Two Ways to Look at TIPS

Thinking FrogTreasury Inflation Protected Securities (TIPS) protect investors from inflation by automatically adjusting the original face value of the bond for inflation.  What I have discovered is that this feature is used for different purposes by different people.  I tend to use TIPS as a method of saving principal, but there are those who use TIPS as a “hedge” against inflation within a larger portfolio of riskier investments.

The Saver’s View

I discovered that the way that I look at TIPS is much different than the way investors tend to look at them.  Since I look at TIPS as a way to save money for the future, I’m not very concerned about my returns.  I’m just trying to preserve the returns that I have already received.  I’m also trying to make sure that all of this money is available on a specific date.   I also intend for that money to be adjusted for inflation.

The Investor’s View

When investors use TIPS, they are usually trying to make sure that if there is a downturn in other investments that are sensitive to inflation, that they own something that counteracts inflation.  This allows their portfolio to lose less money or perhaps even gain money as a result.

Very Different Intentions

These two perspectives come from two very different intentions on the part of the bond holder.  One person is trying to preserve and the other is seeking opportunity.  This is why I recommend that you divide your money into two parts as I describe in the article: Stressed about Savings? Divide and Conquer!

The Investor’s Bond Market Focus

When we look at TIPS from the perspective of an investor, we are more concerned with counteracting inflation.  This can be done by trading bonds that are sensitive to inflation.  To TIPS traders, the current market value is more interesting than the adjusted principle.  An investor is less likely to hold a TIPS to maturity.  For TIPS investors, TIPS mutual funds or ETF’s may make sense.  Trading TIPS on the secondary market may also be useful.  Bond market traders are also very interested in Yield to Maturity (YTM).  That’s because they are concerned with the return on investment.  Without a good return, it isn’t a very good opportunity.  This may not be a big deal in some investor’s minds because the inflation protection may be worth a loss in that part of their portfolio, however.

The Saver’s Inflation Protection Focus

When we look at TIPS from the preservation of savings point of view,   we aren’t interested in the market value of TIPS.  We are interested in the adjusted principle.  Since we intend to be getting this principal someday when the bond matures, that’s all we really care about.  We are more interested in seeing how well our savings is being protected, rather than seeing our yield to maturity.  As preservers of principle, we are willing to pay some or even all of our yield to make sure that we have our money when we need it.

Taxes

Taxes are a serious problem for both the investor and the saver.  This is one place where the two views tend to come together.  Taxes can make it difficult for an investor by taking money away during a successful time causing the money to not be there for a time when things aren’t so successful.  This makes swings in income even worse.

For savers, taxes can actually cause us to lose money due to inflation as I explain in the article: “Inflation Protection and Taxes.”  Since we don’t make much interest on a savings style investment, taxation can make our preservation costs unpredictable and threaten our attempts to preserve once again.

Be Careful Not to Mix Views

It can really cause you to become paralyzed as to what to do with your money if you flip back and forth between the investing and savings views of looking at TIPS.  I find that it is wise to make a conscience effort to think one way or the other when choosing what to do.   I tend to use them for savings preservation.  I see very little help out there when it comes to looking at these bonds from this perspective.  By viewing TIPS in a way that matches your needs, you will be able to make more confident decisions with them.


Copyright © Troy Taft 2020

10 Articles About Inflation Protected Bonds

Tree Under Umbrella

source: freeGraphicToday (Pixabay)

Here’s a list of 10 articles I found that provide information about Inflation Protected Bonds.  Learn more about how I Bonds and TIPS work and good reasons to use them for long-term savings.

Zvi Bodie: I Bonds Are Best for Most Investors

by ThinkAdvisor.com

This is an interview with Professor Zvi Bodie about the safest way to invest for your retirement needs.  He explains the clear benefits and why he believes that more people need to hear about this ultra-safe way to prepare for retirement.

What are I Bonds?

by www.ibonds.info

This overview of I Bonds briefly explains their benefits and how they compare to other investments in general.  It describes I Bonds as a safer investment than other kinds of investments.  It has some very helpful graphics.  I believe is the best site about I Bonds I have found.  You might want to spend some time here looking around at all it has to offer.  This site also sports an up-to-date display of the current interest rate being offered by I Bonds in the upper right hand corner and contains great quotes that people have made about the benefits of I Bonds.

Fixed income that isn’t fixed

by Fidelity Viewpoints, Fidelity Investments

This article provides a good overview of TIPS from an investment perspective.  It also has a discussion about ETFs that give smaller investors access to something called Floating Rate Loans.  I’m not a fan of those at this time, but this article does have a discussion of those as well.

Hedge Your Bets With Inflation-Linked Bonds

by Christina Granville, Investopedia

This article give some great background on the history of Inflation Linked Bonds and provides a brief overview of how they relate to investments in an investment strategy.  I tend to not care about investment strategies in that I use inflation protected bonds for long-term savings.  This article also provides the names the inflation protected bonds available in other countries.  Don’t get too concerned about the discussion about deflation.   She mentions at the end, it doesn’t apply to those of us using it for long-term savings.  I intend to address that issue in another article.

The Investment TIPS You Should Care About

by Wade Pfau on Forbes

This article is directed toward those of you who already think in investing terms.  It’s a bit technical compared to some of the other articles.  The author discusses some of the oddities regarding TIPS and their relationship to other bond investments.  He briefly discusses the idea of real and nominal yield and the difference in thinking that goes along with investing in TIPS.

TIPS: Understanding Treasury Inflation-Protected Securities

by Dan Caplinger on The Motley Fool

This is a great article that covers the history that the United States had with the bond market and inflation during the 1970s and 80s.  It does a great job of explaining the benefit and protection that TIPS provide.  The article concludes by recommending ETFs and Mutual Funds.  I’m not a huge fan of funds.  I hope to explain my viewpoint in a future article, but I have held them at times because I believe that they are some of the safest ones to hold.  This article is not very technical and a great one to read to get some background on TIPS.

Negative TIPS Yields

by Thomas Kenny at The Balance

One of the most alarming and confusing things to discover about investing in TIPS is that they can show a negative yield during certain times in the economy.  This article explains why that happens.  This is another topic I hope to make more clear in the future as well.  It’s good to note that your bank account has been giving you negative yields for several years in a row when you adjust your returns for inflation.  TIPS are just more easily exposed when this happens.  You can choose to not buy TIPS when they go negative.

Tracking Inflation and I Bonds

by TIPS Watch

This is a page on a site all about TIPS that tracks the interest rates of I Bonds.  It also explains how I Bond rates are calculated.  If you want to see the history of I Bond rates, you can see that on this tracking page.

Series I Savings Bonds

by Treasury Direct

This is the United States Treasury Department’s information on I Bonds.  You can get all of the most accurate and latest information here including the current interest rates and how they are calculated.   If you want to buy them, you are only a few clicks away.

Treasury Inflation-Protected Securities (TIPS)

by Treasury Direct

Here is the United States Treasury Departments description of TIPS.  This is where you will find the most up-to-date information on them.  It’s not that hard to understand but you may need to invest a little time reading and thinking about it.  I don’t think you need to know much about investing to understand what it said here.  You can also buy TIPS directly from this site.


Copyright © Troy Taft 2020