Larry Swedroe TIPS strategy

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

Larry Swedroe TIPS strategy

Postby gadfly888 » Sun Mar 23, 2008 12:51 pm

Good Morning,

I currently have a bunch of individual tips and vipsx bought in 3% yield
range. I've kept them this long due to inertness. Belatedly adopting
Larry Swedroe's allocation strategy of holding no TIPS when the real
yield is <1.5%, I intend to sell all my TIPS early next week and purchase
short term federal bonds. All of my bonds have been TIPS or I bonds,
so rebalancing to nominal bonds is not an option. Have any of you
adopted this strategy? If not why not?

Gad-
gadfly888
 
Posts: 104
Joined: Fri Apr 13, 2007 1:14 pm

Postby AzRunner » Sun Mar 23, 2008 1:08 pm

Yes, you will lock in your capital gain on the TIPS but you give up the inflation protection that I assume was part of your reason to buy TIPS in the first place.

I just looked at the yield on Vg Short Term Federal Bond fund (2.94%). You may be doing better with longer term TIPS.

My own thinking is that formulas work as a first step but you also need to look at the specific market situation. Right now real rates are extremely low and the flight to quality has driven up the price and thus lowered the yield on short term federal bonds (not to mention the Fed's action).

Another approach to consider is to sell your shortest term TIPS (with the lowest yield to maturity) and move those to the S-T Federal bond fund. I'm always hesitant to make wholesale moves.

The key is why you bought the TIPS in the first place and why the major change now?

Norm
User avatar
AzRunner
 
Posts: 984
Joined: Mon Feb 19, 2007 6:18 pm
Location: Phoenix

Postby Rager1 » Sun Mar 23, 2008 2:22 pm

Gad,

I don't believe you can successfully time the bond market any more than you can successfully time the stock market. In my opinion, moving in and out of the bond market is a sure way to underperform what the market is doing.

As Norm stated, you should look at the reason you purchased them in the first place. If that reason is still valid, I see no reason to change.

Ed
User avatar
Rager1
 
Posts: 807
Joined: Fri Jun 01, 2007 12:03 pm

Postby BlueEars » Sun Mar 23, 2008 6:20 pm

I think you can be successful with either the buy-hold approach or moving to short term bonds when real rates are so low. Personally I've done the latter. But right now the yield on short term treasuries is so low relative to it's 5yr average that I'd go with either short term bond index or short term investment grade. The yield spreads between these indexes are at extremes not seen in previous crisis (Iraq war, LTCM, 9/11).
User avatar
BlueEars
 
Posts: 3172
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Postby rwwoods » Sun Mar 23, 2008 6:46 pm

I sold my TIPs when the interest rate fell below 1.5% and moved the funds to interimediate corporate bonds.
"I'm not so much concerned about the return on my money as the return of my money" - Will Rogers
rwwoods
 
Posts: 1312
Joined: Thu Jun 07, 2007 7:54 pm
Location: The Villages, Florida

Postby larryswedroe » Mon Mar 24, 2008 7:17 am

As I have stated, I think there are two good strategies with TIPS. One is simply buy and hold and the other is to shift maturities (this is not much different really than the strategy DFA uses that is based on the historical evidence)

Right now IMO a reasonable strategy is to barbell--in the short end own CDs which are providing the best yields. On the longer end own 20 year TIPS.

Here is my thinking--historically 1 year has yielded about 1.7% over inflation, 5 year 2.2%, 10 year 2.3% and 20 year 2.4%. While all TIPS are yielding less than comparable historical maturities, the lowest differential is at the long end with the 20 year yielding about 70bp below the historical average.

By barbelling you reduce the risk of holding the longest maturities.

Right now unfortunately no really good choices. But the TIPS yield curve is relatively steep. I just wish real rates were higher. But we have a huge flight to quality and nominal treasuries of all maturities appear to provide expected negative real returns (as investors pay a liquidity premium).
larryswedroe
 
Posts: 12415
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Postby Rob't » Mon Mar 24, 2008 10:29 am

I understand Larry's point about barbelling if your plan is to hold individual securities, but if by choice or necessity (eg your employer's plan option limitations) you are limited to mutual funds, what would be the best choice? My guess is that moving to short term corporates with the real rate of TIPS funds being so low would be the best risk/return mix. Then, when real rates start moving over 1-1.5% again, move gradually to an increasing proportion of TIPS. Rather than considering this market timing, I would suggest that one is accepting that short term rates must have an inflation expectation built in and that it is historically in excess of 1%. The reason that TIPS real rates are so low is that their NAV has been irrationally driven up by the flight to quality. While I accept the truism that the market can stay irrational longer than I can stay solvent, in this circumstance, being > 15 years from any need to make withdrawals, I'm betting on solvency.
Rob't
 
Posts: 177
Joined: Thu Apr 19, 2007 8:33 pm

Postby larryswedroe » Mon Mar 24, 2008 12:12 pm

robert
I agree, but would shift to shorter term to intermediate CDs as they appear to best offer now and risk free if stay under the limits.
larryswedroe
 
Posts: 12415
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Postby Hedgy » Mon Mar 24, 2008 12:58 pm

larryswedroe wrote:robert
I agree, but would shift to shorter term to intermediate CDs as they appear to best offer now and risk free if stay under the limits.


But Larry, what about those of us whose TIPS holding is a position in the Vanguard fund (VIPSX) in a retirement accout. In other words, CDs are not an option in my Roth IRA. What would you recommend for someone considering shifting out of Vanguard's TIPS fund? Or perhaps there isn't anything else at the moment?
Hedgy
 
Posts: 278
Joined: Wed Mar 28, 2007 3:33 pm

Postby larryswedroe » Mon Mar 24, 2008 1:15 pm

Hedgy
Like I said, you could just keep the position. Unfortunately not many good choices now. MBS look much more attractive now with spreads widening but I would not want extention risk. And Treasuries all priced for very low/negative real yields. Very tough call as I would not violate my basic premises of not taking credit risk. But if want/need higher return might look at a fund that buys government agencies or very high grade corporate bond fund that is short term (the only place credit risk appears to have been rewarded) appropriately (dont have the same call risks) and credit risk increases with time
larryswedroe
 
Posts: 12415
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Postby Kirk » Wed Mar 26, 2008 2:14 pm

larryswedroe wrote:Hedgy
Like I said, you could just keep the position. Unfortunately not many good choices now. MBS look much more attractive now with spreads widening but I would not want extention risk. And Treasuries all priced for very low/negative real yields. Very tough call as I would not violate my basic premises of not taking credit risk. But if want/need higher return might look at a fund that buys government agencies or very high grade corporate bond fund that is short term (the only place credit risk appears to have been rewarded) appropriately (dont have the same call risks) and credit risk increases with time


Don't forget to suggest NOW might be an EXCEPTIONAL time to rebalance.

I was just reading a story in the WS Journal that shows the S&P500 has gone nowhere in the last 9 yrs and it lists a table of returns for many other asset classes. The article suggests this COULD be another "lost decade" like 1929 through 1942 and 1966 through 1982. The article "neglects" to say how well the markets did the following year.

Add in the major bear articles in the major newspapers this weekend that ask if we could get another depression.... I feel pretty good about my "rebalance" buy of SPY recently at a bit lower prices.

I wonder if the WSJ would let me republish that return graph on my blog if I put in an advertisement for their magazine so I could share it... it is well worth looking at if you have access.

Everyone interested in fixed income, commodities, gold, oil, etc... and so much talk of lost decades....

To me, that sounds like a bell ringing....
best regards | Kirk out | >>Even Jack Bogle admits he has some managed funds.
User avatar
Kirk
 
Posts: 35
Joined: Tue Oct 16, 2007 3:18 pm
Location: Los Altos, CA

Postby OptionAl » Wed Mar 26, 2008 2:38 pm

Though I think that it's easier to make such judgments on bonds than stocks, is this not market timing, which appears to me to be a board no-no?
OptionAl
 
Posts: 391
Joined: Wed Mar 26, 2008 2:05 pm

RE: market timing,

Postby Kirk » Wed Mar 26, 2008 2:41 pm

OptionAl wrote:Though I think that it's easier to make such judgments on bonds than stocks, is this not market timing, which appears to me to be a board no-no?


Going into or out of TIPS based on "valuation" is also market timing.

I think suggesting someone consider rebalancing to their targets that would have them take profits in soaring TIPS to buy down double digit SPY, VTI (or their index funds) or beaten down explore portfolio stocks is probably less market timing than suggesting selling TIPS.
best regards | Kirk out | >>Even Jack Bogle admits he has some managed funds.
User avatar
Kirk
 
Posts: 35
Joined: Tue Oct 16, 2007 3:18 pm
Location: Los Altos, CA

Postby OptionAl » Wed Mar 26, 2008 2:45 pm

Kirk, I agree, I wasn't really addressing your post or rebalancing in general, but moving in and out of different classes and durations of bonds, especially when held in a fund.
OptionAl
 
Posts: 391
Joined: Wed Mar 26, 2008 2:05 pm

Postby ddb » Wed Mar 26, 2008 3:07 pm

OptionAl wrote:Though I think that it's easier to make such judgments on bonds than stocks, is this not market timing, which appears to me to be a board no-no?


Yes, it is a very clear case of market timing. Larry disagrees, but I frankly haven't found any of his rationalizations plausible.

If you deviate from your target allocation based on market factors, then you are market timing.

- DDB
"We have to encourage a return to traditional moral values. Most importantly, we have to promote general social concern, and less materialism in young people." - PB
User avatar
ddb
 
Posts: 5487
Joined: Mon Feb 26, 2007 12:37 pm
Location: American Gardens Building, West 81st St.

UPDATE

Postby gadfly888 » Wed Mar 26, 2008 5:17 pm

Sold all TIPS, bonds and vipsx, two days ago. Proceeds sitting in prime
money mrkt. Will submit limit buy orders for VTI in vicinity of recent
mrkt. lows with portion of proceeds. Still holding adequate bond allocation,
all older 2-3% fixed I bonds and old EE's that pay 90% of 5 yr. treasury.
Call it Mrkt. timing, call it spinach, Mr. Swedroe's assessment that viewed
historically treasuries have more downside than upside is compelling.
Mr. William Bernstein's advice that one might consider a moderate increase
to the equity allocation during times of mrkt. stress is sounding more and
more timely. Hmmm, maybe timely is a poor choice of words :wink:

Gad
gadfly888
 
Posts: 104
Joined: Fri Apr 13, 2007 1:14 pm


Return to Investing - Theory, News & General

Who is online

Users browsing this forum: Google [Bot], knowmad, xatruch and 26 guests