Swenson, TIPS and help needed staying the course

[upsydaisy]

(EDITED TO CORRECT TYPO AND ADD AA)

My AA was modeled on David Swenson's thoughts in Unconventional Success and is, at a high level:

REIT 2.2% (VGSLX)
US EQUITIES 16% (VTSAX)
NON-US DEVELOPED 8% (VDMAX)
NON-US EMERGING 12% (VEMAX)
US SMALL CAP 1.8% (VTMSX)

INTERM US TREASURIES 18.6% (VFIUX)
I BONDS 1.2%
TIPS 15% (VIPSX)
MUNIS 16.2% (VCADX, VWITX and BMBIX)
OIL 1.5% (OIL)
GLD 1.5% (GLD)
CASH 6% (Personal Savings Amex paying ~1%)

This actually represents a third of my net worth with the majority of the rest being tied up in a single company stock. This stock will be sellable over the next two years -- as I sell, I will allocate as above, but overall increase the weight in the equities portion so it becomes 65% over time. I own two homes so I kept my REIT low vs Swenson, and the TIPS and REIT are in tax-advantaged accounts, everything else has to be in regular accounts due to lack of space.

As you can see this includes a 15% TIPS allocation (I fulfilled this with VIPSX). I was happy with it and even have perfectly reasonable first-six-month returns (positive but lower than the S&P due to my heavy 50% bond component) but now I can't go a day without reading posts here about how TIPS are a terrible idea and only a fool would own them.

(There are even worse scare-mongering articles in the general media, but I know what the typical Bogleheads view of such things is so currently worrying about only the comments I see on this site (check out this one re:bonds in general: http://www.nytimes.com/2012/12/28/busin ... arket.html)).

So, am I just experiencing the natural tendency to worry about such things and should I remember I have bonds and TIPS in my AA for their ability to diversify and therefore, in some respects their return, per se, is irrelelevant and simply Stay The Course? Or have I made a huge mistake that I should change now given I'm only early in and have no losses to worry about (yet)

-UD

[Call_Me_Op]

I am not familiar with the details of your portfolio. If you can post it here, that would be helpful. For high-quality bonds, the primary factor that determines the risk level is the average duration. If your average duration is 5-6 years or less, I would not worry too much. I seem to recall that Swenson recommends 15% in long bonds. That might get me a little nervous, but in the context of a balanced portfolio it is not too bad.

[livesoft]

For another article on bonds, you should read the Seeking Alpha interview of Larry Swedroe: http://seekingalpha.com/article/1081411 ... -for-yield

Here's my take which is basically worth as much as any talking head's view: Bonds are not going to do for you what they did in the past 5 years. They will do less. But as long as you expect that, there should be no problem. One's only alternative is bonds and perhaps CDs. "What?", you may ask. "How can bonds be an alternative to bonds?" I leave that for you to ponder.

[rj49]

Some people view TIPS as insurance against unexpected inflation, but they're not much fun when inflation is low. At least with regular bonds you get a dependable payout, and if you stay short-term you can reinvest if rates get higher. Unpopularity of TIPS isn't a reason not to invest, as those wise contrarians who bought 3%+inflation ibonds and TIPS can attest to.

[G-Money]

The bond market is very efficient. TIPS look bad because their posted yield is only their real yield, which is currently negative. But nominal treasuries have nearly an identical real yield. Riskier bonds (munis, corporates, MBS) offer better yields, but that's always been the case. So, IMO, there's no reason to change you bond choices.

I also don't think there's any reason to change your stock/bond allocation. No one knows the future. Bonds have a very low expected return. Stocks may, too. You're no more likely to have success timing the market in a low yield environment than you are in any other investment environment. The reason you should stay the course is because you're unlikely to do any better by making a change.

[Taylor Larimore]

UD:

Am I just experiencing the natural tendency to worry about such things and should I remember I have bonds and TIPS in my AA for their ability to diversify and therefore, in some respects their return, per se, is irrelelevant and simply Stay The Course?

Yes. Ignore the media and stay the course (assuming it was the right course to begin with).

Best wishes.
Taylor

[peppers]

Perhaps you mean David Swensen. I don't know about Larry Swenson.

[staythecourse]

I have said, what seems like hundreds of times, but it is every investors RESPONSIBILITY to understand what each asset and subassets role is in their portfolio. After weighing the risks and benefits that said asset only then it should be included in your portfolio. The problem with "lazy portfolios" are that folks just like to jump on them because they are simple, but when something doesn't do well they start second guessing because they don't understand how the components work.

If you have TIPS in your portfolio why would you expect them to do well in this economic climate?? We have poor economic growth worldwide and from fed comments they seem adamant of keeping inflation low as long as unemployment is above ?6% or so. This means TIPS will do poorly UNLESS unexpected inflation occurs. Since growth is sluggish the only way that is likely to happens is a decrease is supply of goods, such as as oil supply disruption.

That is not a reason to dump TIPS, but a reason to understand TIPS doing poorly.

Good luck.

[Call_Me_Op]

I have said, what seems like hundreds of times, but it is every investors RESPONSIBILITY to understand what each asset and subassets role is in their portfolio.

Responsibility is a strong word in this context - but I agree that every investor is well advised to understand what each asset's and sub-asset's role is in their portfolio. Not doing so makes it much more likely to abandon the plan at the worst time. You should not adopt a plan unless you fully understand it.

[Taylor Larimore]

We have poor economic growth worldwide and from fed comments they seem adamant of keeping inflation low as long as unemployment is above ?6% or so. This means TIPS will do poorly UNLESS unexpected inflation occurs.

We have had a long period of "keeping inflation low"; nevertheless, TIPS have done well?

Best wishes.
Taylor

[upsydaisy]

I am not familiar with the details of your portfolio. If you can post it here, that would be helpful. For high-quality bonds, the primary factor that determines the risk level is the average duration. If your average duration is 5-6 years or less, I would not worry too much. I seem to recall that Swenson recommends 15% in long bonds. That might get me a little nervous, but in the context of a balanced portfolio it is not too bad.

I have posted the portfolio as requested (EDITED above).

I went with the VIPSX fund which has an average duration <10 years because (a) buying TIPS directly seemed complex and error-prone and (b) at the time, VTIPX (the shorter duration fund) didn't exist. Given it now does, one of the things I've thought of doing is moving into that (perhaps a 50-50 split between the two). Do you think that's a reasonable measure to correct what you're describing?

Thanks,
UD

[upsydaisy]

For another article on bonds, you should read the Seeking Alpha interview of Larry Swedroe: http://seekingalpha.com/article/1081411 ... -for-yield

Here's my take which is basically worth as much as any talking head's view: Bonds are not going to do for you what they did in the past 5 years. They will do less. But as long as you expect that, there should be no problem. One's only alternative is bonds and perhaps CDs. "What?", you may ask. "How can bonds be an alternative to bonds?" I leave that for you to ponder.

Thanks for the link -- it's a good interview on this and other topics, actually, so really great!

Yes, I expect Bonds to do less than the last five years. In fact, I'm happy for them to do less than the last 20 years if necessary. I really want them there for diversification of my overall portfolio vs chasing any particular yield. But now I am intrigued ... how can bonds be an alternative to bonds?!?

-UD

[upsydaisy]

I have said, what seems like hundreds of times, but it is every investors RESPONSIBILITY to understand what each asset and subassets role is in their portfolio. After weighing the risks and benefits that said asset only then it should be included in your portfolio. The problem with "lazy portfolios" are that folks just like to jump on them because they are simple, but when something doesn't do well they start second guessing because they don't understand how the components work.

If you have TIPS in your portfolio why would you expect them to do well in this economic climate?? We have poor economic growth worldwide and from fed comments they seem adamant of keeping inflation low as long as unemployment is above ?6% or so. This means TIPS will do poorly UNLESS unexpected inflation occurs. Since growth is sluggish the only way that is likely to happens is a decrease is supply of goods, such as as oil supply disruption.

That is not a reason to dump TIPS, but a reason to understand TIPS doing poorly.

Good luck.

You're absolutely right, of course. I do understand what the role of my TIPS are in mt portfolio (in fact, if you look at my AA above you'll see it's far from a copy of Swenson's lazy portfolio). I think the issue that comes up with TIPS is an emotional/psychological one to do with the fact that yields are negative. As another poster points out, above, this is accurately priced within the bond market as a whole (so if not TIPS, it's not as though there's some magic, equally low-risk, yet higher returning fixed income asset class that could be purchased), but something about the flipping into 'negative' conjures up an image that somehow there's something more fundamentally wrong. I don't really believe there is, but it feels like this forum is a good place to share those concerns -- usually discussing this sort of thing out loud can help you think it through.

But, fundamentally, thanks for the virtual slap in the face -- it's useful

[wrysys]

2/3 of your net worth is in a single stock? how's that been working out?

[heyyou]

Your glass is half full.

With a diversified portfolio, there are always some assets that are doing poorly, especially those that did well in the recent past. There is no guarantee that any one will do well in the future either. We live in a tough world. Be thankful that you have investments, even those that perform poorly. Wanting more performance is greed, and I have experienced hard lessons about how my greed blinds me to my risk exposure. YMMV

My Callan Periodic Table shows that every year there are low performing assets, and that they all have taken turns doing poorly over the last twenty years. I mark my Callan P.T. columns at zero return, between the last postive and the first negative assets, to show me how many of those categories were negative for each year.

Many posters read here for the "Stay the Course" encouragement. Many different portfolios will be successful in the long run, especially if rebalanced by buying more of whatever has lost the most. Only one will be optimal and that one will not be the one that was optimal for a previous period.

[upsydaisy]

Your glass is half full.

With a diversified portfolio, there are always some assets that are doing poorly, especially those that did well in the recent past. There is no guarantee that any one will do well in the future either. We live in a tough world. Be thankful that you have investments, even those that perform poorly. Wanting more performance is greed, and I have experienced hard lessons about how my greed blinds me to my risk exposure. YMMV

My Callan Periodic Table shows that every year there are low performing assets, and that they all have taken turns doing poorly over the last twenty years. I mark my Callan P.T. columns at zero return, between the last postive and the first negative assets, to show me how many of those categories were negative for each year.

Many posters read here for the "Stay the Course" encouragement. Many different portfolios will be successful in the long run, especially if rebalanced by buying more of whatever has lost the most. Only one will be optimal and that one will not be the one that was optimal for a previous period.

Thanks Heyyou! I like the idea of looking at the results across the board to remind you where things ended up being -- so easy to focus on the possibility of the glass being half empty. I will adopt this method myself going forward!

[upsydaisy]

2/3 of your net worth is in a single stock? how's that been working out?

Well, in my case really well. That stock is in the company that acquired a start-up that I founded with a couple of friends. While we've had to weather through a complex lock-up process, I already sold enough to buy two homes (including one in San Francisco which is painfully expensive for real estate) and fund the 7 figure portfolio (that I'm now fretting about above!). I will be able to sell the rest of the stock next year but even if something unexpected happened there, we're in the fortunate position of being pretty secure going forward. I guess it's a nice problem to have but with potentially two thirds of our lives ahead of us, making this portfolio really last for the long term is the challenge.

-UD