Help me understand TIPS.

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Jefferson
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Help me understand TIPS.

Post by Jefferson » Tue Jul 17, 2018 9:04 pm

Please help me understand TIPs; specifically when held in an etf such as VTIP. My understanding of bonds in general is limited.

In addition, what is a reasonable percentage range of my bond allocation that should be devoted to TIPs? I would also (potentially) hold Treasuries (VGIT) and Munis (VTEB).

I am in the highest federal tax bracket and 6% state tax. This is for a taxable account.

Angst
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Re: Help me understand TIPs.

Post by Angst » Tue Jul 17, 2018 9:16 pm


alex_686
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Re: Help me understand TIPs.

Post by alex_686 » Tue Jul 17, 2018 9:20 pm

TIPS receive 2 different types of income. The first is the normal interest payment, no different from any other Treasury. The other is a inflation principle adjustment - i.e., the principle is adjusted to reflect inflation. The trick to this one is that you are taxed on this each year like it is OID. The adjustment to principle is taxed today but you don't get the cash flow until maturity. In theory you could have higher tax payments than cash flow from the bond before maturity. For this reason TIPS should always be held in tax advantaged accounts.

There is a similar product called I-bonds. They are like saving bonds. You buy them directly from the government and they don't trade. Tax treatment is a bit more favorable.

I have a hard time recommending TIPS. Risk and return are linked and this is one of the safest investments out there. The only case where they would beat normal treasuries are in a situation where inflation increased unexpectedly.

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Earl Lemongrab
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Re: Help me understand TIPs.

Post by Earl Lemongrab » Wed Jul 18, 2018 11:56 am

To be extremely picky, it's TIPS. The 'S' is not a plural, it stands for "security".
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

JBTX
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Re: Help me understand TIPs.

Post by JBTX » Wed Jul 18, 2018 12:43 pm

Tips are better used in a tax deferred account vs a taxable account given interest is accrued and annually taxable at ordinary tax rates

Tips are not totally risk free. They do have a real interest rate that does go up and down, apart from the inflation component which can cause fluctuation in value. However, over the very long term, on a real inflation adjusted basis, they are safer than regular treasuries because your inflation risk has been mostly elminated.

TIPS are good for inflationry periods. Given we have had declining inflation over almost 35 years, they have not been as attractive as traditional treasuries. But inflation can't go down forever.

TIPS are not as good of a hedge against stock declines in economic downturns. In situations like 2008, when the economy tanks, and stocks tank, and interest rates decrease, people flock to US treasuries.

How much should you have? I probably have approx 1/3 of bond allocation in tips, and maybe 1/2 if you include my ibonds in a taxable account. But that is probably more than most.

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willthrill81
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Re: Help me understand TIPs.

Post by willthrill81 » Wed Jul 18, 2018 3:00 pm

alex_686 wrote:
Tue Jul 17, 2018 9:20 pm
I have a hard time recommending TIPS. Risk and return are linked and this is one of the safest investments out there. The only case where they would beat normal treasuries are in a situation where inflation increased unexpectedly.
I'm not a huge TIPS fans myself, but the exception you provide is a big one. It's kind of like saying that the only time when it isn't good to hold stocks is while they're crashing. The 1940s and especially the 1970s demonstrated that inflation can absolutely increase beyond the market's expectations, crushing nominal bonds. Intermediate term Treasuries had a maximum drawdown of over -30% in real dollars between 1976 and 1981.

TIPS' volatility in funds would be a big drawback for me. Since 2001, TIPS had have a .71% higher return than total bond market but with a standard deviation of 5.96% vs. TBM's 3.45%. And even more importantly in my estimation, TIPS had a maximum drawdown of -12.50% vs. TBM's 3.99%.

If I wanted TIPS, I'd buy them directly and hold them to maturity.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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FIREchief
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Re: Help me understand TIPs.

Post by FIREchief » Wed Jul 18, 2018 3:11 pm

JBTX wrote:
Wed Jul 18, 2018 12:43 pm
TIPS are good for inflationry periods. Given we have had declining inflation over almost 35 years, they have not been as attractive as traditional treasuries.
Inflation rose 2.9% over the past 12 months:

https://www.bls.gov/news.release/cpi.nr0.htm

That's more than the current 2.09% breakeven spread between 10 year TIPS and 10 year nominal treasuries. I like TIPS and my LMP is substantially invested in them for the long haul. :sharebeer

The breakeven inflation rate 12 months prior (June 15, 2017) was 1.67%, so the TIPS buyer has come out way ahead (so far).
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

JBTX
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Re: Help me understand TIPs.

Post by JBTX » Wed Jul 18, 2018 3:21 pm

willthrill81 wrote:
Wed Jul 18, 2018 3:00 pm
alex_686 wrote:
Tue Jul 17, 2018 9:20 pm
I have a hard time recommending TIPS. Risk and return are linked and this is one of the safest investments out there. The only case where they would beat normal treasuries are in a situation where inflation increased unexpectedly.
I'm not a huge TIPS fans myself, but the exception you provide is a big one. It's kind of like saying that the only time when it isn't good to hold stocks is while they're crashing. The 1940s and especially the 1970s demonstrated that inflation can absolutely increase beyond the market's expectations, crushing nominal bonds. Intermediate term Treasuries had a maximum drawdown of over -30% in real dollars between 1976 and 1981.

TIPS' volatility in funds would be a big drawback for me. Since 2001, TIPS had have a .71% higher return than total bond market but with a standard deviation of 5.96% vs. TBM's 3.45%. And even more importantly in my estimation, TIPS had a maximum drawdown of -12.50% vs. TBM's 3.99%.

If I wanted TIPS, I'd buy them directly and hold them to maturity.
The issue with measuring volatility is it is done in nominal terms (I think). Theoretically it should be done in Real terms.

It is hard for me to believe the real volatility of tips is greater than conventional treasuries of similar duration, but perhaps it is so.

You could look at treasuries in nominal terms and it seems like they held up OK in the late 70s but in real terms they got clobbered, although they recovered fairly quickly.

I think people have a hard time wrapping their heads around tips because they tend to focus on nominal measures and not real.

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FIREchief
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Re: Help me understand TIPs.

Post by FIREchief » Wed Jul 18, 2018 3:23 pm

JBTX wrote:
Wed Jul 18, 2018 3:21 pm
I think people have a hard time wrapping their heads around tips because they tend to focus on nominal measures and not real.
Bingo! We see this here all the time.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

JBTX
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Re: Help me understand TIPs.

Post by JBTX » Wed Jul 18, 2018 3:27 pm

FIREchief wrote:
Wed Jul 18, 2018 3:23 pm
JBTX wrote:
Wed Jul 18, 2018 3:21 pm
I think people have a hard time wrapping their heads around tips because they tend to focus on nominal measures and not real.
Bingo! We see this here all the time.
Plus there is a recency bias given their performance has not been stellar over the last 35 years due to declining inflation, plus the long term nominal interest rate drop that has greatly benefited treasuries over that same time period. I really doubt we see a comparable outcome the next couple of decades.

Angst
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Re: Help me understand TIPs.

Post by Angst » Wed Jul 18, 2018 4:30 pm

alex_686 wrote:
Tue Jul 17, 2018 9:20 pm
I have a hard time recommending TIPS. Risk and return are linked and this is one of the safest investments out there. The only case where they would beat normal treasuries are in a situation where inflation increased unexpectedly.

I'm pretty much just amusing myself here with semantics, but I'm sure you'd agree that when it comes to funding a real (not nominal) LMP, you can't beat TIPS.

bikechuck
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Re: Help me understand TIPs.

Post by bikechuck » Wed Jul 18, 2018 4:34 pm

Angst wrote:
Wed Jul 18, 2018 4:30 pm
I'm pretty much just amusing myself here with semantics, but I'm sure you'd agree that when it comes to funding a real (not nominal) LMP, you can't beat TIPS.
Well perhaps so, however I have no clue what a LMP is.

Angst
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Re: Help me understand TIPs.

Post by Angst » Wed Jul 18, 2018 5:13 pm

bikechuck wrote:
Wed Jul 18, 2018 4:34 pm
Angst wrote:
Wed Jul 18, 2018 4:30 pm
I'm pretty much just amusing myself here with semantics, but I'm sure you'd agree that when it comes to funding a real (not nominal) LMP, you can't beat TIPS.
Well perhaps so, however I have no clue what a LMP is.
Sorry. "Liability Matching Portfolio"

Here's a thread grok put together that explains it:
viewtopic.php?f=10&t=218634

jalbert
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Re: Help me understand TIPs.

Post by jalbert » Wed Jul 18, 2018 5:26 pm

I have a hard time recommending TIPS. Risk and return are linked and this is one of the safest investments out there. The only case where they would beat normal treasuries are in a situation where inflation increased unexpectedly.
That is true in a general sense, but it can be made more specific to understand the specific situation when a TIPS will win.

At time of this writing, the 10-yr TIPS breakeven inflation rate is 2.09%, which may change a little by the time you look at the rate. on the Fed web site.

This means that a 10-yr treasury and 10-yr TIPS will have the same return if inflation comes in at 2.09% annualized over the next 10 years. If the annualized 10-yr inflation rate is higher, the TIPS will win. If it comes in lower, the treasury will win.

Another way to view TIPS is that they do not respond to interest rate changes in lockstep with treasuries, so they present a diversification opportunity.
Risk is not a guarantor of return.

alex_686
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Re: Help me understand TIPs.

Post by alex_686 » Wed Jul 18, 2018 5:55 pm

Angst wrote:
Wed Jul 18, 2018 4:30 pm
alex_686 wrote:
Tue Jul 17, 2018 9:20 pm
I have a hard time recommending TIPS. Risk and return are linked and this is one of the safest investments out there. The only case where they would beat normal treasuries are in a situation where inflation increased unexpectedly.

I'm pretty much just amusing myself here with semantics, but I'm sure you'd agree that when it comes to funding a real (not nominal) LMP, you can't beat TIPS.
I would disagree. Historically nominal treasuries have beaten TIPS in a Liability Matching Portfolio. I used to work in a insurance company next to some actuaries so I got to see this up close.

TIPS are basically inflation insurance and we can parse out exactly what we are insuring against and how much that insurance is. TIPS don't beat nominal treasuries under expected inflation. Heck, it can even run high and they still don't beat it. TIPS are priced so they pay off only if there was a sudden surge in inflation, a surge that has never happened since TIPS were invented in 1997. Which, I will admit, is a very short time where inflation has been well controlled.

So I can say it is historically untrue. You will probably point to the fact that TIPS are theoretically better, which I would also agree too. TIPS are just very expensive for what they do.

JBTX
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Re: Help me understand TIPs.

Post by JBTX » Wed Jul 18, 2018 6:04 pm

alex_686 wrote:
Wed Jul 18, 2018 5:55 pm
Angst wrote:
Wed Jul 18, 2018 4:30 pm
alex_686 wrote:
Tue Jul 17, 2018 9:20 pm
I have a hard time recommending TIPS. Risk and return are linked and this is one of the safest investments out there. The only case where they would beat normal treasuries are in a situation where inflation increased unexpectedly.

I'm pretty much just amusing myself here with semantics, but I'm sure you'd agree that when it comes to funding a real (not nominal) LMP, you can't beat TIPS.
I would disagree. Historically nominal treasuries have beaten TIPS in a Liability Matching Portfolio. I used to work in a insurance company next to some actuaries so I got to see this up close.

TIPS are basically inflation insurance and we can parse out exactly what we are insuring against and how much that insurance is. TIPS don't beat nominal treasuries under expected inflation. Heck, it can even run high and they still don't beat it. TIPS are priced so they pay off only if there was a sudden surge in inflation, a surge that has never happened since TIPS were invented in 1997. Which, I will admit, is a very short time where inflation has been well controlled.

So I can say it is historically untrue. You will probably point to the fact that TIPS are theoretically better, which I would also agree too. TIPS are just very expensive for what they do.
You hit the nail when you said short time. If inflation isn't an issue, then there's little need for TIPS.

I tend to disagree there has to a "surge" of inflation. Any material increase in inflation will favor TIPS. There isn't a lot of inflation priced in now, and any material increase would likely be coupled with a nominal rate increase and decrease in value of conventional treasuries.

I just don't think you can fairly evaluate TIPS given their short history in times of low inflation. I will concede that regular treasuries have a liquidity advantage that may lead to some stability.

gmaynardkrebs
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Re: Help me understand TIPs.

Post by gmaynardkrebs » Wed Jul 18, 2018 6:25 pm

alex_686 wrote:
Wed Jul 18, 2018 5:55 pm
..You will probably point to the fact that TIPS are theoretically better, which I would also agree too. TIPS are just very expensive for what they do.
So is fire insurance.

Angst
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Re: Help me understand TIPs.

Post by Angst » Wed Jul 18, 2018 6:55 pm

alex_686 wrote:
Wed Jul 18, 2018 5:55 pm
Angst wrote:
Wed Jul 18, 2018 4:30 pm
alex_686 wrote:
Tue Jul 17, 2018 9:20 pm
I have a hard time recommending TIPS. Risk and return are linked and this is one of the safest investments out there. The only case where they would beat normal treasuries are in a situation where inflation increased unexpectedly.

I'm pretty much just amusing myself here with semantics, but I'm sure you'd agree that when it comes to funding a real (not nominal) LMP, you can't beat TIPS.
I would disagree. Historically nominal treasuries have beaten TIPS in a Liability Matching Portfolio. I used to work in a insurance company next to some actuaries so I got to see this up close.

TIPS are basically inflation insurance and we can parse out exactly what we are insuring against and how much that insurance is. TIPS don't beat nominal treasuries under expected inflation. Heck, it can even run high and they still don't beat it. TIPS are priced so they pay off only if there was a sudden surge in inflation, a surge that has never happened since TIPS were invented in 1997. Which, I will admit, is a very short time where inflation has been well controlled.

So I can say it is historically untrue. You will probably point to the fact that TIPS are theoretically better, which I would also agree too. TIPS are just very expensive for what they do.

No! Let's examine the semantics here, carefully. I said "When it comes to funding a real LMP..." You cannot fund a "real" LMP with nominals, whatever limited or extensive "history" you have to go on. "Liability Matching" is just that, matching a liability. TIPS will guarantee the real matching of that liability. You could even present good odds if you like for equity being able to "match" that liability 30 years out if you want to, but there is a guarantee implicit in the term LMP, and neither gold, nor equity, nor nominal Treasuries is going to provide that guarantee, but TIPS will.

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willthrill81
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Re: Help me understand TIPs.

Post by willthrill81 » Wed Jul 18, 2018 7:18 pm

JBTX wrote:
Wed Jul 18, 2018 12:43 pm
TIPS are good for inflationry periods. Given we have had declining inflation over almost 35 years, they have not been as attractive as traditional treasuries. But inflation can't go down forever.
The graph below is of U.S. inflation rates since 1983. There doesn't seem to be much of a downward trend to me, but that's merely my perception.

Image
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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willthrill81
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Re: Help me understand TIPs.

Post by willthrill81 » Wed Jul 18, 2018 7:22 pm

JBTX wrote:
Wed Jul 18, 2018 12:43 pm
TIPS are good for inflationry periods. Given we have had declining inflation over almost 35 years, they have not been as attractive as traditional treasuries. But inflation can't go down forever.
The graph below is of U.S. inflation rates since 1983. The downward trend looks fairly weak to me with a lot of variation, but that's just my perception.

Image
JBTX wrote:
Wed Jul 18, 2018 3:21 pm
willthrill81 wrote:
Wed Jul 18, 2018 3:00 pm
alex_686 wrote:
Tue Jul 17, 2018 9:20 pm
I have a hard time recommending TIPS. Risk and return are linked and this is one of the safest investments out there. The only case where they would beat normal treasuries are in a situation where inflation increased unexpectedly.
I'm not a huge TIPS fans myself, but the exception you provide is a big one. It's kind of like saying that the only time when it isn't good to hold stocks is while they're crashing. The 1940s and especially the 1970s demonstrated that inflation can absolutely increase beyond the market's expectations, crushing nominal bonds. Intermediate term Treasuries had a maximum drawdown of over -30% in real dollars between 1976 and 1981.

TIPS' volatility in funds would be a big drawback for me. Since 2001, TIPS had have a .71% higher return than total bond market but with a standard deviation of 5.96% vs. TBM's 3.45%. And even more importantly in my estimation, TIPS had a maximum drawdown of -12.50% vs. TBM's 3.99%.

If I wanted TIPS, I'd buy them directly and hold them to maturity.
The issue with measuring volatility is it is done in nominal terms (I think). Theoretically it should be done in Real terms.

It is hard for me to believe the real volatility of tips is greater than conventional treasuries of similar duration, but perhaps it is so.

You could look at treasuries in nominal terms and it seems like they held up OK in the late 70s but in real terms they got clobbered, although they recovered fairly quickly.

I think people have a hard time wrapping their heads around tips because they tend to focus on nominal measures and not real.
Have you measured the standard deviation of TIPS real returns since their inception?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

JBTX
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Re: Help me understand TIPs.

Post by JBTX » Wed Jul 18, 2018 9:41 pm

willthrill81 wrote:
Wed Jul 18, 2018 7:22 pm
JBTX wrote:
Wed Jul 18, 2018 12:43 pm
TIPS are good for inflationry periods. Given we have had declining inflation over almost 35 years, they have not been as attractive as traditional treasuries. But inflation can't go down forever.
The graph below is of U.S. inflation rates since 1983. The downward trend looks fairly weak to me with a lot of variation, but that's just my perception.

Image

Nonetheless, the trend has been down, and overall fairly low. Compared to nominal interest rates which have been declining over that time period, thus making TIPS look weak compared to US Treasuries.



JBTX wrote:
Wed Jul 18, 2018 3:21 pm
willthrill81 wrote:
Wed Jul 18, 2018 3:00 pm
alex_686 wrote:
Tue Jul 17, 2018 9:20 pm
I have a hard time recommending TIPS. Risk and return are linked and this is one of the safest investments out there. The only case where they would beat normal treasuries are in a situation where inflation increased unexpectedly.
I'm not a huge TIPS fans myself, but the exception you provide is a big one. It's kind of like saying that the only time when it isn't good to hold stocks is while they're crashing. The 1940s and especially the 1970s demonstrated that inflation can absolutely increase beyond the market's expectations, crushing nominal bonds. Intermediate term Treasuries had a maximum drawdown of over -30% in real dollars between 1976 and 1981.

TIPS' volatility in funds would be a big drawback for me. Since 2001, TIPS had have a .71% higher return than total bond market but with a standard deviation of 5.96% vs. TBM's 3.45%. And even more importantly in my estimation, TIPS had a maximum drawdown of -12.50% vs. TBM's 3.99%.

If I wanted TIPS, I'd buy them directly and hold them to maturity.
The issue with measuring volatility is it is done in nominal terms (I think). Theoretically it should be done in Real terms.

It is hard for me to believe the real volatility of tips is greater than conventional treasuries of similar duration, but perhaps it is so.

You could look at treasuries in nominal terms and it seems like they held up OK in the late 70s but in real terms they got clobbered, although they recovered fairly quickly.

I think people have a hard time wrapping their heads around tips because they tend to focus on nominal measures and not real.
Have you measured the standard deviation of TIPS real returns since their inception?


No. But found this. Doesn't visually seem like a of difference

https://static.seekingalpha.com/uploads ... _2BTrs.jpg

In fact, the TIPs real trendline seems a bit smoother, except for 2008-2009 period where it had a fairly remarkable hiccup.

jalbert
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Re: Help me understand TIPs.

Post by jalbert » Wed Jul 18, 2018 11:42 pm

The argument in favor of TIPS, particularly for those in or near retirement is that inflation is a significant risk and you are at a life stage where you may not have an option to work longer to compensate if the inflation rate increases beyond expectations.

The argument against TIPS is that the Fed currently has lots of amnunition to fight inflation so you might as well earn the higher expected nominal return of nominal bonds.
Risk is not a guarantor of return.

fennewaldaj
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Re: Help me understand TIPs.

Post by fennewaldaj » Thu Jul 19, 2018 12:04 am

alex_686 wrote:
Wed Jul 18, 2018 5:55 pm
Angst wrote:
Wed Jul 18, 2018 4:30 pm
alex_686 wrote:
Tue Jul 17, 2018 9:20 pm
I have a hard time recommending TIPS. Risk and return are linked and this is one of the safest investments out there. The only case where they would beat normal treasuries are in a situation where inflation increased unexpectedly.

I'm pretty much just amusing myself here with semantics, but I'm sure you'd agree that when it comes to funding a real (not nominal) LMP, you can't beat TIPS.
I would disagree. Historically nominal treasuries have beaten TIPS in a Liability Matching Portfolio. I used to work in a insurance company next to some actuaries so I got to see this up close.

TIPS are basically inflation insurance and we can parse out exactly what we are insuring against and how much that insurance is. TIPS don't beat nominal treasuries under expected inflation. Heck, it can even run high and they still don't beat it. TIPS are priced so they pay off only if there was a sudden surge in inflation, a surge that has never happened since TIPS were invented in 1997. Which, I will admit, is a very short time where inflation has been well controlled.

So I can say it is historically untrue. You will probably point to the fact that TIPS are theoretically better, which I would also agree too. TIPS are just very expensive for what they do.
I would argue that you are not paying much at all for the insurance when the breakeven inflation rate is only 2.09%. Sure inflation might be lower than that but its not at all hard to imagine it being higher. Inflation of 3% for a decade would hardly be a crazy bout of inflation but that would make TIPS bought now much much better than nominals

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FIREchief
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Re: Help me understand TIPs.

Post by FIREchief » Thu Jul 19, 2018 12:35 am

fennewaldaj wrote:
Thu Jul 19, 2018 12:04 am
alex_686 wrote:
Wed Jul 18, 2018 5:55 pm
Angst wrote:
Wed Jul 18, 2018 4:30 pm
alex_686 wrote:
Tue Jul 17, 2018 9:20 pm
I have a hard time recommending TIPS. Risk and return are linked and this is one of the safest investments out there. The only case where they would beat normal treasuries are in a situation where inflation increased unexpectedly.

I'm pretty much just amusing myself here with semantics, but I'm sure you'd agree that when it comes to funding a real (not nominal) LMP, you can't beat TIPS.
I would disagree. Historically nominal treasuries have beaten TIPS in a Liability Matching Portfolio. I used to work in a insurance company next to some actuaries so I got to see this up close.

TIPS are basically inflation insurance and we can parse out exactly what we are insuring against and how much that insurance is. TIPS don't beat nominal treasuries under expected inflation. Heck, it can even run high and they still don't beat it. TIPS are priced so they pay off only if there was a sudden surge in inflation, a surge that has never happened since TIPS were invented in 1997. Which, I will admit, is a very short time where inflation has been well controlled.

So I can say it is historically untrue. You will probably point to the fact that TIPS are theoretically better, which I would also agree too. TIPS are just very expensive for what they do.
I would argue that you are not paying much at all for the insurance when the breakeven inflation rate is only 2.09%. Sure inflation might be lower than that but its not at all hard to imagine it being higher. Inflation of 3% for a decade would hardly be a crazy bout of inflation but that would make TIPS bought now much much better than nominals
Inflation was 2.9% over the last 12 months. The insurance cost was better than free. The TIPS buyer with $1M cleared over $8K compared to his buddy who bought 10 year treasuries. See my earlier post. This is not just hypothetical. Some of us really do invest our LMPs in TIPS.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

JBTX
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Re: Help me understand TIPs.

Post by JBTX » Thu Jul 19, 2018 8:43 pm

jalbert wrote:
Wed Jul 18, 2018 11:42 pm
The argument in favor of TIPS, particularly for those in or near retirement is that inflation is a significant risk and you are at a life stage where you may not have an option to work longer to compensate if the inflation rate increases beyond expectations.

The argument against TIPS is that the Fed currently has lots of amnunition to fight inflation so you might as well earn the higher expected nominal return of nominal bonds.
By the same token, US conventional treasuries are generally regarded as the safest among investment alternatives worldwide, and that being the case, people flock to them, bidding up their value and decreasing future returns.

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FIREchief
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Re: Help me understand TIPs.

Post by FIREchief » Thu Jul 19, 2018 8:46 pm

JBTX wrote:
Thu Jul 19, 2018 8:43 pm
jalbert wrote:
Wed Jul 18, 2018 11:42 pm
The argument in favor of TIPS, particularly for those in or near retirement is that inflation is a significant risk and you are at a life stage where you may not have an option to work longer to compensate if the inflation rate increases beyond expectations.

The argument against TIPS is that the Fed currently has lots of amnunition to fight inflation so you might as well earn the higher expected nominal return of nominal bonds.
By the same token, US conventional treasuries are generally regarded as the safest among investment alternatives worldwide, and that being the case, people flock to them, bidding up their value and decreasing future returns.
Hopefully everybody realizes that TIPS are US treasuries. I know you said "conventional," but a more correct term might be "nominal."
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: Help me understand TIPs.

Post by willthrill81 » Thu Jul 19, 2018 8:58 pm

JBTX wrote:
Thu Jul 19, 2018 8:43 pm
jalbert wrote:
Wed Jul 18, 2018 11:42 pm
The argument in favor of TIPS, particularly for those in or near retirement is that inflation is a significant risk and you are at a life stage where you may not have an option to work longer to compensate if the inflation rate increases beyond expectations.

The argument against TIPS is that the Fed currently has lots of amnunition to fight inflation so you might as well earn the higher expected nominal return of nominal bonds.
By the same token, US conventional treasuries are generally regarded as the safest among investment alternatives worldwide, and that being the case, people flock to them, bidding up their value and decreasing future returns.
Another 'argument' against TIPS could be that T-bills may largely minimize the negative impact of inflation.
As you can see, while there are certainly a few times when cash lost money to inflation it actually provided a small return above inflation the vast majority of the time. And lest you think this is an isolated phenomenon, it works this way in every country and currency and even holds up in times of very high inflation. Believe it or not, even as inflation in the US spiked well into double digits in the late 70s and early 80s, Tbills lagged inflation by more than 1% only once in that period! Completely counter to common belief, properly invested cash is perhaps the single most consistent inflation hedge available.
https://portfoliocharts.com/2017/05/12/ ... -investor/
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Re: Help me understand TIPs.

Post by JBTX » Thu Jul 19, 2018 9:04 pm

FIREchief wrote:
Thu Jul 19, 2018 8:46 pm
JBTX wrote:
Thu Jul 19, 2018 8:43 pm
jalbert wrote:
Wed Jul 18, 2018 11:42 pm
The argument in favor of TIPS, particularly for those in or near retirement is that inflation is a significant risk and you are at a life stage where you may not have an option to work longer to compensate if the inflation rate increases beyond expectations.

The argument against TIPS is that the Fed currently has lots of amnunition to fight inflation so you might as well earn the higher expected nominal return of nominal bonds.
By the same token, US conventional treasuries are generally regarded as the safest among investment alternatives worldwide, and that being the case, people flock to them, bidding up their value and decreasing future returns.
Hopefully everybody realizes that TIPS are US treasuries. I know you said "conventional," but a more correct term might be "nominal."
Thanks. I actually edited my post to insert conventional to make it more explicit. I thought the term "conventional" bonds referred to...conventional bonds, but I'm not a bond expert. Maybe nominal is correct but it seems counterintuitive to me.

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Re: Help me understand TIPs.

Post by JBTX » Thu Jul 19, 2018 9:07 pm

willthrill81 wrote:
Thu Jul 19, 2018 8:58 pm
JBTX wrote:
Thu Jul 19, 2018 8:43 pm
jalbert wrote:
Wed Jul 18, 2018 11:42 pm
The argument in favor of TIPS, particularly for those in or near retirement is that inflation is a significant risk and you are at a life stage where you may not have an option to work longer to compensate if the inflation rate increases beyond expectations.

The argument against TIPS is that the Fed currently has lots of amnunition to fight inflation so you might as well earn the higher expected nominal return of nominal bonds.
By the same token, US conventional treasuries are generally regarded as the safest among investment alternatives worldwide, and that being the case, people flock to them, bidding up their value and decreasing future returns.
Another 'argument' against TIPS could be that T-bills may largely minimize the negative impact of inflation.
As you can see, while there are certainly a few times when cash lost money to inflation it actually provided a small return above inflation the vast majority of the time. And lest you think this is an isolated phenomenon, it works this way in every country and currency and even holds up in times of very high inflation. Believe it or not, even as inflation in the US spiked well into double digits in the late 70s and early 80s, Tbills lagged inflation by more than 1% only once in that period! Completely counter to common belief, properly invested cash is perhaps the single most consistent inflation hedge available.
https://portfoliocharts.com/2017/05/12/ ... -investor/
One would think that real returns of TIPS would exceed the real return of tbills, although I havent looked at the data.

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Re: Help me understand TIPs.

Post by willthrill81 » Thu Jul 19, 2018 9:15 pm

JBTX wrote:
Thu Jul 19, 2018 9:07 pm
willthrill81 wrote:
Thu Jul 19, 2018 8:58 pm
JBTX wrote:
Thu Jul 19, 2018 8:43 pm
jalbert wrote:
Wed Jul 18, 2018 11:42 pm
The argument in favor of TIPS, particularly for those in or near retirement is that inflation is a significant risk and you are at a life stage where you may not have an option to work longer to compensate if the inflation rate increases beyond expectations.

The argument against TIPS is that the Fed currently has lots of amnunition to fight inflation so you might as well earn the higher expected nominal return of nominal bonds.
By the same token, US conventional treasuries are generally regarded as the safest among investment alternatives worldwide, and that being the case, people flock to them, bidding up their value and decreasing future returns.
Another 'argument' against TIPS could be that T-bills may largely minimize the negative impact of inflation.
As you can see, while there are certainly a few times when cash lost money to inflation it actually provided a small return above inflation the vast majority of the time. And lest you think this is an isolated phenomenon, it works this way in every country and currency and even holds up in times of very high inflation. Believe it or not, even as inflation in the US spiked well into double digits in the late 70s and early 80s, Tbills lagged inflation by more than 1% only once in that period! Completely counter to common belief, properly invested cash is perhaps the single most consistent inflation hedge available.
https://portfoliocharts.com/2017/05/12/ ... -investor/
One would think that real returns of TIPS would exceed the real return of tbills, although I havent looked at the data.
Over the long-term, they almost certainly would. But the key there is long-term. 1 month T-bills have had higher returns than Vanguard's TIPS fund (VIPSX) in six of the last 18 years and with no downside risk. VIPSX has a duration of 7.7 years, higher than VBMFX's (TBM) 6.1 years.
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Re: Help me understand TIPs.

Post by jalbert » Thu Jul 19, 2018 9:18 pm

JBTX wrote:
Thu Jul 19, 2018 8:43 pm
jalbert wrote:
Wed Jul 18, 2018 11:42 pm
The argument in favor of TIPS, particularly for those in or near retirement is that inflation is a significant risk and you are at a life stage where you may not have an option to work longer to compensate if the inflation rate increases beyond expectations.

The argument against TIPS is that the Fed currently has lots of amnunition to fight inflation so you might as well earn the higher expected nominal return of nominal bonds.
By the same token, US conventional treasuries are generally regarded as the safest among investment alternatives worldwide, and that being the case, people flock to them, bidding up their value and decreasing future returns.
How do treasury yields compare to yields of sovereign bonds in other developed market countries?
Risk is not a guarantor of return.

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Re: Help me understand TIPs.

Post by JBTX » Thu Jul 19, 2018 9:21 pm

willthrill81 wrote:
Thu Jul 19, 2018 9:15 pm
JBTX wrote:
Thu Jul 19, 2018 9:07 pm
willthrill81 wrote:
Thu Jul 19, 2018 8:58 pm
JBTX wrote:
Thu Jul 19, 2018 8:43 pm
jalbert wrote:
Wed Jul 18, 2018 11:42 pm
The argument in favor of TIPS, particularly for those in or near retirement is that inflation is a significant risk and you are at a life stage where you may not have an option to work longer to compensate if the inflation rate increases beyond expectations.

The argument against TIPS is that the Fed currently has lots of amnunition to fight inflation so you might as well earn the higher expected nominal return of nominal bonds.
By the same token, US conventional treasuries are generally regarded as the safest among investment alternatives worldwide, and that being the case, people flock to them, bidding up their value and decreasing future returns.
Another 'argument' against TIPS could be that T-bills may largely minimize the negative impact of inflation.
As you can see, while there are certainly a few times when cash lost money to inflation it actually provided a small return above inflation the vast majority of the time. And lest you think this is an isolated phenomenon, it works this way in every country and currency and even holds up in times of very high inflation. Believe it or not, even as inflation in the US spiked well into double digits in the late 70s and early 80s, Tbills lagged inflation by more than 1% only once in that period! Completely counter to common belief, properly invested cash is perhaps the single most consistent inflation hedge available.
https://portfoliocharts.com/2017/05/12/ ... -investor/
One would think that real returns of TIPS would exceed the real return of tbills, although I havent looked at the data.
Over the long-term, they almost certainly would. But the key there is long-term. 1 month T-bills have had higher returns than Vanguard's TIPS fund (VIPSX) in six of the last 18 years and with no downside risk. VIPSX has a duration of 7.7 years, higher than VBMFX's (TBM) 6.1 years.
Well of course. That's an excellent job of cherry picking time spans. Real returns were 3-4% in 2000, and now what are they, 1%?

Tbills have returned approximately the same as the NASDAQ too. I'm not sure that is terribly meaningful

https://www.macrotrends.net/1320/nasdaq ... ical-chart

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Re: Help me understand TIPs.

Post by LadyGeek » Thu Jul 19, 2018 9:31 pm

Angst wrote:
Wed Jul 18, 2018 5:13 pm
bikechuck wrote:
Wed Jul 18, 2018 4:34 pm
Angst wrote:
Wed Jul 18, 2018 4:30 pm
I'm pretty much just amusing myself here with semantics, but I'm sure you'd agree that when it comes to funding a real (not nominal) LMP, you can't beat TIPS.
Well perhaps so, however I have no clue what a LMP is.
Sorry. "Liability Matching Portfolio"

Here's a thread grok put together that explains it:
viewtopic.php?f=10&t=218634
Here's the entire series: Grok's tips
Jefferson wrote:
Tue Jul 17, 2018 9:04 pm
Please help me understand TIPs; specifically when held in an etf such as VTIP. My understanding of bonds in general is limited.

In addition, what is a reasonable percentage range of my bond allocation that should be devoted to TIPs? I would also (potentially) hold Treasuries (VGIT) and Munis (VTEB).

I am in the highest federal tax bracket and 6% state tax. This is for a taxable account.
Did we answer your question? If not, or you don't understand something, please let us know.

You're asking for help with your taxable account. May I suggest you let us help you with your entire portfolio? I recommend you start a thread in the Investing - Help with Personal Investments forum using the Asking Portfolio Questions format. It will make you think about the "big picture" while giving us the information we need to point you in the right direction.
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Re: Help me understand TIPs.

Post by FIREchief » Thu Jul 19, 2018 9:32 pm

willthrill81 wrote:
Thu Jul 19, 2018 8:58 pm
Another 'argument' against TIPS could be that T-bills may largely minimize the negative impact of inflation.
They haven't over the past 12 months (see my earlier post).
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: Help me understand TIPs.

Post by willthrill81 » Thu Jul 19, 2018 9:45 pm

JBTX wrote:
Thu Jul 19, 2018 9:21 pm
willthrill81 wrote:
Thu Jul 19, 2018 9:15 pm
JBTX wrote:
Thu Jul 19, 2018 9:07 pm
willthrill81 wrote:
Thu Jul 19, 2018 8:58 pm
JBTX wrote:
Thu Jul 19, 2018 8:43 pm


By the same token, US conventional treasuries are generally regarded as the safest among investment alternatives worldwide, and that being the case, people flock to them, bidding up their value and decreasing future returns.
Another 'argument' against TIPS could be that T-bills may largely minimize the negative impact of inflation.
As you can see, while there are certainly a few times when cash lost money to inflation it actually provided a small return above inflation the vast majority of the time. And lest you think this is an isolated phenomenon, it works this way in every country and currency and even holds up in times of very high inflation. Believe it or not, even as inflation in the US spiked well into double digits in the late 70s and early 80s, Tbills lagged inflation by more than 1% only once in that period! Completely counter to common belief, properly invested cash is perhaps the single most consistent inflation hedge available.
https://portfoliocharts.com/2017/05/12/ ... -investor/
One would think that real returns of TIPS would exceed the real return of tbills, although I havent looked at the data.
Over the long-term, they almost certainly would. But the key there is long-term. 1 month T-bills have had higher returns than Vanguard's TIPS fund (VIPSX) in six of the last 18 years and with no downside risk. VIPSX has a duration of 7.7 years, higher than VBMFX's (TBM) 6.1 years.
Well of course. That's an excellent job of cherry picking time spans. Real returns were 3-4% in 2000, and now what are they, 1%?

Tbills have returned approximately the same as the NASDAQ too. I'm not sure that is terribly meaningful

https://www.macrotrends.net/1320/nasdaq ... ical-chart
It's not cherry picking at all. VIPSX's inception date was in mid-2000. Portfolio Visualizer only has data beginning in Jan., 2001.
Last edited by willthrill81 on Thu Jul 19, 2018 9:49 pm, edited 1 time in total.
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Re: Help me understand TIPs.

Post by willthrill81 » Thu Jul 19, 2018 9:48 pm

FIREchief wrote:
Thu Jul 19, 2018 9:32 pm
willthrill81 wrote:
Thu Jul 19, 2018 8:58 pm
Another 'argument' against TIPS could be that T-bills may largely minimize the negative impact of inflation.
They haven't over the past 12 months (see my earlier post).
And VIPSX lost money in real terms in five of the last 17 years. Anything can happen in the short-term.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Help me understand TIPs.

Post by JBTX » Thu Jul 19, 2018 10:09 pm

willthrill81 wrote:
Thu Jul 19, 2018 9:45 pm
JBTX wrote:
Thu Jul 19, 2018 9:21 pm
willthrill81 wrote:
Thu Jul 19, 2018 9:15 pm
JBTX wrote:
Thu Jul 19, 2018 9:07 pm
willthrill81 wrote:
Thu Jul 19, 2018 8:58 pm


Another 'argument' against TIPS could be that T-bills may largely minimize the negative impact of inflation.


https://portfoliocharts.com/2017/05/12/ ... -investor/
One would think that real returns of TIPS would exceed the real return of tbills, although I havent looked at the data.
Over the long-term, they almost certainly would. But the key there is long-term. 1 month T-bills have had higher returns than Vanguard's TIPS fund (VIPSX) in six of the last 18 years and with no downside risk. VIPSX has a duration of 7.7 years, higher than VBMFX's (TBM) 6.1 years.
Well of course. That's an excellent job of cherry picking time spans. Real returns were 3-4% in 2000, and now what are they, 1%?

Tbills have returned approximately the same as the NASDAQ too. I'm not sure that is terribly meaningful

https://www.macrotrends.net/1320/nasdaq ... ical-chart
It's not cherry picking at all. VIPSX's inception date was in mid-2000. Portfolio Visualizer only has data beginning in Jan., 2001.
OK, much to unpack here.

First, I got my direction mixed up. Lowering real rates help tips returns.

Since inception, $10000 in vanguard TIPS is $24578

Same period vanguard short term treasuries vfisx is $16957

Tips was substantially better.

You also mentioned vbmfx.(Not sure why) That was $22390

As to short term treasuries beating tips 6 out of 18 years, of course they did. Interest rates go up and down.

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Re: Help me understand TIPs.

Post by willthrill81 » Thu Jul 19, 2018 10:26 pm

JBTX wrote:
Thu Jul 19, 2018 10:09 pm
willthrill81 wrote:
Thu Jul 19, 2018 9:45 pm
JBTX wrote:
Thu Jul 19, 2018 9:21 pm
willthrill81 wrote:
Thu Jul 19, 2018 9:15 pm
JBTX wrote:
Thu Jul 19, 2018 9:07 pm


One would think that real returns of TIPS would exceed the real return of tbills, although I havent looked at the data.
Over the long-term, they almost certainly would. But the key there is long-term. 1 month T-bills have had higher returns than Vanguard's TIPS fund (VIPSX) in six of the last 18 years and with no downside risk. VIPSX has a duration of 7.7 years, higher than VBMFX's (TBM) 6.1 years.
Well of course. That's an excellent job of cherry picking time spans. Real returns were 3-4% in 2000, and now what are they, 1%?

Tbills have returned approximately the same as the NASDAQ too. I'm not sure that is terribly meaningful

https://www.macrotrends.net/1320/nasdaq ... ical-chart
It's not cherry picking at all. VIPSX's inception date was in mid-2000. Portfolio Visualizer only has data beginning in Jan., 2001.
OK, much to unpack here.

First, I got my direction mixed up. Lowering real rates help tips returns.

Since inception, $10000 in vanguard TIPS is $24578

Same period vanguard short term treasuries vfisx is $16957

Tips was substantially better.

You also mentioned vbmfx.(Not sure why) That was $22390
If you're only looking at cumulative returns, there are lots of asset classes (some of which are fixed income) that outperformed TIPS over that same period.

And I mentioned VBMFX because it's a TBM, seemingly the most common bond fund for Bogleheads.
JBTX wrote:
Thu Jul 19, 2018 10:09 pm
As to short term treasuries beating tips 6 out of 18 years, of course they did. Interest rates go up and down.
Precisely. The fairly brief history of TIPS has shown that they are volatile by bond standards, even in real terms. I'm not against TIPS, but people (not saying you specifically) shouldn't treat them like nominal bonds. And their volatility means that it might not be prudent for an investor to hold all of their fixed income in TIPS or else they might be forced to sell them at a (by bond standards) significant loss.
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Re: Help me understand TIPs.

Post by JBTX » Thu Jul 19, 2018 10:36 pm

willthrill81 wrote:
Thu Jul 19, 2018 10:26 pm
JBTX wrote:
Thu Jul 19, 2018 10:09 pm
willthrill81 wrote:
Thu Jul 19, 2018 9:45 pm
JBTX wrote:
Thu Jul 19, 2018 9:21 pm
willthrill81 wrote:
Thu Jul 19, 2018 9:15 pm


Over the long-term, they almost certainly would. But the key there is long-term. 1 month T-bills have had higher returns than Vanguard's TIPS fund (VIPSX) in six of the last 18 years and with no downside risk. VIPSX has a duration of 7.7 years, higher than VBMFX's (TBM) 6.1 years.
Well of course. That's an excellent job of cherry picking time spans. Real returns were 3-4% in 2000, and now what are they, 1%?

Tbills have returned approximately the same as the NASDAQ too. I'm not sure that is terribly meaningful

https://www.macrotrends.net/1320/nasdaq ... ical-chart
It's not cherry picking at all. VIPSX's inception date was in mid-2000. Portfolio Visualizer only has data beginning in Jan., 2001.
OK, much to unpack here.

First, I got my direction mixed up. Lowering real rates help tips returns.

Since inception, $10000 in vanguard TIPS is $24578

Same period vanguard short term treasuries vfisx is $16957

Tips was substantially better.

You also mentioned vbmfx.(Not sure why) That was $22390
If you're only looking at cumulative returns, there are lots of asset classes (some of which are fixed income) that outperformed TIPS over that same period.

And I mentioned VBMFX because it's a TBM, seemingly the most common bond fund for Bogleheads.
JBTX wrote:
Thu Jul 19, 2018 10:09 pm
As to short term treasuries beating tips 6 out of 18 years, of course they did. Interest rates go up and down.
Precisely. The fairly brief history of TIPS has shown that they are volatile by bond standards, even in real terms. I'm not against TIPS, but people (not saying you specifically) shouldn't treat them like nominal bonds. And their volatility means that it might not be prudent for an investor to hold all of their fixed income in TIPS or else they might be forced to sell them at a (by bond standards) significant loss.
Agree with this. I'm just saying TIPS and short term treasuries are cats and dogs.

While on the surface it seems surprising that short term treasuries have been an adequate hedge for inflation (ignoring taxes), theoretically long term it makes sense. Over the long term, all else equal, investors are not going to accept a negative rate of real return.

TIPS are just conventional bonds, but with the inflation risk eliminated. They still have all the risk/return aspects related to the change in real returns.

I agree that some (including me years ago before I understood these things) underestimated the risk of these, and tended to view them as mostly risk free, which they aren't...nor are they supposed to be.

Ultimately, I'm still not understanding the assertions made in the thread of TIPS being suboptimal to conventional treasuries, or short term treasuries, or anything else. They are what they are, with their own unique characteristics.

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Re: Help me understand TIPs.

Post by FIREchief » Fri Jul 20, 2018 12:20 am

willthrill81 wrote:
Thu Jul 19, 2018 9:48 pm
FIREchief wrote:
Thu Jul 19, 2018 9:32 pm
willthrill81 wrote:
Thu Jul 19, 2018 8:58 pm
Another 'argument' against TIPS could be that T-bills may largely minimize the negative impact of inflation.
They haven't over the past 12 months (see my earlier post).
And VIPSX lost money in real terms in five of the last 17 years. Anything can happen in the short-term.
Which means absolutely nothing to me. I buy and hold individual TIPS. Why are we looking back 17 years?? Shouldn't we be looking forward?? :confused
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: Help me understand TIPs.

Post by willthrill81 » Fri Jul 20, 2018 12:41 am

FIREchief wrote:
Fri Jul 20, 2018 12:20 am
willthrill81 wrote:
Thu Jul 19, 2018 9:48 pm
FIREchief wrote:
Thu Jul 19, 2018 9:32 pm
willthrill81 wrote:
Thu Jul 19, 2018 8:58 pm
Another 'argument' against TIPS could be that T-bills may largely minimize the negative impact of inflation.
They haven't over the past 12 months (see my earlier post).
And VIPSX lost money in real terms in five of the last 17 years. Anything can happen in the short-term.
Which means absolutely nothing to me. I buy and hold individual TIPS. Why are we looking back 17 years?? Shouldn't we be looking forward?? :confused
As I said to begin with, if I was buying TIPS, I'd buy them as you are: individually and held to maturity.

If you can tell us what the future holds, I'd love to hear it. My crystal ball is still in the shop.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Help me understand TIPs.

Post by gmaynardkrebs » Fri Jul 20, 2018 9:06 am

JBTX wrote:
Thu Jul 19, 2018 10:36 pm
While on the surface it seems surprising that short term treasuries have been an adequate hedge for inflation (ignoring taxes), theoretically long term it makes sense. Over the long term, all else equal, investors are not going to accept a negative rate of real return.
Not necessarily. Investors have to accept a negative rate of real return if forced to. As Rogoff and Reinhardt have shown, history is replete with examples of such financial repression, when real short rates are suppressed well into negative territory. Often, this is accomplished by keeping short nominal rates below the rate of inflation. Central banks can, and have done this for extended periods of time. To me, a great advantage of long maturity TIPS over short t-bills is protection against the threat of this common form of financial repression. Short T-bills simply cannot provide that; indeed, they are often the key instrument by which FR is carried out. I am not saying this will happen, but I do think it's a significant risk that should be factored in in favor of long TIPS.

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Re: Help me understand TIPs.

Post by JBTX » Fri Jul 20, 2018 9:35 am

gmaynardkrebs wrote:
Fri Jul 20, 2018 9:06 am
JBTX wrote:
Thu Jul 19, 2018 10:36 pm
While on the surface it seems surprising that short term treasuries have been an adequate hedge for inflation (ignoring taxes), theoretically long term it makes sense. Over the long term, all else equal, investors are not going to accept a negative rate of real return.
Not necessarily. Investors have to accept a negative rate of real return if forced to. As Rogoff and Reinhardt have shown, history is replete with examples of such financial repression, when real short rates are suppressed well into negative territory. Often, this is accomplished by keeping short nominal rates below the rate of inflation. Central banks can, and have done this for extended periods of time. To me, a great advantage of long maturity TIPS over short t-bills is protection against the threat of this common form of financial repression. Short T-bills simply cannot provide that; indeed, they are often the key instrument by which FR is carried out. I am not saying this will happen, but I do think it's a significant risk that should be factored in in favor of long TIPS.
Good points. That's why I said long term. There will be times, like last decade, that you will have financial repression.

I'm not sure TIPS are a perfect hedge against financial repression. There was a period where TIPS went into negative real return territory. Ibonds of course would prevent that but they have their own limitations as an investment.

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Re: Help me understand TIPs.

Post by FIREchief » Fri Jul 20, 2018 1:33 pm

willthrill81 wrote:
Fri Jul 20, 2018 12:41 am
FIREchief wrote:
Fri Jul 20, 2018 12:20 am
willthrill81 wrote:
Thu Jul 19, 2018 9:48 pm
FIREchief wrote:
Thu Jul 19, 2018 9:32 pm
willthrill81 wrote:
Thu Jul 19, 2018 8:58 pm
Another 'argument' against TIPS could be that T-bills may largely minimize the negative impact of inflation.
They haven't over the past 12 months (see my earlier post).
And VIPSX lost money in real terms in five of the last 17 years. Anything can happen in the short-term.
Which means absolutely nothing to me. I buy and hold individual TIPS. Why are we looking back 17 years?? Shouldn't we be looking forward?? :confused
As I said to begin with, if I was buying TIPS, I'd buy them as you are: individually and held to maturity.

If you can tell us what the future holds, I'd love to hear it. My crystal ball is still in the shop.
Bingo!! So a person just makes a decision based upon information avaiable to them. I have two sets:
1) a large number of folks here on the forum that claim TIPS are inferior to nominal treasuries because the insurance against unexpected inflation is too expensive
2) actual facts from the US treasury and department of labor that show CPI-U increased 2.90% over the past 12 months while the current breakeven inflation rate for 10 year notes is inflation = 2.09%

I've already come out ahead close to 1% on that ten year TIPS I bought a year ago, so I'll just stay the course and enjoy that free insurance. Of course we don't know what inflation will actually be over the next ten years, but it's worth it to buy the insurance for my LMP.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

gmaynardkrebs
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Re: Help me understand TIPs.

Post by gmaynardkrebs » Fri Jul 20, 2018 2:32 pm

FIREchief wrote:
Fri Jul 20, 2018 1:33 pm
willthrill81 wrote:
Fri Jul 20, 2018 12:41 am
FIREchief wrote:
Fri Jul 20, 2018 12:20 am
willthrill81 wrote:
Thu Jul 19, 2018 9:48 pm
FIREchief wrote:
Thu Jul 19, 2018 9:32 pm


They haven't over the past 12 months (see my earlier post).
And VIPSX lost money in real terms in five of the last 17 years. Anything can happen in the short-term.
Which means absolutely nothing to me. I buy and hold individual TIPS. Why are we looking back 17 years?? Shouldn't we be looking forward?? :confused
As I said to begin with, if I was buying TIPS, I'd buy them as you are: individually and held to maturity.

If you can tell us what the future holds, I'd love to hear it. My crystal ball is still in the shop.
Bingo!! So a person just makes a decision based upon information avaiable to them. I have two sets:
1) a large number of folks here on the forum that claim TIPS are inferior to nominal treasuries because the insurance against unexpected inflation is too expensive
2) actual facts from the US treasury and department of labor that show CPI-U increased 2.90% over the past 12 months while the current breakeven inflation rate for 10 year notes is inflation = 2.09%

I've already come out ahead close to 1% on that ten year TIPS I bought a year ago, so I'll just stay the course and enjoy that free insurance. Of course we don't know what inflation will actually be over the next ten years, but it's worth it to buy the insurance for my LMP.
In my view, the starting point for a future CPI prediction has to be the Fed's stated target, which is 2%, with a slight tilt to the upside. I'd say the market's current 2.09 breakeven seems reasonable, given taht the Fed exerts extremely great, albeit not total control, over inflation. But I have to up the current market estimate a bit, because there is quite a bit of chatter from left leaning economists, who could be influential in a future Democratic administration, to raise the target to as high as 4%. This potential regime change, which i feel is not embedded in the present market breakeven estimate, gets a degree of bi-partisan support from several influential right-centrist Republican aligned economists who advocate ditching the CPI target entirely, in favor of NGDP targeting. So, I add a bit for for all that, ending up with a breakeven of 2.25 to 2.5%. This leads me to conclude that right now, TIPS buyers are actually being paid to buy inflation insurance, making them a good deal vs. nominals of the same duration. Of course, other will prefer simply to go with the market estimate of 2.09%, which would be a wash.

Jefferson
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Re: Help me understand TIPs.

Post by Jefferson » Fri Jul 20, 2018 10:55 pm

LadyGeek wrote:
Thu Jul 19, 2018 9:31 pm
Did we answer your question? If not, or you don't understand something, please let us know.

You're asking for help with your taxable account. May I suggest you let us help you with your entire portfolio? I recommend you start a thread in the Investing - Help with Personal Investments forum using the Asking Portfolio Questions format. It will make you think about the "big picture" while giving us the information we need to point you in the right direction.
[ quote fixed by admin LadyGeek]

LadyGeek, I am overwhelmed at the amount of information in this thread. It's going to take me a while to absorb even a little of it. I am very grateful to everyone here for their contributions.

I'm asking about the taxable account because that one is easier to affect quickly, even with the tax consequences. This is for two reasons:

1) My taxable account is larger than tax-advantaged (almost 2x as large), but monthly deposits are also much larger ($12K/month vs about $3,500/month, wife and I combined). Larger deposits offer a greater opportunity to make substantial changes faster.

2) My tax-advantaged account has significant transaction costs; a 2% transaction fee for both buying and selling.

For the time being, our tax-advantaged setup is what it is. The cost to making changes are too high to restructure it. I'm looking into moving the entire small business 401k plan to Vanguard, but that's another topic. (FWIW, employees don't incur transaction costs, but they are in American Funds, which have high ERs).

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SeeMoe
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Re: Help me understand TIPs.

Post by SeeMoe » Mon Jul 23, 2018 8:20 pm

willthrill81 wrote:
Wed Jul 18, 2018 3:00 pm
alex_686 wrote:
Tue Jul 17, 2018 9:20 pm
I have a hard time recommending TIPS. Risk and return are linked and this is one of the safest investments out there. The only case where they would beat normal treasuries are in a situation where inflation increased unexpectedly.
I'm not a huge TIPS fans myself, but the exception you provide is a big one. It's kind of like saying that the only time when it isn't good to hold stocks is while they're crashing. The 1940s and especially the 1970s demonstrated that inflation can absolutely increase beyond the market's expectations, crushing nominal bonds. Intermediate term Treasuries had a maximum drawdown of over -30% in real dollars between 1976 and 1981.

TIPS' volatility in funds would be a big drawback for me. Since 2001, TIPS had have a .71% higher return than total bond market but with a standard deviation of 5.96% vs. TBM's 3.45%. And even more importantly in my estimation, TIPS had a maximum drawdown of -12.50% vs. TBM's 3.99%.

If I wanted TIPS, I'd buy them directly and hold them to maturity.

Thank you for explaining TIPS and reasons to be a bit leery of them. I never bothered with them because of the low yields and “ the scared bucks” philosophy/ reasons for owning them in my opinion. Instead I have some short term investment grade bonds and Prime MM’s as well as short term treasuries for market security. Could be wrong, but that’s me.

SeeMoe.. :shock:
"By gnawing through a dike, even a Rat can destroy a nation ." {Edmund Burke}

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willthrill81
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Re: Help me understand TIPs.

Post by willthrill81 » Mon Jul 23, 2018 8:31 pm

SeeMoe wrote:
Mon Jul 23, 2018 8:20 pm
willthrill81 wrote:
Wed Jul 18, 2018 3:00 pm
alex_686 wrote:
Tue Jul 17, 2018 9:20 pm
I have a hard time recommending TIPS. Risk and return are linked and this is one of the safest investments out there. The only case where they would beat normal treasuries are in a situation where inflation increased unexpectedly.
I'm not a huge TIPS fans myself, but the exception you provide is a big one. It's kind of like saying that the only time when it isn't good to hold stocks is while they're crashing. The 1940s and especially the 1970s demonstrated that inflation can absolutely increase beyond the market's expectations, crushing nominal bonds. Intermediate term Treasuries had a maximum drawdown of over -30% in real dollars between 1976 and 1981.

TIPS' volatility in funds would be a big drawback for me. Since 2001, TIPS had have a .71% higher return than total bond market but with a standard deviation of 5.96% vs. TBM's 3.45%. And even more importantly in my estimation, TIPS had a maximum drawdown of -12.50% vs. TBM's 3.99%.

If I wanted TIPS, I'd buy them directly and hold them to maturity.

Thank you for explaining TIPS and reasons to be a bit leery of them. I never bothered with them because of the low yields and “ the scared bucks” philosophy/ reasons for owning them in my opinion. Instead I have some short term investment grade bonds and Prime MM’s as well as short term treasuries for market security. Could be wrong, but that’s me.

SeeMoe.. :shock:
Glad to be of help.

Based on history, short-term bonds and T-bills can both offer some protection against inflation risk, and they are all more liquid than TIPS in the sense that they can be reliably sold at almost any time without incurring a significant loss in real dollars. Even short-term CDs may be preferable; Larry Swedroe advocates CDs over bonds for many retail investors.

That being said, I can see an argument for holding some of one's fixed income allocation but certainly no more than 50%.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

gmaynardkrebs
Posts: 887
Joined: Sun Feb 10, 2008 11:48 am

Re: Help me understand TIPs.

Post by gmaynardkrebs » Mon Jul 23, 2018 10:18 pm

Jefferson wrote:
Tue Jul 17, 2018 9:04 pm
Please help me understand TIPs; specifically when held in an etf such as VTIP. My understanding of bonds in general is limited.

In addition, what is a reasonable percentage range of my bond allocation that should be devoted to TIPs? I would also (potentially) hold Treasuries (VGIT) and Munis (VTEB).

I am in the highest federal tax bracket and 6% state tax. This is for a taxable account.
If what you want is protection from inflation, meaning that the dollar you put in today (T1) will be worth $1 at T2, buy TIPS at T1 that mature at T2, and hold them to maturity. That's it. TIPS funds are the same as TIPS ladders. Bond ladders are a different discussion, so I will stop there.

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FIREchief
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Re: Help me understand TIPs.

Post by FIREchief » Tue Jul 24, 2018 3:03 am

willthrill81 wrote:
Mon Jul 23, 2018 8:31 pm
Based on history, short-term bonds and T-bills can both offer some protection against inflation risk, and they are all more liquid than TIPS in the sense that they can be reliably sold at almost any time without incurring a significant loss in real dollars.
You seem to be mixing two issues here (nominals vs. TIPS and long vs. short terms). Other than a real strange situation in 2008, TIPS are just as liquid as any other US treasury. I continue to be baffled by your claims that short term nominal bonds offer protection against inflation. It simply is not true.
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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