Buying Vanguard TIPS Fund with current interest rates ok?

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lightheir
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Buying Vanguard TIPS Fund with current interest rates ok?

Post by lightheir »

I am about to rebalance my portfolio, and I am in a high (35%) fed tax bracket.

Was looking at Vanguard Inflation-Protected Securities Fund (VIPSX) as a long-term bond holding to be placed into a tax-advantaged account.

Of note, because interest rates are at all-time lows right now, and it would difficult for them to go any lower, would that be a big risk to advise against buying VIPSX now, as rates really have very little room to go lower, and thus the main risk is for interest rates to go up and thus decrease the share value of the fund?

Or is this risk really not important in the context of a long-term (10+yr) target holding time?
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by Doc »

lightheir wrote:Of note, because interest rates are at all-time lows right now, and it would difficult for them to go any lower, would that be a big risk to advise against buying VIPSX now, as rates really have very little room to go lower, and thus the main risk is for interest rates to go up and thus decrease the share value of the fund?
Rates are low because of Fed action to improve employment and the slow economy. The Fed indicated in the last few weeks that they intended to keep them low for the foreseeable future. But there has been some signs of inflation starting to rise and keeping inflation in check is the second of the Feds main objectives. So the Fed may need to increase rates. Conflicting objectives.

With rates as low as they are you are not likely to lose a lot by waiting. I would not make a large new commitment to TIPS under the current abnormal conditions. Others disagree. See the current thread: Grok's Tip #10. http://www.bogleheads.org/forum/viewtop ... 10&t=84168
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by dbr »

lightheir wrote:I am about to rebalance my portfolio, and I am in a high (35%) fed tax bracket.

Was looking at Vanguard Inflation-Protected Securities Fund (VIPSX) as a long-term bond holding to be placed into a tax-advantaged account.

Of note, because interest rates are at all-time lows right now, and it would difficult for them to go any lower, would that be a big risk to advise against buying VIPSX now, as rates really have very little room to go lower, and thus the main risk is for interest rates to go up and thus decrease the share value of the fund?

Or is this risk really not important in the context of a long-term (10+yr) target holding time?
Even if this fear is accepted as a basis for making decisions about how to invest, the argument does not distinguish between TIPS and nominal bonds nor across ranges of duration. Therefore there is no help there in trying to decide what bonds one should choose.

Within bond investments, it is possible that for long term investors longer duration TIPS are the best choice of all bonds right now -- or not. Larry Swedroe posts monthly on the subject. One should never forget to compare these options to CD's and I-bonds, pluses and minuses accounted for on all sides.
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by Taylor Larimore »

Hi Lightheir:
Of note, because interest rates are at all-time lows right now, and it would difficult for them to go any lower, would that be a big risk to advise against buying VIPSX now, as rates really have very little room to go lower, and thus the main risk is for interest rates to go up and thus decrease the share value of the fund?
There is always "risk" with any investment. You can try to market-time VIPSX--or do as Mr. Bogle recommends: Develop a personal asset allocation plan and then stay-the-course.

In my opinion, a long-term investor can permanently hold up to 50% TIPS, as a percentage of bonds, in a tax-advantaged account. We have done exactly this for more than 10 years, and intend to continue.
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by Sammy_M »

Doc wrote:With rates as low as they are you are not likely to lose a lot by waiting. I would not make a large new commitment to TIPS under the current abnormal conditions.
I hold this view as well.
Last edited by Sammy_M on Tue Jan 10, 2012 4:12 pm, edited 1 time in total.
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by Taylor Larimore »

Sammy_M wrote:
Doc wrote:With rates as low as they are you are not likely to lose a lot by waiting. I would not make a large new commitment to TIPS under the current abnormal conditions.
I hold this view as well.
Rates have been low for a long time, nevertheless our TIPS fund is our best performing fund so far this year.

I go on the theory that everything Mr. Market knows (who is much smarter than I am) is already priced into TIPS (and most other investments).
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by Bungo »

Taylor Larimore wrote: In my opinion, a long-term investor can permanently hold up to 50% TIPS, as a percentage of bonds, in a tax-advantaged account. We have done exactly this for more than 10 years, and intend to continue.
I'm curious to know how you arrived at the 50% number. That happens to be my allocation, too, but I don't have any justification for it, other than "it's not included in the total bond market (my other 50%), and I think some inflation protection seems prudent."
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by Doc »

Taylor Larimore wrote: Rates have been low for a long time, nevertheless our TIPS fund is our best performing fund so far this year.
1) "Rates have been low for a long time" - The point is not that rates have been low but they are artificially low because of the short term Fed action to stimulate the economy and the continuation of this stimulus action is unlikely for both inflation and political reasons.

2) "... our TIPS fund is our best performing fund so far this year." - Exactly. See 1). The Feds purchasing of Treasuries have increased demand and artificially pushed up the price of all Treasuries including TIPS and thus make TIPS funds look good in the short term. But the OP is addressing a long term commitment not "recency" as Larry would call it.
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Why 50/50 ?

Post by Taylor Larimore »

Bungo wrote:
Taylor Larimore wrote: In my opinion, a long-term investor can permanently hold up to 50% TIPS, as a percentage of bonds, in a tax-advantaged account. We have done exactly this for more than 10 years, and intend to continue.
I'm curious to know how you arrived at the 50% number. That happens to be my allocation, too, but I don't have any justification for it, other than "it's not included in the total bond market (my other 50%), and I think some inflation protection seems prudent."
Hi Bongo:

Mel (who is an I-Bond and TIPS expert) encouraged us to get into TIPS when Vanguard first offered the fund in 2000. His arguments for this complex security (which I still don't completely understand) were so persuasive that I wanted a good chunk. I settled on 50/50 because I believe this ratio should provide the maximum non-correlation benefit. So far, our 50% TBM and 50% TIPS combination has never had a losing year!
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by grok87 »

Doc wrote:
lightheir wrote:Of note, because interest rates are at all-time lows right now, and it would difficult for them to go any lower, would that be a big risk to advise against buying VIPSX now, as rates really have very little room to go lower, and thus the main risk is for interest rates to go up and thus decrease the share value of the fund?
Rates are low because of Fed action to improve employment and the slow economy. The Fed indicated in the last few weeks that they intended to keep them low for the foreseeable future. But there has been some signs of inflation starting to rise and keeping inflation in check is the second of the Feds main objectives. So the Fed may need to increase rates. Conflicting objectives.

With rates as low as they are you are not likely to lose a lot by waiting. I would not make a large new commitment to TIPS under the current abnormal conditions. Others disagree. See the current thread: Grok's Tip #10. http://www.bogleheads.org/forum/viewtop ... 10&t=84168
Thanks Doc for the link.
Personally I hold Ibonds and long term tips (mostly 30 year etc.) and that's what I would recommend. To be clear though, if you can't do that I would still recommend an allocation to TIPs through VIPSX.
cheers,
Last edited by grok87 on Thu Oct 27, 2011 9:08 pm, edited 2 times in total.
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by beareconomy »

With the VIPSX, it will be dependent on your goals. VIPSX has an average duration of TIPS bonds of about 8 years or so with a realy yield now of about 0, so you are just getting cpi inflation. What that means is nominally you could in theory you could be losing money in the fund for a total of 8 years, but holding for greater than 8 years in nominal terms you will be ahead. If your plans are for less than 8 years, I would be careful. I really wish Vanguard had TIPS bonds of different durations because I would prefer to go longer than 8 years and receive a higher real yield personally. I actually buy the individual TIPS bonds from treasurydirect in the auctions. Too bad I was in high school when they came out with the really high real yielding ones. I think during the auction this month, I got a real yield from a 30 year TIPS of .999%. Being 32, I don't mind going long. Next month they are reissuing the 10 year TIPS, but the yield probably won't be higher than about .2% or so. I think I'm gonna pass on that. The 5 year TIPS for December will probably be a negative real yield, that is just a waste of my time.

Again, this is my understanding of the instrument. So it is best to check up on what I say. Being a physician, I really don't know everything.
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by grok87 »

beareconomy wrote:Too bad I was in high school when they came out with the really high real yielding ones. I think during the auction this month, I got a real yield from a 30 year TIPS of .999%. Being 32, I don't mind going long.
Hi beareconomy,
20 year tips were yielding 3% back in the fall of 2008!
I'm not optimistic we will get back to that level. But it could happen...
cheers,
RIP Mr. Bogle.
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by dbr »

beareconomy wrote: I really wish Vanguard had TIPS bonds of different durations because I would prefer to go longer than 8 years and receive a higher real yield personally.
You can buy LTPZ, PIMCO 15+ year TIPS ETF. There is also a PIMCO 5- year ETF.
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by Clearly_Irrational »

Taylor Larimore wrote:In my opinion, a long-term investor can permanently hold up to 50% TIPS, as a percentage of bonds, in a tax-advantaged account. We have done exactly this for more than 10 years, and intend to continue.
I can see why you might want some in your portfolio but that seems like a heavy bet, what makes your so confident in their future performance to weight them so heavily?
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Why TIPS?

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Clearly_Irrational wrote:
Taylor Larimore wrote:In my opinion, a long-term investor can permanently hold up to 50% TIPS, as a percentage of bonds, in a tax-advantaged account. We have done exactly this for more than 10 years, and intend to continue.
I can see why you might want some in your portfolio but that seems like a heavy bet, what makes your so confident in their future performance to weight them so heavily?
Clearly-Irrational:

I am not "confident" of the future performance or exact weighting of any mutual fund in our portfolio. My crystal ball is too cloudy for that.

I have been reading warnings about the future of TIPS ever since we first purchased ours in 2000. Nevertheless, since then, our TIPS fund has outperformed our other bond fund (Total Bond Market Index Fund) and TIPS is currently the year-to-date best performer of all our funds.

It is helpful to look at our two bond fund's history:

YEAR--CPI----TIPS---TBM
2001---2.8%---7.7%---8.4%
2002---1.6%--16.6%---8.3%
2003---2.3%---8.0%---4.0%
2004---2.7%---8.3%---4.2%
2005---3.4%---2.6%---2.4%
2006---3.2%---0.4%---4.3%
2007---2.8%--11.6%---6.9%
2008---0.1%--(2.8%)--5.1%
2009---2.7%--10.8%---5.9%
2010---1.5%---6.2%---6.4%

It is notable that annual Inflation (CPI-U) fluctuated between 0.1% amd 3.4% during this period but our 2-bond fund combination always enjoyed a gain.

I gave up trying to market-time stocks and bonds many years ago. Stay-the-course works much better.
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Re: Why TIPS?

Post by lightheir »

Taylor Larimore wrote:
Clearly_Irrational wrote:
Taylor Larimore wrote:In my opinion, a long-term investor can permanently hold up to 50% TIPS, as a percentage of bonds, in a tax-advantaged account. We have done exactly this for more than 10 years, and intend to continue.
I can see why you might want some in your portfolio but that seems like a heavy bet, what makes your so confident in their future performance to weight them so heavily?
Clearly-Irrational:

I am not "confident" of the future performance or exact weighting of any mutual fund in our portfolio. My crystal ball is too cloudy for that.

I have been reading warnings about the future of TIPS ever since we first purchased ours in 2000. Nevertheless, since then, our TIPS fund has outperformed our other bond fund (Total Bond Market Index Fund) and TIPS is currently the year-to-date best performer of all our funds.

It is helpful to look at our two bond fund's history:

YEAR--CPI----TIPS---TBM
2001---2.8%---7.7%---8.4%
2002---1.6%--16.6%---8.3%
2003---2.3%---8.0%---4.0%
2004---2.7%---8.3%---4.2%
2005---3.4%---2.6%---2.4%
2006---3.2%---0.4%---4.3%
2007---2.8%--11.6%---6.9%
2008---0.1%--(2.8%)--5.1%
2009---2.7%--10.8%---5.9%
2010---1.5%---6.2%---6.4%

It is notable that annual Inflation (CPI-U) fluctuated between 0.1% amd 3.4% during this period but our 2-bond fund combination always enjoyed a gain.

I gave up trying to market-time stocks and bonds many years ago. Stay-the-course works much better.
Taylor - I'm about to embark on the same 50/50 TIPS/TBM distribution as you are. Are you holding both of those in IRA/401k tax advantaged? (I don't have vanguard in my retirement account but have Fidelity.)
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by Beagler »

Taylor Larimore wrote: There is always "risk" with any investment. You can try to market-time VIPSX--or do as Mr. Bogle recommends: Develop a personal asset allocation plan and then stay-the-course.
Mr. Bogle'sLittle Book of Common Sense Investing http://tinyurl.com/3r65fqd extols the benefits of a total bond market fund. But in his recent interview with Ms. Benz http://www.morningstar.com/Cover/videoC ... ?id=397707 Mr. Bogle appears to deviate from his TBM recommendation, citing current low bond yields:

"I don't think most people can afford to settle on a 2% bond return. That would be more or less ... I guess our Total Bond Market Index Fund is around 2.3%. So, a little better because it has some corporates in there, while it’s heavily dominated by Treasuries and mortgage-backed securities, maybe 70% of the index, 65% or 70% are in those super-safe, very short, mostly very short, maturity bonds.

So I think investors are going to have to be willing to go out a little bit longer in maturity over that 10 years maybe, and a little bit down in quality, maybe investment-grade-quality bonds, which is today, according to the press, I think this is a high number, but what I read in The Times every morning, is about 4.8% for a long-term investment-grade bond."


This does not sound like staying the course to me.

On the other hand, Bill Bernstein is sticking to his guns on bond duration: http://www.morningstar.com/cover/videoc ... ?id=355635
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Bond fund location ?

Post by Taylor Larimore »

Hi lightheir:
Taylor - I'm about to embark on the same 50/50 TIPS/TBM distribution as you are. Are you holding both of those in IRA/401k tax advantaged? (I don't have vanguard in my retirement account but have Fidelity.)
Both these bond funds are very tax-INefficient. Unless your income is low enough to keep you from paying income tax, these two funds should be in tax-advantaged accounts. High income tax investors should consider tax-exempt bond funds if they do not have room in a tax-advantaged account for their bond allocation.
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Re: Bond fund location ?

Post by Doc »

Taylor Larimore wrote:Hi lightheir:
Taylor - I'm about to embark on the same 50/50 TIPS/TBM distribution as you are. Are you holding both of those in IRA/401k tax advantaged? (I don't have vanguard in my retirement account but have Fidelity.)
Both these bond funds are very tax-INefficient. Unless your income is low enough to keep you from paying income tax, these two funds should be in tax-advantaged accounts. High income tax investors should consider tax-exempt bond funds if they do not have room in a tax-advantaged account for their bond allocation.
The thirty year nominal Treasury is currently yielding 3.372%. The expected return from a comparable TIPS should be a little lower. In the 25% tax bracket this means you are losing 03.72*.25=0.93 % to taxes each year. Rick Ferri's Portfolio Solutions website is using 7.8% annual return for US large cap stocks. http://www.portfoliosolutions.com/f-13.html This means if that return is all LTCG a loss to taxes of only 7.8*.15=1.17 %. That's not enough difference to worry about as far as tax placement is concerned. "Very tax-INefficient" overstates the case.
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Re: Bond fund location ?

Post by Taylor Larimore »

Doc wrote:
Taylor Larimore wrote:Hi lightheir:
Taylor - I'm about to embark on the same 50/50 TIPS/TBM distribution as you are. Are you holding both of those in IRA/401k tax advantaged? (I don't have vanguard in my retirement account but have Fidelity.)
Both these bond funds are very tax-INefficient. Unless your income is low enough to keep you from paying income tax, these two funds should be in tax-advantaged accounts. High income tax investors should consider tax-exempt bond funds if they do not have room in a tax-advantaged account for their bond allocation.
The thirty year nominal Treasury is currently yielding 3.372%. The expected return from a comparable TIPS should be a little lower. In the 25% tax bracket this means you are losing 03.72*.25=0.93 % to taxes each year. Rick Ferri's Portfolio Solutions website is using 7.8% annual return for US large cap stocks. http://www.portfoliosolutions.com/f-13.html This means if that return is all LTCG a loss to taxes of only 7.8*.15=1.17 %. That's not enough difference to worry about as far as tax placement is concerned. "Very tax-INefficient" overstates the case.
Doc:

According to Vanguard, below are the 10-year before and after-tax returns for Total Bond Market (VBMFX) and Inflation-Protected Securities (VIPSX) funds:

Fund........Return Before Taxes.......After-Tax
VBMFX.............. 5.38%................3.59%
VIPSX............... 6.94%................5.07%
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Re: Bond fund location ?

Post by Doc »

Taylor Larimore wrote:
Doc wrote:
Taylor Larimore wrote:Hi lightheir:
Taylor - I'm about to embark on the same 50/50 TIPS/TBM distribution as you are. Are you holding both of those in IRA/401k tax advantaged? (I don't have vanguard in my retirement account but have Fidelity.)
Both these bond funds are very tax-INefficient. Unless your income is low enough to keep you from paying income tax, these two funds should be in tax-advantaged accounts. High income tax investors should consider tax-exempt bond funds if they do not have room in a tax-advantaged account for their bond allocation.
The thirty year nominal Treasury is currently yielding 3.372%. The expected return from a comparable TIPS should be a little lower. In the 25% tax bracket this means you are losing 03.72*.25=0.93 % to taxes each year. Rick Ferri's Portfolio Solutions website is using 7.8% annual return for US large cap stocks. http://www.portfoliosolutions.com/f-13.html This means if that return is all LTCG a loss to taxes of only 7.8*.15=1.17 %. That's not enough difference to worry about as far as tax placement is concerned. "Very tax-INefficient" overstates the case.
Doc:

According to Vanguard, below are the 10-year before and after-tax returns for Total Bond Market (VBMFX) and Inflation-Protected Securities (VIPSX) funds:

Fund........Return Before Taxes.......After-Tax
VBMFX.............. 5.38%................3.59%
VIPSX............... 6.94%................5.07%
Right. But we need to look at what it is likely to be the outlook going forward not what has happened in the past. The market is telling us that the 30 year Treasury is going to be a little over 3% going forward for the next 30 years. Furthermore that past after tax number from Vanguard is for the top rate. As you noted in a previous post, high income tax payers should consider muni's as an alternative.

If you commit to long TIPS now it doesn't matter what happens in the future. You will have that return for the next 30 years. That's why they call it fixed income. And that number is about 3% nominal. If we get unexpected high inflation and the taxes on the TIPS in taxable go way up you simply sell them and repurchase in tax advantaged and reverse your position. You can do this with little tax consequence. On the other hand if you go the other way, you can't sell equities in taxable and repurchase in tax advantaged without likely incurring a high CG tax.

Tax efficiency is based on return times the tax rate not the tax rate alone. Making placement judgements on tax rates alone is only looking at one half of the equation.
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Correction

Post by Taylor Larimore »

Doc:
As you noted in a previous post, high income tax payers should consider muni's as an alternative.
My complete sentence:
High income tax investors should consider tax-exempt bond funds IF they do not have room in a tax-advantaged account for their bond allocation.
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Re: Correction

Post by Doc »

Taylor Larimore wrote:Doc:
As you noted in a previous post, high income tax payers should consider muni's as an alternative.
My complete sentence:
High income tax investors should consider tax-exempt bond funds IF they do not have room in a tax-advantaged account for their bond allocation.
Sorry Taylor. I wasn't addressing that nuance.

When you try to bring the muni's into the calculus you can easily lose track of the objective. The OP was concerned with TIPS. If you are a high rate taxpayer you should probably be holding TIPS in tax advantaged and equities in taxable. Gaining a tax advantage by substituting muni's for TIPS defeats the objective of the inflation protection. If you want to sacrifice the inflation protection that same high tax rate investor would probably be better off with equities in tax advantaged - just the reverse. This is the "traditional" simplified rule of thumb for tax advantaged placement. With interest rates very low as they are now the "traditional" approach is not so clear for the middle rate tax payers. I would hazard a guess that most investors on this board who are concerned with this aspect of investing are in the middle range. The situation may reverse for low rate taxpayers because the dividend and CG rate are very low now but you might have to do some tax gain harvesting to ensure you remain at the lower tax rates during withdrawal. The what ifs in this case get very involved.
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Apology appreciated and accepted.

Post by Taylor Larimore »

Hi Doc:
Sorry Taylor. I wasn't addressing that nuance.
I understand. No harm done.
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Re: Bond fund location ?

Post by Sunny Sarkar »

Doc wrote:The thirty year nominal Treasury is currently yielding 3.372%. The expected return from a comparable TIPS should be a little lower. In the 25% tax bracket this means you are losing 03.72*.25=0.93 % to taxes each year. Rick Ferri's Portfolio Solutions website is using 7.8% annual return for US large cap stocks. http://www.portfoliosolutions.com/f-13.html This means if that return is all LTCG a loss to taxes of only 7.8*.15=1.17 %. That's not enough difference to worry about as far as tax placement is concerned. "Very tax-INefficient" overstates the case.
Hi Doc:

You don't need numbers to check whether or not bonds are tax-inefficient. It's just common sense - they pay almost all of their returns as taxable dividends.

Period dependent numbers often convey the wrong message.
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Re: Bond fund location ?

Post by Doc »

Sunny Sarkar wrote:Hi Doc:

You don't need numbers to check whether or not bonds are tax-inefficient. It's just common sense - they pay almost all of their returns as taxable dividends.

Period dependent numbers often convey the wrong message.
Sunny, I think you have a misunderstanding of a couple of points.

Tax (in)efficiency is the percent of income lost to taxes not the tax rate on the income alone. That means both the tax rate and the pretax return are important. Yes bonds are taxed at a higher rate than equities but they also return less. Currently the 30 year Treasury is probably slightly less tax effcient than a large cap index fund but the ten is probably more tax efficient than a small value fund in the middle tax brackets. It is the knee jerk reaction that "TIPS belong in tax advantaged" that often conveys the wrong message.

Period dependent numbers do often convey the wrong message. But if you buy a long term Treasury at a given YTM, that is the yield that you will get on that investment until enough time has passed that you reach the duration of the initial investment. On the equity side Ferri's 30 year forward projections as I understand them are based on adding risk factors to current "riskless" securities and thus are less dependent on past period data. A big unkown is the forward inflation rate but we have the break even from long TIPS/nominals to at least give us an estimate from Mr. Market. (We have to assume that Rick is smart enough to consider period dependency when determining those risk factors.)
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Re: Bond fund location ?

Post by grok87 »

Doc wrote:
Sunny Sarkar wrote:Hi Doc:

You don't need numbers to check whether or not bonds are tax-inefficient. It's just common sense - they pay almost all of their returns as taxable dividends.

Period dependent numbers often convey the wrong message.
Sunny, I think you have a misunderstanding of a couple of points.

Tax (in)efficiency is the percent of income lost to taxes not the tax rate on the income alone. That means both the tax rate and the pretax return are important. Yes bonds are taxed at a higher rate than equities but they also return less. Currently the 30 year Treasury is probably slightly less tax effcient than a large cap index fund but the ten is probably more tax efficient than a small value fund in the middle tax brackets. It is the knee jerk reaction that "TIPS belong in tax advantaged" that often conveys the wrong message.

Period dependent numbers do often convey the wrong message. But if you buy a long term Treasury at a given YTM, that is the yield that you will get on that investment until enough time has passed that you reach the duration of the initial investment. On the equity side Ferri's 30 year forward projections as I understand them are based on adding risk factors to current "riskless" securities and thus are less dependent on past period data. A big unkown is the forward inflation rate but we have the break even from long TIPS/nominals to at least give us an estimate from Mr. Market. (We have to assume that Rick is smart enough to consider period dependency when determining those risk factors.)
To Doc's point, which is better to hold in taxable. A muni money market yielding 0%. Or an FDIC insured savings account yielding 1%?
With rates this low one does not lose much to taxes-i.e. compounding the 1% (gross of tax) before or after taxes doesn't matter much. For a 10 year holding period for a $10,000 investment I think it works out to a dollar per year...
cheers,
RIP Mr. Bogle.
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by abuss368 »

Exactly. Too many folks on this forum beat up taxes and so called asset location over all the other more important decisions - security selection, diversification, etc.

To think David Swensen of Unconventional Success recommends Trasuries and TIPS. I know folks who have these bonds in both taxable and tax advantaged accounts and there are "no problems".

Hey folks, if you are paying taxes you made money!!!!!!!
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by Sunny Sarkar »

Hi Doc/grok:

As a general principle, for the purposes of a long term portfolio strategy, I maintain it's common sense that taxable bonds are better placed in tax-advantaged accounts because almost all of their returns are subject to non-deferred/immediate taxation at the marginal rate.

If I understand your point correctly, you are saying that current yields are so low that there's nothing much to lose to taxes by placing bonds in the taxable accounts. That maybe true for only the current state of things - and that will definitely change - then what? You can also look at your math from this angle: if you lose 0.93% of your 3.372% return to taxes, then assuming 2-3% inflation, you are losing almost 100% (or more) of your real returns to taxes when you place them in taxable accounts.

In my 10 years as a Boglehead, I have noticed that everything about investing ultimately bows down to the "humble arithmetic" of the markets. There's nothing much we can really do beyond: some stocks, some bonds, and keep costs low (taxes being the largest cost).

:peace
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by abuss368 »

Here is another big curveball. What happens, and there is a very good chance, that qualified rates go away. All bets are off and all dividends and interest are taxed at the same rates.
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by tipswatcher »

I would not make a large new commitment to TIPS under the current abnormal conditions.
I also agree, but I have thought this for half of 2011, and for half of 2011 I have been wrong.

Eventually, I will be right. Treasury yields are abnormally low, and since they are low the demand for TIPS is even higher, because they protect you against inflation. Buyers are willing to accept negative real returns because the super-safe alternatives pay woefully less (at least in theory, given that inflation appears to be at least a moderate threat in the next five years.)

Earlier this year, I worried about TIPS mutual funds being 'toppy' and I sold out (I also have a buy-and-hold TIPS ladder, that was untouched). My alternative - available at that time - was a 5-year CD at a credit union paying 3%. I felt that was a safer super-safe bet.

Those rates on CDs are long gone. As an alternative. if you are high on TIPS:

1) Start with a minimum investment and dollar cost average in a TIPS fund.

2) Buy TIPS directly from TreasuryDirect.gov and hold them to maturity.
TIPS: Perfect investment for imperfect times?
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by AZK »

People mention buying individual tips through treasury direct...how exactly do you do this through a tax advantaged account? Can you buy them and designate location? Or do you buy them through your Ira? I assume you can't buy them through your 401k?
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by Sunny Sarkar »

IRA with VBS can do it.
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by Sammy_M »

AZK wrote:People mention buying individual tips through treasury direct...how exactly do you do this through a tax advantaged account? Can you buy them and designate location? Or do you buy them through your Ira? I assume you can't buy them through your 401k?
You can buy them through a broker by participating at auction or in the secondary market. You might want to check out TFB's Explore TIPS book. In additional to Vanguard Brokerage, Fidelity and Schwab are good places for investing in direct TIPS. As far as a 401K, I believe you'd have to have a "brokerage window" to buy direct TIPS.
Last edited by Sammy_M on Tue Jan 10, 2012 4:12 pm, edited 1 time in total.
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by pinnacleplace »

Beagler wrote:
Taylor Larimore wrote: There is always "risk" with any investment. You can try to market-time VIPSX--or do as Mr. Bogle recommends: Develop a personal asset allocation plan and then stay-the-course.
Mr. Bogle'sLittle Book of Common Sense Investing http://tinyurl.com/3r65fqd extols the benefits of a total bond market fund. But in his recent interview with Ms. Benz http://www.morningstar.com/Cover/videoC ... ?id=397707 Mr. Bogle appears to deviate from his TBM recommendation, citing current low bond yields:

"I don't think most people can afford to settle on a 2% bond return. That would be more or less ... I guess our Total Bond Market Index Fund is around 2.3%. So, a little better because it has some corporates in there, while it’s heavily dominated by Treasuries and mortgage-backed securities, maybe 70% of the index, 65% or 70% are in those super-safe, very short, mostly very short, maturity bonds.

So I think investors are going to have to be willing to go out a little bit longer in maturity over that 10 years maybe, and a little bit down in quality, maybe investment-grade-quality bonds, which is today, according to the press, I think this is a high number, but what I read in The Times every morning, is about 4.8% for a long-term investment-grade bond."


This does not sound like staying the course to me.

On the other hand, Bill Bernstein is sticking to his guns on bond duration: http://www.morningstar.com/cover/videoc ... ?id=355635
I also heard this interview with J. Bogle, any feedback or insight on he believes one should change up their Bond portfolio?
thanks!
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by dbr »

pinnacleplace wrote:
Beagler wrote:
Taylor Larimore wrote: There is always "risk" with any investment. You can try to market-time VIPSX--or do as Mr. Bogle recommends: Develop a personal asset allocation plan and then stay-the-course.
Mr. Bogle'sLittle Book of Common Sense Investing http://tinyurl.com/3r65fqd extols the benefits of a total bond market fund. But in his recent interview with Ms. Benz http://www.morningstar.com/Cover/videoC ... ?id=397707 Mr. Bogle appears to deviate from his TBM recommendation, citing current low bond yields:

"I don't think most people can afford to settle on a 2% bond return. That would be more or less ... I guess our Total Bond Market Index Fund is around 2.3%. So, a little better because it has some corporates in there, while it’s heavily dominated by Treasuries and mortgage-backed securities, maybe 70% of the index, 65% or 70% are in those super-safe, very short, mostly very short, maturity bonds.

So I think investors are going to have to be willing to go out a little bit longer in maturity over that 10 years maybe, and a little bit down in quality, maybe investment-grade-quality bonds, which is today, according to the press, I think this is a high number, but what I read in The Times every morning, is about 4.8% for a long-term investment-grade bond."


This does not sound like staying the course to me.

On the other hand, Bill Bernstein is sticking to his guns on bond duration: http://www.morningstar.com/cover/videoc ... ?id=355635
I also heard this interview with J. Bogle, any feedback or insight on he believes one should change up their Bond portfolio?
thanks!
I can't answer to the quality comment, but the technical (possible) justification for the duration argument is that the yield curve was very steep earlier this year, but less so now. Larry Swedroe has sometimes opined that a yield benefit exceeding 20bps per year of duration is a justified risk. That would have indicated going longer for a while there. The idea that one should respond to the structure of yield curves is one Larry sometimes suggests, but seems to me to open a can of worms, ala trying to understand what Mr. Bogle really meant.
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Re: Buying Vanguard TIPS Fund with current interest rates ok

Post by Beagler »

dbr wrote:
pinnacleplace wrote:
Beagler wrote:
Taylor Larimore wrote: There is always "risk" with any investment. You can try to market-time VIPSX--or do as Mr. Bogle recommends: Develop a personal asset allocation plan and then stay-the-course.
Mr. Bogle'sLittle Book of Common Sense Investing http://tinyurl.com/3r65fqd extols the benefits of a total bond market fund. But in his recent interview with Ms. Benz http://www.morningstar.com/Cover/videoC ... ?id=397707 Mr. Bogle appears to deviate from his TBM recommendation, citing current low bond yields:

"I don't think most people can afford to settle on a 2% bond return. That would be more or less ... I guess our Total Bond Market Index Fund is around 2.3%. So, a little better because it has some corporates in there, while it’s heavily dominated by Treasuries and mortgage-backed securities, maybe 70% of the index, 65% or 70% are in those super-safe, very short, mostly very short, maturity bonds.

So I think investors are going to have to be willing to go out a little bit longer in maturity over that 10 years maybe, and a little bit down in quality, maybe investment-grade-quality bonds, which is today, according to the press, I think this is a high number, but what I read in The Times every morning, is about 4.8% for a long-term investment-grade bond."


This does not sound like staying the course to me.

On the other hand, Bill Bernstein is sticking to his guns on bond duration: http://www.morningstar.com/cover/videoc ... ?id=355635
I also heard this interview with J. Bogle, any feedback or insight on he believes one should change up their Bond portfolio?
thanks!
...The idea that one should respond to the structure of yield curves is one Larry sometimes suggests, but seems to me to open a can of worms, ala trying to understand what Mr. Bogle really meant.
I don't think it takes a divining rod to see that Mr. Bogle is suggesting straying from TBM into LT corporates for the higher yield. :)
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