role of tiaa-cref traditional in portfolio

[Beanbone]

Hi -

I'm wondering if bogleheads have a theory concerning tiaa-cref traditional in a portfolio. this is available to me, and cref claims it's risk profile is VERY low (guarenteed 3% return with an average of over 4.5% over time).

How does this play with asset allocation for a 44 year old? In other words, if I have 60% stocks / 40% bonds (all tiaa & vanguard index funds), can I lower my bond allocation by 10-20% for tiaa-cref traditional? I'm getting a little nervous about bond prices, and long term interest rates, and this looks like a way to hedge against a bond bubble...

thanks for your help.

[DaveS]

Cref has some good index funds. A guaranteed 3% might sound good based on unique events since 2006 or so but I would just rather own the market plus at your age, about 40% IN BONDS. Go back a longer time and 3% stinks. Dave

[Levett]

TIAA Traditional is part of your fixed income (it holds more than bonds alone).

Although many versions of TIAA Traditional provide a 3% guarantee, you should check its history relative to what happens to prevailing interest rates.

As rates move up, TIAA Traditional has historically paid accumulators a rate higher than 3%. As rates have historically moved down, TIAA has moved toward the 3% guarantee where it currently sits for many accumulators.

How good is TIAA Traditional? How about good enough so that the Norwegian Sovereign Wealth fund (the largest sovereign wealth fund in the world) just partnered with TIAA on some office properties and intends to pursue more joint ventures with TIAA.

https://www.tiaa-cref.org/public/about/press/about_us/releases/articles/pressrelease443.html

The basis of TIAA Traditional is the TIAA General Account with some of the highest credit ratings in the land.

Consider yourself fortunate to have access to TIAA Traditional.

Lev

[House Blend]

Beanbone,

I assume you mean replacing 10 to 20% of your portfolio that is currently in bonds with TIAA Traditional.

Yes, that is perfectly reasonable, and is not going to increase your overall risk level. It will also lower your interest rate risk.

A good option for those who can't stand the idea that their "safe" investments can lose money.

However, be sure you understand the peculiar restrictions of the particular flavor of Traditional available in your plan. They vary. Some flavors are essentially illiquid and cannot be transferred out of except over 9 years/10 payments.

Disclosure: I hold roughly equal amounts of Traditional (the most illiquid form), VG Total Bond, and VG TIPS. But I no longer add new money to Traditional.

[rr2]

TIAA Traditional comprises ALL of our fixed income holdings. We do not hold any other bonds. Our asset allocation is CREF Stock (for equities), TIAA Traditional Annuity (for fixed income), and TIAA Real Estate.

[Beanbone]

Thank you all for your responses. Because tiaa traditional has such a low risk role in the portfolio, does this mean one should consider it in a different asset class from bonds? If so, how would this change the allocation philosophy for the rest of my portfolio? I.e. should I increase my allocation of stocks? Say 15 % traditional, 15% bonds, 70 % stocks? Would this have a similar risk profile as 60% stocks, 40 % bonds?

[Call_Me_Op]

Theoretically, TIAA traditional has a risk not possessed by bond funds. It is tied to the solvency of TIAA-CREF. That said, it is quite safe and can be used to replace a portion of your bond allocation.

[Levett]

" does this mean one should consider it in a different asset class from bonds"

TIAA calls it "guaranteed income."

Do any of your bond funds make a similar claim?

Lev

[The Wizard]

I'm not a big fan of Trad.
95% of my retirement assets are in T-C, just so you know.
I'd focus mainly on TREA for the time being for your low-volatility funds.
Wait for bonds to come back and Trad to increase their rates.
You WILL NOT get rich putting all your $$$ in Trad...

[brick-house]

Good luck getting me to give up the TIAA Traditional in my old employer's GSRA. 3% floor with potential for additional dividends backed by TIAA's General Account. GSRA contracts allow withdrawals and/or transfers - like a money market on steroids...

Here is a dated PDF (2010) outlining TIAA Traditional holdings in detail as well as how it can benefit a diversified portfolio

http://www.tiaa-cref.org/ucm/groups/con ... 011136.pdf

Launched with the founding of TIAA in 1918, the TIAA Traditional Annuity is
the pioneering retirement offering on which the company built its asset and
participant base. Since 1918, a variety of new retirement products have been
introduced in the marketplace, many by TIAA-CREF. Yet the TIAA Traditional
Annuity remains a centerpiece of participants’ retirement portfolios, providing
an attractive combination of account features and an excellent complement to
TIAA-CREF’s equity, fixed-income, money market and real estate investment
offerings. Today, more participant dollars are allocated to the TIAA Traditional
Annuity than to any other TIAA-CREF product.1

1918 ? For real? Almost 100 years old -TIAA Traditional is aptly named...

[fatmike91]

I have a fair amount in traditional. It clearly is in the fixed income category.

But it's not a bond. It doesn't have interest rate risk/reward.

I like the thought that it's a money market on steroids. I no longer have a 10 year holding requirement, so I can withdraw at any time. Maybe, it's most like cash? I've struggled with this very question myself. I won't add anymore to it, but it is my single largest position.

[House Blend]

Thank you all for your responses. Because tiaa traditional has such a low risk role in the portfolio, does this mean one should consider it in a different asset class from bonds?

If you have the illiquid form, don't plan on treating it as an asset class with a separate allocation target that you maintain. Because you can't rebalance out of it.

If you prefer the BH approach of using rebalancing to maintain allocation targets, I would lump it in under the general category of fixed income, and use your (liquid) bond funds when your IPS tells you it is time to rebalance from fixed income to equity.

If so, how would this change the allocation philosophy for the rest of my portfolio? I.e. should I increase my allocation of stocks? Say 15 % traditional, 15% bonds, 70 % stocks? Would this have a similar risk profile as 60% stocks, 40 % bonds?

No. I would say that 60/40 is about 60/40, whether the 40 is composed only of bonds, only of Traditional, or a mix of the two. Yes I am aware of mean variance optimization, and you can make the case that Traditional has essentially a zero correlation with the stock market, whereas government bonds have had long periods of positive correlation. On the other hand, when s**t hits the market and everything tanks, government bonds tend to be the one thing that goes up.

If you're looking to control risk and/or reach the efficient frontier, pay more attention to the stock side of your portfolio.

[ofcmetz]

You should definitely find out what the terms of you TIAA account are relating to the restrictions on your traditional account. For me with the GRSA account the Traditional is like a money market as far as liquidity restrictions. I keep half of my fixed income in it. Rest is in bond funds.

[cheese_breath]

In today's environment I consider bonds a risky investment. There's nothing wrong with having some TIAA Traditional as a hedge against losses in your bond funds when interest rates begin rising. And 3% isn't all that bad earnings today. Nobody says you have to stay in it forever if conditions change. Personally, at age 72 I'm interested in principle protection and don't have any bonds. I carry about 30-35% of my portfolio in stocks and the rest in TIAA Traditional.

[Beanbone]

Thank you all for your responses. Because tiaa traditional has such a low risk role in the portfolio, does this mean one should consider it in a different asset class from bonds?

If you have the illiquid form, don't plan on treating it as an asset class with a separate allocation target that you maintain. Because you can't rebalance out of it.

If you prefer the BH approach of using rebalancing to maintain allocation targets, I would lump it in under the general category of fixed income, and use your (liquid) bond funds when your IPS tells you it is time to rebalance from fixed income to equity.

I definitely prefer the BH approach. What is "IPS"? Sorry, I'm new to the forum.

If so, how would this change the allocation philosophy for the rest of my portfolio? I.e. should I increase my allocation of stocks? Say 15 % traditional, 15% bonds, 70 % stocks? Would this have a similar risk profile as 60% stocks, 40 % bonds?

No. I would say that 60/40 is about 60/40, whether the 40 is composed only of bonds, only of Traditional, or a mix of the two. Yes I am aware of mean variance optimization, and you can make the case that Traditional has essentially a zero correlation with the stock market, whereas government bonds have had long periods of positive correlation. On the other hand, when s**t hits the market and everything tanks, government bonds tend to be the one thing that goes up.

If you're looking to control risk and/or reach the efficient frontier, pay more attention to the stock side of your portfolio.

Thanks. How do you suggest controlling risk / reach with stocks? Is there a BH page that outlines different risk / reward scenarios for various stock types?

t

[House Blend]

I hope I'm not leading you out into the weeds, but these wiki articles may be helpful:
http://www.bogleheads.org/wiki/Asset_Allocation
http://www.bogleheads.org/wiki/Slice_and_Dice
http://www.bogleheads.org/wiki/Value_Tilting_-_Stock

The idea behind tilting to small and value is that it allows you to lower your equity percentage (and achieve lower portfolio volatility) for a given level of expected return. At least that's the theory.

One of the points I was making earlier is that (IMO) slicing and dicing the fixed income side of your portfolio may provide some of that same kind of benefit, but a better risk/reward tradeoff is more likely on the equity side.

Whether I'm right or wrong, it would be interesting to compare the historical volatility and returns of a 60/40 balanced fund with a 60/40 allocation of say TSM and (a liquid form of) TIAA Traditional. But the way that Traditional operates makes that data impossible to gather.

More advice: if you're starting out, just get the basic asset classes covered: Stocks (US+International), Fixed Income, and maybe TIAA Real Estate. Don't get caught up in the tilting and slicing just because that's what the cool kids are doing.

[Socrativestor]

Asset allocation is all about allocating assets to asset classes, most of which can be thought of has having sub-classes that therefore also receive allocations. In the case of the stock/equity asset class, for example, most people consider the sub-classes to be US and International (though some people, might consider the sub-classes to be US, Developed International and Emerging Markets).

In the case of the fixed income asset class, many people consider the sub-classes to be Nominal Bonds and Real Bonds. Others, such as myself, consider the sub-classes to be: Stable Value, Nominal Bonds and Real Bonds. I consider my TIAA Traditional to be part of my Stable Value allocation (along with US EE Savings Bonds).

There is no perfect way to do this -- just a way that makes sense for you. I.e. realizing yourself what defines each class and sub-class and why you have a particular allocation to each. To my way of thinking, Stable Value is different from Nominal Bonds and Real Bonds because the principal value is unaffected by changes in interest rates. This does not make Stable Value safer than Nominal Bonds or Real Bonds -- just different (and therefore adding additional diversification to a portfolio), especially, as some have pointed out, if you have the illiquid form of TIAA Traditional.

Overall then the allocation to stock/equity is unaffected by the sub-allocations to fixed income. As a first approximation, 60/40 portfolio is a 60% stock/equity regardless of how the 40% fixed income is deployed (with the huge proviso that all the fixed income investments are SAFE -- e.g. no high-yield "bonds"). In my own case, I am 25% fixed income and have recently shifted my sub-allocation to eliminate Real Bonds and minimize Nominal Bonds in favor of loading up on Stable Value (TIAA Traditional in its liquid form) -- but this has not affected the rest of my allocation at all.

As others have posted, beyond this first approximation it is possible to think of sub-class allocations causing shifts in asset class allocations -- e.g. increasing the small and value stock/equity sub-classes IN ORDER TO REDUCE the overall stock/equity allocation (and hence increase the fixed income allocation). A similar argument can be made for multi-asset-class portfolios where an allocation to a third (or even fourth and fifth) asset class (such as collateralized commodities future, real estate such TIAA Real Estate Account and the like) affects the allocations to stock/equity and fixed income. But there may be no need for you to go into those weeds ...