TIPS Bonds Explained | US Treasury Inflation Protected Securities
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- Опубликовано: 6 окт 2024
- TIPS Bonds Explained! Today I talk about TIPS for a hedge against inflation. TIPS stands for US Treasury Inflation Protected Securities and are a safer way, at least when it comes to protecting your original investment, to invest in a rising inflationary environment compared to other, more volatile options. And now that the stock market has gotten more jittery due to inflation concerns and potential interest rate hikes, you might be looking at TIPS as an option to help preserve your capital. This video talks about and explains what TIPS are, goes over the basics of traditional bonds (including their performance during inflation) and demonstrates how TIPS are different, when you might want to hold TIPS and how/where you can buy TIPS bonds. If you're looking for strategies and ways to invest against inflation, particularly in 2021 as we come out of the pandemic, this video gives you a solid option to consider. And if you're simply asking "Should I buy TIPS bonds?", hopefully this video will help you in coming to a decision.
To see my video comparing my personal experience with TIPS and I bonds, click here: • I bonds and TIPS Compared
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DISCLAIMER: MY VIDEOS ARE FOR EDUCATIONAL PURPOSES ONLY AND I AM ONLY SHARING MY PERSONAL OPINION. I AM NOT A FINANCIAL ADVISOR, THEREFORE, ANY INFORMATION PRESENTED SHOULD BE VIEWED AS HAVING AN EDUCATIONAL PURPOSE ONLY AND NOT AS FINANCIAL ADVICE. WHEN MAKING ANY FINANCIAL-RELATED DECISIONS, PLEASE DO YOUR OWN RESEARCH AND/OR CONSULT WITH A PROFESSIONAL THAT CAN PROVIDE YOU PERSONALIZED GUIDANCE.
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Thanks so much for watching---please LIKE, SUBSCRIBE and SHARE! Are YOU considering TIPS or another strategy as a hedge against inflation?
Excellent and helpful video. 😃👏👏. I plan to watch your channel given how thoughtful the content in this video is. Thank you 👍
Thank you so much for the feedback~so glad you found the video helpful. It's great to have you onboard with the channel and I hope to hear from you again! 😊
Great video, but TIPS are still confusing! When inflation goes up, so do interest rates to fight the inflation, I should think. (And anyway interest rates are so low, they can’t really go DOWN any more.) If interest rates go up, bonds go down. But if I put my fixed income money into cash or short term treasuries during inflationary times I am SURE to lose buying power. Not sure how to think about these trade-offs, or whether TIPS have been around long enough to measure how they did in different inflationary environments. And inflation is definitely here, but I didn’t predict its arrival and can’t guess whether it will keep rising or not.
Maybe I should just figure on putting a SMALL portion of my non-stock investments into TIPS, which would at least add some diversity without making any big bet on this asset I don’t really understand.
Thank you~and I agree Margaret, they can be confusing! Everything you said is correct, just remember that the TIPS principal getting adjusted is the wild card..if you think inflation will continue to rise, then the principal gets adjusted up. But if you think it will drop, then it will get adjusted down. That's the risk. By itself, inflation looks like it will continue to go up, but we know interest rates will go up at some point which could then drive inflation down. So let me tell you what I did for myself...and it's pretty much what you just suggested. I put about 20% of my cash reserves earlier in the year in to a TIPS fund, I never had invested in them before because I never worried this much about inflation. A fund is easier for liquidity and I didn't want to be tied into buying individual TIPS and then holding them to maturity. The risk with a fund is you don't have the downside protection of individual TIPS where your face value is guaranteed if deflation hits. Now as/when interest rates start to rise, I will look to start strategically reducing my position over time. I think your approach is solid is starting small, that's basically what I did. Best of luck in making the decision you feel is best for yourself 😊
@@HealthyWealthyandWise I've been putting 36 percent of my 401k funds into a TIPS fund for two years now. I hope it pays off, but like you, I do get concerned about the safety net not being there on the down side if deflation occurs. I suspect it will be a limited loss and less concerned if I was in a corporate bond with greater risks. Great explanation on how TIPS work by the way!!!!
@@johnsanders3877 Thanks for sharing John and I'm glad you found the video helpful. So far, I haven't done anything with mine, but I'll watch for evidence of inflation really beginning to slow down fast and then start taking out some here and there. Like you, I'm not too worried, mostly because in the year or so I've had it, the quarterly payouts significantly outpaced any other safer place I could have invested...and I just don't see the fund price cratering, so even if it goes down some, I'm sure I'll still come out ahead. And you're probably even more ahead since you've been in your fund for 2 years so even a bit of drop in the value of the fund shares should leave you overall much better than if you were in a market money or a savings account.
That's what I did. I bought a little bit of Tips just to get a firsthand look at how they work.
Inflation inflation inflation!!! Ahhhhhhhhhh!! This is a great video. Thanks Kevmeister
Thanks Flimsy! I am not usually a bond/treasury investor myself, but I don't see how inflation won't be an issue this year, so I took a portion of my money market funds (that's getting .000....1% interest or whatever miniscule interest there is, lol) and put it in a TIPS ETF...we'll see how it goes!
Am I looking at this correctly? During a time where inflation goes up, this is a good time to buy TIPS?
Typically...although it tends to be better if you buy it before the inflation hits or when it shows on the CPI--which can be hard to predict! Because when the CPI goes up, the principle is adjusted (not the rate)...so if inflation is already elevated and you might expect it to go down at the time you buy it, then the principle could get adjusted down leaving your returns less (You'll still get returns, it will just be lower as the rate is applied to the decreased principle). You are protected on the downside to never lose your original investment (principle) if you hold to maturity, but then the risk is that other bonds or stocks could outperform it. Little confusing, but I hope this helps.
Your explanation is very clear and well organised, well done! I had a quick glance at some TIPS ETFs, eg SCHP, TIP, their prices are going down despite the rising interest rate, how shall we interpret this trend?
Thank you! And you have a great question. I would interpret it that investors are considering the higher interest rates will start to lower inflation, which in turn will lower the CPI (measure of inflation that TIPS adjusts on), which will then adjust the principal of a TIPS lower. Remember that investors are investing in the ETF, not an actual TIPS, so the ETF shares could begin to trade lower if investors feel that the underlying value of the TIPS will start to go down as as inflation goes down, which tends to happen when the Fed raises interest rate. So some of that's speculation based on the expectations of multiple interest rate hikes this year. Also, you want to look at the dividends that come from the ETF, if they're high enough, it still might be a net positive for you even if the ETF share price is down some.
Thanks Kevin. Good info. 👍and subscribed.
Awesome Ken...thank you and glad to have you onboard! Sorry it took so long to reply, but I've been super busy as of late
Thanks Kevin. Very interesting ... love this video
Thank you YR! And the video I know you're waiting for will be out later today 😊
Great info as always
Thank you so much! Really appreciate you taking the time to say this 😊
Great video thank you
Can you recommend any ETF’S? I’m not trusting any one Stock at this time.
I get that, that's actually what I'm mostly doing right now myself...I've picked up a couple of tech stocks that have been down that I liked, but mostly have been adding to ETFs this year because everything seems pricey and therefore risky to me. As far as recommending any ETFs, as a general rule that I hold myself to, I don't recommend anything on the channel, but I will tell you I've invested in Vanguard mutual funds and ETFs for about 25 years, particularly because of their low costs. Don't know if they're still the best, but I've been very happy with them. Nothing super exciting, but my 4 biggest ETFs with them are split between growth (VUG, MGK) and Value (VTV, VYM). I also have some (but significantly less) money in international growth, small cap value, utilities, and financials funds. And most recently, and related to this video, I invested in a TIPS ETF (VTIP). Anyways, not saying you should get any of these, but just sharing what I've done.
What concerned me was that you said you get taxed on the increases? So, if they then tank, you do get your principle back - but - you're out the taxes you paid. So, because of paying taxes when things are good, you could end up losing a portion of your principle, after all. Am I understanding this correctly?
That is a great question! I'm not a tax expert, but my understanding would be that in a year where deflation were to occur (after a years of gains per your scenario), where it reduces the par value of TIPS for a particular year, you may be able to use it to offset other income gains, just like using a capital loss to offset capital gains. Again, that's my understanding however I would recommend contacting a tax professional for definitive answer.
If you gave an example using real inflation numbers, that would be helpful. Thanks
Thanks for the suggestion...that might be good for a follow-up video
Nice video. Do you think TIPS would be a good place to store some of your emergency fund since they have the potential for greater interest than a bank?
I don't think so because emergency money should be highly liquid -- meaning you can get your hands on it quickly. You'd have to sell your bonds to liquidate. Perhaps buying short, medium, and longer term TIPs would allow you to access the short-term bond money for emergencies. Keep some money in cash and in actual gold ingots. Gold is always very liquid (there is always a market for it).
As an individual or corporation can you buy $10,000.00 in I Bonds each year?
Yes per TreasuryDirect: treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibuy.htm
Do you think the 10 or even the 20 year US Treasury will reach 5% or higher by end of 2022? I'm 58 and am going to sell my rentals and put all my life savings into Treasury bonds once they hit 5% for the 10 or 20 year. I net 5 to 7 % on my rental homes but I am over being a landlord and a 5% Treasury for doing nothing nets me just a few hundred dollars less then rentals. My thought is for 10 or 20 years I live off the interest. When I reach 68 or 78 then I get my principal back and live the last decade by taking large yearly sum from my principal and die with zero. Your thoughts?
Sorry, I have a very literal way of thinking and possibly I'm misunderstanding. Inflation and the rate of change in the CPI seems to be conflated. If inflation remains constant at ~8%, (which means the CPI is increased ~8%) does that mean the principal on a TIPS remains unchanged because inflation did not change? It would seem to me that if inflation remains constant at ~8% then the principal should be increased at ~8% at each revaluation.
Which do you like better: TIPS or ibonds? They both help protect against inflation.
Thanks for the question...I like them both in this environment. The one issue I with I bonds are the fact that you can't cash them out for the first 12 month you own them...so, if you are considering putting your emergency funds in them like you mentioned in your other question, you would want to consider them not being liquid for the first 12 months if you did have an emergency...which I hope you don't!. Having said that, they would far outpace what you would get have your money sitting in a bank. From November of last year through this May, you're guaranteed to get over 7% on them each month, so that's pretty good considering what savings rates are. I personally have a TiPS ETF mainly for the liquidity factor, but I might be more hesitant to buy into one now as interest rates will be going up which might pressure each share down of the ETF....as I said in the video, the downside of the TIPS ETF is that you're not guaranteed to not lose your principal.
@@HealthyWealthyandWise I like the 7.12 % interest, (or more) on I bonds
@@1linkbelt Totally agree...and the next update will keep that rate at least that high and probably higher I would think
Do you think is too late to buy TIPS ETF?
Great question~I can't say for sure, but I don't think it is too late. And I say that because I bought into one and am not thinking I need to sell. The issue you'll have with an ETF is that fund price will vary some based on investors perceptions, so they might be priced high. But you'll still get the dividends which could counter any slight drop in the ETF price based on market sentiment. IMO, because the Fed is getting more aggressive in talking about inflation, it's likely going to be around for some time, so I don't think it's too late yet.
@@HealthyWealthyandWise thank you for responding my question. I also have JPST and VNQ to diversify my basket. Do you think these options also help to keep the balance?
@@julianalee4056 Sure thing! They definitely both help to diversify. JPST probably isn't netting you much right now, but if everything gets choppy in the market, it'll preserve what you have. VNQ obviously gives you some real estate exposure which helps with more diversification. For your specific situation, I don't know what's optimal for you (or anyone!), but you are getting some diversification which I think is what you're looking for: more upside VNQ, more stability with JPST
Money under the mattress would probably give me more interest.
I get what you're saying! I do have to say it's worth looking at I-bonds right now...it looks like they are going to pay out at over 9% rate for the next six months once it's announced in May. The main negative thing with them is that you can't sell the bond until you've held it for at least 1 year...so if you might need your money before that, you wouldn't want to tie it up in that. I've been so busy as of late, but I'm hoping to find time to put out a video on this for anyone that might want more info. on this.
@@HealthyWealthyandWise The main negative is that you're still limited to a $10k pittance when you have 7-figures sitting idly by.
@@joseargonza7984 Totally agree Jose...I actually mentioned this in my new video on I bonds...it's not a complete solution for inflation if you have a considerable amount of capital.
TIPS ETF's navs have been tanking over the past year even though inflation has been going up, yet you are saying TIPS NAV goes up when inflation goes up which doesnt make any sense. Securities like this have their NAV decrease and interest rate go up when interest rates are rising, and their NAV increases and interest rate decreases when interest rates are rising.
True, however ETFs are a different animal than a standalone bond in that investors are trading these on expectations on where inflation and interest rates are going (interest rates are going up so investors are expecting inflation rates to go down and pricing the ETF that way) whereas the standalone TIPS will keep adjusting its principle along the way (up or down) keeping the same interest rate until maturity