austinite wrote:If I read Larry correctly I could put 100% of this in one issue that matures in 20 years and do well
austinite wrote:If I read Larry correctly I could put 100% of this in one issue that matures in 20 years and do well.
larryswedroe wrote:I also suggest you totally forget about duration of TIPS< IMO it is basically meaningless number. Dont even think about it.
larryswedroe wrote:I am not underestimating any psychological effects.
larryswedroe wrote:Firstk, you should not care about the price volatility of TIPS as it is basically irrelevant. You buy them to guarantee a real rate of return and that is what they deliver, regardless of the volatility in between.
But the volatility of a real bond is almost certainly going to be far less than that of a nominal bond and the reason is simple, nominal rates are more volatile than real rates, which are fairly stable. While we have seen nominal bonds trade say between 3-16 or so real bonds would have probably traded between say 1 and 4%. So how much volatility is there anyway?
The only risk is real rates rising. But if they do, basically so what? You are still going to get your real return.
larryswedroe wrote:Now as to the other issue in withdrawal, again if you are in withdrawal and will have to be selling some TIPS (not an issue if not having to sell them but can sell other assets) you should not be owning long term TIPS, but shorter ones---that is a maturity issue, not a duration issue. Matching maturity to cash flow needs is basic finance and risk management principal.
Again duration of a real bond IMO is basically irrelevant, only for nominal bonds is it important
larryswedroe wrote:The rest of us have nominal liabilities.
larryswedroe wrote:First, the liabilities in retirement are likely to be nominal not real. ... The rest of us have nominal liabilities.
larryswedroe wrote:Second, Norbert, you are totally missing the point re for example 1994. You don't have to explain it to people IF YOU HAVE EXPLAINED IT TO THEM AHEAD OF TIME.
larryswedroe wrote:To correct your misinformation in your advice to Ariel
First, one of the probems with TBM is its market cap weighting. Thus when you get big refi boom due to rate drop and big housing market for same reason the % of MBS in TBM rises. And so now it is about 36% of the TBM fund. Not an insignificant percentage. At least one should know what one is investing in and fully understand the risks.
Third, a found somewhat interesting your last bit of advice--to match maturity of liability. Which I fully agree with in general. And the reason of course to do that is to eliminate risk. Of course that basically says duration is meaningless in this case since you have matched the asset and liability and eliminated risk, and thus you should not care about duration.
larryswedroe wrote:What difference does it make if TIPS are yielding 4% or 2% and you are trying to match the expenses say do in ten years.
larryswedroe wrote: For example beginning in 1933 and until 1951 there were only three years where one month bills had positive returns. And from 33-97 the return was negative for full period. Also from73-82 it was negative...Example the 26-05 reutrn on one month bills was 0.6 real.
Lbill wrote:One question regarding TIPS, particularly long-maturity TIPS. I understand liability matching - that's essentially what I'm trying to do by holding a 20-year TIPS income ladder. What I don't understand very well is YTM. The quoted YTM of each maturity that I've purchased assumes that the semi-annual interest payments will theoretically be reinvested at the same real interest rate, correct? But if I don't reinvest the interest, or I reinvest it at a lower real rate, then my actual YTM will be lower than the quoted YTM, correct? How can I match liabilities when actual YTM will not actually turn out to be the quoted YTM ? And isn't the reinvestment risk much greater for long TIPS, so the the risk of liability mis-matching actually increases with the length of maturity?
Lbill wrote:I understand liability matching - that's essentially what I'm trying to do by holding a 20-year TIPS income ladder. ... How can I match liabilities when actual YTM will not actually turn out to be the quoted YTM?
So for your second question your actual total return will be different from the original YTM.
As far as the last question the answer is: it depends. If you are only talking real dollars your interpretation is correct but if you are talking about nominal dollars there will be less of a difference between the nominal YTM and the nominal total return because TIPS cash flows are back loaded and look more like a zero coupon bond then the equivalent nominal bond. (Note: the quoted TIPS YTM are real not nominal.)
Sadly there are not zero coupon TIPS, so anything you do will be an approximation. If the 20yr TIPS ladder does not constitute all of your assets, then just make sure that each TIPS' maturing principal matches your equivalent liability and send all of the TIPS interest payments to your "other" portfolio. The "other" portfolio will really include some extra amount of fixed income based on these payments (higher in the early years, and lower when the ladder is nearly depleted).
Lbill wrote:That's sorta the approach I took - since I know what the real principal value will be at maturity, I used that number for liability matching. The interest payments that are thrown off will just go "somewhere." Not a very efficient way of doing it but I don't know any better way - like to know if there is.
bmb wrote:The beauty of TIPS is that duration, the interest rate, and the magnitude of future inflation are far less important than with nominal bonds. You know your real return and you know your capital is at almost no risk, which are the most important issues with fixed income investments.
As long as you match the maturities to your distribution needs, you can't really lose, even though you may be sacrificing some potential gain for the inflation protection.