Best Way to Learn About TIPS?

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Small Law Survivor
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Best Way to Learn About TIPS?

Post by Small Law Survivor »

The Boglehead board seems to be full of discussions around inflation protected securities. I'm reading them, and I'm starting to think that individual TIPS would be an option for me in my tIRA. However, much of the discussion goes over my head. I really don't understand this security and I'm not about to invest in them until I do.

For example, McQ writes: "If long TIPS hit a real yield above 2.0% I will… 4. Convert *all* my bond holdings to long TIPS, including those embedded in Wellesley, Wellington or other balanced funds."
viewtopic.php?p=6877277#p6877277

Huh? How can I evaluate this statement, and the general enthusiasm for TIPS in my situation? I have long-term bond money in my tIRA - I'd love to lock a good interest rate on that money.

The discussion in that thread, which now has over 500 posts, is completely over my head.

How can best self-educate on TIPS?
71 yrs. mostly-retired lawyer. Boglehead since day 1 (and M* Diehard long before that) under various names
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Svensk Anga
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Re: Best Way to Learn About TIPS?

Post by Svensk Anga »

I read this book before I started buying TIPS.https://www.amazon.com/Explore-TIPS-Pra ... 08HN9PYGC/

I think it was helpful, but its been a decade ago.

The book will help with the mechanics of the things. You will have to decide for yourself how exposed you are to inflation and whether moving into TIPS at the available yields is your best response.
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Re: Best Way to Learn About TIPS?

Post by strbrd »

i'm in a similar boat. i bought a small chunk of TIPS in my rIRA that will mature when i'm 65; mainly because owning something is the best way to educate myself on it. i found this explanation of the liability-matching everyone is talking about helpful (viewtopic.php?t=375102)--it's similar to the Mel EE-bond homemade-annuity theory as i understand it, a floor for safety that allows you to invest the rest of your holdings in higher-risk assets. i think?
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Small Law Survivor
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Re: Best Way to Learn About TIPS?

Post by Small Law Survivor »

Not getting much response on this, which suggests that I've asked a really stupid question. :confused
71 yrs. mostly-retired lawyer. Boglehead since day 1 (and M* Diehard long before that) under various names
toddthebod
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Re: Best Way to Learn About TIPS?

Post by toddthebod »

Small Law Survivor wrote: Thu Oct 13, 2022 5:00 pm Not getting much response on this, which suggests that I've asked a really stupid question. :confused
I think it's a good question, it's just so broad that it's hard to know where to start. Have you read this page?
https://www.bogleheads.org/wiki/Treasur ... d_Security

Tell us what you know about TIPS, and people can try filling in the blanks.
Backtests without cash flows are meaningless. Returns without dividends are lies.
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squirrel1963
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Re: Best Way to Learn About TIPS?

Post by squirrel1963 »

Small Law Survivor wrote: Thu Oct 13, 2022 5:00 pm Not getting much response on this, which suggests that I've asked a really stupid question. :confused
On the contrary it's a great question to ask.

In a nutshell, TIPS are treasury bonds which are "inflation protected". This means that their principal and the interest payments are adjusted to keep up with inflation.

The interest rate specified on TIPS is real interest rate. In order to better distinguish from regular treasuries, we usually refer to them as "nominal Treasuries", because the interest is in a nominal amount.

A trivial example (and comparison with nominal treasuries is):

Suppose these two Bonds:

1 year nominal treasury with 4% interest rate.
1 year TIPS with 1% real interest rate.

Now suppose that inflation during this year is 8%. In this case the actual interest for the above TIPS will be
1% real rate + 8% inflation rate = 9% nominal rate
Whereas the nominal treasury will have the 4% nominal rate

There are a lots of details of course, hopefully this quick overview helps.
LMP | Liability Matching Portfolio | safe portfolio: TIPS ladder + I-bonds + Treasuries | risky portfolio: US stocks / US REIT / International stocks
MnD
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Re: Best Way to Learn About TIPS?

Post by MnD »

For me I tend to learn best by experience.
Buy a TIPS in a very small amount, preferably in an account where you have other fixed income holdings.
See how it behaves relative to bond funds and/or nominal Treasury bonds.
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dbr
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Re: Best Way to Learn About TIPS?

Post by dbr »

It's a reasonable question. But so far a book and a Wiki article have been suggested. There is also the horses mouth: https://www.treasurydirect.gov/marketab ... ties/tips/

Another book:

The Larry Swedroe book on bond investing.

There can be a lot of posts discussing how niggle nuanced advantages and disadvantages from different investments and it is not really that important to follow all of that.

Buying TIPS in a mutual fund is simple enough. Most of what applies to TIPS in a fund is also basic to any bonds in a fund.
Gerard
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Re: Best Way to Learn About TIPS?

Post by Gerard »

When the term inflation rate is used with reference to Tips,
What defines that rate? Is it the same calculation used for Ibonds? Or something else.
sycamore
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Re: Best Way to Learn About TIPS?

Post by sycamore »

Small Law Survivor wrote: Thu Oct 13, 2022 9:08 am How can best self-educate on TIPS?
I've seen several Bogleheads thread refer to the tipswatch.com website. It has an article "Q&A on TIPS" that may help explain things.
toddthebod
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Re: Best Way to Learn About TIPS?

Post by toddthebod »

Gerard wrote: Thu Oct 13, 2022 6:18 pm When the term inflation rate is used with reference to Tips,
What defines that rate? Is it the same calculation used for Ibonds? Or something else.
Both are based on the CPI-U, but they are calculated differently. For TIPS, they adjust the principal based on ongoing inflation. Like you buy the bond one day, then a month later they increase the principal by the inflation that happened last month (this is a simplification for how the calculation works, but it gives you a general idea. I think there is a one month lag, but I'm not positive.)

For I bonds, twice a year, they look at the prior six months (like today they looked at April through September), calculated the inflation, and then any I bonds bought between November 1 and April 30 will earn that rate for their first six months. Then they will earn the rate calculated from October through March for six months. Etc.

This delay in I bond rates is why you can buy I bonds right now that are paying interest based on inflation from October 2021 through March 2022.
Backtests without cash flows are meaningless. Returns without dividends are lies.
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Re: Best Way to Learn About TIPS?

Post by epoche »

Svensk Anga wrote: Thu Oct 13, 2022 10:07 am I read this book before I started buying TIPS.https://www.amazon.com/Explore-TIPS-Pra ... 08HN9PYGC/

I think it was helpful, but its been a decade ago.

The book will help with the mechanics of the things. You will have to decide for yourself how exposed you are to inflation and whether moving into TIPS at the available yields is your best response.
The wiki and the above book are very useful, although I will say that I was left with what seemed like some still pretty basic questions after reading both. I also like the TIPSwatch site for learning the basics:
https://tipswatch.com/why-tips/

I read the book "Money Magic" by Kotlikoff recently, and it gives substantial attention to TIPS as the foundation of a super-safe portfolio (building off Zvi Bodie's work). That convinced me that due to my personal timeframe and goals, I should be laddering into individual TIPS and holding to maturity.
But that is the first and most important decision - do TIPS meet your objectives and timeframe? Just because they are sucking up all the oxygen at BH doesn't mean you have to jump on them.

Speaking as someone whose bond needs have heretofore been satisfied with the allocation in my target-date funds, learning about TIPS feels like being thrown in the deep end with an un-inflated (see what I did there...) flotation ring. How do I compute the expected return on this squishy thing with a constantly changing inflation component that impacts both the principal and the coupon?

Do you feel you understand I-bonds? (If not, try: https://tipswatch.com/i-bond-manifesto/ or the I-bond manifesto thread here on BH.)
If so, you can understand TIPS, and maybe it is helpful to draw some (imperfect) analogies:
I-bonds fixed component -> Real yield on TIPS
I-bonds inflation adjustment released every 6 months -> TIPS inflation factor
I-bonds deflation protection (composite rate never falls below 0%) -> TIPS deflation protection (value paid at maturity can never be below face value)
(There are details that differ. As I said, it is an imperfect analogy. Stand by for corrections...)

Most of the above sources suggest buying at auction to begin - my experience was that as soon as I felt I knew enough to put in an order at an auction, I also knew enough to buy on the secondary market and could choose maturities that better match my expected timeframe.

In many ways they behave like other marketable bonds. But there are oddities:
Remember that the coupon doesn't equal yield, and the coupon is adjusted by the inflation factor. In general, don't buy TIPS with negative real yields. (They're now well positive for all issues, hence the attention they are getting.) Buy TIPS with low inflation factors if you want more protection against deflation. The tax consequences may be the most difficult part of understanding TIPS, so buy them in a tax-advantaged account if possible.

If you expect your duration to remain relatively constant (but then who always needs to meet expenses exactly X years into a future that never arrives?), then a TIPS fund will do just as well and is easier to manage.

Hope that helps.
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Re: Best Way to Learn About TIPS?

Post by martincmartin »

Why do you want to hold bonds?

- If you panic when the dollar value of your retirement fund goes down, and you might panic sell on the way down, then hold short term treasuries. They'll retain their value in the worst case, namely rising interest rates.

- If you have known liabilities at a known date and you're looking to set aside money for them, use duration matched TIPS.

- If you'll retire in the next 15 years, or retired less than 15 years ago, and you want to minimize the chance of running out of money, hold a total bond market fund in tax sheltered. In taxable, hold half intermediate duration treasuries and half intermediate duration TIPS.

- If you think TIPS are a good deal now, and you want to sell something else you hold and buy TIPS: don't. The efficient market hypothesis says it'll be a wash.
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Small Law Survivor
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Re: Best Way to Learn About TIPS?

Post by Small Law Survivor »

Quick follow up on this:

tipswatch.com is a good website to learn about tips.

Also, this Youtube video (mentioned in tipswatch), is very educational:

What Are Tips | How To Buy Tips Fidelity & Treasury Direct (Treasury-Inflation Protected Securities)
https://www.youtube.com/watch?v=ajwb0bu ... ondNestEgg

Thanks, Small Law Suvivor
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Re: Best Way to Learn About TIPS?

Post by Lee_WSP »

Small Law Survivor wrote: Thu Oct 13, 2022 5:00 pm Not getting much response on this, which suggests that I've asked a really stupid question. :confused
It’s a great question. The problem is that only a small subset of posters can actually answer it. I personally only have a very limited understanding of TIPS (tip of the iceberg) and will remain at that high level, know what I don’t know, type of knowledge base.

I’m not even sure I can do any better than saying that the yield on TIPS is the real yield, but what happens is that the inflation component will adjust the corpus up or down to account for inflation such that at maturity you receive the real yield you originally purchased them at. Real being computed via the CPI or whatever index they’re pegged to.
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Re: Best Way to Learn About TIPS?

Post by lws »

OP,
Read Treasury Direct's explanation as mentioned above.
That's a good place to start.
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Re: Best Way to Learn About TIPS?

Post by Kevin M »

I trust that Harry's book is good, but I don't recall reading it. I did read some of his blog posts on TIPS years ago, which I think is what was the basis of his book. He explains things very well in general.

The Wiki page is OK, but very basic.

In June 2021, I bought 10 of the 7/15/2023 TIPS and 10 of the 7/15/2023 nominal Treasury. I have shared the results so far in a number of posts, and analyzing the results has deepened my knowledge of TIPS. I have been buying a lot of TIPS in 2022, and have shared a lot about that in the Trading Treasuries thread.

So, as others have said, I think a good way to learn is to buy a small quantity, preferably in an IRA so no tax reporting issues, then ask questions about whatever you don't understand about your purchase or what happens after your purchase.

I think I probably learned most of what I know about TIPS from this forum, and from links provided in forum posts. I am still learning, and sharing what I learn on the forum.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: Best Way to Learn About TIPS?

Post by dbr »

Kevin M wrote: Sun Oct 16, 2022 3:21 pm I trust that Harry's book is good, but I don't recall reading it. I did read some of his blog posts on TIPS years ago, which I think is what was the basis of his book. He explains things very well in general.

The Wiki page is OK, but very basic.

In June 2021, I bought 10 of the 7/15/2023 TIPS and 10 of the 7/15/2023 nominal Treasury. I have shared the results so far in a number of posts, and analyzing the results has deepened my knowledge of TIPS. I have been buying a lot of TIPS in 2022, and have shared a lot about that in the Trading Treasuries thread.

So, as others have said, I think a good way to learn is to buy a small quantity, preferably in an IRA so no tax reporting issues, then ask questions about whatever you don't understand about your purchase or what happens after your purchase.

I think I probably learned most of what I know about TIPS from this forum, and from links provided in forum posts. I am still learning, and sharing what I learn on the forum.

Kevin
Are there one or two single things that stand out to you that seem to create particular difficulties with understanding TIPS distinct from understanding any bonds?
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Re: Best Way to Learn About TIPS?

Post by squirrel1963 »

Kevin M wrote: Sun Oct 16, 2022 3:21 pm I trust that Harry's book is good, but I don't recall reading it. I did read some of his blog posts on TIPS years ago, which I think is what was the basis of his book. He explains things very well in general.

The Wiki page is OK, but very basic.

In June 2021, I bought 10 of the 7/15/2023 TIPS and 10 of the 7/15/2023 nominal Treasury. I have shared the results so far in a number of posts, and analyzing the results has deepened my knowledge of TIPS. I have been buying a lot of TIPS in 2022, and have shared a lot about that in the Trading Treasuries thread.

So, as others have said, I think a good way to learn is to buy a small quantity, preferably in an IRA so no tax reporting issues, then ask questions about whatever you don't understand about your purchase or what happens after your purchase.

I think I probably learned most of what I know about TIPS from this forum, and from links provided in forum posts. I am still learning, and sharing what I learn on the forum.

Kevin
I found the thread you started to be super informative in understanding treasuries in general, not just TIPS.

Also I completely agree that doing your own trading is a great way to learn.
LMP | Liability Matching Portfolio | safe portfolio: TIPS ladder + I-bonds + Treasuries | risky portfolio: US stocks / US REIT / International stocks
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Re: Best Way to Learn About TIPS?

Post by Kevin M »

dbr wrote: Sun Oct 16, 2022 3:27 pm
Kevin M wrote: Sun Oct 16, 2022 3:21 pm I trust that Harry's book is good, but I don't recall reading it. I did read some of his blog posts on TIPS years ago, which I think is what was the basis of his book. He explains things very well in general.

The Wiki page is OK, but very basic.

In June 2021, I bought 10 of the 7/15/2023 TIPS and 10 of the 7/15/2023 nominal Treasury. I have shared the results so far in a number of posts, and analyzing the results has deepened my knowledge of TIPS. I have been buying a lot of TIPS in 2022, and have shared a lot about that in the Trading Treasuries thread.

So, as others have said, I think a good way to learn is to buy a small quantity, preferably in an IRA so no tax reporting issues, then ask questions about whatever you don't understand about your purchase or what happens after your purchase.

I think I probably learned most of what I know about TIPS from this forum, and from links provided in forum posts. I am still learning, and sharing what I learn on the forum.

Kevin
Are there one or two single things that stand out to you that seem to create particular difficulties with understanding TIPS distinct from understanding any bonds?
The basics come down to understanding real vs nominal (yields, returns, etc.), and how the inflation adjustments are done. I'm sure that these basics are covered in the sources mentioned so far in this thread. If you really want to understand the inflation adjustments, you need to understand:
  • What is "reference CPI", and how is it calculated. This includes understanding the lag between CPI and reference CPI.
  • What is the dated date ref CPI? All marketable Treasuries have a dated date, but only TIPS have a ref CPI associated with that.
  • How to calculate the index ratio (IR), also referred to as the inflation factor. It's simple if you understand and know how to find the reference CPIs mentioned above. Divide the ref CPI for date of interest by the dated date ref CPI for the TIPS you're evaluating.
  • How to calculate adjusted price from quoted price: multiply quoted price by the index ratio.
Other things that come to mind:
  • How TIPS price is affected by changes in real yield. Understanding the price/yield relationship is not unique to TIPS, but using the real yield instead of nominal yield is.
  • That you know the real yield of TIPS when you buy, and you know that your return will be close to this if you hold to maturity, but you don't know what the nominal return will be, since it depends on inflation.
  • That your coupon payments also are adjusted by the index ratio.
  • That both changes in yield as well as inflation affect the price and return of your TIPS before maturity.
  • Understanding breakeven inflation (BEI) is useful, but not important if you don't care about expected inflation or comparing expected return of TIPS to nominals.
There probably are more basics that are important, but the listed ones are what I can think of now.

One area that I've learned a lot about is seasonal adjustments to TIPS yields, that affect shorter-term TIPS significantly. This is a very deep topic that does not seem to be understood by many, and I don't think it's covered in any of the references. Although the calculations are straightforward, understanding the significance of it, and explaining it to others, has been quite difficult. This is unique to TIPS compared to nominal bonds.

What we've been learning recently from experience is that longer-term TIPS can lose more due to increasing real yields than they gain from the inflation adjustments. This has caused big declines in longer-term TIPS funds even though inflation has been high, and this seems to have surprised folks a lot. #Cruncher and I do some analysis of this in this thread: Short-term TIPS at negative yields vs. rolling 4-week Tbills (the title doesn't cover what the thread has expanded to, which also includes analysis of longer-term TIPS).

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: Best Way to Learn About TIPS?

Post by dbr »

Kevin M wrote: Sun Oct 16, 2022 4:00 pm
dbr wrote: Sun Oct 16, 2022 3:27 pm
Kevin M wrote: Sun Oct 16, 2022 3:21 pm I trust that Harry's book is good, but I don't recall reading it. I did read some of his blog posts on TIPS years ago, which I think is what was the basis of his book. He explains things very well in general.

The Wiki page is OK, but very basic.

In June 2021, I bought 10 of the 7/15/2023 TIPS and 10 of the 7/15/2023 nominal Treasury. I have shared the results so far in a number of posts, and analyzing the results has deepened my knowledge of TIPS. I have been buying a lot of TIPS in 2022, and have shared a lot about that in the Trading Treasuries thread.

So, as others have said, I think a good way to learn is to buy a small quantity, preferably in an IRA so no tax reporting issues, then ask questions about whatever you don't understand about your purchase or what happens after your purchase.

I think I probably learned most of what I know about TIPS from this forum, and from links provided in forum posts. I am still learning, and sharing what I learn on the forum.

Kevin
Are there one or two single things that stand out to you that seem to create particular difficulties with understanding TIPS distinct from understanding any bonds?
The basics come down to understanding real vs nominal (yields, returns, etc.), and how the inflation adjustments are done. I'm sure that these basics are covered in the sources mentioned so far in this thread. If you really want to understand the inflation adjustments, you need to understand:
  • What is "reference CPI", and how is it calculated. This includes understanding the lag between CPI and reference CPI.
  • What is the dated date ref CPI? All marketable Treasuries have a dated date, but only TIPS have a ref CPI associated with that.
  • How to calculate the index ratio (IR), also referred to as the inflation factor. It's simple if you understand and know how to find the reference CPIs mentioned above. Divide the ref CPI for date of interest by the dated date ref CPI for the TIPS you're evaluating.
  • How to calculate adjusted price from quoted price: multiply quoted price by the index ratio.
Other things that come to mind:
  • How TIPS price is affected by changes in real yield. Understanding the price/yield relationship is not unique to TIPS, but using the real yield instead of nominal yield is.
  • That you know the real yield of TIPS when you buy, and you know that your return will be close to this if you hold to maturity, but you don't know what the nominal return will be, since it depends on inflation.
  • That your coupon payments also are adjusted by the index ratio.
  • That both changes in yield as well as inflation affect the price and return of your TIPS before maturity.
  • Understanding breakeven inflation (BEI) is useful, but not important if you don't care about expected inflation or comparing expected return of TIPS to nominals.
There probably are more basics that are important, but the listed ones are what I can think of now.

One area that I've learned a lot about is seasonal adjustments to TIPS yields, that affect shorter-term TIPS significantly. This is a very deep topic that does not seem to be understood by many, and I don't think it's covered in any of the references. Although the calculations are straightforward, understanding the significance of it, and explaining it to others, has been quite difficult. This is unique to TIPS compared to nominal bonds.

What we've been learning recently from experience is that longer-term TIPS can lose more due to increasing real yields than they gain from the inflation adjustments. This has caused big declines in longer-term TIPS funds even though inflation has been high, and this seems to have surprised folks a lot. #Cruncher and I do some analysis of this in this thread: Short-term TIPS at negative yields vs. rolling 4-week Tbills (the title doesn't cover what the thread has expanded to, which also includes analysis of longer-term TIPS).

Kevin
Thanks. That calls out some of the particular issues people will want to focus on.
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Re: Best Way to Learn About TIPS?

Post by Northern Flicker »

Small Law Survivor wrote: Thu Oct 13, 2022 9:08 am The Boglehead board seems to be full of discussions around inflation protected securities. I'm reading them, and I'm starting to think that individual TIPS would be an option for me in my tIRA. However, much of the discussion goes over my head. I really don't understand this security and I'm not about to invest in them until I do.

For example, McQ writes: "If long TIPS hit a real yield above 2.0% I will… 4. Convert *all* my bond holdings to long TIPS, including those embedded in Wellesley, Wellington or other balanced funds."
viewtopic.php?p=6877277#p6877277
With all due respect to McQ, that plan (at least as described in the thread) in my opinion is market timing, plain and simple. Whether or not long-term durations are appropriate for you has zero to do with the historical return of bonds.

The best recommendation is to have a financial plan that drives an asset allocation that in turn drives the selection of investments to implement the asset allocation.

If you are in or near retirement, one example of a plan would be to use income flooring to cover known mandatory spending not covered by SS and any other pensions, and use a risk portfolio (stocks and bonds) to cover discretionary expenses and mandatory expenses that exceed projected expenses.

Delaying SS, a TIPS portfolio (mutual fund or bond ladder) with duration matching duration out to age of life expectancy, or a SPIA are ways to extend SS benefits to cover mandatory expenses. BH poster grok87's three-legged stool is a similar strategy.

Another way to devise a plan is based on sustainable withdrawal research and having a single portfolio and a withdrawal strategy. The portfolios are typically 40-60% stock, although the retirement income funds at the end of target date fund glide paths often have lower equity allocations. VTINX is 30% stock as an example. The SWR research suggests that may be too low, but there is no consensus on the appropriate level. Vanguard recommends short-term TIPS and has them at 17% of bonds in VTINX.

A third approach is bucketing, in which you might hold a year of expenses not covered by SS/pensions in cash (year 1 bucket), a year of expenses not covered by SS/pensions in short TIPS (year 2 bucket), and the remainder bucket in a stock/bond portfolio, which perhaps would be 50-60% stock. The bonds could be nominal bonds or a mix of nominal bonds and TIPS (such as the Swensen bond portfolio of 50% treasuries, 50% TIPS). The buckets are to drive the asset allocation and rebalancing to it.

The 1st and 3rd strategies could be combined wherein income flooring would drive the allocation to TIPS in the remainder bucket of strategy 3.
Last edited by Northern Flicker on Sun Oct 16, 2022 8:30 pm, edited 1 time in total.
My postings represent my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Kevin M
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Re: Best Way to Learn About TIPS?

Post by Kevin M »

Kevin M wrote: Sun Oct 16, 2022 4:00 pm
dbr wrote: Sun Oct 16, 2022 3:27 pm
Kevin M wrote: Sun Oct 16, 2022 3:21 pm <snip>
Are there one or two single things that stand out to you that seem to create particular difficulties with understanding TIPS distinct from understanding any bonds?
One area that I've learned a lot about is seasonal adjustments to TIPS yields, that affect shorter-term TIPS significantly. This is a very deep topic that does not seem to be understood by many, and I don't think it's covered in any of the references. Although the calculations are straightforward, understanding the significance of it, and explaining it to others, has been quite difficult. This is unique to TIPS compared to nominal bonds.
In thinking about it a bit more, I realize that working on spreadsheets to support calculating the seasonally-adjusted yields forced me to really dig into the specifics of inflation adjustments, and to build up my own arsenal of TIPS and CPI reference spreadsheets that I could use to do the calculations.

For example, I have a script that pulls the most recent CPI values (unadjusted and seasonally adjusted) from FRED into a sheet in my TIPS and CPI reference spreadsheet (this can easily be done without a script by downloading from FRED then importing into a spreadsheet). In another sheet I calculate the reference CPI values (unadjusted and seasonally adjusted) for each date up to the latest available ref CPI date (currently 12/1/2022). From this I calculate the seasonal-adjustment factors for each date of interest.

In the same spreadsheet I have a TIPS reference sheet, which for one thing provides the dated date and dated date ref CPI for each TIPS. As the source for this, I import data from the eyebonds.info website with this:

Code: Select all

=IMPORTHTML("http://eyebonds.info/tips/tipslist_mat.html","table",1)
Note that pretty much everything you need to know about TIPS related to inflation adjustments is available at that website, but I wanted to do my own calculations to make sure I really understood them.

FYIW, I use IMPORTRANGE a lot to import data from one spreadsheet into another, for example, importing the ref CPI data from the TIPS and CPI reference spreadsheet to my TIPS seasonal adjustment spreadsheet.

Bottom line is that I learned a lot about the details of TIPS by working on these spreadsheets.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: Best Way to Learn About TIPS?

Post by arcticpineapplecorp. »

here's a good article I read the other day:
https://portfoliocharts.com/2022/09/27/ ... more-57625

i don't know much about them either but I think i remember someone writing the other day that people think tips are safe because they're inflation protected, but they're not protected against changes in interest rates. And as such, like other bonds, will lose value as interest rates rise. case in point the tips fund at vanguard is down -13.03% ytd which is only slightly less down than total bond index fund. (source: https://investor.vanguard.com/investmen ... file/vipsx)

of course i've also read on bogleheads many prefer individual tips to a tips fund. so i don't know if/how that changes the ytd return (if individual tips are held to maturity perhaps they don't suffer these losses, unless you plan to sell before maturity?)
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Re: Best Way to Learn About TIPS?

Post by squirrel1963 »

arcticpineapplecorp. wrote: Sun Oct 16, 2022 9:34 pm here's a good article I read the other day:
https://portfoliocharts.com/2022/09/27/ ... more-57625

i don't know much about them either but I think i remember someone writing the other day that people think tips are safe because they're inflation protected, but they're not protected against changes in interest rates. And as such, like other bonds, will lose value as interest rates rise. case in point the tips fund at vanguard is down -13.03% ytd which is only slightly less down than total bond index fund. (source: https://investor.vanguard.com/investmen ... file/vipsx)

of course i've also read on bogleheads many prefer individual tips to a tips fund. so i don't know if/how that changes the ytd return (if individual tips are held to maturity perhaps they don't suffer these losses, unless you plan to sell before maturity?)
If you hold to maturity you are guaranteed to get exactly what you were promised. This is true for any type of bonds, TIPS, treasuries, and so on.
The difference between TIPS and treasuries is that TIPS yield is expressed in real terms, whereas treasury yield is expressed in nominal term.
LMP | Liability Matching Portfolio | safe portfolio: TIPS ladder + I-bonds + Treasuries | risky portfolio: US stocks / US REIT / International stocks
Looking4Answers
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Re: Best Way to Learn About TIPS?

Post by Looking4Answers »

MnD wrote: Thu Oct 13, 2022 5:55 pm For me I tend to learn best by experience.
Buy a TIPS in a very small amount, preferably in an account where you have other fixed income holdings.
See how it behaves relative to bond funds and/or nominal Treasury bonds.
This sounds like a good idea, but wondering about "small amount". I did that this year with first purchase of a T-bill and and a T-note (between $1000 and $12,000). I looked at the secondary TIPS on Schwab and Fidelity, and it seems the minimums are fairly high, if I am understanding correctly. Are there ever smaller amounts available? If I tried to buy at auction with small amount, is there a possibility that it would not be filled? - Well, I actually don't even know if it possible to enter a very small amount on a Treasury auction.
Last edited by Looking4Answers on Wed Nov 23, 2022 1:05 pm, edited 1 time in total.
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Kevin M
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Re: Best Way to Learn About TIPS?

Post by Kevin M »

Looking4Answers wrote: Wed Nov 23, 2022 12:19 pm
MnD wrote: Thu Oct 13, 2022 5:55 pm For me I tend to learn best by experience.
Buy a TIPS in a very small amount, preferably in an account where you have other fixed income holdings.
See how it behaves relative to bond funds and/or nominal Treasury bonds.
This sounds like a good idea, but wondering about "small amount". I did that this year with first purchase of a T-bill and and a T-note (between $1000 and $12,000). I looked at the secondary TIPS on Schwab and Fidelity, and it seems the minimums are fairly high, if I am understanding correctly. Is this typical? If I tried to buy at auction with small amount, is there a possibility that it would not be filled?
You need to look at the depth of book to see offers for smaller quantities. At Fidelity, click the depth of book icon on the right. At Vanguard, click the See more link. You usually will then see minimum quantity as low as 1. Occasionally, there are no smaller minimum quantities than the best price, but it's unusual. At Schwab, you can even specify the desired quantity in the search criteria.

I may have mentioned it already, but I did this in June 2021, when I bought 10 each of a 2-year TIPS and a 2-year nominal Treasury maturing on the same date. Seeing how the TIPS did compared to the nominal gave me more confidence in buying shorter-term TIPS, which I have been doing heavily this year. With shorter-term TIPS, the inflation adjustment has been larger in magnitude than the real loss due to higher real yield, so the nominal return has been positive. I don't think I would've thought enough about it to understand this if I hadn't done these purchases.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Best Way to Learn About TIPS?

Post by Looking4Answers »

Kevin M wrote: Wed Nov 23, 2022 1:03 pm
Looking4Answers wrote: Wed Nov 23, 2022 12:19 pm
MnD wrote: Thu Oct 13, 2022 5:55 pm For me I tend to learn best by experience.
Buy a TIPS in a very small amount, preferably in an account where you have other fixed income holdings.
See how it behaves relative to bond funds and/or nominal Treasury bonds.
This sounds like a good idea, but wondering about "small amount". I did that this year with first purchase of a T-bill and and a T-note (between $1000 and $12,000). I looked at the secondary TIPS on Schwab and Fidelity, and it seems the minimums are fairly high, if I am understanding correctly. Is this typical? If I tried to buy at auction with small amount, is there a possibility that it would not be filled?
You need to look at the depth of book to see offers for smaller quantities. At Fidelity, click the depth of book icon on the right. At Vanguard, click the See more link. You usually will then see minimum quantity as low as 1. Occasionally, there are no smaller minimum quantities than the best price, but it's unusual. At Schwab, you can even specify the desired quantity in the search criteria.

I may have mentioned it already, but I did this in June 2021, when I bought 10 each of a 2-year TIPS and a 2-year nominal Treasury maturing on the same date. Seeing how the TIPS did compared to the nominal gave me more confidence in buying shorter-term TIPS, which I have been doing heavily this year. With shorter-term TIPS, the inflation adjustment has been larger in magnitude than the real loss due to higher real yield, so the nominal return has been positive. I don't think I would've thought enough about it to understand this if I hadn't done these purchases.
Thanks, Kevin. That was very helpful. Do you have any "rules of thumb" that you use when doing a search or looking at what is available to narrow down what is actually a decent price for secondary issues? I have seen some detailed calculations on various threads, but I suspect those who are more familiar with offerings can see what are the more attractive listings fairly quickly and then do more detailed calculations on just those.
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Re: Best Way to Learn About TIPS?

Post by Kevin M »

Looking4Answers wrote: Wed Nov 23, 2022 2:16 pm
Kevin M wrote: Wed Nov 23, 2022 1:03 pm
Looking4Answers wrote: Wed Nov 23, 2022 12:19 pm
MnD wrote: Thu Oct 13, 2022 5:55 pm For me I tend to learn best by experience.
Buy a TIPS in a very small amount, preferably in an account where you have other fixed income holdings.
See how it behaves relative to bond funds and/or nominal Treasury bonds.
This sounds like a good idea, but wondering about "small amount". I did that this year with first purchase of a T-bill and and a T-note (between $1000 and $12,000). I looked at the secondary TIPS on Schwab and Fidelity, and it seems the minimums are fairly high, if I am understanding correctly. Is this typical? If I tried to buy at auction with small amount, is there a possibility that it would not be filled?
You need to look at the depth of book to see offers for smaller quantities. At Fidelity, click the depth of book icon on the right. At Vanguard, click the See more link. You usually will then see minimum quantity as low as 1. Occasionally, there are no smaller minimum quantities than the best price, but it's unusual. At Schwab, you can even specify the desired quantity in the search criteria.

I may have mentioned it already, but I did this in June 2021, when I bought 10 each of a 2-year TIPS and a 2-year nominal Treasury maturing on the same date. Seeing how the TIPS did compared to the nominal gave me more confidence in buying shorter-term TIPS, which I have been doing heavily this year. With shorter-term TIPS, the inflation adjustment has been larger in magnitude than the real loss due to higher real yield, so the nominal return has been positive. I don't think I would've thought enough about it to understand this if I hadn't done these purchases.
Thanks, Kevin. That was very helpful. Do you have any "rules of thumb" that you use when doing a search or looking at what is available to narrow down what is actually a decent price for secondary issues? I have seen some detailed calculations on various threads, but I suspect those who are more familiar with offerings can see what are the more attractive listings fairly quickly and then do more detailed calculations on just those.
What I do is not typical for a Boglehead, so I simply share what I do, but don't necessarily recommend it to others.

I pull quotes for all Treasuries from Fidelity and load them into a spreadsheet. I chart the yields vs. term to maturity, and I zero in mostly on maturities that are on the steep part of the yield curve. Currently that's out to about six-month maturity:

Image

I look at the peaks on the steep part of the curve, then I do a search in a range near whatever peak is in my desired maturity range (e.g, 1, 2, 3, 4, 5 or 6 month). I pick one in this range that looks good, which isn't necessarily the highest; for example, if I only pick up one basis point for extending maturity by 15 days, I might take the shorter-term one.

In taxable, I now prefer bills over notes or bonds for maturities of less than one year, because the tax reporting is a bit easier if you hold to maturity, but I will buy a note or bond if the yield is enough higher than the bill of similar maturity.

Note that staying relatively short term involves reinvestment risk, which is why it would not be a standard BH approach.

TIPS are more complicated, because I adjust for seasonality in my purchase decisions, but I do basically the same thing, and am currently most interested in the July 2023 and Jan 2024 TIPS.

Image

I am considering selling my Jan 2023 TIPS and using the proceeds to buy more 7/15/23, but am waiting for replies to my thread about this.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
Looking4Answers
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Re: Best Way to Learn About TIPS?

Post by Looking4Answers »

Would be interested what others may do to narrow their search when buying on the secondary market? Either to include or exclude certain offerings?
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Re: Best Way to Learn About TIPS?

Post by bikechuck »

Every time I read a Tips thread my brain hurts. I might regret this but I decided the perfect was the enemy of the good so my approach was to build a seven ladder as follows

1) I already had a three year CD ladder with yields in excess of 4% mature in January of 2023, 2024 and 2025

2) I wanted Tips for each of the next 7 years and I wanted them to mature in January of each year.

3) I found multiple Tips on Schwab maturing on January 15 of each of those 7 years. I purchased the amount that I wanted from the cusip with the highest Yield To Maturity.

4) 1 - 3 above will get me to age 80

5) I plan to buy another rung this January at auction which will extend my ladder one additional year.

6) For the third consecutive year my wife and I will each buy $10K of iBonds.

I am hoping that my simplistic approach outlined above will be good enough and I suspect that it will be. I plan to purchase an additional rung each January at auction as long as there is a positive real yield
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Re: Best Way to Learn About TIPS?

Post by Kevin M »

bikechuck wrote: Wed Nov 23, 2022 10:52 pm Every time I read a Tips thread my brain hurts. I might regret this but I decided the perfect was the enemy of the good so my approach was to build a seven ladder as follows

1) I already had a three year CD ladder with yields in excess of 4% mature in January of 2023, 2024 and 2025

2) I wanted Tips for each of the next 7 years and I wanted them to mature in January of each year.

3) I found multiple Tips on Schwab maturing on January 15 of each of those 7 years. I purchased the amount that I wanted from the cusip with the highest Yield To Maturity.

4) 1 - 3 above will get me to age 80

5) I plan to buy another rung this January at auction which will extend my ladder one additional year.

6) For the third consecutive year my wife and I will each buy $10K of iBonds.

I am hoping that my simplistic approach outlined above will be good enough and I suspect that it will be. I plan to purchase an additional rung each January at auction as long as there is a positive real yield
Seems like a good plan. Interesting that you chose January maturity, as that's the one month that has two TIPS maturing on the same date in some years. So yeah, there are "multiple", but "multiple" = 2. The yields typically are pretty close for those, as they should be.

So, the topic of this thread is learning about TIPS. How has your experience helped you learn about TIPS?
If I make a calculation error, #Cruncher probably will let me know.
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Re: Best Way to Learn About TIPS?

Post by bagle »

Kevin M wrote: Sun Oct 16, 2022 4:00 pm
The basics come down to understanding real vs nominal (yields, returns, etc.), and how the inflation adjustments are done. I'm sure that these basics are covered in the sources mentioned so far in this thread. If you really want to understand the inflation adjustments, you need to understand:
  • What is "reference CPI", and how is it calculated. This includes understanding the lag between CPI and reference CPI.
  • What is the dated date ref CPI? All marketable Treasuries have a dated date, but only TIPS have a ref CPI associated with that.
  • How to calculate the index ratio (IR), also referred to as the inflation factor. It's simple if you understand and know how to find the reference CPIs mentioned above. Divide the ref CPI for date of interest by the dated date ref CPI for the TIPS you're evaluating.
  • How to calculate adjusted price from quoted price: multiply quoted price by the index ratio.

Excellent list. Perhaps it´s implied here, but I would add how to calculate value of TIPS I need to buy today to fund $__ in real spending in year __. #cruncher´s spreadsheet is an great resource for this, but it requires some some number crunching skills.
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Re: Best Way to Learn About TIPS?

Post by bagle »

bagle wrote: Thu Nov 24, 2022 3:27 am
Kevin M wrote: Sun Oct 16, 2022 4:00 pm
The basics come down to understanding real vs nominal (yields, returns, etc.), and how the inflation adjustments are done. I'm sure that these basics are covered in the sources mentioned so far in this thread. If you really want to understand the inflation adjustments, you need to understand:
  • What is "reference CPI", and how is it calculated. This includes understanding the lag between CPI and reference CPI.
  • What is the dated date ref CPI? All marketable Treasuries have a dated date, but only TIPS have a ref CPI associated with that.
  • How to calculate the index ratio (IR), also referred to as the inflation factor. It's simple if you understand and know how to find the reference CPIs mentioned above. Divide the ref CPI for date of interest by the dated date ref CPI for the TIPS you're evaluating.
  • How to calculate adjusted price from quoted price: multiply quoted price by the index ratio.
Excellent list. Perhaps it´s implied here, but I would add how to calculate value of TIPS I need to buy today to fund $__ in real spending in year __. #cruncher´s spreadsheet is a great resource for this, but it requires some number crunching skills.
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Re: Best Way to Learn About TIPS?

Post by bikechuck »

Kevin M wrote: Thu Nov 24, 2022 1:55 am
bikechuck wrote: Wed Nov 23, 2022 10:52 pm Every time I read a Tips thread my brain hurts. I might regret this but I decided the perfect was the enemy of the good so my approach was to build a seven ladder as follows

1) I already had a three year CD ladder with yields in excess of 4% mature in January of 2023, 2024 and 2025

2) I wanted Tips for each of the next 7 years and I wanted them to mature in January of each year.

3) I found multiple Tips on Schwab maturing on January 15 of each of those 7 years. I purchased the amount that I wanted from the cusip with the highest Yield To Maturity.

4) 1 - 3 above will get me to age 80

5) I plan to buy another rung this January at auction which will extend my ladder one additional year.

6) For the third consecutive year my wife and I will each buy $10K of iBonds.

I am hoping that my simplistic approach outlined above will be good enough and I suspect that it will be. I plan to purchase an additional rung each January at auction as long as there is a positive real yield
Seems like a good plan. Interesting that you chose January maturity, as that's the one month that has two TIPS maturing on the same date in some years. So yeah, there are "multiple", but "multiple" = 2. The yields typically are pretty close for those, as they should be.

So, the topic of this thread is learning about TIPS. How has your experience helped you learn about TIPS?
Thanks Kevin,

I chose January because as each rung matures my wife and I will use it as a portion of our RMDs and to help fund the coming year's expenses. Also my wife is likely to survive me and she has limited patience and interest in managing a portfolio. We review our portfolio together on a monthly basis and it will be easy for her to move this money from her IRA to taxable each January when the funds find their way into her settlement account. Keeping this to the same month and the first month of each year values simplicity over squeezing the maximum financial value out of the ladder.

Most of what I have learned about tips comes from Boglehead threads like this one and from reading Harry Sit's book "Understanding Tips". I have had my seven and soon to be eight year ladder for less than one month. The only thing that I have learned from that experience so far is how quick and easy it was to build the ladder. We used Schwab and were able to execute this in 20 minutes or less.
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Re: Best Way to Learn About TIPS?

Post by Kevin M »

bikechuck wrote: Thu Nov 24, 2022 2:16 pm
Kevin M wrote: Thu Nov 24, 2022 1:55 am
bikechuck wrote: Wed Nov 23, 2022 10:52 pm Every time I read a Tips thread my brain hurts. I might regret this but I decided the perfect was the enemy of the good so my approach was to build a seven ladder as follows

1) I already had a three year CD ladder with yields in excess of 4% mature in January of 2023, 2024 and 2025

2) I wanted Tips for each of the next 7 years and I wanted them to mature in January of each year.

3) I found multiple Tips on Schwab maturing on January 15 of each of those 7 years. I purchased the amount that I wanted from the cusip with the highest Yield To Maturity.

4) 1 - 3 above will get me to age 80

5) I plan to buy another rung this January at auction which will extend my ladder one additional year.

6) For the third consecutive year my wife and I will each buy $10K of iBonds.

I am hoping that my simplistic approach outlined above will be good enough and I suspect that it will be. I plan to purchase an additional rung each January at auction as long as there is a positive real yield
Seems like a good plan. Interesting that you chose January maturity, as that's the one month that has two TIPS maturing on the same date in some years. So yeah, there are "multiple", but "multiple" = 2. The yields typically are pretty close for those, as they should be.

So, the topic of this thread is learning about TIPS. How has your experience helped you learn about TIPS?
Thanks Kevin,

I chose January because as each rung matures my wife and I will use it as a portion of our RMDs and to help fund the coming year's expenses. Also my wife is likely to survive me and she has limited patience and interest in managing a portfolio. We review our portfolio together on a monthly basis and it will be easy for her to move this money from her IRA to taxable each January when the funds find their way into her settlement account. Keeping this to the same month and the first month of each year values simplicity over squeezing the maximum financial value out of the ladder.

Most of what I have learned about tips comes from Boglehead threads like this one and from reading Harry Sit's book "Understanding Tips". I have had my seven and soon to be eight year ladder for less than one month. The only thing that I have learned from that experience so far is how quick and easy it was to build the ladder. We used Schwab and were able to execute this in 20 minutes or less.
Thanks for sharing all of this.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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