Buy and hold TIPS, or buy & sell depending on market?

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Buy and hold TIPS, or buy & sell depending on market?

Postby joer1212 » Thu Mar 14, 2013 6:07 pm

I have an allocation to TIPS (VIPSX) in my Roth IRA which is about 5% of my overall portfolio.
Recently, as the yield on TIPS has turned negative after inflation, I've been hearing a lot of noise about how I should not be holding TIPS at all in my portfolio right now. This suggests to me that I should be timing the market by buying and selling TIPS as conditions dictate. Even some investment books I've read have advocated this approach. They even display charts showing when to "load up" on TIPS and when not to hold them at all, according to their yield, maturity, etc.
Am I missing something here?
As a Boglehead, this goes against everything I've learned about choosing an asset allocation and sticking to it in all market conditions & rebalancing regularly.

FYI: I plan on retiring in about 9 years.
Last edited by joer1212 on Thu Mar 14, 2013 8:44 pm, edited 1 time in total.
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Re: Buy and hold TIPS, or buy & sell depending on market?

Postby nisiprius » Thu Mar 14, 2013 7:20 pm

TIPS have negative REAL yield (after inflation), not negative yield.

I believe some of the noise you are hearing is coming from people who never wanted anyone to hold TIPS in the first place, and are using negative real yield as a handy new stick to beat TIPS with.

And then, of course, there is always noise about something you need to do in your portfolio "right now." Some of that noise comes from people who make money whenever you place orders, and not when you don't.

Stocks are still stocks, and are as risky as they ever were. Nominal bonds have expected negative real yield, just like TIPS; the only difference is that with TIPS you know exactly what your negative real yield will be.
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Re: Buy and hold TIPS, or buy & sell depending on market?

Postby givewell » Thu Mar 14, 2013 7:33 pm

+1

Indeed, through my 403(b) every month I buy more shares in the longstanding Vanguard TIPS fund.

Especially when part of a balanced portfolio, there is nothing more sensible than TIPS and I-Bonds.
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Re: Buy and hold TIPS, or buy & sell depending on market?

Postby joer1212 » Thu Mar 14, 2013 8:47 pm

givewell wrote:+1

Indeed, through my 403(b) every month I buy more shares in the longstanding Vanguard TIPS fund.

Especially when part of a balanced portfolio, there is nothing more sensible than TIPS and I-Bonds.


So, you're saying 'stay the course' and keep my allocation to TIPS, regardless of the current economic climate? Why do authors like Larry Swedroe advise to alter your TIPS allocation based on yield? Isn't that just as silly as selling stocks when there is a down market?
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Re: Buy and hold TIPS, or buy & sell depending on market?

Postby joer1212 » Thu Mar 14, 2013 8:53 pm

nisiprius wrote:TIPS have negative REAL yield (after inflation), not negative yield.

I believe some of the noise you are hearing is coming from people who never wanted anyone to hold TIPS in the first place, and are using negative real yield as a handy new stick to beat TIPS with.

And then, of course, there is always noise about something you need to do in your portfolio "right now." Some of that noise comes from people who make money whenever you place orders, and not when you don't.

Stocks are still stocks, and are as risky as they ever were. Nominal bonds have expected negative real yield, just like TIPS; the only difference is that with TIPS you know exactly what your negative real yield will be.


Just like with stocks, isn't a down market for TIPS an opportunity to buy more more of them for cheaper? Or, am I missing something very fundamental (i.e. stocks and TIPS work differently, etc)?
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Re: Buy and hold TIPS, or buy & sell depending on market?

Postby wjo » Thu Mar 14, 2013 9:13 pm

joer1212 wrote:
nisiprius wrote:TIPS have negative REAL yield (after inflation), not negative yield.

I believe some of the noise you are hearing is coming from people who never wanted anyone to hold TIPS in the first place, and are using negative real yield as a handy new stick to beat TIPS with.

And then, of course, there is always noise about something you need to do in your portfolio "right now." Some of that noise comes from people who make money whenever you place orders, and not when you don't.

Stocks are still stocks, and are as risky as they ever were. Nominal bonds have expected negative real yield, just like TIPS; the only difference is that with TIPS you know exactly what your negative real yield will be.


Just like with stocks, isn't a down market for TIPS an opportunity to buy more more of them for cheaper? Or, am I missing something very fundamental (i.e. stocks and TIPS work differently, etc)?


You are right that a down market in TIPS is a good time to buy. Like a few years ago when they were yielding 4% real. (My biggest investment mistake not to load up on them then in a matching strategy for future needs :oops: )

But now is not a time when TIPS are on sale - as with nominal bonds, yields are low and they are relatively expensive.

IMHO, TIPS are best used as a matching strategy and held to maturity - that way you know exactly what your are getting. A TIPS mutual fund, like a nominal bond fund, will vary in NAV depending on current yields. Its unclear that a TIPS fund will provide the same benefit in terms of protection from unexpected inflation that an individual TIP held to maturity will do. That said, like a nominal bond fund, it will have some diversification benefit to your portfolio when used as part of an overall asset allocation and one uses volatility to rebalance.
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Re: Buy and hold TIPS, or buy & sell depending on market?

Postby joer1212 » Fri Mar 15, 2013 4:00 pm

IMHO, TIPS are best used as a matching strategy and held to maturity - that way you know exactly what your are getting. A TIPS mutual fund, like a nominal bond fund, will vary in NAV depending on current yields. Its unclear that a TIPS fund will provide the same benefit in terms of protection from unexpected inflation that an individual TIP held to maturity will do. That said, like a nominal bond fund, it will have some diversification benefit to your portfolio when used as part of an overall asset allocation and one uses volatility to rebalance.


My Roth IRA has 50% REITs (VGSIX) and 50% TIPS (VIPSX). Recently, the REIT fund has grown beyond the TIPS fund, so now I have about 55% REITS and 45% TIPS. Should I sell some of my REIT fund and buy some of the TIPS fund to rebalance everything back to 50%/50%? Or should I leave it as it is?
Contrarily, should I just get rid of TIPS altogether right now and buy more REITs with that money? Instinct tells me to rebalance everything back to 50%/50%, but I could be wrong.
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Re: Buy and hold TIPS, or buy & sell depending on market?

Postby Doc » Fri Mar 15, 2013 7:35 pm

joer1212 wrote: So, you're saying 'stay the course' and keep my allocation to TIPS, regardless of the current economic climate? Why do authors like Larry Swedroe advise to alter your TIPS allocation based on yield? Isn't that just as silly as selling stocks when there is a down market?


The TIPS vs. stock analysis is not relevant. IIRC Swedroe's original changing allocation was based on historic data showing that Treasuries trade in a band of 1% to 3% real yield. And he uses this band to make his TIPS allocation but I believe that the allocation was as a percent of Treasury holding not as a percent of portfolio or bonds. The analysis is in the appendix of his bond book.

Remember this is fixed income which means exactly that - FIXED. Once you make the purchase you are going to get the promised return - default excluded. The only thing you can gain by selling early is to change future ordinary income into current LTCG. This only makes sense if you are holding the TIPS in taxable and if the extra state income tax doesn't eat all you Federal tax savings.
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Re: Buy and hold TIPS, or buy & sell depending on market?

Postby joer1212 » Sat Mar 16, 2013 3:00 am

You are right that a down market in TIPS is a good time to buy. Like a few years ago when they were yielding 4% real. (My biggest investment mistake not to load up on them then in a matching strategy for future needs :oops: )

But now is not a time when TIPS are on sale - as with nominal bonds, yields are low and they are relatively expensive.


I'm really confused.
Right now, my Roth IRA allocation has shifted to about 45% TIPS (VIPSX) and 55% REITs (VGSIX). At the beginning of the year (when I made my $5,500 maximum Roth contribution) I added money to both REIT and TIPS funds so that they each became exactly 50% of the account. Since my plan is to rebalance any asset class that moves 5% or more from its original allocation, shouldn't I now sell REITs and buy TIPS so that they are rebalanced back to their original 50/50 ratio?
I understand the principle that when real yields on TIPS are low, their price will be high, and vice-versa (just like with nominal bonds). But, if you're saying that now is not the time to buy TIPS, how would I rebalance my portfolio, and how would I know when to do so? Shouldn't I just go by the NAV of my TIPS holdings (i.e. when their NAV drops 5%, I buy more of them to bring their allocation back in line) to determine whether or not I should buy or sell them?
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