TIPS for investors in their 30s?

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asif408
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TIPS for investors in their 30s?

Post by asif408 »

I was wondering what benefit (if any) investors in their 30s would have owning TIPS. I've looked at the Vanguard target retirement funds and there are no TIPS in the 2045 target retirement fund until 5 years from retirement. Then the amount increases.

I've seen people on here report owning anywhere from 0%-50% of their bond allocation in TIPS and was wondering if any other investors in their 30s (or those around 30 years from retirement) own TIPS. I've been trying to learn as much as I can about TIPS but I have to admit the more I read the more confused I get. I currently just have a TBM fund.
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Re: TIPS for investors in their 30s?

Post by Rodc »

If we get unexpected inflation you will likely be glad you have them.

If we do not get unexpected inflation you will likely be glad you don't have them.

If being young your bond allocation is small or modest it will not make much different either way.

Early on your periodic investments will drive your results, much more than the specific type of bonds you own.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: TIPS for investors in their 30s?

Post by dbr »

It's not likely that you have a specific reason to make sure your bond investments are free of inflation risk. So there may be no benefit for you to own TIPS.

It is also true that if you want to invest in "no default risk" treasuries and at a duration similar to what TIPS or TIPS fund you would buy, then there would be nothing wrong with holding some allocation to TIPS.

The confusion you mention may be because you are trying to reconcile different people who say without clear explanation that someone should do "this," or "that," or "some other thing" when it would be simpler to note the characteristics of different kinds of investments and decide which are the best fit for your situation and objectives. In the case of TIPS it is to own an asset that has no inflation risk and otherwise is a Treasury bond of some duration or another. There may be minor nuances regarding details, difference between funds and individual bonds, and tax status (all Treasuries are state tax exempt). Is there a specific point of confusion?
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Re: TIPS for investors in their 30s?

Post by wilked »

I am young/mid 30s, and I carry about 50% of bonds as TIPS. I do so to protect against inflation, as the rest of my portfolio doesn't really protect for this
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Re: TIPS for investors in their 30s?

Post by asif408 »

dbr wrote:It's not likely that you have a specific reason to make sure your bond investments are free of inflation risk. So there may be no benefit for you to own TIPS.

It is also true that if you want to invest in "no default risk" treasuries and at a duration similar to what TIPS or TIPS fund you would buy, then there would be nothing wrong with holding some allocation to TIPS.

The confusion you mention may be because you are trying to reconcile different people who say without clear explanation that someone should do "this," or "that," or "some other thing" when it would be simpler to note the characteristics of different kinds of investments and decide which are the best fit for your situation and objectives. In the case of TIPS it is to own an asset that has no inflation risk and otherwise is a Treasury bond of some duration or another. There may be minor nuances regarding details, difference between funds and individual bonds, and tax status (all Treasuries are state tax exempt). Is there a specific point of confusion?
I have a couple points of confusion:

1) What are the differences between long and short term TIPS funds? It seems like if you are trying to protect against inflation over the long term you would want to own long term TIPS funds, but I haven't seen much advice advocating long-term TIPS funds. Vanguard uses the short term TIPS fund in their retirement accounts, which I guess is because they don't start including them in the portfolio until 5 years from retirement.

It would seem to me long term TIPS funds would guarantee your money keeps pace with inflation over the investment lifetime. But then I'm not sure if the short term TIPS fund would be any different over the long haul if TIPS are a hedge against inflation no matter the time frame. Is the difference just in the volatility?

2) If I have investments and/or an income that keeps up with inflation (such as a pension through work) along with my retirement accounts (IRA, Roth, & 457b) would that lessen the need for TIPS?
Last edited by asif408 on Wed May 28, 2014 11:22 am, edited 1 time in total.
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Re: TIPS for investors in their 30s?

Post by steve_14 »

asif408 wrote:I was wondering what benefit (if any) investors in their 30s would have owning TIPS.
You could start your retirement TIPS ladder now, and get the added yield (and interest rate risk) of 30 year TIPS.
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Re: TIPS for investors in their 30s?

Post by abuss368 »

You are asking a good question. I too have been learning about TIPS and considering if I need them as well at this point, if at all, in our portfolio.

Vanguard does not include them in their Target fund offerings until right before retirement. Also notable is Vanguard replaced the Intermediate Term TIPS fund in the Target fund offerings with the new Short Term TIPS Index fund. An article posted on Vanguard's website noted that a shorter term bond was better suited for inflation protection. The high duration of the Intermediate Term TIPS fund (i.e. 8.0+-) may have had something to do with it as well. I personally have zero interest in the Short term TIPS fund. In reviewing Vanguard's website, there is $0 in dividend income. That is not helping a retiree who has cash flow needs.

I would advise that if your overall bond holdings are not significant at this point, you will be fine to invest in Total Bond Index (or Intermediate Tax exempt in a taxable account) and obtain Admiral shares status when possible.

Vanguard appears to be marketing and recommending the new Total International Bond Index fund more than any other offering. I rarely hear anything about TIPS anymore!

I would expect however, that if I was going to add one additional bond fund to our Total Bond Index, it may possibly be the Intermediate Term TIPS fund. I think debt in general, and international debt specifically, is a whole different ball game than equities.
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Re: TIPS for investors in their 30s?

Post by abuss368 »

wilked wrote:I am young/mid 30s, and I carry about 50% of bonds as TIPS. I do so to protect against inflation, as the rest of my portfolio doesn't really protect for this
David Swensen, Yale University CIO, and author of the excellent investment book "Unconventional Success" recommended a 50% of fixed income allocation to TIPS.
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Re: TIPS for investors in their 30s?

Post by abuss368 »

Equities provide inflation protection in the mid to long term. In addition, REITs have been known to provide inflation protection as the leases for real estate mature and new leases are executed as higher rental rates.
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Re: TIPS for investors in their 30s?

Post by dbr »

asif408 wrote: I have a couple points of confusion:

1) What are the differences between long and short term TIPS funds? It seems like if you are trying to protect against inflation over the long term you would want to own long term TIPS funds, but I haven't seen much advice advocating long-term TIPS funds. Vanguard uses the short term TIPS fund in their retirement accounts, which I guess is because they don't start including them in the portfolio until 5 years from retirement.

Term in a bond fund has nothing to do with how long you own them. It has to do with how far away from maturity the bonds in the funds are. You can own the fund forever as the management simply replaces maturing bonds with new ones. The difference between long and short duration bond funds is that longer funds are more sensitive to interest rate changes (real rates for TIPS, not affected by nominal rates changing due to changes in inflation rate). Longer term funds are therefore more volatile. I would not choose duration in bond funds "because Vanguard does it." I would make that decision based on understanding how funds behave and deciding what suits your needs and preferences.

The inflation part of the deal is that the value of the bonds is incremented daily to offset inflation. That process goes on as long as you own the fund. The periodic increment is the same no matter whether you hold long term or short term bonds. It would seem to be arguable that there is little benefit from seeking an offset to inflation risk in short funds because short bond returns follow inflation with less risk than do longer bonds. Vanguard has argued that short TIPS are better "correlated" with inflation but to me that is a clear misunderstanding of what it means to offset inflation risk in bonds and making that statement is actual miss-education.



It would seem to me long term TIPS funds would guarantee your money keeps pace with inflation over the investment lifetime. But then I'm not sure if the short term TIPS fund would be any different over the long haul if TIPS are a hedge against inflation no matter the time frame. Is the difference just in the volatility?

Mostly right in what you say; both TIPS keep pace with inflation. You should note that TIPS are NOT a hedge against inflation because they do not offset inflation risks in the rest of the portfolio not invested in TIPS. They only offset inflation to themselves. The portfolio would be hedged if TIPS were the entirety of it. However, there is also the yield curve, in which the longer the term the greater the real interest rate. It is arguable that intermediate duration bonds are a better trade-off of volatility and return than short bonds. It is also an argument that in a portfolio of stocks and bonds, especially with more stocks than bonds, that bonds should be short and safe and risk taken in stocks. In any case, with more stocks than bonds, exactly what bonds one owns is not very important. That is why most of these bond discussions amount to dancing on the head of a pin. Even so, knowing stuff about stuff is still a good idea.


2) If I have investments and/or an income that keeps up with inflation (such as a pension through work) along with my retirement accounts (IRA, Roth, & 457b) would that lessen the need for TIPS?

Right, the greater one's overall position involves assets that are not TIPS and income streams that grow with inflation over time, the less use there is in holding TIPS. Keep in mind the premium paid to hold TIPS over nominal bonds is minimal, so there is no reason to avoid TIPS because they are TIPS. Whether Treasuries of the proposed duration are a preferable choice in general is a different discussion, that discussion not being a very important one for young investors holding stocks and looking at a long future of income generation.
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Re: TIPS for investors in their 30s?

Post by Longtimelurker »

I own iBonds, and highly recommend them. I am 34.

I will look to start buying TIPS in another decade as two things become more clear:

1: What my expenses will be in early retirement
2: When I want early retirement to start

When I do buy, it will be as part of a liability matching strategy for core expenses.
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Re: TIPS for investors in their 30s?

Post by feh »

I'm planning on retiring in 2 years. I have not owned TIPS before, but between now and retirement, TIPS will become 20% of our bond holdings. They will be held in a fund w/ 5 year average duration (AIANX).
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Re: TIPS for investors in their 30s?

Post by #Cruncher »

dbr in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2072230#p2072230]this post[/url] wrote:I would not choose duration in bond funds "because Vanguard does it." I would make that decision based on understanding how funds behave and deciding what suits your needs and preferences.

Vanguard has argued that short TIPS are better "correlated" with inflation but to me that is a clear misunderstanding of what it means to offset inflation risk in bonds and making that statement is actual miss-education.
Two excellent points, dbr.
feh wrote:They [TIPS] will be held in a fund w/ 5 year average duration (AIANX).
I wouldn't believe the 5.3 year duration reported for the American Century AIANX Inflation-Adjusted Bond Fund. I would assume that its average duration is actually about the same as the 7.9 that Vanguard reports for its Inflation-Protected Securities Fund (VIPSX). I say this because the maturity breakdown and average maturity are about the same for both funds:

Code: Select all

Maturity     AIANX   VIPSX
--------     -----   -----
   0-1          2%      2%
   1-3         14%     18%
   3-5         20%     15%
   5-10        37%     39%
  10-20        20%     19%
  20-30         7%      7%
              ----    ----
              100%    100%

Code: Select all

Avg Life       8.44    8.5
Avg Duration   5.3     7.9
American Century may be defining "duration" in terms of sensitivity to nominal interest rates instead of to TIPS rates themselves. I've seen other TIPS funds do this; but I believe it's a useless statistic.
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Re: TIPS for investors in their 30s?

Post by abuss368 »

Hi asif408,

Have you decided if you are going to add TIPS or not? You have received some very informative posts.

Best.
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Re: TIPS for investors in their 30s?

Post by asif408 »

Hi abuss368,

I think I will stick with my current bond holding (TBM) for now. You are correct about the posts, and I do greatly appreciate the feedback. I can't say that any of the feedback has moved me towards adding them at this point.

Considering my situation (relatively low balance in IRAs, of which 30% is in bonds, and a pension I have through work), I think I will keep things simple and stick with my version of Rick Ferri's "Core Four" portfolio. I think as my bond allocation increases with age I will definitely consider adding some TIPS.

Thanks again everyone!
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Re: TIPS for investors in their 30s?

Post by abuss368 »

asif408 wrote:Hi abuss368,

I think I will stick with my current bond holding (TBM) for now. You are correct about the posts, and I do greatly appreciate the feedback. I can't say that any of the feedback has moved me towards adding them at this point.

Considering my situation (relatively low balance in IRAs, of which 30% is in bonds, and a pension I have through work), I think I will keep things simple and stick with my version of Rick Ferri's "Core Four" portfolio. I think as my bond allocation increases with age I will definitely consider adding some TIPS.

Thanks again everyone!
Hi asif408,

The "Core Four" portfolio as recommended by Rick Ferri is an excellent low cost and effective choice.

Best.
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Re: TIPS for investors in their 30s?

Post by KyleAAA »

The best reason is that TIPS haven't been super highly correlated with other bonds in the past (haven't looked in a while). Thus, holding half your bonds in TIPS might offer some moderate diversification benefit regardless of age. Inflation protection isn't a very good reason for an investor in their 30's to me because they presumably already hold plenty of equities and perhaps REITs.
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Re: TIPS for investors in their 30s?

Post by Call_Me_Op »

wilked wrote:I am young/mid 30s, and I carry about 50% of bonds as TIPS. I do so to protect against inflation, as the rest of my portfolio doesn't really protect for this
Oh? You don't have any stocks?
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Re: TIPS for investors in their 30s?

Post by conlius »

I am 29 and have a small allocation to TIPS. My bond allocation is ~25% of my portfolio and set as 60/20/20 for Total Bond Market, TIPS, and High-Yield respectively. As I age, I will slowly decrease my high-yield positions and move closer to a 75/25 or 66/33 TBM/TIPS for the bond portion of my portfolio. I like the idea that I can catch some gains if inflation gets out of control one day.
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Re: TIPS for investors in their 30s?

Post by abuss368 »

KyleAAA wrote:The best reason is that TIPS haven't been super highly correlated with other bonds in the past (haven't looked in a while). Thus, holding half your bonds in TIPS might offer some moderate diversification benefit regardless of age. Inflation protection isn't a very good reason for an investor in their 30's to me because they presumably already hold plenty of equities and perhaps REITs.
Excellent post based on a higher equity allocation earlier in the investing timeframe and the overall need for TIPS.
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Re: TIPS for investors in their 30s?

Post by abuss368 »

Does anyone know what the dividend will be for the Vanguard Intermediate TIPS fund this month?
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