Need help with TIPS explanation

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dcarste
Posts: 157
Joined: Mon Apr 27, 2015 4:55 pm

Need help with TIPS explanation

Post by dcarste »

I am evaluating whether to take a portion of my fixed income investments currently in total bond market, and investing in Vanguard TIPS fund or Short Term Tips fund. If the yield is negative, which it is currently, it is essentially a bet that if I buy the TIPS fund w/ a negative 1.5% rate, that CPI will be higher than 1.5%? Otherwise if CPI is lower than 1.5%, I effectively lose money?

What about whether I should invest at all in TIPS vs Total Bond Market? I see the bond market as Fed repressing interest rates and a guarantee I will lose purchasing power, that is why I am considering TIPS.

Help and advise Pls. I am retired with a 50/50 split stocks/bonds three fund portfolio currently.
dbr
Posts: 46182
Joined: Sun Mar 04, 2007 8:50 am

Re: Need help with TIPS explanation

Post by dbr »

First understand that the negative yield quoted is real yield. The real yield on much fixed income is equally negative. You will lose real dollars on about any fixed income investment today. Real yield can be negative from time to time.

So, yes, if there is inflation greater than 1.5%, then the nominal yield will be positive after the bonds are indexed for inflation.

As to holding TIPS compared to total bond index, the difference is that TIPS are Treasuries and don't have any default risk, relatively speaking, and they do not have inflation risk in the sense that they are exactly compensated for CPI inflation.

As to what anyone "should" do, the answer is that you pays yer money and you takes yer choice.

Disclaimer: My fixed income holdings are half in an intermediate Treasury fund and half in a intermediate TIPS fund. The result for a whole portfolio depends on the entirety of one's stock and bond investments.
sycamore
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Joined: Tue May 08, 2018 12:06 pm

Re: Need help with TIPS explanation

Post by sycamore »

dcarste wrote: Mon Aug 02, 2021 10:50 am ...I see the bond market as Fed repressing interest rates and a guarantee I will lose purchasing power, that is why I am considering TIPS.
I don't quite follow what you mean, and I may or may not agree with it :) but in any case I'm not sure TIPS will solve the problem for you. As Treasury bonds, they're also subject to pricing done by bond market buyers and sellers, and whatever Fed repression is going on. The "inflation protection" provided by TIPS is only one component of their return. It's not a silver bullet for getting "enough" return from bonds.

Some investors use I Bonds as a portion of their fixed income allocation. I Bonds and TIPS get the same inflation adjustment. An advantage of I Bonds is that their yields won't go below zero. But they do have downsides: you're limited to $10k per person per year; you have to keep them at least one year; if you sell before 5 years, you lose 3 months of interest; and you can't buy them in a brokerage account -- gotta use a Treasury Direct account;
hudson
Posts: 7119
Joined: Fri Apr 06, 2007 9:15 am

Re: Need help with TIPS explanation

Post by hudson »

dcarste wrote: Mon Aug 02, 2021 10:50 am I am evaluating whether to take a portion of my fixed income investments currently in total bond market, and investing in Vanguard TIPS fund or Short Term Tips fund. If the yield is negative, which it is currently, it is essentially a bet that if I buy the TIPS fund w/ a negative 1.5% rate, that CPI will be higher than 1.5%? Otherwise if CPI is lower than 1.5%, I effectively lose money?

What about whether I should invest at all in TIPS vs Total Bond Market? I see the bond market as Fed repressing interest rates and a guarantee I will lose purchasing power, that is why I am considering TIPS.

Help and advise Pls. I am retired with a 50/50 split stocks/bonds three fund portfolio currently.
I can't warm up to total bond funds because they have too much corporate/investment grade holdings.
I do not own any TIPS, but plan to move in that direction. I'm 73; at 76, I'll have the cash to set up a duration matched Liability Matching Portfolio.
I'll use either TIPS funds/ETFs or I'll buy individual TIPS. I believe that a non rolling TIPS ladder is optimal. The fund/ETF solution might be easier. I might start with the fund/ETFs and slowly buy individual TIPS...or not.

Maybe these discussions? viewtopic.php?f=10&t=320347

viewtopic.php?f=10&t=320295

viewtopic.php?p=4762139#p4762139

viewtopic.php?p=5207938#p5207938
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