Christine Benz offers some insights to this question in this thoughtful and thorough column.With yields up and inflation tame, is this asset class still a must-own?
http://news.morningstar.com/articlenet/ ... ?id=609519
Christine Benz offers some insights to this question in this thoughtful and thorough column.With yields up and inflation tame, is this asset class still a must-own?
In the last week of October and last week of November 2008, Hedge Funds had to liquidate massive amounts of TIPS because of margin calls. This caused 30-year TIPS yields to spike well over 3%.Sidney wrote:I don't recall the reasons why TIPS got hammered in 2008. Liquidity squeeze, perhaps? Anyway, it was a great time to swap from nominal bonds to TIPS.
(Vanguard's target-date series has also recently switched its TIPS exposure from Vanguard Inflation-Protected Securities to Vanguard Short-Term Inflation-Protected Securities Index (VTAPX).)
Christine will be on our Panel of Experts during our next Boglehead Reunion in October.The broad takeaways from these experts--and from life-cycle portfolios and indexes--are that TIPS aren't a must-have for accumulators' portfolios, but a bulwark against inflation still makes sense for retirees.
You should just make that your signatureabuss368 wrote:Investing in Total Bond Market and stay the course!
Keep investing simple!
That may be a good idea!stevewolfe wrote:You should just make that your signatureabuss368 wrote:Investing in Total Bond Market and stay the course!
Keep investing simple!
Hi nedsaid,nedsaid wrote:Total Bond Market does not include TIPS. If you want TIPS, you need to buy the TIPS fund.
I have been adding to my TIPS funds, particularly now that they have dropped about 8-9% this year.
nedsaid wrote:You know this. Until recently, I did not. I was under the impression that TIPS were in the Total Market until I read someone's post and looked it up for myself on Morningstar. So "total" wasn't as "total" as I thought. I was probably not the only person operating under a false assumption.
I have owned TIPS funds for years.
Sunny Sarkar wrote:I'm in the middle of accumulation phase.
My current TIPS target allocation is 50% of bonds in VIPSX.
Should I...
(a) reduce TIPS allocation (if yes, to how much?)
(b) reduce TIPS maturity (to Short-Term TIPS fund)
(c) do both
(d) do nothing
Thanks,
Sunny
I've never understood the view expressed in the last sentence (my underline). I don't see a TIPS holding as a bet that inflation will be higher than anticipated. I see it as avoiding any bet at all. On the contrary, in my view holding nominal bonds is making a bet that the CPI will not rise more than is expected. (1) The difference in viewpoint depends on whether one looks at bond returns in real or nominal terms. I do the former and therefore, see my TIPS return as being unaffected by whatever the CPI change happens to be.I've never been in the school of high TIPS allocations as others have advocated. My view has always been to hold between 10% and 20% of a fixed-income portfolio in TIPS or I-Bonds as a hedge against unanticipated inflation. Any more than that seems to be an overly large bet on an upward surprise in inflation.
Code: Select all
Taxable IRA Total
------- --- -----
TIPS & I Bonds 30% 11% 41%
Other Treasury 3% - 3% (2)
Tax Exempt Funds 35% - 35%
Total Bond Fund - 4% 4%
Invest Grade Funds - 13% 13%
High Yield Fund - 4% 4%
----- --- ----
Total 68% 32% 100%
I don't get it why this point is so commonly misunderstood or miss-stated.#Cruncher wrote:On page 2 of the article Rick Ferri is quoted as saying:I've never understood the view expressed in the last sentence (my underline). I don't see a TIPS holding as a bet that inflation will be higher than anticipated. I see it as avoiding any bet at all. On the contrary, in my view holding nominal bonds is making a bet that the CPI will not rise more than is expected. (1) The difference in viewpoint depends on whether one looks at bond returns in real or nominal terms. I do the former and therefore, see my TIPS return as being unaffected by whatever the CPI change happens to be.I've never been in the school of high TIPS allocations as others have advocated. My view has always been to hold between 10% and 20% of a fixed-income portfolio in TIPS or I-Bonds as a hedge against unanticipated inflation. Any more than that seems to be an overly large bet on an upward surprise in inflation.
Do nothing. You have 25 years to go, say. Just do nothing.Sunny Sarkar wrote:I'm in the middle of accumulation phase.
My current TIPS target allocation is 50% of bonds in VIPSX.
Should I...
(a) reduce TIPS allocation (if yes, to how much?)
(b) reduce TIPS maturity (to Short-Term TIPS fund)
(c) do both
(d) do nothing
Thanks,
Sunny
For those interested in the nitty gritty, apparently the TIPS were used as the collateral for Repos (short for Repurchase Obligation). Money is borrowed short term against the collateral of securities (if I borrow $100m I might have to provide $105m of collateral, the difference being the 'haircut'). If I fail to repay the money then the lender sells the collateral, rather than me repurchasing it.Spirit Rider wrote:In the last week of October and last week of November 2008, Hedge Funds had to liquidate massive amounts of TIPS because of margin calls. This caused 30-year TIPS yields to spike well over 3%.Sidney wrote:I don't recall the reasons why TIPS got hammered in 2008. Liquidity squeeze, perhaps? Anyway, it was a great time to swap from nominal bonds to TIPS.
Vanguard's TIPS fund (VIPSX) declined less than -3% in 2008. Meanwhile the S&P 500 Index plunged -37%.I don't recall the reasons why TIPS got hammered in 2008.
July to December 2008 the Inflation rate suddenly dropped. Inflation bonds do relatively well when inflation is higher than expected, relatively less well when inflation is lower than expected.I don't recall the reasons why TIPS got hammered in 2008.
In November of 2008 the yield on the 10 year note spiked to 3.15% (on October 31, 20-year bonds hit 3.35% real rate) -- over twice the rate it started the year at. In a very short window, individual bonds went down quite a bit and, for those who were following Swedroe's guidance on buying long on the yield curve at those rates, it was perhaps a once in a lifetime opportunity.Taylor Larimore wrote:Vanguard's TIPS fund (VIPSX) declined less than -3% in 2008. Meanwhile the S&P 500 Index plunged -37%.I don't recall the reasons why TIPS got hammered in 2008.
Best wishes.
Taylor
Um... no they don't. You might say 3-5 years is a business cycle but you'll have to post some proof that each business cycle is expected to end in a 50-60% haircut.Sidney wrote:Note, one expects the stock market to take a 50-60% haircut every five years or so --
Are we talking about stock market? I don't think so. 50% or more drops are extraordinary events, often associated with bubbles. I wouldn't exactly consider those "normal range for downturns".Sidney wrote:Nonetheless, 50-60% is in the normal range for a down-turn.
Can you cite some examples where stock prices go down and stay down? We've recovered from every bear markets so far. Note this doesn't mean we'll always recover for future bear markets, but when looking at history, stock prices hasn't ever really "stayed down".Sidney wrote:On the other hand, there are plenty of examples where stock prices go down and stay down.
Real yields hit 4.4%+ in 2000 (dot com bubble burst).Sidney wrote:In November of 2008 the yield on the 10 year note spiked to 3.15% (on October 31, 20-year bonds hit 3.35% real rate) -- over twice the rate it started the year at. In a very short window, individual bonds went down quite a bit and, for those who were following Swedroe's guidance on buying long on the yield curve at those rates, it was perhaps a once in a lifetime opportunity.
Just one more in support of this (clear) line of thinking. I see this as going hand in hand with accepting & taking risk on the equity side, and minimzing risk on the fixed income side.#Cruncher wrote:On page 2 of the article Rick Ferri is quoted as saying:I've never understood the view expressed in the last sentence (my underline). I don't see a TIPS holding as a bet that inflation will be higher than anticipated. I see it as avoiding any bet at all. On the contrary, in my view holding nominal bonds is making a bet that the CPI will not rise more than is expected. (1) The difference in viewpoint depends on whether one looks at bond returns in real or nominal terms. I do the former and therefore, see my TIPS return as being unaffected by whatever the CPI change happens to be.I've never been in the school of high TIPS allocations as others have advocated. My view has always been to hold between 10% and 20% of a fixed-income portfolio in TIPS or I-Bonds as a hedge against unanticipated inflation. Any more than that seems to be an overly large bet on an upward surprise in inflation.