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TIPS: Actual bonds vs. ETF or fund?
Old 06-11-2021, 05:51 AM   #1
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TIPS: Actual bonds vs. ETF or fund?

I've decided to slide 50K of my "cash" to TIPS (our goal is to have 2 years salary saved in cash, and due to a RE sale, we have 3, so I'm ok taking the extra risk even though it's part of my "cash" hoard). Does anyone have any strong opinion on whether I should go straight to treasury direct and buy the individual bonds vs. just slide 50K into the vanguard mutual fund admiral shares?? I've googled it and mostly see the usual: auction vs. "at will", having to wait for auction to reinvest dividends, etc. but also of course the main attraction of indie bonds is that if you just hold full term, you get 100% back.

Thank you for any thoughts!
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Old 06-11-2021, 06:33 AM   #2
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I’m no expert but here’s a couple of relevant Google results:

https://www.thebalance.com/pros-and-...-funds-2466782
https://obliviousinvestor.com/indivi...vs-tips-funds/
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Old 06-11-2021, 06:42 AM   #3
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We have funds in Vanguard VTSAX Admiral Shares (12.38% YTD, 43.97% 1 Yr, 18.02% 3 Yr, 17.36% 5 Yr, 14.2% 10 Yr) and just not aware of any bonds with similar results.



After early retirement 2 years ago have greatly reduced bonds in our investment package to about 55/45 and improved our investment returns to above 10%. We only take a 3% investment withdrawal at the moment which keeps our investment and cash growing as we start to travel again........finally.


Good luck.
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Old 06-11-2021, 07:25 AM   #4
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I'm invested in VG TIPS mutual funds (VIPSX and VTAPX) for convenience and simplicity. The MFs will behave a little differently from buying individual TIPS but the net result is the same, minus the expense drag on the MFs.
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Old 06-11-2021, 09:51 AM   #5
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We bought TIPS directly. Life's a tradeoff; here are the tradeoffs I see:

1) Often people buy MFs (including ETFs, which are mutual funds BTW) for diversification. This is unnecessary for govvies, agencies, and TIPS because there is essentially no risk of default.

2) Often people buy MFs in order to hold bonds of various maturities. IMO this is much less of an issue with TIPS because yield curves are pretty flat. TIPS yield curves do not have to factor in a consensus inflation risk like traditional govvies and agencies do.

3) Often people buy MFs because they perceive that this is simpler than buying individual bonds. This is really not true. A call to the Bond Desk at Schwab or Fido should slay this perceived monster.

4) Expense ratios have come down on TIPS MFs but they still are not zero.

5) MFs have the advantage of easy reinvestment. As a practical matter it would take a pretty big holding of individual TIPS before the semiannual interest payments would be big enough to reinvest.

So, what did we do?

In the winter of 2006/2007 we bought a slug of the 2s of 2026 into our IRAs. This was the lowest coupon (minimum reinvestment risk) and the longest (minimum hassle) issue we could get at the time. From the beginning this was a buy and hold plan. We view it as we view fire insurance. We gave up a little yield in exchange for the inflation protection. That was/is the insurance premium. Paying a fire insurance premium does not make us wish our house burns down, nor does paying an inflation protection premium make us wish for high inflation.

One issue I see with TIPS: I think it is a go-big-or-go-home kind of investment. A few percent in a portfolio is not likely to make a difference if the SHTF. In our case, we put enough into TIPS to provide at least 5 years of needed cash flow during a major inflation event and recovery. Remember, too, inflation is a loss forever, quite unlike dips in the stock market that are always (last 100+ years anyway) followed by recoveries.
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Old 06-11-2021, 10:05 AM   #6
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I'm also no expert but since the OP seems to be looking for a place to park cash my thoughts were (a) make sure to max out iBond purchases first since they're far superior to current TIPS of any duration; (b) perhaps put the rest into VTAPX/VTIP which has short-duration TIPS and certainly seems likely to continue to trounce MM fund returns as long as inflation is running hot.
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Old 06-11-2021, 10:18 AM   #7
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Quote:
Originally Posted by kevink View Post
... make sure to max out iBond purchases first since they're far superior to current TIPS of any duration ...
Excellent point. I always forget about I-Bonds because the purchase limits are too low to be of use to us. But anyone starting to build an inflation-protection strategy would be well adivsed to buy I-Bonds to the limit before wading into TIPS.
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Old 06-11-2021, 11:25 AM   #8
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If you know you won't need it in the next year, as a couple, you can sock away $20k now and $20k more in January 2022 in I-Bonds which currently have a >3% state tax-free interest rate and no fees. The rest you can put in Tips or some shorter-term treasury bond fund.
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Old 06-11-2021, 11:28 AM   #9
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Thank you for the feedback, notably the iBond. I just read about those and had already forgotten!
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Old 06-11-2021, 11:49 AM   #10
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Also while on the iBonds topic here’s a good article that just came my way today on how to double your annual purchase limit using a trust:

http://https://thefinancebuff.com/bu...ect-trust.html
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Old 06-11-2021, 12:07 PM   #11
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their site is down for now, but I'll google that.
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Old 06-11-2021, 01:06 PM   #12
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We usually buy individual bonds for our IRAs for the guaranteed return of principal reason, though we own some funds in 401K plans where individual bonds are not an option.
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Old 06-11-2021, 02:43 PM   #13
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I'm thinking we can double ours because both my wife and I own one LLC each, and that's one of the ways you can buy. Waiting to hear back from my FP on that one!
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