Can someone explain TIPS to me please?

[lsbcal]

Originally Posted by cute fuzzy bunny

...Look at the high inflation periods in the historic data. A mix of 25-35% value stocks and the rest plain old bonds offered inflation protection as good or better than a 100% tips portfolio.

My withdrawal rate is too high to consider 100% TIPS unless they yielded north of 5% -- we'll never get there. On the old FIRECalc I ran a simulation with a 60/40 portfolio comparing 2.2% TIPS to 5 yr Treasuries for the 40% part of it. The TIPS portfolio did better. I don't have the details of the runs and you cannot select TIPS in the newer FIRECalc unfortunately. Anyway that convinces me that when TIPS are available at higher yields I'll load up. Might sell them though if the rates decline dramatically like they did this January and then move to short term treasuries or even money market funds.

[cute fuzzy bunny]

Problem you had there was comparing tips to 5 year bonds. A broad based tips index generally runs closer to ~10 years duration and contains a lot of long term bonds.

A better index to compare to would be intermediate or long term treasuries.

Most of the real TIPS aficionados seem to agree that somewhere above 2.5-2.75% yield you should start buying tips and below that level you should dump them in favor of other options.

The other problem with TIPS in long range scenario calculators is that they havent been around for very long. While you could fake a buy-and-hold-to-maturity scenario, you cant fake the rebalancing trades. TIPS can be pretty volatile in the secondary market.

If new TIPS were coming along with 3.xx%+ rates, I'd buy some. At this price point...no.

[lsbcal]

CFB, I would not buy long term treasuries as they would get clobbered by inflation and studies have shown that you don't get paid to own them. So it's better to stick with intermediate term which is why I chose 5yr treasuries in FIRECalc (and also the tool has limited choices).

My own approach is to buy TIPS above about 2.4% and to plan to hold unless they drop to very low level like maybe 1.5%. I don't buy so much that I cannot hold to maturity and I do not plan on trying to rebalance them. Recently I've loaded up on the 20yr TIPS. If they go above 3% I may not be able to buy a lot more as I'll already have a bunch. But I'll just have to be satisfied with a better then average historic real rate yield that is guarenteed.

Basically I'm following the approach Larry Swedroe has discussed in his bond book (Appendix B) plus several discussions on the Boglehead site.

[cute fuzzy bunny]

I understand your reasoning, its just that you've compared apples to oranges. Five years is a little low on the range of intermediate term and you arent comparing 5 year tips to those.

I thought the last auction of 5 year tips was paying ~.625%?

Maybe my recollections of readings over at the bogleheads site are weak but I could have sworn I've seen several threads where they stated a threshold at ~2.5%...buy above and sell below. Havent read Swedroes book but I know he posts there.

[cute fuzzy bunny]

Bogleheads :: View topic - 20yr TIPS @ 2.3%, good deal?

Most recent discussion. Doesnt seem to be much consensus as to what point to buy/sell. Seems to vary between 2.2 and 2.8%. Seems like plenty are buying.

[lsbcal]

Originally Posted by cute fuzzy bunny

I understand your reasoning, its just that you've compared apples to oranges. Five years is a little low on the range of intermediate term and you arent comparing 5 year tips to those.

I thought the last auction of 5 year tips was paying ~.625%?

Yes they are different maturities. What I'm saying is that I would not go longer in treasuries then 5yrs because of the inflation risk and historical return for the risk of extending out in nominal treasuries is not good. With TIPS you do not have that inflation risk so can extend out and capture the longer durations. So I'm comparing what is possible for me to invest in: shorter duration apples or longer duration oranges. Yep, they are different fruits but I need to buy some fruit for my basket . You could choose to buy some 5yr Treasuries and some 20yr TIPS too.

See Bloomberg for the current rates:
Bloomberg.com: Government Bonds

P.S. The coupon on the 5yr is 0.625 but the real rate today for this is 1.84%.

[cute fuzzy bunny]

You know that fruity basket thing is going to come back on you some day, hmm?

[lsbcal]

Some people think I'm a little fruity already. This whole economic mess is making me fruitier.

[Gearhead Jim]

The yield curve graph on the link lsbcal posted, shows 20 yr Treasuries at about 4.03%, while 20 year TIPS are priced to yield 2.53%. Does that mean 20 yr TIPS will beat 20 yr Treasuries if the inflation rate averages above 1.50% (4.03 - 2.53 = 1.50) and you hold to maturity?
Sounds like a sure bet to me, if you are looking to add to your bond portfolio only.

[LOL!]

And another link with a great link on inflation-linked bonds: Bogleheads :: View topic - TC on TIPS

This links to the recent TIAA-CREF 3-page paper on the subject.

[haha]

Originally Posted by LOL!

And another link with a great link on inflation-linked bonds: Bogleheads :: View topic - TC on TIPS

This links to the recent TIAA-CREF 3-page paper on the subject.

I read this. Interesting factoid therein-in the ten years 1997-2007, the average TIPS return from coupon alone was 3.25%.

That gave a pretty good headstart, and allowed more than a little of that handsome market adjustment return to happen.

Another thing- I haven't tried to work this out rigorously, but it appears to me that if someone is willing and able to withdraw only the coupon (of 2.75% or whatever), then these are in fact AAA long term retiree investments. But any liquidating schemes present more than a few problems. Rising real interest rates would be one.

Ha

[cute fuzzy bunny]

Originally Posted by haha

That gave a pretty good headstart

Ding ding ding!

The high coupon rates that we'll likely never see again also gave a big boost to the NAV's for anyone who unloaded them on the secondary market.

[clifp]

Originally Posted by cute fuzzy bunny

Maybe my recollections of readings over at the bogleheads site are weak but I could have sworn I've seen several threads where they stated a threshold at ~2.5%...buy above and sell below. Havent read Swedroes book but I know he posts there.

That's my criteria also, when TIPs and EE bonds were paying above 3% I was happy buyer, when they dropped down to 1% I was happy seller. (Although, in hindsight buying banks stocks and ISM/OSM with the proceeds was really stupid).

At the 2.5% level I am sort of indifferent they don't really support a 4% withdrawal at that level, more like a 3-3.5% level. While I could survive at 3%, I think after this years market that means many years of additional work for the average young dreamer.

[lsbcal]

Originally Posted by clifp

...At the 2.5% level I am sort of indifferent they don't really support a 4% withdrawal at that level, more like a 3-3.5% level. While I could survive at 3%, I think after this years market that means many years of additional work for the average young dreamer.

The question is how are you going to get a real return of 3-3.5%. If you find a nice way with your FI allocation let me know! If you have, for instance, an AA that's 50/50 and your real returns are 2.5% bonds (guarenteed with TIPS) and 5.5% stocks (a bit dicey and time variable but possible) then doesn't that get you to your 4% real?

BTW, there is a good on-going thread at Bogleheads on TIPS (started by yours truely):
Bogleheads :: View topic - 20yr TIPS @ 2.3%, good deal?

[cute fuzzy bunny]

Smirk. I was going to tell you that this "Les" guy over there seemed to have plenty of good opinions about tips and when to buy.

[lsbcal]

Originally Posted by cute fuzzy bunny

Smirk. I was going to tell you that this "Les" guy over there seemed to have plenty of good opinions about tips and when to buy.

Yes, he has some really good ideas doesn't he .

To give credit though, I just started the thread and there are plenty of good responses including some from Larry Swedroe.

[clifp]

Originally Posted by lsbcal

The question is how are you going to get a real return of 3-3.5%. If you find a nice way with your FI allocation let me know!?

A few days ago I didn't have a good answer to that question.
Now I just need 50 billion or so, a reputation of a brilliant investor, and then I loan money to GE at 10% interest, with an upside equity kicker, like Warren Buffett.

Right now I am just chasing yield down the black hole of declining markets, while watching my "gee I thought there were pretty safe investments" like OSM/ISM with real yield of 4+% when I bought them, turn into toxic waste.

When I do find these 3.5% real return investments I let you know. Don't hold your breath

[oldman]

Originally Posted by Bikerdude

I'm in the pro Tips camp but I only buy individual Tips not funds.

The face value of the TIPS bond will not be reduced due to deflation, however any gains will disappear as deflation continues/increases. In a deflationary economy (very rare here, think 1930's) any money you do have is worth more so it could be a wash as far as purchasing power goes.

I would worry more about the government fudging the infaltion numbers more than deflation.

I went to Fidelity and checked for TIPS in fixed income. It brought up a number of bonds I have trouble understanding. But I'm more interested in individual bonds. So how do you select the bond other than by maturity? I selected one and the price was about $127.

[lsbcal]

TIPS are very complex bonds in my opinion. To understand them you might start with the Bogleheads site. There may be a FAQ there or try the Treasury Direct site. You need to recognize the risks involved. Right now the real yields are very high versus historical averages and so they are probably excellent investments. Just my opinion though. If you don't understand the bond characteristics then buy a fund like VIPSX.