How to Invest in TIPS

Comments on “Tips About Treasury Inflation-Protected Securities,” by Brian Haughey, CFA, FRM, CAIA, in the November 2022 AAII Journal:

When discussing purchases of TIPS, you mention doing so through exchange-traded funds (ETFs) and directly at U.S. Treasury auctions. In addition, as with all Treasuries, there is an after-hours market reachable through most stockbrokers. For example, you could buy a previously issued 10-year TIPS with only two years remaining before maturity.
—Kendrick M. from North Carolina

The only way to invest in bonds of any type is to buy individual bonds. If you buy bond ETFs or mutual funds you are at a much greater risk of essentially a permanent loss. You have no maturity value (i.e., no principal amount or par value, meaning the face value of the bond), and you have no date when that maturity value must be paid to you.

Buying individual bonds is a learning experience, but well worth the effort. The risks associated with bond ETFs and mutual funds are the equivalent to those of investing in individual stocks: When they go down, depending on the weighted average of maturity dates, they could stay down for 10 to 15 years. Individual bond risk can be mitigated by diversification, just like individual stock risk.

Be advised that Treasury accounts on the TreasuryDirect.gov platform are a hassle to set up and using the platform isn’t intuitive, but it will be the last bank-account equivalent to fail. And a Treasury account can be set up to automatically, electronically transfer your accrued interest to your bank account.
—Michael D. from California

Good points, Michael. Treasury Direct.gov is also a great way to buy short duration Treasury bills. Even the very short ones are paying more than most savings and money market accounts, and investments can be automatically rolled over as they mature. Once your TreasuryDirect.gov account is open, it’s easy to execute this strategy. I’m now making 3% to 4% on funds that my bank still pays well below 1% on.
—Philip D. from California

Comparing the Major Indexes

Comment on “Index Fund Options for AAII’s Asset Allocation Models,” by Charles Rotblut, CFA, in the November 2022 AAII Journal:

Thank you, Charles. I’ve been waiting for an article comparing and contrasting the S&P, Russell and CRSP indexes for the domestic market. This was really helpful. I look forward to the other articles in the series.
—Thomas S. from Oregon

Analyzing REITs

Comment on “Key Ingredients of a Blue-Chip REIT,” by Brad Thomas, in the November 2022 AAII Journal:

I have been following this author for years and always enjoy the perspective that he lends to the subject of real estate investment trusts (REITs). I would however add one extra characteristic test that I use for any of my individual stock picks—a reasonable total return over time compared to the market. The test I use is that if the stock trades at least 10% below the Vanguard S&P 500 ETF (VOO) over both three-year and five-year time frames, I usually will sell it.

Federal Realty Investment Trust (FRT), mentioned as a blue-chip REIT in the article, fails my return test. However, in fairness to what Morningstar calls “fair value” for this stock, it could just mean that now is a good time to buy it. That is for each investor to decide.
—Dave G. from Texas

I would add an analysis of shareholder dilution, which is twofold.

First, while investors should add back noncash, stock-based compensation to get to adjusted funds from operations (AFFO), they should pay attention to the percentage of a REIT’s equity being “given” to management each year.

Second, since new investments are generally funded from a combination of debt and new share sale proceeds, evaluate whether those investments merely increase the size of the entire REIT or, more importantly, result in increased cash flows per share. Pay attention to debt levels: Many REITs mask poor investments by increasing leverage in order to maintain dividend payout levels.
—Philip D. from California

Lessons From Down Markets

Comment on “Most Mutual Funds and ETFs Bleed Red in the Third Quarter,” by Matt Bajkowski, in the November 2022 AAII Journal:

The tables here bring the miserable year of 2022 into stark relief with all that red. The warnings from old survivors of recessions never convince new investors that it can happen to them, too. That’s why 2022 had to happen. We can hope that a major recession would have a half-life effect that implies it will only take 50% of the last time it happened (15 years) to get back to breakeven this time.
—Barry J. from Texas