SSSS wrote:If you're talking about holding TIPS in a taxable brokerage account at Vanguard, that's the same as holding them at Treasury Direct.
dbr wrote:The market value of individual bonds also fluctuates but eventually comes to rest at the redemption value when the bond matures.
amh wrote:In the scenario where you hold individual TIPS and the interest rates rise, the value of your individual TIPS holdings will decrease as well. If you hold them to maturity, their "transient" value on the secondary market is of no concern. Similarly, if you hold shares of VIPSX long enough, the fund will eventually roll over to new TIPS at the higher rate. Holding shares of the fund and building your own bond ladder are equivalent in this respect. So the NAV volatility is mainly a concern for speculators, provided you match the average fund maturity to your own timeframe.
cb474 wrote:But in the short run with VIPSX I could have a negative return, including something pretty severe like in 2008. So in that sense, it seems to me like a TIPS ladder of my own making could be less volatile than VIPSX. But the downside would be that it's less convenient that just investing in VIPSX.
Or is there some downside that I'm not seeing to a TIPS ladder of my own making, where all the bonds are held until maturity? Is that how VIPSX works? Does Vanguard hold all the bonds in VIPSX to maturity?
Thanks to everyone for the responses.
insurancerenegade wrote:There is an important difference between bond funds and holding your own ladder of bonds (TIPS or otherwise). Bond funds maintain constant maturity (and duration) and if interest rates rise shortly before you need to withdraw cash you will take a loss based on the average duration of the bonds in the fund. Individual TIPS (or other bonds) held to maturity have maturities and durations that decrease with time so that if an interest rate increase comes comes later in your planned holding period, individual bonds will perform much better than the funds.
dbr wrote:The key question is what is the purpose in holding the bonds? People seem to focus on the individual investment in terms of "getting back what I put in" without considering what they are doing with their portfolio as a whole.
cb474 wrote:SSSS wrote:If you're talking about holding TIPS in a taxable brokerage account at Vanguard, that's the same as holding them at Treasury Direct.
So there are no extra fees or expenses associated with purchasing TIPS through VBS vs. TreasuryDirect?
cb474 wrote:I was imagining holding the TIPS bonds to maturity. I that case, unlike VIPSX, a TIPS ladder of my own making would never have a negative return, right? Whereas VIPSX in short run might. I recognize that in the long run it should all be a wash. But in the short run with VIPSX I could have a negative return, including something pretty severe like in 2008. So in that sense, it seems to me like a TIPS ladder of my own making could be less volatile than VIPSX.
wiki wrote:If you are planning to reinvest (i.e, rollover) some of the annual redemption into new individual TIPS bonds, then you have gained nothing by using a rolling ladder over a fund. Because not rolling over the whole bond at the (hypothetically) very high yield has an identical opportunity cost to selling a portion of your fund at the (hypothetically) very low NAV. Another issue with this approach is how to deal with the longevity risk if you outlive your ladder.
It has been regularly argued on the Bogleheads forum that a bond fund is risky because of NAV fluctuations. For example, the NAV for Vanguard Inflation Protected Securities fell 20.4% from peak to trough in 2008. Instead, it is said, investors should hold individual bonds, which can always be redeemed at face value by holding until maturity.
This argument is wrong because the individual bonds in a bond fund react to the market identically to the individual bonds held in a personal portfolio. You can see this by manually calculating a NAV for your own portfolio of individual bonds, and watching its daily fluctuations. The key thought is that although bond funds do have volatility, they are exactly as volatile as a rolling bond ladder with the same duration. On a Bogleheads Forum post, tfb made this explicit with the following example:
After you create your TIPS ladder, call this ladder "My TIPS Fund." Create some imaginary shares and calculate the NAV for your fund. When one bond matures, for which you receive the full guaranteed value and real yield, you take the cash, divide by the NAV at that time, and reduce the number of shares you still own in My TIPS Fund. Now, it's as if you just sold some shares from My TIPS Fund at the current NAV. Let's say the NAV is lower than the initial NAV. Did you just suffer a loss? Or did you receive the full guaranteed value and real yield from the matured bond? You see it's just a matter of framing. The substance remains exactly the same.
At any moment after buying a bond fund, you can always be assured of getting your principal back. Just as when holding an individual bond, you may have to wait some period of time if you want to be reassured the return of your principal. That period of time is the duration. Since you should always have been keeping your duration equal to or less than your investment horizon (the time after which you need the money), you will be indifferent to (if the duration equals your horizon) or happy about (if the duration is less than your horizon) interest rate increases which cause a decline in NAV. In fact, you will be slightly better off if yields change and your fund has positive convexity, as is the case with most non- MBS funds.
Could you refine your question? Are you doing something different from the wiki example, e.g., not reinvesting?cb474 wrote:I have in fact read the wiki about individual bonds vs. bond funds.
fishnskiguy wrote:The main advantage of purchasing TIP at auction through VBS versus TD, is it is much easier to talk to a human being at VBS.
alec wrote:not too mention you don't need a gazillion passwords and a secret decoder sheet to log into VBS.
Actually the only time there will be a difference in the interest rate risk of VIPSX and a laddered set of TIPS that match the average maturity and duration of VIPSX is if you have to take cash out of the portfolio before the last of the bonds owed at the time of the interest rate spike matures.
Then is is much better to own the laddered TIPS.