Letters to the Editor

Glossary for Beginners

A new reader named Mike has asked for a short Glossary for Beginners. He wanted to know about TIPS and P/E10 in particular.

Mike came very close to the right definition for P/E10: “My very uneducated guess on that second one is the Price/Earnings ratio for the past 10 years for any specific investment (stock, fund etc).” P/E10 is the current price of the S&P500 index divided by the average of the last ten years of earnings. Professor Robert Shiller includes a full set of S&P500 data at his web site, including the current value of P/E10.
Professor Shiller’s Web Site

P/E10

P/E10 turns out to be much more useful than one might imagine. I reported in my May 2005 Highlights post:

"14. We have found that P/E10, which is calculated on the S&P500 index as a whole, also works very well for the Large Capitalization Growth, Small Capitalization Growth, Large Capitalization Value and Small Capitalization Value slices as well. You do not need a separate indicator."

TIPS and I-Bonds

TIPS are Treasury Inflation Protected Securities. They are treasury bonds that adjust principal to match inflation (CPI). Because this adjustment to principal is taxed immediately along with the interest payment, TIPS are best held inside tax sheltered accounts. You can purchase any quantity of TIPS and you can sell them in the secondary market.

I-Bonds are similar to TIPS. They are Savings Bonds intended to benefit small investors. You are limited to purchasing no more than $60000 per social security number per year. You may not redeem I-Bonds during the first year. You may redeem I-Bonds only with the Federal Government. There is no secondary market. There are no taxes to pay on I-Bonds until you sell them (unless you choose otherwise). This includes both the adjustment of principal and the interest. I-Bonds are best held in taxable accounts.

There are many additional details about TIPS and I-Bonds. Most of them are pleasant.

TIPS and I-Bonds are sometimes called Treasury Inflation Indexed Securities.

Site References

Here are some links to articles within this site can be helpful.

Why PE10?
Why PE10?

See the TIPS and I Bonds section of the Letters to the Editor page about True Buy-and-Hold Investing, TIPS and I Bonds.
True Buy-and-Hold Investing, TIPS and I Bonds

I hope that you take advantage of my Guidelines section.
Guidelines

Here is another good post for reading right away: Rule of Thumb?
Rule of Thumb?

Final Note

I am amenable to providing a glossary. If any of you have something in mind, please let me know so that I can include it.

Earlier Letters

Refer to the September 18, 2005 letter and its links at the bottom of the page.
From A Novice in Investing

Have fun.

John Walter Russell
October 2, 2005