I'm learning about TIPS. Here is how they work according to my understanding.
Say you buy a 100 K worth of 10 year TIPS with at 3% rate. In Year 1 inflation is 2%. So you tack that on to 100 K and get 102 K, and then you get 3% of that in the first year (in two payments I think, but I'm trying to keep it simple).
(n Year 2 inflation is 4%. So you tack 4% onto 102 K and that year you get 3% of that. Etc. Until at the end of the 10th year you get your inflation adjusted principle back.
Okay, but you're tying up 100 K to get back only a few thousand per year. To get a meaningful amount back each year, you'd have to put like $1 M in there and get back 30 K or whatever. But if you do that, you're tying up $1 M for 10 years. If your entire portfolio is $2.5 M, say, you're tying up 40% of your portfolio for 10 years on that one thing, which doesn't seem right.
So do the people that typically get TIPS have portfolios way more than $2.5 M? Or is there something else I'm missing in this? What kind of situations are beneficial for TIPS?
Say you buy a 100 K worth of 10 year TIPS with at 3% rate. In Year 1 inflation is 2%. So you tack that on to 100 K and get 102 K, and then you get 3% of that in the first year (in two payments I think, but I'm trying to keep it simple).
(n Year 2 inflation is 4%. So you tack 4% onto 102 K and that year you get 3% of that. Etc. Until at the end of the 10th year you get your inflation adjusted principle back.
Okay, but you're tying up 100 K to get back only a few thousand per year. To get a meaningful amount back each year, you'd have to put like $1 M in there and get back 30 K or whatever. But if you do that, you're tying up $1 M for 10 years. If your entire portfolio is $2.5 M, say, you're tying up 40% of your portfolio for 10 years on that one thing, which doesn't seem right.
So do the people that typically get TIPS have portfolios way more than $2.5 M? Or is there something else I'm missing in this? What kind of situations are beneficial for TIPS?
Statistics: Posted by icbmwapg41 — Sat Oct 12, 2024 10:53 pm — Replies 0 — Views 19