Moving from TIPs fund to TIPs ladder???

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
209south
Posts: 528
Joined: Mon Jan 28, 2013 9:58 pm

Moving from TIPs fund to TIPs ladder???

Post by 209south »

I am 55 years old and hope to retire in the next few years. I have accumulated a solid (~$5mm) and conservative (~35/65) portfolio but will have no pension income other than social security, which I expect will cover ~25% of my retirement spending. I will be thus be counting on my portfolio to fund retirement spending and, hopefully, to leave a residual to my kids and certain charities. In my reading on this website and elsewhere I have been persuaded about the merits of ‘liability-matched portfolios’ and of using TIPs for this purpose where cost-effective. So TIPs funds (mostly Vanguard) represent 17.5% of my total portfolio, and I’ve just begin to focus on the ‘fund vs. ladder’ tradeoffs. The Vanguard TIPs fund is currently yielding 13 bps real (the ST fund is negative 0.49% and I own that too!), vs. long-term individual TIPs yields of ~100 bps. SO, given that the purpose of TIPs in my portfolio are really to match future liabilities, my thought is to gradually create a TIPs ladder within my Vanguard IRA, in amounts that will roughly cover the RMDs in the years currently available, and then fill in over time as other maturities become available. This appears to be a no-brainer, but I’m curious what I might be missing? Having 17.5% of my portfolio yielding essentially zero real on a blended basis is bothering me!
User avatar
#Cruncher
Posts: 3975
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: Moving from TIPs fund to TIPs ladder???

Post by #Cruncher »

209south wrote:... I’ve just begin to focus on the ‘fund vs. ladder’ tradeoffs. The Vanguard TIPs fund is currently yielding 13 bps real ... vs. long-term individual TIPs yields of ~100 bps.
Given today's rising yield curve, you can squeeze a slightly higher yield from a non-rolling TIPS ladder than from a typical broad TIPS fund. For example, the default ladder on my TIPS Ladder Builder spreadsheet shows that one can build a 30-year 30,000 constant dollar per year ladder for $803,000 using WSJ TIPS Quotes 7/24/2015. (Scroll down to see the totals.)

Code: Select all

 Maturity    Coupon     YTM        Cost   Proceeds
----------   ------    ------     ------  --------
04/15/2016   0.125%    0.321%     17,202    30,512
04/15/2017   0.125%   (0.251%)    16,848    30,007
04/15/2018   0.125%   (0.156%)    16,570    29,696
04/15/2019   0.125%    0.039%     17,293    30,464
04/15/2020   0.125%    0.150%     16,214    29,443
01/15/2021   1.125%    0.230%     18,227    30,476
01/15/2022   0.125%    0.357%     16,545    29,788
01/15/2023   0.125%    0.440%     17,095    30,467
01/15/2024   0.625%    0.490%     16,477    29,204
01/15/2025   2.375%    0.531%     20,648    30,293
01/15/2026   2.000%    0.585%     20,533    30,214
01/15/2027   2.375%    0.591%     21,164    29,543
04/15/2028   3.625%    0.626%     26,093    30,408
04/15/2029   3.875%    0.658%    115,038    90,082
04/15/2032   3.375%    0.727%    182,003   149,574
02/15/2040   2.125%    1.007%    114,738   119,812
02/15/2041   2.125%    1.009%     36,647    30,512
02/15/2042   0.750%    1.055%     27,364    30,239
02/15/2043   0.625%    1.054%     25,972    29,535
02/15/2044   1.375%    1.055%     31,895    29,869
02/15/2045   0.750%    1.047%     27,991    30,256
                                 -------   -------
Total                            802,556   900,394
There are three different ways of computing an "average" yield-to-maturity (YTM) from the bonds making up this ladder:

Code: Select all

Simple Average YTM      0.55%
Weighted Average YTM    0.70%
Cash Flow YTM (XIRR)    0.79%
  • Simple Average YTM: without any weighting. This exceeds the SEC yield of the Vanguard broad TIPS fund admiral shares because they have a 0.10% expense ratio and because the fund overweights the shorter-term lower-yielding maturities. (See graph in this post from last November.)
  • Weighted Average YTM: Weighted by the amounts in the Cost column. Because of coupon interest collections on later-maturing bonds, the ladder has a lighter weighting of shorter-term TIPS with lower YTMs.
  • Cash Flow YTM: Since this is a non-rolling ladder, it makes sense to calculate the YTM based on the overall cash flow. This accentuates the effect of the longer-term higher-yielding TIPS. This is calculated with the Excel XIRR function using the Maturity and Proceeds columns with the 07/27/2015 settlement date and (802,556) cost inserted before the Apr-15-2016 row.
User avatar
nisiprius
Advisory Board
Posts: 52105
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Moving from TIPs fund to TIPs ladder???

Post by nisiprius »

Having about 30% of my portfolio earning zero real doesn't bother me in the slightest. If you want to feel better, spin it the other way--you're "preserving real wealth."

This is strictly a personal decision of mine, but you might find it interesting. I did exactly the opposite thing. I moved from a TIPS ladder to a TIPS fund. Managing about two dozen individual TIPS issue is a royal PITA in many ways. And at Vanguard--it's bad at other brokerages but its worse at Vanguard--having two dozen individual TIPS made the size of my printed statements explode, typically well over twenty pages, because for some reason Vanguard chooses to print the details of each individual issue in such a way that it can't fit more than three issues per page.

I found the PITA aspect tolerable, but as we age, despite my being in excellent health, I feel that it's important that my wife understand the basic holdings and mechanics of the account well enough that she could manage it if she had to... without relying on an advisor. It has become clear that she is just not going to look at a statement for long enough to understand even the basics if it contains twenty pages of TIPS listings. We will see what happens when the statement only lists six mutual funds.

I started investing in individual TIPS when they were new, I believe before TIPS funds were available, and just kept it up out of habit. I believe in the superiority of individual bonds over a fund--don't want to go down that rathole--but I've also believed for a long time that the superiority isn't huge. It was actually a big wrench to liquidate the TIPS and buy the fund because of ego involvement. It is my honest belief that I have, in fact, consciously traded off a slightly better (for my purposes) investment for a slightly worse on, in favor of simplicity.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Topic Author
209south
Posts: 528
Joined: Mon Jan 28, 2013 9:58 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by 209south »

Thanks, #cruncher, that is very interesting data, and certainly supports my objective. You say the 'simple average ytm' exceeds the TIPs fund due to the 10 bp expense ratio and because the fund overweights shorter maturities. I guess I would just flip those for emphasis as the differences are profound - 55 bps for the 'simple average' but only 17 bps for the fund before the 10 bp expense ratio...i.e 55 vs. net 7...and that's before recognizing I have about 1/4 of my TIPs dollars in the short term fund with substantial negative yields (the advisability of short-term vs. long-term fixed income exposure has been debated endlessly elsewhere...most of my FI is in Vanguard muni funds and BND which are essentially intermediate term, so I'm starting to like the idea of stretching for long-term TIPs returns as a diversifier and as a LMP tool...I do wish Vanguard offered a true long-term TIPs fund!)

nisiprius, I totally understand your emphasis on simplicity...that is something currently lacking in my portfolio. I have taxable, Roth IRA, rollover IRA, spousal IRA, 401k, deferred comp from prior employer, variable life at NWM, variable annuity at Jefferson National...all serve a purpose but it's a lot to keep track of and my wife, like yours, has little interest in following these details. I think attempting to match the TIPs ladder maturities with RMDs out of my IRAs makes good sense, but your advice has cautioned me that I need to buckle down and finish my IPS and provide more clarity to my wife and family on the portfolio. Thank you!
Karamatsu
Posts: 1447
Joined: Mon Oct 27, 2008 2:42 am

Re: Moving from TIPs fund to TIPs ladder???

Post by Karamatsu »

It seems to me that using TIPS to fund specific, known future liabilities in a tax-advantaged account is pretty much the perfect use case for them, and since there's no rolling forward of the ladder, it really shouldn't be all that hard to deal with or explain. Cash will simply appear when it's needed... what could be better?
Topic Author
209south
Posts: 528
Joined: Mon Jan 28, 2013 9:58 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by 209south »

I agree, Karamatsu - nisiprius, one quick question re. building a ladder within Vanguard Brokerage...you mention the multiple pages that are generated as part of the statement, which sounds tiresome...but is there at least a summary page for the TIPs ladder that shows current market value etc? Also, #cruncher, in searching this site I came upon your TIPs ladder spreadsheet - I have downloaded it and will play with it and come back with questions if I have them, but thank you so much for creating this outstanding resource!
User avatar
Artsdoctor
Posts: 6017
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Moving from TIPs fund to TIPs ladder???

Post by Artsdoctor »

nisiprius wrote:Having about 30% of my portfolio earning zero real doesn't bother me in the slightest. If you want to feel better, spin it the other way--you're "preserving real wealth."

This is strictly a personal decision of mine, but you might find it interesting. I did exactly the opposite thing. I moved from a TIPS ladder to a TIPS fund. Managing about two dozen individual TIPS issue is a royal PITA in many ways. And at Vanguard--it's bad at other brokerages but its worse at Vanguard--having two dozen individual TIPS made the size of my printed statements explode, typically well over twenty pages, because for some reason Vanguard chooses to print the details of each individual issue in such a way that it can't fit more than three issues per page.

I found the PITA aspect tolerable, but as we age, despite my being in excellent health, I feel that it's important that my wife understand the basic holdings and mechanics of the account well enough that she could manage it if she had to... without relying on an advisor. It has become clear that she is just not going to look at a statement for long enough to understand even the basics if it contains twenty pages of TIPS listings. We will see what happens when the statement only lists six mutual funds.

I started investing in individual TIPS when they were new, I believe before TIPS funds were available, and just kept it up out of habit. I believe in the superiority of individual bonds over a fund--don't want to go down that rathole--but I've also believed for a long time that the superiority isn't huge. It was actually a big wrench to liquidate the TIPS and buy the fund because of ego involvement. It is my honest belief that I have, in fact, consciously traded off a slightly better (for my purposes) investment for a slightly worse on, in favor of simplicity.
I think this is an incredibly fair and honest self-assessment. I also am simplifying investment strategies as I get older because I am concerned about making sure things go smoothly if I'm unable to manage finances.

My only reservation about a TIPS fund is that I intend on spending down everything we have so there will come a point when I NEED that investment, including all of the principal. I can definitely "feed" a cash account with dividends as they accrue but eventually I'm going to sell that fund; since it's a bond fund, I'm going to be viewing it as a safe harbor, more so than a typical equity fund. If one has time, perhaps in the accumulation years, you'll be just fine, but I'm somewhat concerned about having the sell ANYTHING when I'm forced. In another words, when an individual TIPS matures, I know I've got the money to spend that year. I can't say the same thing about the fund. So with a fund, it appears that you'd be wise to ultimately liquidate it well in advance of when you NEED the money (for example, I subscribe to the belief that you probably shouldn't be holding a fund with an average maturity much longer than when you're going to need the principal).

I also agree that have a near 0% real return doesn't bother me because all about capital preservation. I wish TIPS weren't so expensive but that's just the way it is.
User avatar
abuss368
Posts: 27850
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Moving from TIPs fund to TIPs ladder???

Post by abuss368 »

209south wrote:I am 55 years old and hope to retire in the next few years. I have accumulated a solid (~$5mm) and conservative (~35/65) portfolio but will have no pension income other than social security, which I expect will cover ~25% of my retirement spending. I will be thus be counting on my portfolio to fund retirement spending and, hopefully, to leave a residual to my kids and certain charities. In my reading on this website and elsewhere I have been persuaded about the merits of ‘liability-matched portfolios’ and of using TIPs for this purpose where cost-effective. So TIPs funds (mostly Vanguard) represent 17.5% of my total portfolio, and I’ve just begin to focus on the ‘fund vs. ladder’ tradeoffs. The Vanguard TIPs fund is currently yielding 13 bps real (the ST fund is negative 0.49% and I own that too!), vs. long-term individual TIPs yields of ~100 bps. SO, given that the purpose of TIPs in my portfolio are really to match future liabilities, my thought is to gradually create a TIPs ladder within my Vanguard IRA, in amounts that will roughly cover the RMDs in the years currently available, and then fill in over time as other maturities become available. This appears to be a no-brainer, but I’m curious what I might be missing? Having 17.5% of my portfolio yielding essentially zero real on a blended basis is bothering me!
Hi 209south,

In my opinion and good short or intermediate term bond fund with provide safety and income to a portfolio. Vanguard has moved away from the Intermediate Term TIPS fund in the Target Funds and to a Four Fund Portfolio that include U.S. and International Stocks and also U.S. and International Bonds. The Short Term TIPS fund is in the few Target Funds near retirement.

Best.
John C. Bogle: “Simplicity is the master key to financial success."
RetiredinKaty
Posts: 134
Joined: Mon Sep 09, 2013 6:52 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by RetiredinKaty »

A really good discussion. I am comfortable with the intermediate TIPS fund, but the ladder would be the safest way to go for those who could manage it. I think I would want professional assistance to put a ladder together, and I doubt my spouse would want to maintain it.
User avatar
abuss368
Posts: 27850
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Moving from TIPs fund to TIPs ladder???

Post by abuss368 »

What is the nominal yield for the Vanguard Intermediate TIPS fund?
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by Phineas J. Whoopee »

abuss368 wrote:What is the nominal yield for the Vanguard Intermediate TIPS fund?
Nobody can can calculate it, because nobody can know today's and future CPI numbers until after the fact. One can find out what it was, but that may not help.

With nominal bonds you know how much money you are going to get, so you can calculate nominal YTM. You don't know how many goods and services you will be able to buy with it.

With inflation-protected bonds you don't know how much money you are going to get, so you can't calculate nominal YTM. You do know, roughly at least because every individual's basket is different, how many goods and services you will be able to buy with it.

We can't calculate the real YTM on nominal bonds, just like we can't calculate the nominal YTM on TIPS. All we can calculate are two things:

1) Calculate what they were, after the fact, when we know the numbers; and

2) Calculate the break-even rate, at which the yields on the nominals and TIPS would converge.

The latter is kind of like the old question "If the temperature is minus 40 degrees, is that Fahrenheit or Celsius?" to which the answer is "Yes."

PJW
User avatar
abuss368
Posts: 27850
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Moving from TIPs fund to TIPs ladder???

Post by abuss368 »

Excellent thread!
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by Phineas J. Whoopee »

^ I'm happy you think so. In the future you may wish to refer back to it.
PJW
FactualFran
Posts: 2750
Joined: Sat Feb 21, 2015 1:29 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by FactualFran »

If your objective is liability matching, you want to use investments that mature by the date you need the money, rather than a mutual fund that has no maturity date. With a mutual fund that has no maturity date, you don't know what the principal will by the date you need the money. With individual TIPS, you also don't know what the principal will be at maturity, but you do know it will be at the maximum of the current principal adjusted by the change in the CPI-U and the original par value.
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by Phineas J. Whoopee »

If one's objective is liability matching over a naturally limited lifetime (as opposed to institutions, which in the grand scheme can't last forever, but aren't limited by individual mortality), holding a non-rolling ladder of TIPS, with its steadily decreasing average duration, can be a sensible move.

If one would instead hold a constant-average-duration rolling ladder of TIPS, then there is no meaningful difference from what one gets with an equivalent-duration TIPS fund, which does precisely that. One even can mix, in one's portfolio, longer- and shorter- duration bond funds, TIPS or otherwise, to dial in whatever average duration one likes.

PJW
User avatar
#Cruncher
Posts: 3975
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: Moving from TIPs fund to TIPs ladder???

Post by #Cruncher »

nisiprius in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2568371#p2568371]this post[/url] wrote:Managing about two dozen individual TIPS issue is a royal PITA in many ways.
There are a couple of qualifiers that affect the complexity.
  • Are the TIPS in a taxable account? If so, I'd go even further and say handling a bunch of individual TIPS is an Imperial PITA. However, it's much less complicated if they are in an IRA (either Traditional or Roth.)
  • Does the ladder cover any gap years? If it does, then handling those gaps would be complicated. However, if there are no gap years, then handling is much easier. Interest and principal will be credited automatically to the sweep fund associated with the brokerage account. The only action needed each year is to decide what to do with the sweep fund balance. E.g., withdraw it from the IRA, move it into another fund inside the IRA, or just let it sit there. No new TIPS will need to be purchased. A ladder could be set up this way through 2029 since there are TIPS that mature each of those years.
209south in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2568389#p2568389]this post[/url] wrote:... 55 bps for the 'simple average' but only 17 bps for the fund before the 10 bp expense ratio...i.e 55 vs. net 7...
The reported SEC yield is already net of expenses.
209south in same post wrote:I do wish Vanguard offered a true long-term TIPs fund!
Vanguard doesn't, but PIMCO does: 15+ Year U.S. TIPS Index ETF (LTPZ). It currently holds the April 2032 maturity and the six February maturities 2040-2045.
209south in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2568524#p2568524]this post[/url] wrote:... re. building a ladder within Vanguard Brokerage ... is there at least a summary page for the TIPs ladder that shows current market value etc?
An IRA statement from Vanguard has a summary section like:

Code: Select all

Traditional IRA account  $100,000
Vanguard funds            $40,000
Brokerage assets          $60,000
So if TIPS are the only thing in the brokerage account, you'll see their total market value. But if you have other holdings in the brokerage account, I don't know if Vanguard would show a total just for the TIPS. I doubt it.
Phineas J. Whoopee in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2568728#p2568728]this post[/url] wrote:With nominal bonds you know how much money you are going to get, so you can calculate nominal YTM. You don't know how many goods and services you will be able to buy with it. With inflation-protected bonds you don't know how much money you are going to get, so you can't calculate nominal YTM. You do know, roughly at least ... how many goods and services you will be able to buy with it.
Nicely put, PJW!
User avatar
ogd
Posts: 4876
Joined: Thu Jun 14, 2012 11:43 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by ogd »

209south: the 100bps is in much longer TIPS than the fund. So you are taking a lot of interest rate risk to go that high. I also think that the SEC yield of VIPSX is on the rise from lows earlier in the month (it's a 30 day average), which might close the gap to 7 year-ish bonds.

Individual bonds don't protect you from interest rate risk; they are at all times just as risky as a fund of similar duration. You can see this clearly in their ever-changing prices/yields, but even if you don't want to look (and pretend they are exactly what you began with) you still book losses, in the form of getting less yield than everyone else in the market.

What they do give you is declining duration by default, without having to do anything. If this is important to you (I personally think that the uncertainties from the stock side, negative OR positive, overwhelm every conceivable move from the bond side) and you don't want to do a little management of funds (e.g. gradually shifting LT to ST) to get about the same result, then it might be a way to go.

It's also the case that for Treasury securities, you don't hurt yourself much by going this route because they don't need diversification (unlike riskier bonds), and you do save the expense rate.

But bear in mind that this is a convenience (and perhaps peace of mind) tradeoff much more than an actual fundamental difference between the instruments. In fact, by going to the 30 year TIPS you'd be substantially increasing interest rate risk.
User avatar
Artsdoctor
Posts: 6017
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Moving from TIPs fund to TIPs ladder???

Post by Artsdoctor »

#Cruncher:

"There are a couple of qualifiers that affect the complexity.

•Are the TIPS in a taxable account? If so, I'd go even further and say handling a bunch of individual TIPS is an Imperial PITA. However, it's much less complicated if they are in an IRA (either Traditional or Roth.)"

Managing a 20-year TIPS ladder in a taxable would not only be an imperial PITA but it would be a NIGHTMARE!

•"Does the ladder cover any gap years? If it does, then handling those gaps would be complicated. However, if there are no gap years, then handling is much easier. Interest and principal will be credited automatically to the sweep fund associated with the brokerage account. The only action needed each year is to decide what to do with the sweep fund balance. E.g., withdraw it from the IRA, move it into another fund inside the IRA, or just let it sit there. No new TIPS will need to be purchased. A ladder could be set up this way through 2029 since there are TIPS that mature each of those years."

Ah yes, those pesky gap years. Another PITA. 2030-2031 and especially 2033-2039 are just black holes. I've chosen to fund the latter with an awful lot of 2032s but I've also warmed to rolling 10-years (2015->2025->2035) purchased at auction, although those amounts are small.

So definitely: TIPS ladders for liability matching are complex to set up. But I still find that's having something specific that's indexed to inflation creates a very sound and secure foundation for future spending.
Angst
Posts: 2968
Joined: Sat Jun 09, 2007 11:31 am

Re: Moving from TIPs fund to TIPs ladder???

Post by Angst »

#Cruncher wrote:
209south in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2568524#p2568524]this post[/url] wrote:... re. building a ladder within Vanguard Brokerage ... is there at least a summary page for the TIPs ladder that shows current market value etc?
An IRA statement from Vanguard has a summary section like:

Code: Select all

Traditional IRA account  $100,000
Vanguard funds            $40,000
Brokerage assets          $60,000
So if TIPS are the only thing in the brokerage account, you'll see their total market value. But if you have other holdings in the brokerage account, I don't know if Vanguard would show a total just for the TIPS. I doubt it.
Vanguard's brokerage account does not break out TIPS separately; like most of Vanguard's website, it leaves a lot to be desired.

However, if you go to the Bonds purchasing part of the Vanguard website, once you choose your account, at the upper right is a link "My ladders" where you can set up multiple bond ladders. I keep all my TIPS in one ladder and I can easily track all sorts of stats like principal, accrued interest, cash flow, duration, etc. on a daily basis. If you're unaware of it, be sure to try it out. It's much better than the miserable "Balances and holdings" webpage. I've never tried printing it though.
Topic Author
209south
Posts: 528
Joined: Mon Jan 28, 2013 9:58 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by 209south »

Thanks, Angst, #cruncher and many others - very helpful stuff. I'm going to begin the process of building a TIPs ladder, with the dual and related objectives of (a) liability matching and (b) driving higher yield...I understand that duration is driving the increased yield, but I think targeting a longer duration is sensible in the circumstances...the TIPs are in my portfolio to provide ballast and long-term ballast against future minimum spending. As I've pointed out on other threads, I have a fairly conservative (I hope) returns outlook modeled for my financial outlook, basically 0.5% real on fixed income and 3.5% on equities...my fixed income is made of principally of munis in taxable, TIPs in my IRA and some BND and BNDX in various pockets...with 17.5% of my total portfolio in TIPs and the current yields on Vanguard's TIPs funds of ~zero (25% of mine are ST TIPs), it makes it hard to get to the 0.5% objective. By moving much of my TIPs funds to laddered bonds yielding in the 1% area (I'm 55 and really targeting the maturities commencing in 2030), I 'liability match' while owning assets that will provide a comfortable return. To ogd's point, I am aware of the risk in making this shift, but in reality the vast majority of my fixed income will stay in the intermediate zone, so I'm comfortable with the tradeoffs. Now for the implementation!!
stlutz
Posts: 5585
Joined: Fri Jan 02, 2009 12:08 am

Re: Moving from TIPs fund to TIPs ladder???

Post by stlutz »

Has anyone here or in print elsewhere sat down and come up with realistic simulations that show that a TIPS LMP would "work" but holding a fund where you withdraw an inflation adjusted $ amount every year would not? The former certainly offers more of a feeling of certainty, but is it really anything more than that? It seems like the uncertainties of what your own expenses are, how long you live etc. dwarf the difference of individual bonds vs. a fund, but that's all a gut feel more than sitting down and plowing through numbers...
User avatar
#Cruncher
Posts: 3975
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: Moving from TIPs fund to TIPs ladder???

Post by #Cruncher »

ogd in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2569346#p2569346]this post[/url] wrote:Individual bonds don't protect you from interest rate risk; they are at all times just as risky as a fund of similar duration.
It's important to distinguish between a rolling and a non-rolling bond ladder. The former does indeed suffer the same interest rate risk as a bond fund of the same duration. But the original poster is discussing the latter (pardon the pun) type of bond ladder. When principal and coupon interest are collected each year, they are consumed. Nothing is reinvested in new bonds. So one is unaffected by interest rates at the time each bond in the ladder matures.

The only interest rate risk would be that an unexpected expense arose requiring one to "break" the ladder. If this occurred when interest rates had risen, one would indeed suffer a loss in liquidating some of the ladder to cover the expense. [*] But in the absence of this, I contend that the ladder has no interest rate risk. Granted, it has what we may call opportunity "risk". I.e., if one postponed buying the entire ladder, it's possible that one could get better yields in a few years. (This is the assumption I'm personally going on.) But opportunity "risk" isn't interest rate risk.
stlutz in previous post wrote:Has anyone here ... come up with realistic simulations that show that a TIPS LMP would "work" but holding a fund where you withdraw an inflation adjusted $ amount every year would not?
It isn't very realistic, but one can easily compute how long money would last for an assumed constant growth rate. For example consider the default 30-year $30,000 per year ladder discussed in my post above. It costs $803,000 and has a cash flow based 0.79% internal rate of return. This means that if the $803,000 grew at a constant 0.79%, one should be able withdraw $30,000 per year for 30 years. But what if -- instead of buying the TIPS ladder -- one invested $803,000 in the Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX). If the fund grew at the current 0.17% SEC yield every year, withdrawing $30,000 annually, would exhaust the fund during the 28th year.

Code: Select all

Year     0.79%      0.17%
----    -------    -------
   0    803,000    803,000 
   1    779,344    774,365 
   2    755,501    745,682 
   3    731,469    716,949 
   4    707,248    688,168 
   5    682,835    659,338 
   6    658,229    630,459 
   7    633,429    601,531 
   8    608,433    572,553 
   9    583,240    543,526 
  10    557,848    514,450 
  11    532,255    485,325 
  12    506,459    456,150 
  13    480,460    426,926 
  14    454,256    397,651 
  15    427,845    368,327 
  16    401,225    338,953 
  17    374,394    309,530 
  18    347,352    280,056 
  19    320,096    250,532 
  20    292,625    220,958 
  21    264,937    191,334 
  22    237,030    161,659 
  23    208,902    131,934 
  24    180,552    102,158 
  25    151,979     72,332 
  26    123,179     42,455 
  27     94,153     12,527 
  28     64,896    (17,452)
  29     35,409    (47,482)
  30      5,689    (77,562)
One can get the answer more easily with the Excel NPER function:

Code: Select all

30.2 =NPER(0.79%, 30000, -803000, 0, 0)
27.4 =NPER(0.17%, 30000, -803000, 0, 0)
* Even in this case the ladder might suffer less risk from rising interest rates than would a fund. With the ladder, one can choose which individual bonds to liquidate to cover the unexpected expense. Depending on the yield curve, one could choose to sell short, medium, or long term bonds from the ladder so as to minimize the loss. But with a single TIPS fund, one would have no such flexibility.
Angst
Posts: 2968
Joined: Sat Jun 09, 2007 11:31 am

Re: Moving from TIPs fund to TIPs ladder???

Post by Angst »

ughhh... while composing my reply to stlutz's post, #cruncher comes to the rescue. Well, I'll just leave my post because it's still part of the root of my perspective and logic for maintaining a small TIPS ladder. Here it is, and thanks #cruncher for your post above.
stlutz wrote:Has anyone here or in print elsewhere sat down and come up with realistic simulations that show that a TIPS LMP would "work" but holding a fund where you withdraw an inflation adjusted $ amount every year would not? The former certainly offers more of a feeling of certainty, but is it really anything more than that? It seems like the uncertainties of what your own expenses are, how long you live etc. dwarf the difference of individual bonds vs. a fund, but that's all a gut feel more than sitting down and plowing through numbers...
I don't know if anyone has presented all the numbers... perhaps search on #cruncher posts? But personally, the differences between withdrawing annually from the TIPS fund and allowing a TIPS ladder to pay off/decline over the years are so fundamental that I don't require a complete accounting.

Consider duration: The TIPS fund is currently something over 8 yrs (I'm guessing), but a non-rolling ladder declines over its lifetime to zero. That's a huge difference in itself. Every year's maturing tranche drops to essentially no sensitivity to interest rate risk as it reaches its maturity date.

Consider what it would take for one to hold a ladder, but try to imitate the TIPS fund: Every year, in addition to taking in the proceeds of the maturing oldest TIPS, you would have to sell some of all your other TIPS maturities in order to buy the newest issues. But then the whole idea of having next year's (let alone all future) maturing TIPS real value matching the liability for which it was originally purchased is ruined.

The TIPS fund and a non-rolling ladder are like apples and oranges. With the TIPS fund, there is no matching of liabilities, so statistics/probabilities rear their dubious heads. A non-rolling ladder matches every future year with the "real" equivalent of its original purchase price, more or less, let alone any dividends it has paid out over the years. Chance is theoretically eliminated (yeah, barring armageddon, the rapture, the Donald...)

I know this isn't what you're asking for, and I'd like to see that too, but it's enough for me.
User avatar
ogd
Posts: 4876
Joined: Thu Jun 14, 2012 11:43 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by ogd »

#Cruncher wrote:
ogd in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2569346#p2569346]this post[/url] wrote:Individual bonds don't protect you from interest rate risk; they are at all times just as risky as a fund of similar duration.
It's important to distinguish between a rolling and a non-rolling bond ladder. The former does indeed suffer the same interest rate risk as a bond fund of the same duration. But the original poster is discussing the latter (pardon the pun) type of bond ladder. When principal and coupon interest are collected each year, they are consumed. Nothing is reinvested in new bonds. So one is unaffected by interest rates at the time each bond in the ladder matures.
Actually, the distinction between rolling and non-rolling is unimportant at any given point in time. It only comes to play over time, by reducing duration naturally, as I mentioned. Right now, a non-rolling ladder has the same interest rate risk as a fund.

This is easy to see if we imagine three characters, A holding a fund, B holding a ladder of a similar shape, C holding cash, and a major risk event occuring tomorrow causing a loss of value of 10% in the fund. If B dares look, they will see the same loss; if they don't, they will simply incur it over time. Whereas C is in a much better place and they really didn't have interest rate risk. One can't say it was B and C who had similar risk when A and B can still buy each other's portfolios, whereas C can buy 10% more of each. It's clear to me that A and B have the same risk.

It's true that B's ladder, if left alone, will have lower and lower risk, but that's the future interest rate risk, not the present. It's as if I said that a long Target Retirement fund was much less risky than a 90/10 allocation based on its future trajectory; while still counting its stock-like present returns. As per its current composition, it's just as risky.
#Cruncher wrote:But in the absence of this, I contend that the ladder has no interest rate risk. Granted, it has what we may call opportunity "risk". I.e., if one postponed buying the entire ladder, it's possible that one could get better yields in a few years. (This is the assumption I'm personally going on.) But opportunity "risk" isn't interest rate risk.
We do call this interest rate risk. It's exactly the same thing. The same $X hit to your bottom line as if you'd marked to market, the very real chance you might underperform cash (the zero interest rate risk position) because of rising interest rates.

If one marks their ladder to market, they see exactly the same behavior as a fund: initial loss of value, followed by higher yield. Not looking does not reduce risk or improve returns; furthermore it can cost real opportunities in other situations, like rates going down.
#Cruncher wrote:* Even in this case the ladder might suffer less risk from rising interest rates than would a fund. With the ladder, one can choose which individual bonds to liquidate to cover the unexpected expense. Depending on the yield curve, one could choose to sell short, medium, or long term bonds from the ladder so as to minimize the loss. But with a single TIPS fund, one would have no such flexibility.
Selling at a loss is not that big of a deal with safe bonds. A depreciated bond or a very premium bond of the same maturity have the same yield and they can be exchanged freely. The return of a depreciated bond including reappreciation cannot exceed the yields that are readily available in the market. So choosing what to sell becomes a simple choice about the shape of the portfolio going forward, which is 1) rather market-timing-ish and 2) usually reproducible with funds unless one chooses a very strange shape, for some reason.

(I'm leaving the door open for some tax benefits here, although the interplay of capital losses and interest income is complex and reduces much of the benefit. But clearly, one can do things like: take a capital loss this year at the expense of higher interest income the next because of the different brackets, much more easily than with a fund).
Last edited by ogd on Wed Jul 29, 2015 11:44 am, edited 1 time in total.
User avatar
ogd
Posts: 4876
Joined: Thu Jun 14, 2012 11:43 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by ogd »

209south wrote:To ogd's point, I am aware of the risk in making this shift, but in reality the vast majority of my fixed income will stay in the intermediate zone, so I'm comfortable with the tradeoffs. Now for the implementation!!
As long as you're aware that it's the increased duration / risk that's giving you this return and not the lame-ness of the Vanguard fund, and that holding individual bonds does not protect you from that extra risk, I'm all for it. Like I said, these are Treasuries, the one segment of the bond market where an individual can do this with little or no negative consequences.
User avatar
#Cruncher
Posts: 3975
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: Moving from TIPs fund to TIPs ladder???

Post by #Cruncher »

ogd in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2570221#p2570221]this post[/url] wrote:... a non-rolling ladder has the same interest rate risk as a fund. This is easy to see if we imagine three characters, A holding a fund, B holding a ladder of a similar shape, C holding cash, and a major risk event occuring tomorrow causing a loss of value of 10% in the fund. If B dares look, they will see the same loss; ... It's clear to me that A and B have the same risk. (underline added)
ogd later in same post wrote:We do call this [ what I called opportunity "risk" ] interest rate risk. It's exactly the same thing. The same $X hit to your bottom line as if you'd marked to market, the very real chance you might underperform cash ... because of rising interest rates. (underline added)
Ogd, we don't disagree on the facts. I think where we differ is in the definition of "risk". You're implicitly defining it as "the chance of losing value". I define it as the "chance of not attaining one's goals". I believe we are both right given our different definitions.
Topic Author
209south
Posts: 528
Joined: Mon Jan 28, 2013 9:58 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by 209south »

So, speaking of 'implementation', I have a simple question. Despite being 55 years old and somewhat successful, I have never bought an individual stock or bond...I've been a Vanguard indexer since my profs at Chicago convinced me to be back in the 80s (one reason I am generous to my alma mater!) So, with the intention of building a ladder within my Vanguard IRA, I have three simple questions:
1. When I exchange one fund for another the 'trade' happens seamlessly at the day's close and I'm always fully invested...is that also the case with Treasuries/TIPs? The Vanguard TIPs fund has been remarkably volatile on a day-to-day basis and I'd hate to be out of the market on one of the good days! I'm sure the folks at Vanguard could walk me through this but curious if people here have advice.
2. My current plan is to leave my IRA money in place until RMD-time, so I intend for the ladder to commence in 2030, and build from there. With TIPs currently available for 2032 then 2040-2045, I'm curious what people think is the best manner to deal with the gaps? I suppose I could bulk up on the 2032s and 2040s, or I could just wait until new 10 years are sold for those maturities, or I could fill the gap with nominal treasuries, so that I'm somewhat hedged on my LMP plans (understanding the actual idea is to fund with real bonds, having some nominals in the ladder has some appeal)
3. Finally, I will likely have some lower income years between now and RMD time, and the thought of Roth conversions is appealing for all kinds of reasons. If returns are strong enough on the taxable side I may never need to take RMDs and I like the longer-term estate value of passing on a Roth...so in that event I guess I'd be taking my spending money from taxable, and would just monetize the TIPs either at maturity or otherwise - I guess this is more of an 'opportunity than a risk' to the laddering strategy?
Thanks for your thoughts!!
rca1824
Posts: 719
Joined: Tue Jun 03, 2014 9:33 am

Re: Moving from TIPs fund to TIPs ladder???

Post by rca1824 »

#Cruncher wrote:
ogd in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2569346#p2569346]this post[/url] wrote:Individual bonds don't protect you from interest rate risk; they are at all times just as risky as a fund of similar duration.
It's important to distinguish between a rolling and a non-rolling bond ladder. The former does indeed suffer the same interest rate risk as a bond fund of the same duration. But the original poster is discussing the latter (pardon the pun) type of bond ladder. When principal and coupon interest are collected each year, they are consumed. Nothing is reinvested in new bonds. So one is unaffected by interest rates at the time each bond in the ladder matures.

The only interest rate risk would be that an unexpected expense arose requiring one to "break" the ladder. If this occurred when interest rates had risen, one would indeed suffer a loss in liquidating some of the ladder to cover the expense. [*] But in the absence of this, I contend that the ladder has no interest rate risk. Granted, it has what we may call opportunity "risk". I.e., if one postponed buying the entire ladder, it's possible that one could get better yields in a few years. (This is the assumption I'm personally going on.) But opportunity "risk" isn't interest rate risk.
stlutz in previous post wrote:Has anyone here ... come up with realistic simulations that show that a TIPS LMP would "work" but holding a fund where you withdraw an inflation adjusted $ amount every year would not?
It isn't very realistic, but one can easily compute how long money would last for an assumed constant growth rate. For example consider the default 30-year $30,000 per year ladder discussed in my post above. It costs $803,000 and has a cash flow based 0.79% internal rate of return. This means that if the $803,000 grew at a constant 0.79%, one should be able withdraw $30,000 per year for 30 years. But what if -- instead of buying the TIPS ladder -- one invested $803,000 in the Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX). If the fund grew at the current 0.17% SEC yield every year, withdrawing $30,000 annually, would exhaust the fund during the 28th year.

Code: Select all

Year     0.79%      0.17%
----    -------    -------
   0    803,000    803,000 
   1    779,344    774,365 
   2    755,501    745,682 
   3    731,469    716,949 
   4    707,248    688,168 
   5    682,835    659,338 
   6    658,229    630,459 
   7    633,429    601,531 
   8    608,433    572,553 
   9    583,240    543,526 
  10    557,848    514,450 
  11    532,255    485,325 
  12    506,459    456,150 
  13    480,460    426,926 
  14    454,256    397,651 
  15    427,845    368,327 
  16    401,225    338,953 
  17    374,394    309,530 
  18    347,352    280,056 
  19    320,096    250,532 
  20    292,625    220,958 
  21    264,937    191,334 
  22    237,030    161,659 
  23    208,902    131,934 
  24    180,552    102,158 
  25    151,979     72,332 
  26    123,179     42,455 
  27     94,153     12,527 
  28     64,896    (17,452)
  29     35,409    (47,482)
  30      5,689    (77,562)
One can get the answer more easily with the Excel NPER function:

Code: Select all

30.2 =NPER(0.79%, 30000, -803000, 0, 0)
27.4 =NPER(0.17%, 30000, -803000, 0, 0)
* Even in this case the ladder might suffer less risk from rising interest rates than would a fund. With the ladder, one can choose which individual bonds to liquidate to cover the unexpected expense. Depending on the yield curve, one could choose to sell short, medium, or long term bonds from the ladder so as to minimize the loss. But with a single TIPS fund, one would have no such flexibility.
So you are essentially constructing a 30 year certain annuity with a payout rate of 3.7% indexed to inflation. Have you compared this to the quoted payout rates on inflation-indexed annuities? I can only find quotes for fixed annuities. It seems like on one hand you avoid fees by "doing it yourself" but you also lose the risk-pooling feature of annuities (if you switched to a lifetime annuity), so I'm not sure which one would come out ahead.

I definitely like the idea of matching assets to liabilities though. It makes the most intuitive sense and has zero risk.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
User avatar
ogd
Posts: 4876
Joined: Thu Jun 14, 2012 11:43 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by ogd »

#Cruncher wrote:
ogd in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2570221#p2570221]this post[/url] wrote:... a non-rolling ladder has the same interest rate risk as a fund. This is easy to see if we imagine three characters, A holding a fund, B holding a ladder of a similar shape, C holding cash, and a major risk event occuring tomorrow causing a loss of value of 10% in the fund. If B dares look, they will see the same loss; ... It's clear to me that A and B have the same risk. (underline added)
ogd later in same post wrote:We do call this [ what I called opportunity "risk" ] interest rate risk. It's exactly the same thing. The same $X hit to your bottom line as if you'd marked to market, the very real chance you might underperform cash ... because of rising interest rates. (underline added)
Ogd, we don't disagree on the facts. I think where we differ is in the definition of "risk". You're implicitly defining it as "the chance of losing value". I define it as the "chance of not attaining one's goals". I believe we are both right given our different definitions.
There are a couple of problems with such redefinitions of risk. The first is that it contradicts the market pricing of securities. If you believe that by choosing your risk definition and horizon just-so, instruments like long bonds become riskless, you will be tempted to security-pick to a far greater degree than what we're normally comfortable with. You see free lunches everywhere. Whereby important properties of bonds such as providing a rebalancing buffer for stocks and providing security in case horizon is unexpectedly shortened (e.g. job loss or illness) can fall by the wayside.

The second is that the "risk of not enough return" mindset inevitably points to stocks, possibly leveraged, as in rca1824's threads. I.e. long bonds are not risky if I don't look, and stocks are not risky if I only look at the dividends or other slow-moving, non-anticipating measures. Well, I think you should look at all times when evaluating risk.

My definition of interest rate risk is very reasonable: can you underperform cash based entirely on yield curve changes (i.e. separating it from credit events, or inflation anticipation in this case). If the answer is yes, you have interest rate risk.
User avatar
Artsdoctor
Posts: 6017
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Moving from TIPs fund to TIPs ladder???

Post by Artsdoctor »

"My definition of interest rate risk is very reasonable: can you underperform cash based entirely on yield curve changes (i.e. separating it from credit events, or inflation anticipation in this case). If the answer is yes, you have interest rate risk."

This is a bit tricky. What's your definition of cash? Is it a money market fund earning 0.01% or is it a Barclay's savings account earning 100 times more? Is the interest re-invested or spent? And is the time-frame over the life of the bond?

If you buy 10 individual TIPS now maturing in 2025 for roughly $10,000, your principal at maturity should approximate the $10,000 in 2025-dollars, whatever that might be worth (and this is excluding the coupons along the way). So you'd have to imagine a scenario where cash would have to stay ahead of inflation for a decade, compared to the bond in order to fulfill your definition of interest rate risk.
User avatar
ogd
Posts: 4876
Joined: Thu Jun 14, 2012 11:43 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by ogd »

Artsdoctor wrote:
ogd wrote:My definition of interest rate risk is very reasonable: can you underperform cash based entirely on yield curve changes (i.e. separating it from credit events, or inflation anticipation in this case). If the answer is yes, you have interest rate risk."
This is a bit tricky. What's your definition of cash? Is it a money market fund earning 0.01% or is it a Barclay's savings account earning 100 times more? Is the interest re-invested or spent? And is the time-frame over the life of the bond?
T-bills, so roughly money market without ERs. The best savings account are just unfair (plus inaccessible for large or restricted accounts), though they should be very much on the table for many people.

Interest is re-invested. It's generally best to do this when discussing bond returns so as not to differentiate between e.g. zero coupons and high premium bonds of the same yield.

The time frame can be over the lifetime of the bond if you want. (Shorter would be much more likely and arguably either unfair or truer to the form of what we normally call risk).
Artsdoctor wrote:If you buy 10 individual TIPS now maturing in 2025 for roughly $10,000, your principal at maturity should approximate the $10,000 in 2025-dollars, whatever that might be worth (and this is excluding the coupons along the way). So you'd have to imagine a scenario where cash would have to stay ahead of inflation for a decade, compared to the bond in order to fulfill your definition of interest rate risk.
Yes, this is very possible, e.g. the recent 2005-2007 period with 5% cash yields.
User avatar
Artsdoctor
Posts: 6017
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Moving from TIPs fund to TIPs ladder???

Post by Artsdoctor »

^ Yes, that two-year period could definitely have been the winner. But the last five years have been the unequivocal loser.

I'm thinking to avoid recency bias, of course. This most recent environment has just been so difficult for fixed income investors.

To me, I'd be very hard-pressed to imagine a scenario where flipping T-bills over a decade would come out ahead of a 10-year TIPS, but I could very well be wrong.
User avatar
abuss368
Posts: 27850
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Moving from TIPs fund to TIPs ladder???

Post by abuss368 »

I wish Vanguard's Intermediate TIPS fund paid monthly dividends, was an index fund, and Admiral shares were available with the index!

Keep investing simple!
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by Phineas J. Whoopee »

abuss368 wrote:I wish Vanguard's Intermediate TIPS fund paid monthly dividends, was an index fund, and Admiral shares were available with the index!
...
Suppose your wish were granted. What would you and your clients do?
PJW
longinvest
Posts: 5672
Joined: Sat Aug 11, 2012 8:44 am

Re: Moving from TIPs fund to TIPs ladder???

Post by longinvest »

Couldn't one replace the non-rolling TIPS ladder with a combination of a TIPS fund and cash, rebalancing every 6 months according to the following schedule (e.g. keeping duration at or below the target duration).

30 years => (1 + 2 + ... + 30) / 30 = ((30 X 31) / 2) / 30 = duration 15.5 years
29.5 years => duration 15.0 years
29 years => (1 + 2 + ... + 29) / 29 = ((29 X 30) / 2) / 29 = duration 15.0 years (after withdrawal)
...
2 years => (1 + 2) / 2 = ((2 X 3) / 2) / 2 = duration 1.5 years
1.5 years => duration 1.0 years
1 years => 1 / 1 = duration 1.0 years
0.5 years => duration 0.5 years

So, mainly, reduce the duration by 0.5 year, mid year, and take a withdrawal (maintaining duration) every anniversary.

For example, assuming a TIPS fund duration of 8 years and a target duration of 6 years, one would rebalance to:
6/8 TIPS + 2/8 cash = 75% TIPS + 25% cash

For higher than 8 years duration targets, one would put 100% in the TIPS fund.

This would seem simpler to buy and manage than a 30-year ladder.

What's wrong with it?
Last edited by longinvest on Fri Jul 31, 2015 5:12 pm, edited 1 time in total.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Topic Author
209south
Posts: 528
Joined: Mon Jan 28, 2013 9:58 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by 209south »

longinvest, I'm not sure I understand your question...The Vanguard TIPs fund has a duration of ~8 years...so if you own some combination of that and cash you haven't addressed the longer-term maturities? It may be that a fund is preferable for many/most investors, and I'm sure I'll keep some of TIPs fund holding...but I've decided I'm going to cautiously build a ladder, initially focused on liability-management and coinciding with the RMDs I'm expecting to commence in 2031, as a primary objective of mine is to translating some of my current portfolio into a prescribed future income stream. I'm asset-rich but pension-poor, and I'm trying to chip away at that disconnect.
longinvest
Posts: 5672
Joined: Sat Aug 11, 2012 8:44 am

Re: Moving from TIPs fund to TIPs ladder???

Post by longinvest »

209south wrote:longinvest, I'm not sure I understand your question...The Vanguard TIPs fund has a duration of ~8 years...so if you own some combination of that and cash you haven't addressed the longer-term maturities? It may be that a fund is preferable for many/most investors, and I'm sure I'll keep some of TIPs fund holding...but I've decided I'm going to cautiously build a ladder, initially focused on liability-management and coinciding with the RMDs I'm expecting to commence in 2031, as a primary objective of mine is to translating some of my current portfolio into a prescribed future income stream. I'm asset-rich but pension-poor, and I'm trying to chip away at that disconnect.
One could use PIMCO's 15+ year TIPS index ETF, duration 22.x years, and combine it with cash to dilute the duration to 15.5. Every 6 months, one would rebalance with cash to obtained the desired duration, and every year, one would also take a withdrawal.

My question is: what's the difference between that and actually holding an entire non-rolling ladder of 30 distinct TIPS? Wouldn't buying the ETF and diluting the duration using cash in a high-interest savings account be simpler?
Last edited by longinvest on Fri Jul 31, 2015 5:13 pm, edited 1 time in total.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Topic Author
209south
Posts: 528
Joined: Mon Jan 28, 2013 9:58 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by 209south »

Great question and I'm sure someone more analytical will provide a better answer than I can. All I know is 'given my current objective of using TIPs for LMP purposes, as a proxy for a TIPs ladder the long-term PIMCO fund is more suitable than Vanguard's intermediate term fund'...having said that, I've decided it won't be difficult to set up and monitor a ladder, I like the idea of saving the 10bps expense ratio, and I've already created an LMP spreadsheet putting the ladder alongside expected SS payments allowing for a solid inflation-adjusted 'pension' commencing at age 70. I haven't decided how quickly I'll build the ladder, but am inclined to swiftly fund about 50% of the targeted amount asap, from my existing Vanguard TIPs funds, and then to chip away periodically over the next few years to average in at whatever future rates may be. The longest current TIP is a 2045 maturity, at which time my wife and I will be 85, and I think rather than extending the ladder beyond that point I'll build a DIA over time to supplement SS beyond that age.
User avatar
abuss368
Posts: 27850
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Moving from TIPs fund to TIPs ladder???

Post by abuss368 »

Phineas J. Whoopee wrote:
abuss368 wrote:I wish Vanguard's Intermediate TIPS fund paid monthly dividends, was an index fund, and Admiral shares were available with the index!
...
Suppose your wish were granted. What would you and your clients do?
PJW
Go to Atlantic City and outperform the TIPS fund!
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
ogd
Posts: 4876
Joined: Thu Jun 14, 2012 11:43 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by ogd »

longinvest wrote:What's wrong with it?
Nothing much, but it might perform differently due to the maturity shape. For example, suppose that in the latter half of the ladder, yields go up steeply but only in 15 year+ end of the curve (whether or not realistic). The ladder would not have been affected at all, but a good chunk of the fund is.

Of course, the opposite may happen and the ladder get hit disproportionately. I would say that the dice can fall either way, this time, unlike holding just the constant-duration fund when if "yields go up" the outcome for the fund is probably worse.

One might get closer by switching to a shorter TIPS fund. Or, one might decide that the yields on cash are so good vs what the market is pricing in in its judgment of yields (i.e. compare to the zero term nominals) that the fund+cash combination is more likely than not to outperform.
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by Phineas J. Whoopee »

abuss368 wrote:
Phineas J. Whoopee wrote:
abuss368 wrote:I wish Vanguard's Intermediate TIPS fund paid monthly dividends, was an index fund, and Admiral shares were available with the index!
...
Suppose your wish were granted. What would you and your clients do?
PJW
Go to Atlantic City and outperform the TIPS fund!
I see. You and your clients wouldn't hold TIPS even under your most ideal circumstances, because you think they're surer losers than casino gambling.

Why do you continually ask and start threads about them, then?

A lot of people put time and thought into responding, and now you make it completely clear your questions have never been serious. I think it impolite to waste all of their efforts.

PJW
User avatar
ogd
Posts: 4876
Joined: Thu Jun 14, 2012 11:43 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by ogd »

209south wrote:Great question and I'm sure someone more analytical will provide a better answer than I can. All I know is 'given my current objective of using TIPs for LMP purposes, as a proxy for a TIPs ladder the long-term PIMCO fund is more suitable than Vanguard's intermediate term fund'...having said that, I've decided it won't be difficult to set up and monitor a ladder, I like the idea of saving the 10bps expense ratio, and I've already created an LMP spreadsheet putting the ladder alongside expected SS payments allowing for a solid inflation-adjusted 'pension' commencing at age 70. I haven't decided how quickly I'll build the ladder, but am inclined to swiftly fund about 50% of the targeted amount asap, from my existing Vanguard TIPs funds, and then to chip away periodically over the next few years to average in at whatever future rates may be. The longest current TIP is a 2045 maturity, at which time my wife and I will be 85, and I think rather than extending the ladder beyond that point I'll build a DIA over time to supplement SS beyond that age.
There's nothing particularly wrong with that when you're doing Treasuries and don't need to diversify.

But for me, the big wrench in the smooth running gears of this liability matching stuff is the behavior of equities.

Suppose that equities do extremely well in a period when a bunch of your ladder is maturing. You're in equity-selling mode (to maintain a low risk profile) and you will pretty much never have a real need for the maturing money. Which means the term you were holding was unnecessarily short.

That's the happy scenario, and you might argue that you're fine anyway so who cares. What if equities do extremely poorly? The equity side will call for rebalancing, from the money earmarked from spending and from elsewhere in the ladder. Passing up those equity prices is just as bad as someone having to sell stock. Will you not be inclined to reduce spending a bit instead? At the very least, will you not be selling from across the ladder?

Everytime I try to imagine this in action alongside equities, it's very hard for me to understand how it's that different from someone having a regular balanced portfolio. The volatility of even a small stock allocation overwhelms all these little bond volatility consideration.
dbr
Posts: 46137
Joined: Sun Mar 04, 2007 8:50 am

Re: Moving from TIPs fund to TIPs ladder???

Post by dbr »

ogd wrote:
But for me, the big wrench in the smooth running gears of this liability matching stuff is the behavior of equities.

Suppose that equities do extremely well in a period when a bunch of your ladder is maturing. You're in equity-selling mode (to maintain a low risk profile) and you will pretty much never have a real need for the maturing money. Which means the term you were holding was unnecessarily short.

That's the happy scenario, and you might argue that you're fine anyway so who cares. What if equities do extremely poorly? The equity side will call for rebalancing, from the money earmarked from spending and from elsewhere in the ladder. Passing up those equity prices is just as bad as someone having to sell stock. Will you not be inclined to reduce spending a bit instead? At the very least, will you not be selling from across the ladder?

Everytime I try to imagine this in action alongside equities, it's very hard for me to understand how it's that different from someone having a regular balanced portfolio. The volatility of even a small stock allocation overwhelms all these little bond volatility consideration.
I'm not an enthusiast for the LMP concept, but one thing that is clear is that the LMP is anything but a portfolio. This is money that is separated from and not any part of a portfolio management concept. In fact the LMP is not even assets. The LMP is just some mechanism to provide a defined income stream. That is why the concept is clear and logical if you give up the money and buy an income stream in the form of an SPIA. The TIPS ladder is a kind of neither fish nor fowl LMP and, as you say, lacks a bit in the practice. I will grant that the issue of inflation and SPIAs needs consideration, but an LMP that ends whether you are still alive or not also needs some consideration. That is why the longevity annuity or insurance gets brought into the picture, but now inflation comes back as an issue.
longinvest
Posts: 5672
Joined: Sat Aug 11, 2012 8:44 am

Re: Moving from TIPs fund to TIPs ladder???

Post by longinvest »

ogd wrote:
longinvest wrote:What's wrong with it?
Ogd,

If I translate your answer below correctly, it says: Everything is wrong with it if the objective is liability matching.

In other words, due to some uncertainty in its performance, we can't expect to withdraw a predetermined constant-dollar amount from it annually. There is a risk of premature depletion.
ogd wrote:Nothing much, but it might perform differently due to the maturity shape. For example, suppose that in the latter half of the ladder, yields go up steeply but only in 15 year+ end of the curve (whether or not realistic). The ladder would not have been affected at all, but a good chunk of the fund is.

Of course, the opposite may happen and the ladder get hit disproportionately. I would say that the dice can fall either way, this time, unlike holding just the constant-duration fund when if "yields go up" the outcome for the fund is probably worse.

One might get closer by switching to a shorter TIPS fund. Or, one might decide that the yields on cash are so good vs what the market is pricing in in its judgment of yields (i.e. compare to the zero term nominals) that the fund+cash combination is more likely than not to outperform.
Thanks for the explanation.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Erwin
Posts: 1929
Joined: Fri Apr 27, 2007 11:16 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by Erwin »

RetiredinKaty wrote:A really good discussion. I am comfortable with the intermediate TIPS fund, but the ladder would be the safest way to go for those who could manage it. I think I would want professional assistance to put a ladder together, and I doubt my spouse would want to maintain it.
I do not understand the concern. Once you set it up for your duration, there is no maintenance. Every year you get a chunk of money.
Erwin
Topic Author
209south
Posts: 528
Joined: Mon Jan 28, 2013 9:58 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by 209south »

ogd and dbr, for the time being I contemplate the ladder requiring ~12%-15% of my current portfolio, vs. the 17.5% allocation I currently have toward TIPs. So I would still have a smaller TIPs fund to be used in rebalancing...but when the ladder is in place I will re-evaluate the role of a broader TIPs fund in my portfolio, and in fact am likely to streamline toward a simpler fixed income exposure.
User avatar
ogd
Posts: 4876
Joined: Thu Jun 14, 2012 11:43 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by ogd »

longinvest wrote:If I translate your answer below correctly, it says: Everything is wrong with it if the objective is liability matching.
Oh, I wouldn't go nearly as far. Just because differences can happen, it doesn't mean they are likely. I'd expect yield curve changes to be much smoother than my artificial example that had a peak showing up only in the long end of the curve. I'd expect any deltas to be small and probably overwhelmed by the good cash deals on the short end, if they persist.
RetiredinKaty
Posts: 134
Joined: Mon Sep 09, 2013 6:52 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by RetiredinKaty »

mtp follower wrote:
I do not understand the concern. Once you set it up for your duration, there is no maintenance. Every year you get a chunk of money.
Don't you in fact every year get chunks of money, one of which is large? Can you see that that might be a bit much for some to manage in the context of overall spending?
User avatar
Artsdoctor
Posts: 6017
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Moving from TIPs fund to TIPs ladder???

Post by Artsdoctor »

^ Why would a big chunk coming in be difficult to manage? You can simply put it in your savings or checking account that you're using for that year's expenses.

Income coming in during retirement years can be variable so most people usually have a year or two in a liquid account to draw from for routine expenses as well as luxuries and unexpected bills.
RetiredinKaty
Posts: 134
Joined: Mon Sep 09, 2013 6:52 pm

Re: Moving from TIPs fund to TIPs ladder???

Post by RetiredinKaty »

Yes most people do.
Post Reply