<p>These securities were mentioned in another thread, and several questions come to mind.</p>
<p>If you bought TIPS now you would receive a return slightly less than inflation?</p>
<p>Some of the returns on TIPS over the last few years are price appreciation on the securities as buyers paid up? Several years ago, returns built into the tips were inflation, plus a premium. This has led to capital gains on TIPS as the premium has gone away?</p>
<p>If inflation rises to 7 percent in a year, you will still make close to 7
percent on inflation bonds purchased today? </p>
<p>Nice attempt to get some information from people on this, but either nobody knows or is interested. Informative link, though.</p>
<p>I do think there would be far more interest in this thread if you had changed the P in your title to a T.</p>
<p>I am trying to figure out if I should throw a bunch of money I have in cash into the Vanguard Inflation adjusted securites, I guess those are TIPS. I cashed in half my portfolio around Nov 6th, in preparation for the potential crash to come, with all the bickering ahead. Now I can’t move back into those funds for awhile, but I can move them into TIPS, which could be better than sitting in a cash account. Ideas on the wisdom of this?</p>
<p>“I do think there would be far more interest in this thread if you had changed the P in your title to a T.”</p>
<p>Lol</p>
<p>I have never invested in TIPS. This may be hard to believe, but I try to form opinions on stuff I know about. :)</p>
<p>I looked at your fund and the returns of 6 percent a year are higher than inflation. I want to know if that is because buyers have flocked to tips and other bonds. I want to know if some of that 6 percent can be reversed even if inflation increases slightly.</p>
<p>One of the links I posted shows that years ago the bonds sold with an inflation kicker plus a few extra percent. You would receive more than inflation for those bonds. Lately, people are paying up for these bonds and are willing to accept a little less than inflation. (people have been paying up for all treasuries).</p>
<p>I like the product and if inflation goes crazy it can help a portfolio, but I want to know
more about how this product actually moves in price. This week, interest rates have risen a litttle bit and Bond prices have dropped. I think etfs that have invested in Tips have dropped slightly, not as much as regular bonds. My guess is that mutual funds that invest in tips have also
dropped a little in price.</p>
<p>I like the product, but I want to know more.
Here is the real kicker for me…might be a little over your head…i can’t fly a plane so you have me there. :)</p>
<p>These tips used to pay Around 3 percent plus inflation…now the tips pay slightly less than inflation.</p>
<p>What would happen to tips that already exist if new tips started paying more than inflation again? Would existing tips drop slightly in price? How much?</p>
<p>You are not going to lose a lot of money. Don’t get nervous. I may be off base. I try to know what I am doing before I put money in something. I do get sloppy once in awhile and I get kicked in the butt. If inflation increases you should make money. I want to know how tips work.</p>
<p>We have a friend of my husband’s who trades our Roth accounts. Did a great job the first year (70% return), but not as good since. Better than the s&p, though. He doesn’t advise. Otherwise, all of our stuff is in Vanguard, no advisor. Really don’t know anyone we trust too much, and we should learn ourselves, but we are too lazy. Just dollar cost average, for the most part, until we get scared (obviously, a big mistake).</p>
<p>Our fund has dropped a bit this week, you are right. Of course, the big question is…when will inflation start to rise? Seems like we should have been hammered by now with inflation, but we haven’t.</p>
<p>I think that was in 2000, the first year we gave him money. Unfortunately, it was a return on only about 13K. We’ve only given him another 16K or so since then, and he’s turned it into 210K. Not 70% each year, but pretty darn good. He got asked to work for a hedge fund, but turned it down. We do trust him, as he was my husband’s best friend and really a top notch guy, but he’s got his own system and really doesn’t advise. Maybe we should ask him to trade our Vanguard stuff, but I suspect he’ll say forget it!</p>
<p>Wow, he turned 29K into 210K? I would love to have someone like that! </p>
<p>One thing I heard about tips is it is not ideal to hold it in a taxable account. It’s something about paying taxes on higher interest income. I don’t quite understand the logic, just repeating what I heard.</p>
<p>“Like any bond, TIPS pricing is mainly driven by changes in the real interest rate. When real interest rates rise, TIPS fall, and vice versa. Therein lies the rub. Changes in the nominal rate can and do move TIPS pricing, even during periods of unchanging inflation. An investor buying a single bond and holding it until maturity is less likely to be concerned with these price fluctuations. However, investors in TIPS ETFs who are using these funds for more-tactical purposes are likely to take notice. Most TIPS indexes have high durations, so changes to the nominal rate have a large impact on the prices of the underlying bonds. The impact of changes in inflation expectations can be swamped by gyrations in underlying rates, which goes a long way toward explaining why broad TIPS funds exhibit such low levels of correlation with inflation. That said, shorter-duration TIPS indexes are somewhat more correlated to inflation, given their lesser degree of interest-rate sensitivity.”</p>
<p>I see folks on the boglehead site pushing TIPS all the time. Each time I say I will research them, but it usually gives me a headache and I switch to something more fun like Pinterest :-).</p>
<p>So to put your money in TIPS would be gambling on increasing inflation over time?</p>
<p>It doesn’t really matter what inflation is if the cpi reflects your costs.</p>
<p>If inflation is 3 percent and you make 3 percent, you are really even.</p>
<p>If inflation is 8 percent and you make 8 percent, you are really even.</p>
<p>Actually you want low inflation because you have to pay taxes, and taxes cut your returns below inflation. ( I am not counting on any premium you receive in addition to the inflation rate).</p>
<p>You have to pay taxes on money you won’t receive until the future. Tips should be in retirement accounts.</p>
<p>So why invest in tips? Because you do have some inflation protection. You are not investing in tips to get rich.</p>
<p>Real interest rates have declined and that has helped the return of TIPS. If real interest rates rise, that will hurt the return on TIPS.</p>
<p>If you own TIPS to maturity, you don’t own funds and etfs, than the fluctuations in tip prices are not that big a deal…</p>
<p>I never traded a TIPS professionally. I owned some 5 yr TIPS a few years back but sold them when the nominal yield reached zero. Silly me! I get a headache when I think about TIPS, and I don’t fully understand them which is why I didn’t reply to this thread earlier. They pay a coupon like every other bond, and you get your money back (par) at maturity. The difference is with TIPS, at maturity, you also get a kicker depending on what inflation has been over the life of the bond. So for a $1000 bond, if inflation was high, maybe you will get $1500 when the bond matures. That is why a bond can trade at a calculated negative interest rate. The yield is calculated based on the tiny coupon and the par value of 100, when in fact you will get something more than 100. So how does a 30 yr TIPS protect you from inflation when you only get the inflation protection in 30 years? All you get is the lousy tiny coupon until then.</p>
<p>“So how does a 30 yr TIPS protect you from inflation when you only get the inflation protection in 30 years? All you get is the lousy tiny coupon until then.”</p>
<p>Maybe not. I am reading a blurb that states the bond principal amount is adjusted every year, and the coupon is actually paid on the adjusted principal amount. Here comes my headache.</p>