TIPS For Non-Retired?

[Marcretire]

I'm looking at the option of TIPS for my IRA, but, wonder, as someone still working toward retiring one day, if TIPS are appropriate over, say, a total bond index fund. Given the modest inflation rate, the interest on the TIPS bonds would be fairly modest, too,and, so, I wonder if a total bond index fund might be better as its return can be higher. I guess I view TIPS as more of a stable source of an income stream in retirement rather than an effective instrument for growing a portfolio. Would appreciate your thoughts. Thanks.

 

[FIREd]

I have read recently (Swedroe?) that actually TIPS can be a good complement to plain vanilla bonds / bond funds. In a low inflation environment the regular bonds would do better and in a high inflation environment, the TIPS would take the lead. I think that if you have some allocation to fixed income in your portfolio, TIPS are worthy of consideration no matter what your age.

 

[ziggy29]

I have more than half of my bond allocation in TIPS. I have a feeling that despite the current environment, I'd rather have a locked-in 2-3% real return on my bonds than a nominal 5% or so, because I see all these emergency measures as being ultimately inflationary.

 

[Maurice]

What Ziggy said.

 

[Bimmerbill]

My finance instructor in my MBA program really liked TIPS. He would take the train down to Boston MA and buy them. I think it's 10K a pop. Also had some ETFs (I think) that let him buy lower amounts.

 

[joesxm3]

I am just reading the Swedroe book on Alternative Investments and he says that TIPS are a very good diversifier and about 50% of your bonds should be in TIPS.

Great book - you should get and read it.

 

[Maurice]

All my bonds are now inflation linked. (TIPS and iBonds)

 

[WilliamG]

All our short term bonds are currently in CDs and IBonds. IBonds are definitely hold money though as they are back from days of 3+% real rate. Thinking about adding 5 year TIPS purchased at auction to CD ladder in IRA. Don't want to go out further than 5 years; is this too short for a TIP?

 

[Maurice]

The 5 year is yielding 1.29% over CPI, whereas the 20 year was auctioned at 2.5% on Monday (although the yield as since dropped a bit). Personally I view inflation as a medium term risk, not a short term, so in my mind the 5 year is less interesting than the 20.

That's just one man's opinion.

I should add too that I'm only 40 so I view a 20 year horizon differently than, say, someone in their late 50s might.

 

[Maurice]

I thought I'd bump this -

Any other thoughts on 5 yr TIPS?

 

[brewer12345]

I thought I'd bump this -

Any other thoughts on 5 yr TIPS?

I'd say that 5 year tips bought at auction are about as low risk an investment as you can possibly make. Unfortunately, they have a return that reflects that low risk level.

 

[bamsphd]

I thought I'd bump this -

Any other thoughts on 5 yr TIPS?

I have three rungs finished in my five year TIPS ladder. I put 4% of my portfolio into a purchase at auction each year. It is my sleep at night money. I simply don't know of a safer alternative investment than a TIPS purchased at auction and held to maturity.

I expect to lose a little money after taxes. Especially if we have hyperinflation. However, it is primarily insurance against calamity in my mind. Knowing I should not have to sell any stocks for 5+ years also lets me comfortably run with a higher equity percentage in my asset allocation. Hopefully, that will give me higher long-term returns to compensate for the expected under performance of my TIPS ladder.

 

[TromboneAl]

Threads like this are causing me to reconsider inflation-protected bonds.

What are the pros/cons of using an inflation protect bond fund (such as the Vanguard Inflation-Protected Securities Fund) as opposed to TIPS?

 

[FIRE'd@51]

What are the pros/cons of using an inflation protect bond fund (such as the Vanguard Inflation-Protected Securities Fund) as opposed to TIPS?

The obvious negative of VIPSX is the 20 basis point ER, which is a significant portion of the real (inflation-adjusted) yield. However, if you are holding these in a taxable account, you will be better off tax-wise, since VIPSX pays out the inflation component of the return, so there is no taxable "phantom" interest.

If you are holding them in a tax-deferred account, I think you will be better off buying TIPS at auction, and holding them until maturity, whereby you avoid the ER.

 

[Stevewc]

I've been buying TIPS at auction, new issues. I probably should have bought in secondary market but being my first couple auctions I decided not to.
I'm also giving thought to opening a VIPSX account at the minimum amount. My thoughts are to have a place to reinvest all the proceeds from the auction bought bonds to keep everything compounding. The plan is to reinvest everything that shows up in my sweep account until I need to actually start using the money as income. What do you folks think about that as a plan? Pro & con ?
Steve

 

[haha]

I've been buying TIPS at auction, new issues. I probably should have bought in secondary market but being my first couple auctions I decided not to.
I'm also giving thought to opening a VIPSX account at the minimum amount. My thoughts are to have a place to reinvest all the proceeds from the auction bought bonds to keep everything compounding. The plan is to reinvest everything that shows up in my sweep account until I need to actually start using the money as income. What do you folks think about that as a plan? Pro & con ?
Steve

Seems like a sensible plan, given that you like TIPS at or near current prices.

Ha

 

[Maurice]

That could work. You could also use the coupons to buy more in the secondary market. Another option would be to roll the coupon payment into new 10 or 20-yr TIPS, since they are both auctioned around the same time the coupon payments come in.

 

[tjhoo]

If interest rates rise and we have significant inflation, how would TIPS/TIPS fund do compared to tot bond market?
-rising interest rates-->TIPS worse b/c longer duration
-inflation-->TIPS better

which force wins here?

 

[randy082054]

Threads like this are causing me to reconsider inflation-protected bonds.

What are the pros/cons of using an inflation protect bond fund (such as the Vanguard Inflation-Protected Securities Fund) as opposed to TIPS?

To me, the most important advantage to owning individual TIPS vs the fund is that the individual bonds have maturity dates...at the end of their term, you know what you're going to get. The fund will move up & down in price like any other fund, and there's no guarantee what your investment will be worth at the end of the rainbow.
I am 5 years out from planned retirement & heavily invested in individual TIPS. Google Zvi Bodie & listen to some of the available videoed interviews & forums he's participated in...they were very enlightening for me.

 

[Stevewc]

That could work. You could also use the coupons to buy more in the secondary market. Another option would be to roll the coupon payment into new 10 or 20-yr TIPS, since they are both auctioned around the same time the coupon payments come in.

The biggest thing that has me considering this technique is the fact that vanguard requires me to buy a minimum of 10 bonds ($10,000) if purchased online, which is the only way I can buy them at no cost through their brokerage service. You/I can buy less than 10 if assisted by a rep. but there is a cost for that unless you are flagship. Which every time you buy tips through the brokerage it actually lowers the amount of money vanguard counts toward the money calculated for your eligibility to be flagship. I think fidelity will let you buy at no cost under all circumstances. I expect vanguard to start matching fidelity at any time now though. I'm sure they are getting complaints about this.
Steve