated accordingly, see the "Member supplied material section" in: https://www.bogleheads.org/wiki/Boglehe ... cy_project

This presentation was advertised on the financial literacy primary thread, but it seemed useful to give more visibility and more opportunity for discussion by opening a dedicated thread about it, as this is quality material. Note that I am not the author of the presentation, but I'll make sure the author chimes in as needs be! :wink:

Feedback welcome!
This is a fabulous resource-- presenter's background in finance and ability to communicate really show.

Many thanks to the creator and to this board for bringing it to my attention.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by zuma » Tue Apr 10, 2018 6:51 am

Thank you for sharing it.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by longinvest » Tue Apr 10, 2018 6:58 am

To me, this presentation of TIPS seems overly complicated.

I personally think that TIPS are the simplest of marketable securities when thinking in inflation-adjusted terms to avoid Money Illusion. I-Bonds are simpler -- they're cash investments because their value doesn't fluctuate -- but they're not marketable.

Let me explain:
  • The payments (coupons, principal) of TIPS have no inflation risk. The exact inflation-adjusted* future value of all payments of a TIPS is known at the time it is bought.
  • TIPS are bonds and, as such, have a fluctuating market value. The inflation-adjusted price volatility* of long-duration TIPS is higher than that of short-duration ones. This is normal bond behavior.
* Where inflation is measured using CPI shifted by 3-months, using a linear scale for dates other than the first of the month. This is a good-enough measure of inflation, especially over long horizons, even if it doesn't perfectly match one's personal inflation.

I think that it would have been much easier to explain how TIPS work in inflation-adjusted terms. Actually, when thinking in inflation-adjusted terms, it becomes obvious that nominal bonds are complex while TIPS are much simpler.
Last edited by longinvest on Tue Apr 10, 2018 7:11 am, edited 1 time in total.
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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by grok87 » Tue Apr 10, 2018 7:05 am

Great presentation.

Two quibbles:

1) yields. The presentation is a little unclear imho in how it talks about yields. As Einstein* once said everything should be made as simple as possible but not simpler. Trying not to be pedanTic here. There are actually two yields worth understanding:

A) current yield= “interest or coupon”/price. The presentation calls this coupon yield which is fair enough.

B) yield to maturity (aka sec yield) a truer measure of yield which takes into account that generally the price of the bond will move toward par value (inflation indexed par for tips) over time.


Why bring this up? Bond funds sometimes lure investors in with high current yields when the yield to maturity may be different/lower. I think 99% of the time you want to focus on the yield to maturity or sec yield.

2) inflation. Probably worth making the distinction between break even inflation and expected inflation.

That line from the fidelity guy cracked me up. Yeah they don’t want you investing in tips or even treasuries for that matter. They’d much rather have you in their deceptively named actively managed total bond fund, which includes junk bonds and has a high expense ratio. You can buy tips and treasuries yourself for for free at auction and how would they make money off you then?

Put your bonds in treasuries and tips. Take your risk on the equity side!

Cheers
Grok

*the exact quote is unclear.
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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by livesoft » Tue Apr 10, 2018 7:10 am

Great presentation, so thanks very much to the creator and for generously sharing.

Zvi Bodie who championed inflation-adjusted securities for many years has been pretty quiet the last few years. Was that just the proverbial 15 minutes of fame?
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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by simplesimon » Tue Apr 10, 2018 7:12 am

livesoft wrote:
Tue Apr 10, 2018 7:10 am
Zvi Bodie who championed inflation-adjusted securities for many years has been pretty quiet the last few years. Was that just the proverbial 15 minutes of fame?
He was my investments professor and I keep in touch with him occasionally. Last I corresponded with him he said he was engaged in research about how to improve financial products for retirees.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by dodecahedron » Tue Apr 10, 2018 7:13 am

longinvest wrote:
Tue Apr 10, 2018 6:58 am
I think that it would have been much easier to explain how TIPS work in inflation-adjusted terms. Actually, when thinking in inflation-adjusted terms, it becomes obvious that nominal bonds are complex while TIPS are much simpler.
I disagree. Taxes on TIPS are computed on the nominal return, not the inflation adjusted return, so there is no way to analyze TIPS purely in real terms. Also, the inflation index that is most relevant to the investor may not be the same as the inflation index used in TIPS, for reasons mentioned in the presentation (e.g., weights for CPI-U may not reflect inflation experienced by older folks due to its relative weight on housing expenses vs. health expenses.)

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by longinvest » Tue Apr 10, 2018 7:16 am

dodecahedron wrote:
Tue Apr 10, 2018 7:13 am
longinvest wrote:
Tue Apr 10, 2018 6:58 am
I think that it would have been much easier to explain how TIPS work in inflation-adjusted terms. Actually, when thinking in inflation-adjusted terms, it becomes obvious that nominal bonds are complex while TIPS are much simpler.
I disagree. Taxes on TIPS are computed on the nominal return, not the inflation adjusted return, so there is no way to analyze TIPS purely in real terms. Also, the inflation index that is most relevant to the investor may not be the same as the inflation index used in TIPS, for reasons mentioned in the presentation (e.g., weights for CPI-U may not reflect inflation experienced by older folks due to its relative weight on housing expenses vs. health expenses.)
How does one calculate the future inflation-adjusted value of taxes on a nominal bond? Is it any simpler than calculating it for a TIPS?

Avoiding the money illusion is important.
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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by dodecahedron » Tue Apr 10, 2018 8:01 am

longinvest wrote:
Tue Apr 10, 2018 7:16 am
dodecahedron wrote:
Tue Apr 10, 2018 7:13 am
longinvest wrote:
Tue Apr 10, 2018 6:58 am
I think that it would have been much easier to explain how TIPS work in inflation-adjusted terms. Actually, when thinking in inflation-adjusted terms, it becomes obvious that nominal bonds are complex while TIPS are much simpler.
I disagree. Taxes on TIPS are computed on the nominal return, not the inflation adjusted return, so there is no way to analyze TIPS purely in real terms. Also, the inflation index that is most relevant to the investor may not be the same as the inflation index used in TIPS, for reasons mentioned in the presentation (e.g., weights for CPI-U may not reflect inflation experienced by older folks due to its relative weight on housing expenses vs. health expenses.)
How does one calculate the future inflation-adjusted value of taxes on a nominal bond? Is it any simpler that calculating it for a TIPS?

Avoiding the money illusion is important.
I agree that avoiding money illusion is important.

Yes, step one is to compute the taxes and step two is to inflation adjust the after-tax proceeds. But step one is more complicated for TIPS than nominal fixed income instruments, because the (M)AGI-stream associated with TIPS is less predictable especially when there are cliff and nonlinear tax-related effects (e.g., ACA ceilings, senior citizen property tax break thresholds, IRMAA thresholds, the "hump", etc.)

I am comfortable following Bernstein's suggestion to go with short term (nominal) bonds to deal with inflation risk.

The real yields on TIPS in recent years have not been attractive, particularly since the inflation index they use does not necessarily correspond to my personal inflation rate and the taxable income flows are erratic and unpredictable. However, I am comfortable with Ibonds, since there is tax-deferral, deflation protection, state tax advantages, and some flexibility about the timing of when to recognize the taxable cash flows associated with them (nice duration/liquidity properties.)

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by dbr » Tue Apr 10, 2018 8:36 am

I think it is a good try. I applaud the creators for the initiative and effort to put it out there. There is not much that is not addressed.

I disagree with the presentation on some minor points. It is not necessary to digress.

I suspect a person not very familiar with bonds in general and TIPS in particular would come away from this presentation now totally intimidated at the very mention of such an investment. I suspect people who are pretty familiar with TIPS see a pretty good presentation here.

To put some context around this I can't think of an aspect of investing where there is more complexity that can be known and as little complexity that must be known as bonds.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by plannerman » Wed Apr 11, 2018 7:15 am

I think the presentation missed what I consider to be the best use for TIPS--that is for liability matching. As retirees withdrawing from our portfolio for living expenses, we are more concerned about predictable, real cash flow than income. As has been discussed on this board many times, nothing does this better than a TIPS ladder.

plannerman

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by grok87 » Wed Apr 11, 2018 7:48 am

plannerman wrote:
Wed Apr 11, 2018 7:15 am
I think the presentation missed what I consider to be the best use for TIPS--that is for liability matching. As retirees withdrawing from our portfolio for living expenses, we are more concerned about predictable, real cash flow than income. As has been discussed on this board many times, nothing does this better than a TIPS ladder.

plannerman
Agree
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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by columbia » Wed Apr 11, 2018 8:38 am

It would be nice to see Vanguard offer an easier exposure to TIPS, for bond holders who don’t wish to juggle multiple bond funds and offer it in short and intermediate:

1/3 TIPS
1/3 Treasuries
1/3 Corporate

That covers the various concerns pretty well.

As I use TIAA Traditional, I don’t own a bond fund, but would certainly use something like the above as needed.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by bobcat2 » Wed Apr 11, 2018 9:22 pm

plannerman wrote:
Wed Apr 11, 2018 7:15 am
I think the presentation missed what I consider to be the best use for TIPS--that is for liability matching. As retirees withdrawing from our portfolio for living expenses, we are more concerned about predictable, real cash flow than income. As has been discussed on this board many times, nothing does this better than a TIPS ladder.
Exactly. For individuals over the age of 50 the primary use of TIPS, whether bonds or bond funds, is duration matching the TIPS to targeted retirement income. The presentation completely whiffs on this. :(

And then there is this pearl of wisdom.
My Fidelity bond expert suggests a 5%-10% max total portfolio allocation to TIPS.

Perhaps the bond "expert" at Fidelity should confer with the guys at DFA who put about 75% of their TDF fund portfolios into TIPS funds once the investors are in their late 60s or older.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by siamond » Wed Apr 11, 2018 10:58 pm

bobcat2 wrote:
Wed Apr 11, 2018 9:22 pm
My Fidelity bond expert suggests a 5%-10% max total portfolio allocation to TIPS.

Perhaps the bond "expert" at Fidelity should confer with the guys at DFA who put about 75% of their TDF fund portfolios into TIPS funds once the investors are in their late 60s or older.
Personally, I find both approaches (10% or 75%) equally extreme and inappropriate. Furthermore, any recommendation should be put in context of a specific retiree's situation. One-size-fits-all rules like that are just plainly useless imho.

The goal of the presentation (as clearly stated on slide #6) wasn't to make recommendations. It was only to educate (on the mechanics, the pros and the cons, and how to buy). Specific recommendations would be a completely different presentation, where TIPS can't be viewed in isolation from the rest of the portfolio and from personal circumstances.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by cfs » Wed Apr 11, 2018 11:43 pm

Thank you to the MBBC for the presentation, thanks for the link. Gracias por leer / cfs
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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by dcabler » Thu Apr 12, 2018 7:02 am

siamond wrote:
Wed Apr 11, 2018 10:58 pm
bobcat2 wrote:
Wed Apr 11, 2018 9:22 pm
My Fidelity bond expert suggests a 5%-10% max total portfolio allocation to TIPS.

Perhaps the bond "expert" at Fidelity should confer with the guys at DFA who put about 75% of their TDF fund portfolios into TIPS funds once the investors are in their late 60s or older.
Personally, I find both approaches (10% or 75%) equally extreme and inappropriate. Furthermore, any recommendation should be put in context of a specific retiree's situation. One-size-fits-all rules like that are just plainly useless imho.

The goal of the presentation (as clearly stated on slide #6) wasn't to make recommendations. It was only to educate (on the mechanics, the pros and the cons, and how to buy). Specific recommendations would be a completely different presentation, where TIPS can't be viewed in isolation from the rest of the portfolio and from personal circumstances.
Right, Slide #6 says he wasn't going to make any recommendation.
Though early on, he clearly states he won't buy tips for now.
Uses red fonts only in "Arguments against TIPs" section and never in the "arguments for TIPs" section
Provides 6 main arguments against TIPs and only 4 for arguments for TIPs. And "humorously" comparing TIPs holders to "doomsday people" with examples enumerated.
But he's not making any recommendations. :D

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by SocalLiving » Thu Apr 12, 2018 7:36 am

Thank you for posting the link. I definitely know more now than I did before.
I am sure there will be plenty more to think about when I actually want to buy TIPS, but the presentation helped me a lot with the basics.
Thanks!

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by bobcat2 » Thu Apr 12, 2018 7:54 am

dcabler wrote:
Thu Apr 12, 2018 7:02 am
Right, Slide #6 says he wasn't going to make any recommendation.
Though early on, he clearly states he won't buy tips for now.
Uses red fonts only in "Arguments against TIPs" section and never in the "arguments for TIPs" section
Provides 6 main arguments against TIPs and only 4 for arguments for TIPs. And "humorously" comparing TIPs holders to "doomsday people" with examples enumerated.
But he's not making any recommendations. :D
:thumbsup :thumbsup

My Fidelity bond expert suggests a 5%-10% max total portfolio allocation to TIPS.
The above statement is unambiguously a recommendation.


But the bigger problem with the presentation is the failure to mention using TIPS as a liability matching asset for retirement income. That's the reason for holding a significant portion of your portfolio in TIPS both as you near near retirement as well as in retirement.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by bobcat2 » Thu Apr 12, 2018 8:27 am

Here's another oddity in the presentation. While he neglects to mention using a TIPS bond ladder as a liability matching asset for retirement income, he does talk about bond ladders. In the section titled "Better (inflation) Hedge Alternatives" there is a discussion of using nominal bond ladders instead of TIPS because such nominal bond ladders better hedge inflation than holding TIPS. This a fairly unique perspective on inflation protection using bonds. The obvious question the statement raises is the following, why wouldn't holding a TIPS bond ladder rather than a nominal bond ladder provide even better inflation protection?

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by siamond » Thu Apr 12, 2018 8:36 am

bobcat2 wrote:
Thu Apr 12, 2018 7:54 am
My Fidelity bond expert suggests a 5%-10% max total portfolio allocation to TIPS.
The above statement is unambiguously a recommendation.
Not from the author of the presentation... And if you read the slide in context, the point was to consider TIPS vs. diversification, not about asserting what people should do.
bobcat2 wrote:
Thu Apr 12, 2018 7:54 am
But the bigger problem with the presentation is the failure to mention using TIPS as a liability matching asset for retirement income. That's the reason for holding a significant portion of your portfolio in TIPS both as you near near retirement as well as in retirement.
Er... Ok, I guess I have to repeat the point using other words... Describing specific use cases involving TIPS was outside the scope of the presentation.

We spent two hours on the mechanics of a rather complex topic during the chapter meeting. It wasn't the time to go dive in use cases, this would be a separate presentation for another time. If some people would volunteer to assemble and share such a "TIPS use cases and recommendations" presentation, this would be cool, actually.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by Angst » Thu Apr 12, 2018 8:44 am

grok87 wrote:
Wed Apr 11, 2018 7:48 am
plannerman wrote:
Wed Apr 11, 2018 7:15 am
I think the presentation missed what I consider to be the best use for TIPS--that is for liability matching. As retirees withdrawing from our portfolio for living expenses, we are more concerned about predictable, real cash flow than income. As has been discussed on this board many times, nothing does this better than a TIPS ladder.

plannerman
Agree
^ Me too.

The biggest problem with TIPS is those darn coupon payments. If they'd just auction off zero-coupon TIPS, I think things would be a lot easier both for building and maintaining one's LMP.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by dbr » Thu Apr 12, 2018 8:50 am

siamond wrote:
Thu Apr 12, 2018 8:36 am

We spent two hours on the mechanics of a rather complex topic during the chapter meeting. It wasn't the time to go dive in use cases, this would be a separate presentation for another time. If some people would volunteer to assemble and share such a "TIPS use cases and recommendations" presentation, this would be cool, actually.
I was going to add the comment that you have to separate the mechanics of TIPS from the question of TIPS use and recommendations. Frankly I don't think it is going to be possible to generate a useful document on the latter topic. The issue is too much dependent on individual situations and preferences and cannot avoid getting bogged down in an infinite number of debates about differences that are not differences as well as debate about financial planning issues in general. For example and with all due respect to Bob K, Bernstein, and others, in my opinion the concept of the LMP is not at all a solidly established strategy recommendation for retirement, and within the LMP in my opinion a TIPS ladder is not at all a solidly established way to meet the rationale of the LMP. But this is a digression not intended to discuss LMP but intended to illustrate how difficult it will be to arrive at a clear document on the use of TIPS that almost everyone will find acceptable. The fact that TIPS recommendations from professional advisors and TIPS composition in professionally designed portfolios is all over the map will be unresolveable issues that will loom over any attempt to generate a clear recommendation.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by bobcat2 » Thu Apr 12, 2018 8:51 am

The presenter misunderstands how TIPS should be used by individual investors to hedge against inflation. Simply holding TIPS bonds or TIPS funds in a portfolio will not in any meaningful sense hedge the portfolio against inflation. Nor should the individual investor be interested in attempting to hedge the portfolio against inflation. Simply holding TIPS assets in a portfolio with nominal bonds and stocks provides an additional diversification benefit, but little or no hedge against inflation for the investor.

What's important to hedge against inflation is not the portfolio, but the output of the portfolio. For the retiree or near retiree that output is income in retirement. The meaningful way to hedge retirement income against inflation using TIPS is to liability match the TIPS with the retirement income stream.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by bobcat2 » Thu Apr 12, 2018 9:24 am

On the Perspective 2 slide we get the following observation which is stated as a known fact, but rejected by many financial experts.
Investors with large stock allocations do not need to buy TIPS because stocks are a good inflation hedge.
We often hear this opinion - Is it true? The truth is stocks provide little practical inflation protection. The correlation coefficient between annual total US stock market returns and the CPI for the years 1926-2012 is about -0.02, or approximately zero. The worst two calendar decades for inflation in the US during the 20th century were 1910-19 and 1970-79. How good was the inflation protection provided by stocks for those two high inflation decades? As you can see from the following table when inflation was at its worse during the 20th century equities were a lousy inflation hedge.

Code: Select all

             Annual                            Annual Real
Decade       Inflation Rate                   Return on Equities
1910-19           7.3%                               -2.6%
1970-79           7.4%                               -0.7% 
Source: Triumph of the Optimists


Stocks provide higher average returns than other financial assets. So you do better than inflation over very long time periods because of the high average returns of stocks. But if you may need the money in the next 10 to 15 years and you think your stock holdings will provide inflation protection – think again. :(

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by siamond » Thu Apr 12, 2018 9:44 am

dbr wrote:
Thu Apr 12, 2018 8:50 am
The fact that TIPS recommendations from professional advisors and TIPS composition in professionally designed portfolios is all over the map will be unresolveable issues that will loom over any attempt to generate a clear recommendation.
I'll admit that my post was a little bit tongue in cheek... Totally agreed. Which is exactly why one should probably not mix a discussion of mechanics with a discussion of use cases and (often biased) recommendations.

Anyhoo, those slides are provided as an open Powerpoint file as an attempt to help the Bogleheads community. People are of course free to pick and choose whatever they want, and assemble derivative presentations as they see fit.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by bobcat2 » Thu Apr 12, 2018 10:04 am

From the presentation.
My Fidelity expert humorously described TIPS investors as “doomsday” people who:
• Worry a lot
• Build bunkers in case of nuclear war
• Buy lots of gold
• Distrust the government (which is comical, because TIPS are issued by the government.

For even more humor in the presentation I suggest adding the following slide.
My finance professor humorously described stock investors as “hopeless” optimists who:
• Build houses in flood plains and earthquake zones
• Think seat belts are too restraining
• Smoke a lot because they have good genes
• Buy lots of frontier market stocks and bonds because they have high expected returns and are good diversifiers
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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by dcabler » Thu Apr 12, 2018 10:16 am

siamond wrote:
Thu Apr 12, 2018 9:44 am
dbr wrote:
Thu Apr 12, 2018 8:50 am
The fact that TIPS recommendations from professional advisors and TIPS composition in professionally designed portfolios is all over the map will be unresolveable issues that will loom over any attempt to generate a clear recommendation.
I'll admit that my post was a little bit tongue in cheek... Totally agreed. Which is exactly why one should probably not mix a discussion of mechanics with a discussion of use cases and (often biased) recommendations.

Anyhoo, those slides are provided as an open Powerpoint file as an attempt to help the Bogleheads community. People are of course free to pick and choose whatever they want, and assemble derivative presentations as they see fit.
Perhaps keep the mechanics portion of the slideset on the BH Wiki, but remove the pros/cons section? I do suspect that seeing the presentation made in person might bring about a different perspective than just a cold read of a slideset.

It's hard to discuss an "inflation hedge" without including time as a factor. You want instant inflation hedge? That sends you in one direction that might look more like a ladder/LMP. You want inflation hedge over time but willing to fall behind for a little while? Maybe a short/intermediate bond fund is fine. Willing to wait a little longer? Maybe stocks will do the job. As it's been said already in this thread, it's hard to make specific recommendations that cover everybody's wants/needs in the context of the short history TIPs.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by grok87 » Thu Apr 12, 2018 10:55 am

Angst wrote:
Thu Apr 12, 2018 8:44 am
grok87 wrote:
Wed Apr 11, 2018 7:48 am
plannerman wrote:
Wed Apr 11, 2018 7:15 am
I think the presentation missed what I consider to be the best use for TIPS--that is for liability matching. As retirees withdrawing from our portfolio for living expenses, we are more concerned about predictable, real cash flow than income. As has been discussed on this board many times, nothing does this better than a TIPS ladder.

plannerman
Agree
^ Me too.

The biggest problem with TIPS is those darn coupon payments. If they'd just auction off zero-coupon TIPS, I think things would be a lot easier both for building and maintaining one's LMP.
Agree but 1% is pretty close to 0%?
Keep calm and Boglehead on. KCBO.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by siamond » Thu Apr 12, 2018 11:58 am

dcabler wrote:
Thu Apr 12, 2018 10:16 am
siamond wrote:
Thu Apr 12, 2018 9:44 am
Anyhoo, those slides are provided as an open Powerpoint file as an attempt to help the Bogleheads community. People are of course free to pick and choose whatever they want, and assemble derivative presentations as they see fit.
Perhaps keep the mechanics portion of the slideset on the BH Wiki, but remove the pros/cons section? I do suspect that seeing the presentation made in person might bring about a different perspective than just a cold read of a slideset.
Actually, the Financial Literacy Wiki page is a bit special. The usual policy of neutrality (and rough consensus) of Wiki pages does not apply in this case. People just share material they assembled to benefit other would-be presenters, who can pick and choose, tweak and tune things in their own way for their own needs.

More generally, I wasn't seeking any consensus building in this thread (ah! I know better than that! :wink:). I was just trying to give exposure to what I think is a really good effort in describing TIPS mechanics and their pros and cons. When I see cookie-cutter TIPS recommendations without any such background, personally, I cringe.

I was also trying to indirectly give more exposure to the Financial Literacy wiki page. It is easy to argue at length on one aspect or another of a given topic. While it seems more constructive (and more difficult) to assemble and share material enabling discussions and education. And if such material appears a tad opinionated, well, up to the would-be presenter to pick and choose.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by bobcat2 » Thu Apr 12, 2018 1:27 pm

dbr wrote:
Thu Apr 12, 2018 8:50 am
For example and with all due respect to Bob K, Bernstein, and others, in my opinion the concept of the LMP is not at all a solidly established strategy recommendation for retirement, ...
Since I have been singled out, I want to respond. I do not recommend constructing a liability managed portfolio (LMP). I do recommend a liability driven investment (LDI) strategy, aka goal-based investing. While LDI strategies and LMP may seem superficially very similar, operationally there are large differences. One significant difference is that LDI retirement strategies nearly always gauge progress toward reaching the retirement income goal, starting many years before retirement, through use of the funded ratio. LMP has no required relationship with the funded ratio, or any other measure of investing progress toward the goal, many years before retirement.

Goal-based investing - Investopedia
A relatively new approach to wealth management that emphasizes investing with the objective of attaining specific life goals. ... [GBI] increases clients’ commitments to their life goals by enabling them to gauge tangible progress towards their goals
link - https://www.investopedia.com/terms/g/go ... esting.asp

Goal-Based Approach to Investment Management
A solution-focused perspective

• Determine the appropriate objective function for the portfolio before optimization

• Example: liability-driven investing with the goal of repaying targeted liabilities according to a time schedule, as
in a defined-benefit pension fund covering the promised retirement benefits of plan members

• Example: A DC managed account. Goal is to accumulate enough funds to purchase an inflation-protected retirement income for life adequate to sustain the late-in-work life standard of living for each member of the defined contribution retirement plan

Not Examples: target-date retirement funds; 70 -30 rebalancing portfolio strategy between equities and fixed income; earning an expected return equal to the Consumer Price Index plus 3.00%

Source - Robert Merton presentation
link - http://mitsloan.mit.edu/uploadedFiles/A ... Merton.pdf
Warning - the meat of the Merton presentation is rather wonky. It was prepared for investment professionals - not individual DIY retirement investors.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by SavageAmusement » Thu Apr 12, 2018 1:59 pm

I am the author of the TIPS presentation.

I'd like to make a few comments regarding the presentation:

1) My target audience was the 25 to 30 people who regularly show up at Metro-Boston Bogleheads meetings.
2) My goal was to educate an intelligent audience who knew relatively little about TIPS with an introductory presentation.
3) During the presentation, I explained each slide with additional words that don't appear on the slides. We also had a very interactive discussion during the presentation with many attendees asking questions and debating each other and me. Siamond did an excellent job of playing devils advocate. Reading the presentation on the wiki loses all that context.
4) I never made a TIPS recommendation and explicitly stated so. In the name of full disclosure, I stated that I concluded TIPS weren't for me ... for now. I made it clear during the presentation that that wasn't a recommendation. It was an attempt by me to be honest so the audience could be aware of any potential bias on my part.
5) I went out of my way to be objective. I tried to enumerate the case for and against TIPS as completely and fairly as possible within the available time. I'd like to remind the TIPS advocates who reside herein that I needed to say some negative things about TIPS in order to make a case against them. That's kind of the nature of making a case against something. Please look at the case I made for TIPS. I said some very positive things about them.
6) A discussion of LMP using TIPS ladders was way beyond the scope of this presentation. I had 2 hours to make this presentation, including the interactive discussion, bio breaks, and Q&A. Siamond promised to kneecap me if I ran over my allotted time by a nanosecond.
7) Please be nice to my Fidelity bond expert. She is a wonderful person who is a treasure trove of valuable bond information. Even if you don't agree with her, she is not to be dismissed lightly. By the way, she's not a salesperson. She works in their education group after many years on Fidelity's bond desk. She has a terrific sense of humor which apparently not everyone appreciated. Some of her better material ended up on the cutting room floor.
8) This presentation was my take on TIPS. It's not perfect by any means, but as a general introduction to TIPS, it doesn't suck. Be that as it may, some of you appear to think it does indeed suck. I invite a member of that crowd to author a better TIPS presentation to replace mine.

Finally, I never intended the presentation to end up here. I agreed to let Siamond post it here after the fact. I can tell you unequivocally that our goal was to educate people, not offend them. Would I do another Metro-Boston presentation? Yes. Would I allow it to be posted here? Absolutely not.

SavageAmusement

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by Yooper16 » Thu Apr 12, 2018 4:32 pm

Thanks for your effort. Still don't understand how the TIPS stuff works and the presentation(in the latter pages) said that TIPS can be difficult to understand.

So as I have learned here, if you don't understand something its best not invest in it. Following that sage advise--- I do I-Bonds via TD and TSM at Vanguard for inflation protection. Never have had an issue with TD (been using around 15 years, after converting dozens for paper products) received from bi-weekly payroll deduction. Never had an issue with Vanguard and their workings.

Prefer not having to strain the brain.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by gmaynardkrebs » Thu Apr 12, 2018 6:19 pm

Yooper16 wrote:
Thu Apr 12, 2018 4:32 pm
Thanks for your effort. Still don't understand how the TIPS stuff works and the presentation(in the latter pages) said that TIPS can be difficult to understand.
So as I have learned here, if you don't understand something its best not invest in it. ....
I don't think many people understand how stocks work either, yet for most people, it's the core of their retirement portfolios. How many people outside of BH have even an inkling of what P/Es, buybacks, Sharpe ratios, alpha vs, beta, dividends vs earnings etc etc. really mean. In most ways, TIPS are easier to understand -- you get back what you put, in real dollars, plus a little interest. The reason people don't know about them is that the brokerages and mutual fund companies can't pay their Yacht Club fees selling TIPS.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by bayview » Thu Apr 12, 2018 7:04 pm

If I didn’t have the G fund, I would have TIPS matched out to years, as an LMP.

IF (as is frequently threatened, but so far hasn’t happened), the G fund is gutted and loses its unique structure, I will probably move the $$$ out of my TSP and put it into into TIPS.

If Ed McMahon (oh wait, he’s dead) appears at my door with a check for a million bucks, I’ll start buying iBonds in taxable. It will only take 100 years, right? Or 50 if buying jointly. So maybe I’ll mix in some TIPS as well. As mentioned above, it truly is unfortunate that there aren’t TIPS zeroes, to avoid the taxation issues.

SavageAmusement, I’m sorry that you feel that your work was chewed up here, because I think this was a great presentation. Don’t forget that on BH, and especially on the Theory subforum, we’re always ready to sacrifice a good plan in favor of the perfect plan. :D

Thanks for allowing this to be posted. :beer
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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by ikowik » Thu Apr 12, 2018 7:57 pm

SavageAmusement wrote:
Thu Apr 12, 2018 1:59 pm
I am the author of the TIPS presentation.

Finally, I never intended the presentation to end up here. I agreed to let Siamond post it here after the fact. I can tell you unequivocally that our goal was to educate people, not offend them. Would I do another Metro-Boston presentation? Yes. Would I allow it to be posted here? Absolutely not.

SavageAmusement
Thank you for allowing this presentation to be posted here. I learned somethings that were not clear to me; you make the point about complexity of TIPS very well in your presentation .
It is too bad that a good effort gets chewed on by nit-picking arguments

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by Dudley » Thu Apr 12, 2018 8:09 pm

SavageAmusement wrote:
Thu Apr 12, 2018 1:59 pm
I am the author of the TIPS presentation.
I read it and appreciated it. Thank you.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by gmaynardkrebs » Thu Apr 12, 2018 11:35 pm

Dudley wrote:
Thu Apr 12, 2018 8:09 pm
SavageAmusement wrote:
Thu Apr 12, 2018 1:59 pm
I am the author of the TIPS presentation.
I read it and appreciated it. Thank you.
+1

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by Valuethinker » Fri Apr 13, 2018 2:47 am

bobcat2 wrote:
Thu Apr 12, 2018 9:24 am
On the Perspective 2 slide we get the following observation which is stated as a known fact, but rejected by many financial experts.
Investors with large stock allocations do not need to buy TIPS because stocks are a good inflation hedge.
We often hear this opinion - Is it true? The truth is stocks provide little practical inflation protection. The correlation coefficient between annual total US stock market returns and the CPI for the years 1926-2012 is about -0.02, or approximately zero. The worst two calendar decades for inflation in the US during the 20th century were 1910-19 and 1970-79. How good was the inflation protection provided by stocks for those two high inflation decades? As you can see from the following table when inflation was at its worse during the 20th century equities were a lousy inflation hedge.

Code: Select all

             Annual                            Annual Real
Decade       Inflation Rate                   Return on Equities
1910-19           7.3%                               -2.6%
1970-79           7.4%                               -0.7% 
Source: Triumph of the Optimists


Stocks provide higher average returns than other financial assets. So you do better than inflation over very long time periods because of the high average returns of stocks. But if you may need the money in the next 10 to 15 years and you think your stock holdings will provide inflation protection – think again. :(

BobK
In a metaphoric sense, I kneel before thee and kiss the hem of thy garment!

Of course it would be Dimson & Marsh (I once attended a minicourse given by one of them).

Thank you so much for iterating this point in a persuasive way. I thank you, and I am pretty sure Nisiprius would thank you.

My one caveat is that it may be the case that stocks underperform rising inflation, but outperform in falling inflation. Having 1 data point-- the 1970s and then the period 1981-2000, roughly. The underlying correlation being with monetary policy but also with tax drag-- corporate earnings are overstated in periods of inflation, due to the use of nominal values for things like depreciation.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by Lauretta » Fri Apr 13, 2018 4:25 am

Thanks for sharing this excellent presentation! I found it very interesting also because since I live in the Eurozone I hadn't given much thought to inflation linked bonds before, partly because many of them are issued by Italy and so present some credit risk (if I remember correctly Valuethinker pointed out a number of problems with inflation linked of bonds for eurozone investors in some other post).

I have a question on the low correlation of TIPs to inflation in the short run (the presenation mentions that the monthly correlation of TIPs to inflation is 0.09), as I am not sure I understand the resason why, since by definition TIPs adjust the coupon and principal value to compensate for inflation. So if I understand correctly the correlation is calculated for a TIP fund, and I imagine that it is due to the volatility in the market value of the bonds within the fund? Is this correct? :?: I imagine that if one buys an individual TIP and holds it till maturity there should be no reason why it doesn't fully protect against inflation (leaving aside the question whether CPI precisely reflects actual inflation). Is that the case?
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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by johnz1001 » Fri Apr 13, 2018 5:01 am

SavageAmusement wrote:
Thu Apr 12, 2018 1:59 pm
I am the author of the TIPS presentation.

I'd like to make a few comments regarding the presentation:

1) My target audience was the 25 to 30 people who regularly show up at Metro-Boston Bogleheads meetings.
2) My goal was to educate an intelligent audience who knew relatively little about TIPS with an introductory presentation.
8) This presentation was my take on TIPS. It's not perfect by any means, but as a general introduction to TIPS, it doesn't suck. Be that as it may, some of you appear to think it does indeed suck. I invite a member of that crowd to author a better TIPS presentation to replace mine.

Finally, I never intended the presentation to end up here. I agreed to let Siamond post it here after the fact. I can tell you unequivocally that our goal was to educate people, not offend them. Would I do another Metro-Boston presentation? Yes. Would I allow it to be posted here? Absolutely not.

SavageAmusement
This was a great presentation on TIPS. I know something about them but your presentation clarified a lot more. There are a lot of serious academics on this site, and they do what serious academics do. They criticize and pick apart. So, I appreciate you allowing Siamond to post this and hope the criticisms are seen for what they are: some worthy points by academics, some of which further illuminate TIPS and their various uses and limitations. Your intention as stated in 2 above far exceeded expectations.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by SavageAmusement » Fri Apr 13, 2018 5:15 am

Lauretta wrote:
Fri Apr 13, 2018 4:25 am
Thanks for sharing this excellent presentation! I found it very interesting also because since I live in the Eurozone I hadn't given much thought to inflation linked bonds before, partly because many of them are issued by Italy and so present some credit risk (if I remember correctly Valuethinker pointed out a number of problems with inflation linked of bonds for eurozone investors in some other post).

I have a question on the low correlation of TIPs to inflation in the short run (the presenation mentions that the monthly correlation of TIPs to inflation is 0.09), as I am not sure I understand the resason why, since by definition TIPs adjust the coupon and principal value to compensate for inflation. So if I understand correctly the correlation is calculated for a TIP fund, and I imagine that it is due to the volatility in the market value of the bonds within the fund? Is this correct? :?: I imagine that if one buys an individual TIP and holds it till maturity there should be no reason why it doesn't fully protect against inflation (leaving aside the question whether CPI precisely reflects actual inflation). Is that the case?
Lauretta,

You answered your own question when you said: "I imagine that it is due to the volatility in the market value of the bonds within the fund? I imagine that if one buys an individual TIP and holds it till maturity there should be no reason why it doesn't fully protect against inflation (leaving aside the question whether CPI precisely reflects actual inflation)."

You are correct.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by dbr » Fri Apr 13, 2018 8:32 am

Lauretta wrote:
Fri Apr 13, 2018 4:25 am
Thanks for sharing this excellent presentation! I found it very interesting also because since I live in the Eurozone I hadn't given much thought to inflation linked bonds before, partly because many of them are issued by Italy and so present some credit risk (if I remember correctly Valuethinker pointed out a number of problems with inflation linked of bonds for eurozone investors in some other post).

I have a question on the low correlation of TIPs to inflation in the short run (the presenation mentions that the monthly correlation of TIPs to inflation is 0.09), as I am not sure I understand the resason why, since by definition TIPs adjust the coupon and principal value to compensate for inflation. So if I understand correctly the correlation is calculated for a TIP fund, and I imagine that it is due to the volatility in the market value of the bonds within the fund? Is this correct? :?: I imagine that if one buys an individual TIP and holds it till maturity there should be no reason why it doesn't fully protect against inflation (leaving aside the question whether CPI precisely reflects actual inflation). Is that the case?
I find your post very perceptive. A pet peeve of mine about TIPS is this false conclusion that because the market price of a TIPS does not correlate with inflation that TIPS are not free of inflation risk. TIPS are always compensated for inflation. However, your argument should be extended to note that compensation for inflation does not require holding the bond to maturity. It operates at all times. The holding to maturity, or, equivalently, the suggestion to buy short TIPS, is only required if you want inflation compensation and no interest rate volatility at the same time. There is another option, which is I bonds, which are not marketable and thus do not have price volatility and are compensated for inflation. In that case there is a restriction on the annual amount that can be purchased. There are no corporate or municipal bonds that are inflation indexed.

In investing it is easy to list a set of requirements that very quickly excludes all possible options.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by nedsaid » Fri Apr 13, 2018 8:54 am

bobcat2 wrote:
Thu Apr 12, 2018 9:24 am
On the Perspective 2 slide we get the following observation which is stated as a known fact, but rejected by many financial experts.
Investors with large stock allocations do not need to buy TIPS because stocks are a good inflation hedge.
We often hear this opinion - Is it true? The truth is stocks provide little practical inflation protection. The correlation coefficient between annual total US stock market returns and the CPI for the years 1926-2012 is about -0.02, or approximately zero. The worst two calendar decades for inflation in the US during the 20th century were 1910-19 and 1970-79. How good was the inflation protection provided by stocks for those two high inflation decades? As you can see from the following table when inflation was at its worse during the 20th century equities were a lousy inflation hedge.

Code: Select all

             Annual                            Annual Real
Decade       Inflation Rate                   Return on Equities
1910-19           7.3%                               -2.6%
1970-79           7.4%                               -0.7% 
Source: Triumph of the Optimists


Stocks provide higher average returns than other financial assets. So you do better than inflation over very long time periods because of the high average returns of stocks. But if you may need the money in the next 10 to 15 years and you think your stock holdings will provide inflation protection – think again. :(

BobK
The stagflation years of the 1970's are a good illustration of this. In another thread, there was a discussion of nominal bonds and inflation. Just eyeballing charts and using educated guesses, it seemed that from let's say 1972 or so, it took both stock and bond investors a decade or more to get their inflation adjustment and this would assume reinvestment of dividends and interest. The point is, the inflation adjustment can be delayed depending upon how big the inflation spike is and how long sustained higher inflation lasts. Stocks are not TIPS. Nominal bonds are not TIPS.

I hold stocks because they represent cash flows from business that most likely will grow over time. So far so good. Though earnings growth will grow over time, the multiple that the market will pay for a dollar of earnings will change. In my lifetime, I have seen the forward P/E ratios of stocks range from about 8 to about 32. Over the years, the fluctuation in P/E ratios will even out over time and your return from stocks should equal the business or economic return from the underlying businesses. Thus over long periods of time, you will most likely beat inflation handily over time. In the short run, about anything can happen. This is why stocks are risky.
A fool and his money are good for business.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by HueyLD » Fri Apr 13, 2018 11:07 am

bayview wrote:
Thu Apr 12, 2018 7:04 pm
If I didn’t have the G fund, I would have TIPS matched out to years, as an LMP.

IF (as is frequently threatened, but so far hasn’t happened), the G fund is gutted and loses its unique structure, I will probably move the $$$ out of my TSP and put it into into TIPS.

If Ed McMahon (oh wait, he’s dead) appears at my door with a check for a million bucks, I’ll start buying iBonds in taxable. It will only take 100 years, right? Or 50 if buying jointly. So maybe I’ll mix in some TIPS as well. As mentioned above, it truly is unfortunate that there aren’t TIPS zeroes, to avoid the taxation issues.

SavageAmusement, I’m sorry that you feel that your work was chewed up here, because I think this was a great presentation. Don’t forget that on BH, and especially on the Theory subforum, we’re always ready to sacrifice a good plan in favor of the perfect plan. :D

Thanks for allowing this to be posted. :beer
Bayview summed up the forum personality very well.

SavageAmusement, please don't get discouraged by some of the "suggestions" in this thread. They were not at your meeting and did not hear all the discussions between the presenter and the attendees. They didn't know that your presentation was meant to be an introduction, not a ultra comprehensive academic paper that went thru a vigorous peer review process.

Since you did such a good job in your first presentation, you need to come back for a follow-up presentation so that you can incorporate many good suggestions from outstanding posters on this forum.

Whenever I taught technical subjects in a classroom setting, I always offered an opportunity for those who were interested in more in-depth knowledge on the subjects additional tools/readings after the class. That way, I could get thru my material within the timeframe as well as providing a few participants with additional information on an as needed basis.

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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by triceratop » Fri Apr 13, 2018 11:18 am

bobcat2 wrote:
Thu Apr 12, 2018 8:51 am
The presenter misunderstands how TIPS should be used by individual investors to hedge against inflation. Simply holding TIPS bonds or TIPS funds in a portfolio will not in any meaningful sense hedge the portfolio against inflation. Nor should the individual investor be interested in attempting to hedge the portfolio against inflation. Simply holding TIPS assets in a portfolio with nominal bonds and stocks provides an additional diversification benefit, but little or no hedge against inflation for the investor.

What's important to hedge against inflation is not the portfolio, but the output of the portfolio. For the retiree or near retiree that output is income in retirement. The meaningful way to hedge retirement income against inflation using TIPS is to liability match the TIPS with the retirement income stream.

BobK
How do you know what the presenter understands or misunderstands? How can you characterize their level of knowledge? That's a statement about what they personally know or believe.

Instead you could try to point out that there is a lack of clarity in the presentation; except, I have not seen you do so with regards to the TIPS & inflation hedge point. The presenter even includes a slide on the imperfection of this hedge. And, as repeatedly pointed out in this thread, you do not know what the presenter said in addition to the slide. This makes your comment unsupported (as well as slightly rude, IMO).

Let's focus on the ideas please, not individuals.

"What's important to hedge against inflation is not the portfolio, but the output of the portfolio."

"citation needed". The portfolio's value can be withdrawn against. This sounds like a variant of the dividend income fallacy in stocks, but in bonds instead.
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Re: Introduction to Treasury Inflation Protected Securities (TIPS)

Post by nedsaid » Fri Apr 13, 2018 10:35 pm

SavageAmusement wrote:
Thu Apr 12, 2018 1:59 pm

Finally, I never intended the presentation to end up here. I agreed to let Siamond post it here after the fact. I can tell you unequivocally that our goal was to educate people, not offend them. Would I do another Metro-Boston presentation? Yes. Would I allow it to be posted here? Absolutely not.

SavageAmusement
Your presentation was a good one. Almost impossible to make a presentation that would satisfy everyone. Pretty much, whenever one presents information it invites criticism. I have a few bruises to show from this forum, this is a smart and a tough crowd. Please don't take it personally. You made a contribution to your local chapter and to this forum. Thank you.
A fool and his money are good for business.

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