TIPs - what am I missing?
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TIPs - what am I missing?
Newly retired at age 60 with a 45% / 20% / 35% asset allocation in VTI / VXUS / fixed income investments.
My fixed income investments consist of cash, ibonds, Toyota demand shares, and a large amount of VTIP (vanguard short term inflation adjusted securities etf).
I have a basic understanding of Inflation Protected Securities. For folks smarter than I, what might there be that I don’t understand about them? What is the worse outcome that could happen? Inflation could be much less than expected and their principle decline sharply?
Are there other inflation protected mutual funds or etfs passively managed or actively managed that may be worth considering as an alternative to VTIP?
I don’t do actively managed stock funds as a rule of thumb but would consider an actively managed bond fund if there was some reason I thought the expense was worth the return based upon the fund’s long term return history.
Thank you - I have learned a lot here and hope to learn more.
My fixed income investments consist of cash, ibonds, Toyota demand shares, and a large amount of VTIP (vanguard short term inflation adjusted securities etf).
I have a basic understanding of Inflation Protected Securities. For folks smarter than I, what might there be that I don’t understand about them? What is the worse outcome that could happen? Inflation could be much less than expected and their principle decline sharply?
Are there other inflation protected mutual funds or etfs passively managed or actively managed that may be worth considering as an alternative to VTIP?
I don’t do actively managed stock funds as a rule of thumb but would consider an actively managed bond fund if there was some reason I thought the expense was worth the return based upon the fund’s long term return history.
Thank you - I have learned a lot here and hope to learn more.
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Re: TIPs - what am I missing?
Interested as well
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Re: TIPs - what am I missing?
TIPS don't have the downside protection nominal bonds have during market crashes and historically have a lower return than nominal bonds. half my bonds are intermediate TIPS (SCHP), half are long treasuries.
SCHP has an intermediate duration, VTIP is short
SCHP has an intermediate duration, VTIP is short
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Re: TIPs - what am I missing?
Thank you - any idea of what to expect from TIPs during a market crash?chrisdds98 wrote: ↑Mon Sep 27, 2021 12:55 pm TIPS don't have the downside protection nominal bonds have during market crashes and historically have a lower return than nominal bonds. half my bonds are intermediate TIPS (SCHP), half are long treasuries.
SCHP has an intermediate duration, VTIP is short
I see SCHP has a 1 year return of 3.91% and VTIP has a 1 year return of 3.82%
That makes sense I think.
Thank you.
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Re: TIPs - what am I missing?
in 2008 TIPS were -2.85% compared to nominal at +13.32%
Re: TIPs - what am I missing?
TIP's effectively let you ignore inflation, they let you speak in real terms. I.e. if you buy $1,000 of a TIP that matures in 5 years, you are "guaranteed" to get $1,000 worth of buying power in 5 years time. Nobody/nothing else can provide that service.
i.e. the US govt is saying, hey if you buy a TIP from us, we promise the $1,000 of buying power today will continue and give you $1,000 of buying power when the TIP matures. Bonds can not promise that. They can only put in expected inflation, and they usually do, and the expected inflation is usually correct, but there is zero promise that $1,000 of normal bonds(or treasuries) today will buy the same stuff tomorrow.
So TIP's let you speak in real terms. I know in retirement in 5 years I'm going to need $25k, so I need to buy $25k of tips maturing in 5 years today, and I'm "guaranteed" to get the same $25k worth of buying power in 5 years. This is huge, if your needs match this use-case.
If your needs do not match this use case, then tips perhaps become less useful. They certainly don't have any downside protection, i.e. if deflation happens, TIPS do not promise you the extra return you would have gotten with say nominal(normal) bonds.
So if you know you need $25k in 20 years, then buy $25k of 20 year TIPS and you are good to go, and you can promptly ignore what happens in the world(provided the US govt doesn't fall over and go away).
Another way to think of it: with TIP's you can mostly create your own social security.
As for ETF's that are useful for treasuries, see the wiki, which provides a handy list.
Around active management, there is no evidence that I'm aware of that actively managed TIPS does anything useful.
i.e. the US govt is saying, hey if you buy a TIP from us, we promise the $1,000 of buying power today will continue and give you $1,000 of buying power when the TIP matures. Bonds can not promise that. They can only put in expected inflation, and they usually do, and the expected inflation is usually correct, but there is zero promise that $1,000 of normal bonds(or treasuries) today will buy the same stuff tomorrow.
So TIP's let you speak in real terms. I know in retirement in 5 years I'm going to need $25k, so I need to buy $25k of tips maturing in 5 years today, and I'm "guaranteed" to get the same $25k worth of buying power in 5 years. This is huge, if your needs match this use-case.
If your needs do not match this use case, then tips perhaps become less useful. They certainly don't have any downside protection, i.e. if deflation happens, TIPS do not promise you the extra return you would have gotten with say nominal(normal) bonds.
So if you know you need $25k in 20 years, then buy $25k of 20 year TIPS and you are good to go, and you can promptly ignore what happens in the world(provided the US govt doesn't fall over and go away).
Another way to think of it: with TIP's you can mostly create your own social security.
As for ETF's that are useful for treasuries, see the wiki, which provides a handy list.
Around active management, there is no evidence that I'm aware of that actively managed TIPS does anything useful.
Whether rich or poor, a young woman should know how a bank account works, understand the composition of mortgages and bonds, and know the value of interest and how it accumulates. -Hetty Green
Re: TIPs - what am I missing?
VTIP's duration is too short for me.Parkinglotracer wrote: ↑Mon Sep 27, 2021 8:03 am Newly retired at age 60 with a 45% / 20% / 35% asset allocation in VTI / VXUS / fixed income investments.
My fixed income investments consist of cash, ibonds, Toyota demand shares, and a large amount of VTIP (vanguard short term inflation adjusted securities etf).
I have a basic understanding of Inflation Protected Securities. For folks smarter than I, what might there be that I don’t understand about them? What is the worse outcome that could happen? Inflation could be much less than expected and their principle decline sharply?
Are there other inflation protected mutual funds or etfs passively managed or actively managed that may be worth considering as an alternative to VTIP?
I don’t do actively managed stock funds as a rule of thumb but would consider an actively managed bond fund if there was some reason I thought the expense was worth the return based upon the fund’s long term return history.
Thank you - I have learned a lot here and hope to learn more.
I think that one should match the average duration of their investments with their spending horizon.
Maybe a mix of SCHP, VAIPX, and LTPZ?
Related discussions:
viewtopic.php?p=5605754#p5605754
viewtopic.php?f=10&t=344308
viewtopic.php?t=318412
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Re: TIPs - what am I missing?
Deleted
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Re: TIPs - what am I missing?
Thank you. Will diversify my duration.hudson wrote: ↑Mon Sep 27, 2021 5:10 pmVTIP's duration is too short for me.Parkinglotracer wrote: ↑Mon Sep 27, 2021 8:03 am Newly retired at age 60 with a 45% / 20% / 35% asset allocation in VTI / VXUS / fixed income investments.
My fixed income investments consist of cash, ibonds, Toyota demand shares, and a large amount of VTIP (vanguard short term inflation adjusted securities etf).
I have a basic understanding of Inflation Protected Securities. For folks smarter than I, what might there be that I don’t understand about them? What is the worse outcome that could happen? Inflation could be much less than expected and their principle decline sharply?
Are there other inflation protected mutual funds or etfs passively managed or actively managed that may be worth considering as an alternative to VTIP?
I don’t do actively managed stock funds as a rule of thumb but would consider an actively managed bond fund if there was some reason I thought the expense was worth the return based upon the fund’s long term return history.
Thank you - I have learned a lot here and hope to learn more.
I think that one should match the average duration of their investments with their spending horizon.
Maybe a mix of SCHP, VAIPX, and LTPZ?
Related discussions:
viewtopic.php?p=5605754#p5605754
viewtopic.php?f=10&t=344308
viewtopic.php?t=318412
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- Posts: 3944
- Joined: Fri Dec 20, 2019 2:49 am
- Location: Upstate NY
Re: TIPs - what am I missing?
zie wrote: ↑Mon Sep 27, 2021 3:18 pm TIP's effectively let you ignore inflation, they let you speak in real terms. I.e. if you buy $1,000 of a TIP that matures in 5 years, you are "guaranteed" to get $1,000 worth of buying power in 5 years time. Nobody/nothing else can provide that service.
i.e. the US govt is saying, hey if you buy a TIP from us, we promise the $1,000 of buying power today will continue and give you $1,000 of buying power when the TIP matures. Bonds can not promise that. They can only put in expected inflation, and they usually do, and the expected inflation is usually correct, but there is zero promise that $1,000 of normal bonds(or treasuries) today will buy the same stuff tomorrow.
So TIP's let you speak in real terms. I know in retirement in 5 years I'm going to need $25k, so I need to buy $25k of tips maturing in 5 years today, and I'm "guaranteed" to get the same $25k worth of buying power in 5 years. This is huge, if your needs match this use-case.
If your needs do not match this use case, then tips perhaps become less useful. They certainly don't have any downside protection, i.e. if deflation happens, TIPS do not promise you the extra return you would have gotten with say nominal(normal) bonds.
So if you know you need $25k in 20 years, then buy $25k of 20 year TIPS and you are good to go, and you can promptly ignore what happens in the world(provided the US govt doesn't fall over and go away).
Another way to think of it: with TIP's you can mostly create your own social security.
As for ETF's that are useful for treasuries, see the wiki, which provides a handy list.
Around active management, there is no evidence that I'm aware of that actively managed TIPS does anything useful.
Thank you for the detailed explanation. I need to read the boglehead wiki - thank you for the link.
Re: TIPs - what am I missing?
One important thing to note is that TIPS don't guarantee you a positive real return. TIPS (particularly short-term TIPS) have negative real yields right now, and will lose money to inflation as long as yields stay low.
I definitely recommend maxing out your I-bond purchases, as I-bonds have a 0% real return floor, and are currently a much better deal than TIPS.
I definitely recommend maxing out your I-bond purchases, as I-bonds have a 0% real return floor, and are currently a much better deal than TIPS.
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Re: TIPs - what am I missing?
I agree. Luck of the draw I have some Oct 2000 ibonds paying 5% last year - bought what I could this year. May do EE bonds too. Thanks
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Re: TIPs - what am I missing?
You may find this thread of interest. "I Bonds vs Other Choices - Growth of $10,000.". Spoiler alert...The old sub-optimal choice is cash and duration matching has the biggest payoff.