Why isnt everyone buying TIPS?

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finite_difference
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Re: Why isnt everyone buying TIPS?

Post by finite_difference »

Turkishcoffee wrote: Wed May 05, 2021 12:15 pm Market timing comments aside, there are a lot of bright people out there such as Warren Buffett, m El Aian who say inflation is here and coming.

If I fear inflation, why wouldnt I pile all my non equities into TIPS?
If you fear inflation, why not instead reduce bonds, pile into equities, and refinance your mortgage to 30 years?
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rob
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Re: Why isnt everyone buying TIPS?

Post by rob »

gwe67 wrote: Wed May 05, 2021 1:05 pm
lazynovice wrote: Wed May 05, 2021 12:58 pm One reason is that I think inflation fears are being blown out of proportion:

viewtopic.php?f=10&t=345985&p=5944345#p5944345

I have not seen my own CPI change much- if anything it is staying low. Other than property insurance and gasoline, I can’t think of anything that costs me more this month than last May.
You may not be buying any, but lumber has gone up OVER 500% in the last year.

https://finance.yahoo.com/quote/LBS%3DF/
My personal inflation has gone up a lot more than the official nbr recently as it has done for a long time. Maybe I'm just a poor choice of targets... The official index is a poor proxy for me which is why I have some but less than I would otherwise.
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gwe67
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Re: Why isnt everyone buying TIPS?

Post by gwe67 »

finite_difference wrote: Wed May 05, 2021 8:28 pm
gwe67 wrote: Wed May 05, 2021 1:36 pm
lazynovice wrote: Wed May 05, 2021 1:14 pm
gwe67 wrote: Wed May 05, 2021 1:05 pm
lazynovice wrote: Wed May 05, 2021 12:58 pm One reason is that I think inflation fears are being blown out of proportion:

viewtopic.php?f=10&t=345985&p=5944345#p5944345

I have not seen my own CPI change much- if anything it is staying low. Other than property insurance and gasoline, I can’t think of anything that costs me more this month than last May.
You may not be buying any, but lumber has gone up OVER 500% in the last year.

https://finance.yahoo.com/quote/LBS%3DF/
Dad, is that you?

My dad has told me this five times this month. It is becoming a running joke.

No. I own my current house and don’t plan to build one anytime soon. Or build anything else made of wood. So I don’t need TIPS to protect me from skyrocketing lumber prices.

My own CPI would be more sensitive to things like eating out and veterinary bills. Maybe airfare and hotel prices soon.
Lazynovice, I'm your father! (As Darth Vader would say).

The increasing cost of new homes due to lumber cost also increases the value of existing homes. If nothing else, this should increase your property taxes. In my case, I'm looking at about $1,000 per year in additional property taxes.

"Lumber prices skyrocket causing new homes to cost $24,000 more"
https://www.msn.com/en-us/money/realest ... r-BB1fpuxs
I don’t think lumber prices are the main cause of your property taxes increasing by $1,000 per year.
Actually, yes. I had a home built right before pandemic. Homes with the same floor plan being built on the same street are now going for $30,000 more than mine cost. Builder says the increase is almost all due to higher lumber prices. Appraiser is using nearby new sales to set my valuation. Yes, I disputed the appraisal but only got a small decrease.
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finite_difference
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Re: Why isnt everyone buying TIPS?

Post by finite_difference »

gwe67 wrote: Wed May 05, 2021 8:44 pm
finite_difference wrote: Wed May 05, 2021 8:28 pm
gwe67 wrote: Wed May 05, 2021 1:36 pm
lazynovice wrote: Wed May 05, 2021 1:14 pm
gwe67 wrote: Wed May 05, 2021 1:05 pm

You may not be buying any, but lumber has gone up OVER 500% in the last year.

https://finance.yahoo.com/quote/LBS%3DF/
Dad, is that you?

My dad has told me this five times this month. It is becoming a running joke.

No. I own my current house and don’t plan to build one anytime soon. Or build anything else made of wood. So I don’t need TIPS to protect me from skyrocketing lumber prices.

My own CPI would be more sensitive to things like eating out and veterinary bills. Maybe airfare and hotel prices soon.
Lazynovice, I'm your father! (As Darth Vader would say).

The increasing cost of new homes due to lumber cost also increases the value of existing homes. If nothing else, this should increase your property taxes. In my case, I'm looking at about $1,000 per year in additional property taxes.

"Lumber prices skyrocket causing new homes to cost $24,000 more"
https://www.msn.com/en-us/money/realest ... r-BB1fpuxs
I don’t think lumber prices are the main cause of your property taxes increasing by $1,000 per year.
Actually, yes. I had a home built right before pandemic. Homes with the same floor plan being built on the same street are now going for $30,000 more than mine cost. Builder says the increase is almost all due to higher lumber prices. Appraiser is using nearby new sales to set my valuation. Yes, I disputed the appraisal but only got a small decrease.
I’m surprised the increased demand for homes isn’t impacting the price.

That’s the main cause of price increases everywhere I’ve looked (in the US).
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miket29
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Re: Why isnt everyone buying TIPS?

Post by miket29 »

vineviz wrote: Wed May 05, 2021 1:04 pmThat said, TIPS are pretty close to a risk-free asset for most investors so there's little danger in putting most (if not all) your bonds into TIPS.
Individual TIPS bonds are as riskless as they come when held to maturity. The problem comes if one needs to sell an individual bond or draw upon a TIPS bond fund, especially if during a market downturn
ome have called TIPS the only risk-free investment because of their principal safety and inflation protection features. However, one of the major indicators of risk is price volatility, and TIPS often come up lacking in this department. The wild price swings seen in TIPS ETFs during the 2008 and 2020 stock market crashes show they are not nearly as stable as cash in the short run.
https://www.investopedia.com/articles/i ... y-tips.asp
Or look at the price history of Vanguard Inflation-Protected Securities Fund both in 2008 and around the crash in 2000:
https://www.google.com/finance/quote/VA ... window=MAX
Last edited by miket29 on Wed May 05, 2021 9:54 pm, edited 1 time in total.
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Re: Why isnt everyone buying TIPS?

Post by miket29 »

finite_difference wrote: Wed May 05, 2021 8:31 pmIf you fear inflation, why not instead reduce bonds, pile into equities, and refinance your mortgage to 30 years?
This would indeed be the thing to do. Back in my college days, when inflation was real and rising, they taught us in Econ that winners during times of inflation are net monetary debtors. Meaning those who owe more in fixed dollars than they are owed. I think of my parents who bought a house at the limit of what they could afford, but a decade of inflation later (with which their salaries eventually kept up with) their mortgage payment seemed like something you could earn by recycling bottles you found discarded by the road.
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zaboomafoozarg
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Re: Why isnt everyone buying TIPS?

Post by zaboomafoozarg »

Turkishcoffee wrote: Wed May 05, 2021 12:15 pm there are a lot of bright people out there such as Warren Buffett, m El Aian who say inflation is here and coming
This is the same reason that I purchased I Bonds 10 years ago. A lot pf smart people in the market and on this forum said that inflation was going up.

A friend said that I should buy Bitcoin instead and I thought about doing $5k in I Bonds and $5k in Bitcoin.

But nope, I put the whole $10k in I Bonds. And now he's a multi-millionaire and I'm, well, me.

I still have those I Bonds though. Figure that the day I sell them is the day I will want them!
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vineviz
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Re: Why isnt everyone buying TIPS?

Post by vineviz »

miket29 wrote: Wed May 05, 2021 9:49 pm
vineviz wrote: Wed May 05, 2021 1:04 pmThat said, TIPS are pretty close to a risk-free asset for most investors so there's little danger in putting most (if not all) your bonds into TIPS.
Individual TIPS bonds are as riskless as they come when held to maturity. The problem comes if one needs to sell an individual bond or draw upon a TIPS bond fund, especially if during a market downturn.
The term "risk-free asset" specifically refers to an asset which produces a stream of payouts free from credit risk, real rate risk, and inflation risk.

A risk-averse long-term investor will only sell bond before maturity if their circumstances change unexpectedly. A failure by the investor to properly estimate their investment horizon doesn't make the bond itself more (or less) risky.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Why isnt everyone buying TIPS?

Post by anoop »

zaboomafoozarg wrote: Wed May 05, 2021 10:02 pm A friend said that I should buy Bitcoin instead and I thought about doing $5k in I Bonds and $5k in Bitcoin.
Ouch!
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Re: Why isnt everyone buying TIPS?

Post by BJJ_GUY »

vineviz wrote: Wed May 05, 2021 10:07 pm
miket29 wrote: Wed May 05, 2021 9:49 pm
vineviz wrote: Wed May 05, 2021 1:04 pmThat said, TIPS are pretty close to a risk-free asset for most investors so there's little danger in putting most (if not all) your bonds into TIPS.
Individual TIPS bonds are as riskless as they come when held to maturity. The problem comes if one needs to sell an individual bond or draw upon a TIPS bond fund, especially if during a market downturn.
The term "risk-free asset" specifically refers to an asset which produces a stream of payouts free from credit risk, real rate risk, and inflation risk.

A risk-averse long-term investor will only sell bond before maturity if their circumstances change unexpectedly. A failure by the investor to properly estimate their investment horizon doesn't make the bond itself more (or less) risky.
If equities sell off 65% and your TIPS have held in decently, you wouldn't sell TIPS to buy more stocks at steep discounts? Liquidity and technical pressures introduce a different form of risk to TIPS, but to your point it's not the typical factors - but the ability to sell when needed without dealing with a lot of frictional slippage or flat out surprises.

I'd argue that there are a lot of circumstances in which the long-term, risk-averse investor would have poorly estimated their investment horizon and prudent decision making if they hadn't considered some pretty significant (but not all that unlikely) scenarios in which selling a % of TIPS would be the optimal decision.

By the way, I do agree with your point otherwise. If you own individual TIPS purchased below par, they are not only a nearly risk-free asset with inflation hedging qualities, but they are also a deflation hedging instrument, something often over-looked. (It's too bad CPI is such a poor index for inflation, and that technicals in the TIPS market have reduced the attractiveness they once had.)
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Re: Why isnt everyone buying TIPS?

Post by vineviz »

BJJ_GUY wrote: Wed May 05, 2021 10:23 pm If equities sell off 65% and your TIPS have held in decently, you wouldn't sell TIPS to buy more stocks at steep discounts? Liquidity and technical pressures introduce a different form of risk to TIPS, but to your point it's not the typical factors - but the ability to sell when needed without dealing with a lot of frictional slippage or flat out surprises.
Maybe?

Lots of people would do what you suggest, but I don't think there's an easy answer.

Contrary to popular wisdom, my view is that the primary benefit of the risk-free asset in a portfolio isn't as a source of "ballast" which can be used to rebalance when stocks are down but rather as a source of predictable income which can be used to fuel future consumption.

A risk-averse investor (or, more accurately, a loss-averse investor) would be taking on MORE risk by balancing from TIPS to stocks, because they're trading a certain real income stream for a less certain income stream. Which begs a question: if the investor is comfortable taking more risk now, why weren't they taking that higher risk all along?

I've been reading a new working paper from John Cochrane ("PORTFOLIOS FOR LONG-TERM INVESTORS" http://www.nber.org/papers/w28513) which I think makes a convincing case that Merton was right: long-term investors will pay more attention to cash flows than to prices.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Why isnt everyone buying TIPS?

Post by index2max »

Someone correct me if I am wrong here about my assumption.

I presume that treasury inflation-protected securities are tied to the consumer price index to measure inflation?

If that's the case, there's no way anyone with an ounce of common sense would touch them? You're depending on someone who's in deep debt to report back to you on what they want inflation to be to keep kicking the can down the road?

Why would the government give an accurate measure of inflation that's based on the increase in the money supply? If they did that, wouldn't the federal government be required to increase social security payments (cost-of-living adjustment) and interest payments on bonds to keep up with inflation?

https://wiki.mises.org/wiki/Inflation#I ... ney_supply

If I want to keep up with inflation in the long run, I want own cashflow generating assets. If inflation goes up, I raise my prices as a businessman.

I'm sure my response triggered some of the keynesians lurking on this board who will yell "all is well! there's no inflation!" at the top of their lungs, but you can't keep the big lie going forever.

Even Uncle Warren sees the inflation too. He's already wealthy. He doesn't need to lie about what's going on with the day-to-day businesses Berkshire owns.
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Re: Why isnt everyone buying TIPS?

Post by BJJ_GUY »

vineviz wrote: Wed May 05, 2021 10:48 pm
BJJ_GUY wrote: Wed May 05, 2021 10:23 pm If equities sell off 65% and your TIPS have held in decently, you wouldn't sell TIPS to buy more stocks at steep discounts? Liquidity and technical pressures introduce a different form of risk to TIPS, but to your point it's not the typical factors - but the ability to sell when needed without dealing with a lot of frictional slippage or flat out surprises.
Maybe?

Lots of people would do what you suggest, but I don't think there's an easy answer.

Contrary to popular wisdom, my view is that the primary benefit of the risk-free asset in a portfolio isn't as a source of "ballast" which can be used to rebalance when stocks are down but rather as a source of predictable income which can be used to fuel future consumption.

A risk-averse investor (or, more accurately, a loss-averse investor) would be taking on MORE risk by balancing from TIPS to stocks, because they're trading a certain real income stream for a less certain income stream. Which begs a question: if the investor is comfortable taking more risk now, why weren't they taking that higher risk all along?

I've been reading a new working paper from John Cochrane ("PORTFOLIOS FOR LONG-TERM INVESTORS" http://www.nber.org/papers/w28513) which I think makes a convincing case that Merton was right: long-term investors will pay more attention to cash flows than to prices.
Fair enough. Two ways of approaching it I suppose.

I'd alter that last point you quoted (paraphrased?), and say that long-term investors would be well served to pay more attention to valuation (absolute and relative to other asset classes). Relative valuations helps to inform decisions like rebalancing based on return expectations (basically applying an opportunity cost approach).

I'm not sure why a long-term investor is concerned with coupon/income if they are a long way from retirement anyway. Until you begin nearing retirement, I'm looking at risk-adjusted returns. Then, to your point on ballast, the portfolio decisions will be made to best estimate the % of certain volatility and/or drawdown reducing assets need to be held.

Either way, bottom line point, if I had enough risk tolerance to own xx% of stocks before they sold off by 65%, then I should be more than happy to get back to that initial % of equity by buying at discounts where they are fundamentally de-risked, and offer much better expected return prospects (compared to before they sold off).

But hey, to your point, maybe a scenario like this will only reinforce an investor that maybe they shouldn't have had that equity exposure to begin with. In that case, I guess no rebalancing would occur.
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Re: Why isnt everyone buying TIPS?

Post by dh »

zaboomafoozarg wrote: Wed May 05, 2021 10:02 pm
A friend said that I should buy Bitcoin instead and I thought about doing $5k in I Bonds and $5k in Bitcoin.

...
I still have those I Bonds though. Figure that the day I sell them is the day I will want them!
Well done! In 10 years, you will thank yourself for your decision.
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Re: Why isnt everyone buying TIPS?

Post by bigskyguy »

To follow on Vineviz, we are beyond our accumulation phase and well into the decumulation phase. For us, our emotional as well as rational approach to investing flipped about 3 years prior to retirement (2015). Having invested thru 1987, 1999, and 2008, as well as the inflation of the 70’s and early 80s, our mindset rapidly morphed from wanting to grow our pie to being clear that our pie would be there when we were ready to eat it. Ergo, accumulation equated with growth, decumulation with preservation. It’s quite logical during accumulation to question committing hard earned income to an investment that presently has a baked in negative real return. In decumulation, the focus (for us at least) has been the predictability of our return. Having constructed our TIPS ladder, we have a return that is anchored to the cost of living, in essence providing us with an privately funded Social Security add on.
So I find no fault with those who question TIPS in their portfolio growth years. I question those who don’t at least give them a good look as they approach decumulation.
Our approach is heavily influenced by the DFA Target Date Funds Model.

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vineviz
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Re: Why isnt everyone buying TIPS?

Post by vineviz »

BJJ_GUY wrote: Wed May 05, 2021 11:02 pm I'm not sure why a long-term investor is concerned with coupon/income if they are a long way from retirement anyway. Until you begin nearing retirement, I'm looking at risk-adjusted returns. Then, to your point on ballast, the portfolio decisions will be made to best estimate the % of certain volatility and/or drawdown reducing assets need to be held.
I should clarify that I don't mean the long-term investor is necessarily concerned with current period income. For an early-stage accumulator, the income they care about is pretty far in the future (i.e. after retirement) but ultimately that is what they care about. After all, the entire function of saving/investing is forgoing consumption now so we can fund consumption in the future.

If we accept that premise, then it becomes more clear that the tools we typically think about for measuring risk (price volatility, portfolio drawdowns, etc.) are at best imperfect and worst misleading.

Imagine you could buy a "perfectly" risk-free asset: an inflation-indexed perpetuity with no default risk. This is basically TIPS on steroids (and not very different from Social Security, at least in concept). Now imagine the present value of this perpetuity was quoted to the penny every day, just like a stock or ETF. The price of such an asset would be incredibly volatile, even though the real value of that asset would be completely unchanging.

IMHO, the hardest transition for many accumulators to make is shifting their view of the portfolio from one based on current price to one based on future income. On the most recent Morningstar Longview podcast, guest Kerry Pechter used the word "ambidextrous" to refer to financial professionals who are equally comfortable thinking about wealth in terms of both price AND future income. Few people in the finance industry are ambidextrous in this way, and more than a few have an economic incentive not to be.
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Re: Why isnt everyone buying TIPS?

Post by BJJ_GUY »

vineviz wrote: Thu May 06, 2021 8:23 am
IMHO, the hardest transition for many accumulators to make is shifting their view of the portfolio from one based on current price to one based on future income. On the most recent Morningstar Longview podcast, guest Kerry Pechter used the word "ambidextrous" to refer to financial professionals who are equally comfortable thinking about wealth in terms of both price AND future income. Few people in the finance industry are ambidextrous in this way, and more than a few have an economic incentive not to be.
When you reference price, do you mean it in the colloquial sense like 'I paid a good price for that asset'?

In other words, are we agreeing that valuation (and thus an ability to estimate return expectations, and relative attractiveness) is most important during accumulation? If so, I think we're agreeing here
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Re: Why isnt everyone buying TIPS?

Post by aristotelian »

Because TIPS can have negative returns in deflation scenario such as a stock market crash. To the extent bonds are for diversification and hedging against market crash, TIPS are less than ideal.
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Re: Why isnt everyone buying TIPS?

Post by dodecahedron »

vineviz wrote: Wed May 05, 2021 10:48 pm I've been reading a new working paper from John Cochrane ("PORTFOLIOS FOR LONG-TERM INVESTORS" http://www.nber.org/papers/w28513) which I think makes a convincing case that Merton was right: long-term investors will pay more attention to cash flows than to prices.
Thanks for calling this paper to my attention. I found it very thought-provoking.
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Re: Why isnt everyone buying TIPS?

Post by dodecahedron »

bigskyguy wrote: Thu May 06, 2021 6:45 am
So I find no fault with those who question TIPS in their portfolio growth years. I question those who don’t at least give them a good look as they approach decumulation.
I agree very much with both parts of this statement.

One problem with most financial advising professionals is that (pretty much by definition, as currently paid professionals) they are *personally* still in their accumulation phase and may have a hard time truly relating to the perspective of those in their decumulation phase.

That could be part of the explanation as to why almost all such professionals are quite dismissive of TIPS, at least in my experience.
bigskyguy wrote: Thu May 06, 2021 6:45 am Our approach is heavily influenced by the DFA Target Date Funds Model.
I would be curious to learn how this model is different from other Target Date Funds models?
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dodecahedron
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Re: Why isnt everyone buying TIPS?

Post by dodecahedron »

vineviz wrote: Thu May 06, 2021 8:23 am IMHO, the hardest transition for many accumulators to make is shifting their view of the portfolio from one based on current price to one based on future income. On the most recent Morningstar Longview podcast, guest Kerry Pechter used the word "ambidextrous" to refer to financial professionals who are equally comfortable thinking about wealth in terms of both price AND future income. Few people in the finance industry are ambidextrous in this way, and more than a few have an economic incentive not to be.
Thanks for this pointer--I will download the podcast.
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Re: Why isnt everyone buying TIPS?

Post by JackoC »

Turkishcoffee wrote: Wed May 05, 2021 12:15 pm Market timing comments aside, there are a lot of bright people out there such as Warren Buffett, m El Aian who say inflation is here and coming.

If I fear inflation, why wouldnt I pile all my non equities into TIPS?
As usual many answers are ignoring the last phrase of the last sentence *my non equities* and arguing why they think stocks or other risk assets (lumber, etc) will outperform 'riskless' assets. This is beside the point. *Once I've decided what my 'riskless/low risk' allocation will be* why isn't it all TIPS?

Because, there are low risk assets with significantly higher expected return than TIPS. Namely, I rolled into a new 4 yr CD the other day at the worst rate I've ever done for a >1yr CD, and one of the lowest spreads to treasuries I've ever done, yet still 1.50% yield, 0.87% above the interpolated 4 yr treasury yield of 0.63% (at the time a few days ago, the 4/15/25 TIPS yielded CPI-2.23% yesterday). The expected return of TIPS can be assumed fairly close to that of the treasury (slight concession in yield for the insurance value of TIPS, slight yield bonus for bearing the lesser liquidity of TIPS, as a rough estimate we can assume those are close to cancelling each other out in normal times, though in crisis the liquidity boost may far outweigh the insurance premium and *then* TIPS can be more compelling, like for awhile in 2009 and briefly last year).

Also as mentioned a fixed coupon nominal instrument is a better hedge against deflation (which I don't expect, but in that contingency). And, a direct CD with early withdrawal option (albeit relatively unattractive 1 yr interest penalty in the CD mentioned) also gives some protection against a big upsurge in inflation assuming nominal rates follow. I come out ahead roughly speaking if I can replace that CD in a year's time with a 3 yr CD yielding over 2%.

Taxation differences (no state tax on TIPS if in taxable) can affect that comparison at the margin, and it has to be money I basically expect to tie up for the 4 yrs, but it is.

But although I favor the CD in this situation, the inevitable posts saying CPI increase generally understates the increase in living cost are also largely beside the point. CD 1.5%, TIPS CPI-2.23%. Excluding tax, the TIPS will beat the CD where CPI increase averages higher than 3.73% (ignoring my option to break the CD with EWP if rates go up enough). Say CPI increases 4% pa but the 'real' increase in living cost is 5% pa. TIPS gives me 1.77% return in that case, the CD still 1.5%, and 1.77>1.5. The 5 v 4 difference doesn't directly factor in.
Last edited by JackoC on Thu May 06, 2021 9:32 am, edited 1 time in total.
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Re: Why isnt everyone buying TIPS?

Post by vineviz »

BJJ_GUY wrote: Thu May 06, 2021 8:38 am
vineviz wrote: Thu May 06, 2021 8:23 am
IMHO, the hardest transition for many accumulators to make is shifting their view of the portfolio from one based on current price to one based on future income. On the most recent Morningstar Longview podcast, guest Kerry Pechter used the word "ambidextrous" to refer to financial professionals who are equally comfortable thinking about wealth in terms of both price AND future income. Few people in the finance industry are ambidextrous in this way, and more than a few have an economic incentive not to be.
When you reference price, do you mean it in the colloquial sense like 'I paid a good price for that asset'?

In other words, are we agreeing that valuation (and thus an ability to estimate return expectations, and relative attractiveness) is most important during accumulation? If so, I think we're agreeing here
I think we're referring to the same concept: the day-to-day price volatility in a TIPS has everything to do with changes in the discount rate and nothing to do with changes in the future consumption that TIPS will support.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Why isnt everyone buying TIPS?

Post by pokebowl »

vineviz wrote: Wed May 05, 2021 1:04 pm there's a sizable subculture organized around inflation-related conspiracy theories.
Perhaps, but other countries have been caught with their hand in the cookie jar in the past. Argentina comes to mind as a more recent example of a country that intentionally fudged their inflation data. While I won't be on the street corner holding signs stating 'the end is neigh' over it, I do see such a scenario as a valid risk. Now if the risk is enough to take action is individual dependent.
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Re: Why isnt everyone buying TIPS?

Post by willthrill81 »

vineviz wrote: Wed May 05, 2021 1:04 pm
Turkishcoffee wrote: Wed May 05, 2021 12:15 pm Market timing comments aside, there are a lot of bright people out there such as Warren Buffett, m El Aian who say inflation is here and coming.

If I fear inflation, why wouldnt I pile all my non equities into TIPS?
Never base your investment policy on fear or greed.

That said, TIPS are pretty close to a risk-free asset for most investors so there's little danger in putting most (if not all) your bonds into TIPS.

Why isn't everyone buying TIPS? Not everyone is equally sensitive to inflation risk, for one thing. Not everyone understands TIPS and the benefits they provide for a second thing. Finally, somewhat related to the second point but also somewhat distinct, there's a sizable subculture organized around inflation-related conspiracy theories.
You missed one that I firmly believe is applicable to many: TIPS and TIPS funds don't have the word 'total' in them.
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Re: Why isnt everyone buying TIPS?

Post by rich126 »

lazynovice wrote: Wed May 05, 2021 12:58 pm One reason is that I think inflation fears are being blown out of proportion:

viewtopic.php?f=10&t=345985&p=5944345#p5944345

I have not seen my own CPI change much- if anything it is staying low. Other than property insurance and gasoline, I can’t think of anything that costs me more this month than last May.
In the short term I think inflation could be a slight problem but long term it is still unlikely. For some reason people always seem to worry about inflation although it is usually easier to control than other things such as deflation.

A lot of "interesting" things are causing prices to spike:
1. computer chip shortages
2. chicken shortage (most recently)
3. lumber
4. housing supply
5. Gas (maybe, due to a shortage of delivery drivers)
6. Hotel rooms/rental cars in areas getting hit with tourists due to cutbacks during the pandemic
7. ???

Employment is still trying to get back to pre-pandemic levels.

Personally I think long term deflation is more of a concern especially due to the low growth of the population in the US. People are aging, birth rate is extremely low and w/o immigration who is going to be in the workforce in fields such as medicine, technology, etc.? Who will be paying the social security, medicare, etc. taxes to support an aging population?

TIPs to me is just trying to safely preserve your money which for people who have a ton of savings may be important but for most they still need growth above inflation.
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Re: Why isnt everyone buying TIPS?

Post by We'll See »

lazynovice wrote: Wed May 05, 2021 12:58 pm One reason is that I think inflation fears are being blown out of proportion:

viewtopic.php?f=10&t=345985&p=5944345#p5944345

I have not seen my own CPI change much- if anything it is staying low. Other than property insurance and gasoline, I can’t think of anything that costs me more this month than last May.
I can't disagree more. I can't think of much that costs less than last May. Other than office space or some hotels, everything else I see is higher.
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Re: Why isnt everyone buying TIPS?

Post by miket29 »

vineviz wrote: Wed May 05, 2021 10:07 pm The term "risk-free asset" specifically refers to an asset which produces a stream of payouts free from credit risk, real rate risk, and inflation risk.
The definitions I've seen used only use default risk
An asset whose future return is known today with certainty. The risk-free asset is commonly defined as short-term obligations of the US government.
https://www.nasdaq.com/glossary/r/riskl ... free-asset
A risk-free asset is one that has a certain future return—and virtually no possibility they will drop in value or become worthless altogether.
Risk-free assets tend to have low rates of return, since their safety means investors don't need to be compensated for taking a chance.
Risk-free assets are guaranteed against nominal loss, but not against a loss in purchasing power.
https://www.investopedia.com/terms/r/riskfreeasset.asp
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Re: Why isnt everyone buying TIPS?

Post by vineviz »

miket29 wrote: Thu May 06, 2021 12:04 pm
vineviz wrote: Wed May 05, 2021 10:07 pm The term "risk-free asset" specifically refers to an asset which produces a stream of payouts free from credit risk, real rate risk, and inflation risk.
The definitions I've seen used only use default risk
Such definitions are common, but they are incorrect. This is primarily because they depend entirely on the most basic treatment of portfolio theory, in which investors are treated as being single-period wealth maximizers.

For a long-term investors, the totally riskless asset would be an inflation-indexed perpetuity (or lifetime annuity). That's because such an asset would be free of both interest rate risk and inflation risk. This surprises people who incorrectly - or, at least, incompletely - from an introductory finance class (as I did) that 30-day Treasury bills are the riskless asset.

As John Cochrane says in the paper I mentioned earlier:
I am inspired by the brilliant Campbell and Viceira (2001) article on long-term bonds. The indexed perpetuity is the riskless asset for a long-run investor. Stop and savor that statement. I remember first seeing the paper when John gave it at Chicago. I instantly thought, “This is obvious.” And then, I realized that neither I nor anyone in the room knew it, and I realized “this is brilliant.”
Now, the statement is only obvious if you look at the payoffs. An indexed perpetuity gives a steady stream of income forever. It’s the risk-free payoff. Duh.
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Re: Why isnt everyone buying TIPS?

Post by lazynovice »

We'll See wrote: Thu May 06, 2021 11:39 am
lazynovice wrote: Wed May 05, 2021 12:58 pm One reason is that I think inflation fears are being blown out of proportion:

viewtopic.php?f=10&t=345985&p=5944345#p5944345

I have not seen my own CPI change much- if anything it is staying low. Other than property insurance and gasoline, I can’t think of anything that costs me more this month than last May.
I can't disagree more. I can't think of much that costs less than last May. Other than office space or some hotels, everything else I see is higher.
Do TIPS bought today protect you from inflation that has already happened? It seems like they are designed to protect against future inflation. Right? So you have to believe that inflation is going to get worse from now to make them worthwhile to buy today. I think the stuff we are paying more for right now is mostly driven by short term supply shortages and simple math of comparison to last year which was a period of virtually 0 CPI growth.
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Re: Why isnt everyone buying TIPS?

Post by reln »

Turkishcoffee wrote: Wed May 05, 2021 12:15 pm Market timing comments aside, there are a lot of bright people out there such as Warren Buffett, m El Aian who say inflation is here and coming.

If I fear inflation, why wouldnt I pile all my non equities into TIPS?
Tips have low/negative yield.
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Re: Why isnt everyone buying TIPS?

Post by Doc »

I didn't read this whole thread but I spent a lot of time (and money) when they first came on the scene some 15 to 20 years ago.

Vanguard wrote in June 2019:

"TIPS match unexpected inflation closely with high stability, but that stability means their
inflation protection does not go beyond the invested position."

https://www.vanguardinvestments.se/docu ... dities.pdf

Read the 12 page article.
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Re: Why isnt everyone buying TIPS?

Post by aristotelian »

rich126 wrote: Thu May 06, 2021 9:44 am TIPs to me is just trying to safely preserve your money which for people who have a ton of savings may be important but for most they still need growth above inflation.
I think the first part is true but would push back on the second. Nominal bonds with the same credit risk (i.e. Treasuries) have the same expected real return as TIPS. The difference is that nominal continues to pay the same yield even if inflation is below expectations (e.g. in a market crash) whereas TIPS you are protected if inflation increases. I don't think nominal bonds are a better bet to post positive real return, however they are better hedges against a market crash.

Here is 10 year Treasury (red) and TIPS (orange) vs S&P500 (plus) in 2020. Which would you rather had when the market was crashing?
https://imgur.com/a/YRTSPy8

IMO the best bet to beat inflation over time is stocks, while the best hedge against market risk is nominal bonds. TIPS have their uses but not as the core of your bond allocation unless you are already wealthy and extremely conservative.
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Re: Why isnt everyone buying TIPS?

Post by cbeck »

We have been in a world of declining inflation for forty years. During the revival of the economy there may be a blip of inflation as the money dikes break open, but the conditions that have prevailed for these past decades are most likely to resume. Those conditions are weakness of labor due to anti-union legislation and exposure to international competition.
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Re: Why isnt everyone buying TIPS?

Post by abuss368 »

Negative real yields! RUN!

I have kept it simple with Total Bond (which does not include TIPS). Have not invested in TIPS for a long time. Inn hindsight consolidating and simplifying was the best decision.

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Re: Why isnt everyone buying TIPS?

Post by watchnerd »

abuss368 wrote: Thu May 06, 2021 8:18 pm Negative real yields! RUN!

I have kept it simple with Total Bond (which does not include TIPS). Have not invested in TIPS for a long time. Inn hindsight consolidating and simplifying was the best decision.

Tony
You better run from Total Bond, then.

Given its duration and SEC yield, it also has negative real yields at the moment.
Last edited by watchnerd on Thu May 06, 2021 8:23 pm, edited 1 time in total.
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Re: Why isnt everyone buying TIPS?

Post by abuss368 »

watchnerd wrote: Thu May 06, 2021 8:22 pm
abuss368 wrote: Thu May 06, 2021 8:18 pm Negative real yields! RUN!

I have kept it simple with Total Bond (which does not include TIPS). Have not invested in TIPS for a long time. Inn hindsight consolidating and simplifying was the best decision.

Tony
You better run from Total Bond, then.

Given its duration, it also has negative real yields at the moment.
I know! Don’t remind me! Crazy times and markets.

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Re: Why isnt everyone buying TIPS?

Post by watchnerd »

abuss368 wrote: Thu May 06, 2021 8:22 pm I know! Don’t remind me! Crazy times and markets.

Tony
:oops:

Maybe you should get back into TIPS, then, so you can have both negative real yields and inflation protection, too.
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Re: Why isnt everyone buying TIPS?

Post by abuss368 »

watchnerd wrote: Thu May 06, 2021 8:26 pm
abuss368 wrote: Thu May 06, 2021 8:22 pm I know! Don’t remind me! Crazy times and markets.

Tony
:oops:

Maybe you should get back into TIPS, then, so you can have both negative real yields and inflation protection, too.
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Re: Why isnt everyone buying TIPS?

Post by BJJ_GUY »

cbeck wrote: Thu May 06, 2021 7:25 pm We have been in a world of declining inflation for forty years. During the revival of the economy there may be a blip of inflation as the money dikes break open, but the conditions that have prevailed for these past decades are most likely to resume. Those conditions are weakness of labor due to anti-union legislation and exposure to international competition.
Inflation has gone up, not down over the last 40 years. This is kind of a silly statement if you think about what you said. 40 years ago, how much was a Big Mac, gallon of gas, home price, new car etc.?

I'll stay away from the second point you are making. Your rationale seems more emotion that data driven, so no point in furthering the point.
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Re: Why isnt everyone buying TIPS?

Post by averagedude »

I'm not buying due to expected real negative returns. If all durations of TIPS had a positive fixed rate, I would plow 40% of my investments in TIPS ladders.
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Re: Why isnt everyone buying TIPS?

Post by bigskyguy »

averagedude wrote: Thu May 06, 2021 9:41 pm I'm not buying due to expected real negative returns. If all durations of TIPS had a positive fixed rate, I would plow 40% of my investments in TIPS ladders.
Assuming you are in the accumulation phase of you investing life, I consider your stance reasonable. As you move into decumulation, you might well want to reconsider, even if TIPS persist with a MODEST negative REAL rate of return. David Blanchette at Morningstar has shown fairly compelling long term data showing that retirees spending generally runs up to 2% below CPI. In light of that finding, and with Social Security pegged to CPI-U, TIPS that are providing a MODEST negative real rate of return start looking like a plausible, secure, reliable source of income in one’s later years.
As an aside, while TIPS are priced beyond historical norms, so are all other commonly available investments. There are, as best as I can determine, NO reasonably priced investments for we average Joe’s.

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Re: Why isnt everyone buying TIPS?

Post by milktoast »

If I understand correctly, today’s 10yr TIPS yield is -0.88% https://fred.stlouisfed.org/series/DFII10

And today’s 10yr treasury yield is 1.59% https://fred.stlouisfed.org/series/DGS10

Which means the expected inflation rate is 2.47%. I think.

So either way you are expected to lose money in real terms. If you think inflation will be higher than 2.5% then buy TIPS. If you think lower, buy treasury.

Or buy something else. But I think people are buying TIPS, because that’s what drives the yield down.
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Re: Why isnt everyone buying TIPS?

Post by averagedude »

bigskyguy wrote: Thu May 06, 2021 10:24 pm
averagedude wrote: Thu May 06, 2021 9:41 pm I'm not buying due to expected real negative returns. If all durations of TIPS had a positive fixed rate, I would plow 40% of my investments in TIPS ladders.
Assuming you are in the accumulation phase of you investing life, I consider your stance reasonable. As you move into decumulation, you might well want to reconsider, even if TIPS persist with a MODEST negative REAL rate of return. David Blanchette at Morningstar has shown fairly compelling long term data showing that retirees spending generally runs up to 2% below CPI. In light of that finding, and with Social Security pegged to CPI-U, TIPS that are providing a MODEST negative real rate of return start looking like a plausible, secure, reliable source of income in one’s later years.
As an aside, while TIPS are priced beyond historical norms, so are all other commonly available investments. There are, as best as I can determine, NO reasonably priced investments for we average Joe’s.

Joe
Very intelligent post Joe. We are living in a very challenging investment environment.
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Re: Why isnt everyone buying TIPS?

Post by watchnerd »

BJJ_GUY wrote: Thu May 06, 2021 9:35 pm

Inflation has gone up, not down over the last 40 years. This is kind of a silly statement if you think about what you said. 40 years ago, how much was a Big Mac, gallon of gas, home price, new car etc.?
Your example just means inflation exists.

Inflation could have been just 1% per year over the last 40 years and things would still be more expensive than they were 40 years ago.

The *rate* of consumer inflation now isn't even close to what it was decades ago.
Last edited by watchnerd on Thu May 06, 2021 10:43 pm, edited 1 time in total.
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Re: Why isnt everyone buying TIPS?

Post by watchnerd »

milktoast wrote: Thu May 06, 2021 10:28 pm If I understand correctly, today’s 10yr TIPS yield is -0.88% https://fred.stlouisfed.org/series/DFII10

And today’s 10yr treasury yield is 1.59% https://fred.stlouisfed.org/series/DGS10

Which means the expected inflation rate is 2.47%. I think.

So either way you are expected to lose money in real terms. If you think inflation will be higher than 2.5% then buy TIPS. If you think lower, buy treasury.
Correct...the breakeven inflation is 2.45%.

https://fred.stlouisfed.org/series/T10YIE

You're also correct that it's an over/under bet.

If you think inflation will be higher than breakeven, buy TIPS. If you're right, you'll outperform nominals.

Me?

My LMP ladder alternates rungs between TIPS and STRIPS.
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Re: Why isnt everyone buying TIPS?

Post by BJJ_GUY »

watchnerd wrote: Thu May 06, 2021 10:37 pm
BJJ_GUY wrote: Thu May 06, 2021 9:35 pm

Inflation has gone up, not down over the last 40 years. This is kind of a silly statement if you think about what you said. 40 years ago, how much was a Big Mac, gallon of gas, home price, new car etc.?
Your example just means inflation exists.

Inflation could have been just 1% per year over the last 40 years and things would still be more expensive than they were 40 years ago.

The *rate* of consumer inflation now isn't even close to what it was decades ago.
The quote of mine that you are referencing was a direct reply to someone who said inflation has been declining for 40 years. So, indeed, you are correct to point on that what I was saying is that inflation has been positive.

I think the CPI shows inflation just over 2.5% annually over the last 20 years.

Either way, I think you missed the comment to which I was responding, because I wasn't really making much of a point beyond the idea that inflation hasn't been dealing for 4 decades.
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Re: Why isnt everyone buying TIPS?

Post by CuriousTacos »

BJJ_GUY wrote: Thu May 06, 2021 11:10 pm
watchnerd wrote: Thu May 06, 2021 10:37 pm
BJJ_GUY wrote: Thu May 06, 2021 9:35 pm

Inflation has gone up, not down over the last 40 years. This is kind of a silly statement if you think about what you said. 40 years ago, how much was a Big Mac, gallon of gas, home price, new car etc.?
Your example just means inflation exists.

Inflation could have been just 1% per year over the last 40 years and things would still be more expensive than they were 40 years ago.

The *rate* of consumer inflation now isn't even close to what it was decades ago.
The quote of mine that you are referencing was a direct reply to someone who said inflation has been declining for 40 years. So, indeed, you are correct to point on that what I was saying is that inflation has been positive.

I think the CPI shows inflation just over 2.5% annually over the last 20 years.

Either way, I think you missed the comment to which I was responding, because I wasn't really making much of a point beyond the idea that inflation hasn't been dealing for 4 decades.
You were disagreeing with someone who said inflation has been declining, but you misunderstood what that person meant. "Inflation" typically means the annual percent change in prices from the prior year. That poster was saying (correctly) that the rate of inflation has slowed- it was over 10% in the early 80s, and is down to about 2% now. So, yes, prices are still increasing, but not as fast as they were 40 years ago.

I think you're using "inflation" in a way that most people would use "price index". The various price indices (i.e. CPI) have not declined for any significant amount of time over the last 40 years.
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Re: Why isnt everyone buying TIPS?

Post by FIREchief »

Turkishcoffee wrote: Wed May 05, 2021 12:15 pm If I fear inflation, why wouldnt I pile all my non equities into TIPS?
Because I already have?? 8-) And it's not because I fear inflation. It's because I want the freedom to not care about inflation.
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Re: Why isnt everyone buying TIPS?

Post by watchnerd »

BJJ_GUY wrote: Thu May 06, 2021 11:10 pm
The quote of mine that you are referencing was a direct reply to someone who said inflation has been declining for 40 years.
Yes, inflation has been declining for 40 years.

In 1979, inflation was about 13%

Now it's about 2%.

That's a pretty big decline in inflation.

USA green, EU red.

See graph.

Source: https://www.worlddata.info/america/usa/ ... -rates.php

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