TIPS - Going Down with the Ship?

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TIPS - Going Down with the Ship?

Post by abuss368 »

Intermediate Term TIPS Fund - This drop is incredible!

Updated performance figures on Vanguard's website:

YTD - (9.45%)
1 year - (7.43%)

Total Bond Market has now pulled ahead for the YTD, 1 Year, 5 Year, and the 10 Year is not that far off. It really does appear to be a reversion to the mean and that over time is probably does not make much difference. For us then, the question is why complicate things?

Bond returns are a function of term and credit. Bonds should be for safety, income, and some dry powder to rebalance. Having a bond fund drop while the stock market drops is not exactly safety. I am thankful to learn Jack Bogle is no longer in the TIPS funds either but rather Total Bond Market and Intermediate Term Tax Exempt.

Diversification, safety, low costs, no manager risks, no long duration, monthly income from dividends, and best of all simplicity.

Keep investing simple.

Total Bond Market does just that.

Thank You Jack!
John C. Bogle: “Simplicity is the master key to financial success."
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Re: TIPS - Going Down with the Ship?

Post by Jim180 »

Fortunately I don't have anything in that TIPS Fund. With a duration of 8.2, still a negative yield, and little inflation right now there is just nothing attractive about it. Probably the only reasonable way to own TIPS is buy individual TIPS and hold till maturity.
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Re: TIPS - Going Down with the Ship?

Post by neurosphere »

I do 50% TIPS, 50% Short-Term Corporate. Rebalance every once in a while. Not as simple as Total Bond, but simple enough.

There are many roads to well, you know. :D

That's what makes investing (which SHOULD be boring) fun. We can come to this site, choose a mix which will perform 99% of US investors long term, but spend hours and hours quibbling about how to get another 0.5% ahead. :wink:
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Re: TIPS - Going Down with the Ship?

Post by camper »

TBM per Vanguard website

YTD (3.38%)
1 year (2.61%)
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Re: TIPS - Going Down with the Ship?

Post by abuss368 »

camper wrote:TBM per Vanguard website

YTD (3.38%)
1 year (2.61%)
Exactly. Way ahead (even with the loss) over the inflation bond funds!
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Re: TIPS - Going Down with the Ship?

Post by stevewolfe »

I'd feel better about these posts if they were made in 2009 when VIPSX returned 10.8% vs. 5.93% for VBMFX or in 20011 when VIPSX returned 13.24% vs 7.56% for VBMFX. But to cherry pick a down year feels like, well, cherry picking.

Some folks are OK with only Total Bond. Some folks like I-Bonds. Some folks like TIPS. Some folks like some of each. Can't we all just get along? :beer
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Re: TIPS - Going Down with the Ship?

Post by patrick »

I think the safety that matter most is safety in terms of long-term real returns. TBM won't provide that if there is much unexpected inflation, and if you wait to buy TIPS until after you see the unexpected inflation becomes expected, then it will be too late -- that is, the TIPS/nominal yield spread should widen.
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Re: TIPS - Going Down with the Ship?

Post by camper »

YTD (3.38%)
1 year (2.61%)[/quote]

Exactly. Way ahead (even with the loss) over the inflation bond funds![/quote]



Do you expect bond funds with different durations to perform exactly the same?

How has short term bond index done in relation to TBM? What are the durations?
Last edited by camper on Tue Sep 10, 2013 12:15 am, edited 1 time in total.
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Re: TIPS - Going Down with the Ship?

Post by alec »

I....... am...... so..... scared..... :wink:
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Re: TIPS - Going Down with the Ship?

Post by nedsaid »

Total Bond Mariket Index is not "Total" in that it does not own TIPS. I own both the Vanguard Total Bond and Vanguard TIPS funds. Both are excellent long term holdings.

Though TIPS are doing very poorly this year, they had a big run-up the last 3-4 years before that. Don't worry, TIPS will be back. A whiff of inflation will take care of that.

From the peak, my retirement portfolio is down about 1%. That is hardly going down with the ship.
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Re: TIPS - Going Down with the Ship?

Post by abuss368 »

nedsaid wrote:Total Bond Mariket Index is not "Total" in that it does not own TIPS. I own both the Vanguard Total Bond and Vanguard TIPS funds. Both are excellent long term holdings.

Though TIPS are doing very poorly this year, they had a big run-up the last 3-4 years before that. Don't worry, TIPS will be back. A whiff of inflation will take care of that.

From the peak, my retirement portfolio is down about 1%. That is hardly going down with the ship.
Hi needsaid,

I wonder if the "Total" Bond Market fund will ever include TIPS in the index someday down the road as the TIPS market continues to increase in size?
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Why buy TIPS??

Post by Bill Bernstein »

It's important, before you purchase any asset class, to ask why it's there.

For TIPS, there are 3 possible reasons:

1) To diversify your bond holdings, as recommended by Rick Ferri. TIPS certainly perform this task admirably, as long as you don't own "too much" of them, meaning, at a minimum, they should be a lot less than half your bonds. TIPS funds are fine for this purpose.

2) To defease future real living expenses at a fixed point in the future, ie, the maturity of the bond, at which point they become riskless in inflation-adjusted returns, the only asset class that does this. There's no reason why, if that's your goal, a TIPS ladder that matches your living expsnes needs, *not a fund,* can't hold even the lion's share of your sheltered nest egg.

3) As a risk-free asset. This is a mistake: as pointed out under 2), TIPS become riskless only at or near maturity. During the last crisis, the long TIPS lost nearly 25% of its value (and it wasn't even a real "long" TIPS, but rather had a maturity of less than 24 years . . .)

If long TIPS simply revert to their "historical" yield in the 2-2.5% range, we've only absorbed half the damage at the long end thus far this year.

Bill
Last edited by Bill Bernstein on Mon Sep 09, 2013 9:04 pm, edited 1 time in total.
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Re: TIPS - Going Down with the Ship?

Post by nedsaid »

Abuss368,
You will have to ask Vanguard. They don't consult me on the composition of their funds! You would have to think that as the amount of TIPS outstanding continues to grow that they would consider it. Thanks for your comment.
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Re: TIPS - Going Down with the Ship?

Post by john94549 »

Were not TIPS the wonderful "can't lose" ballast of just a few years ago? Well, I sold my modest Vanguard TIPS fund a while back at a modest gain. Also sold my modest short-term fund (VFSTX) a while back at a modest gain.

My CDs never seem to cause me much distress. Set and forget.
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Re: TIPS - Going Down with the Ship?

Post by cflannagan »

abuss368 wrote:Intermediate Term TIPS Fund - This drop is incredible!

Updated performance figures on Vanguard's website:

YTD - (9.45%)
1 year - (7.43%)

Total Bond Market has now pulled ahead for the YTD, 1 Year, 5 Year, and the 10 Year is not that far off. It really does appear to be a reversion to the mean and that over time is probably does not make much difference. For us then, the question is why complicate things?

Bond returns are a function of term and credit. Bonds should be for safety, income, and some dry powder to rebalance. Having a bond fund drop while the stock market drops is not exactly safety. I am thankful to learn Jack Bogle is no longer in the TIPS funds either but rather Total Bond Market and Intermediate Term Tax Exempt.

Diversification, safety, low costs, no manager risks, no long duration, monthly income from dividends, and best of all simplicity.

Keep investing simple.

Total Bond Market does just that.

Thank You Jack!
Anyone know what Jack Bogle have in his bond allocation currently? Back in 2006, he had money in TIPS. Curious if he still holds any TIPS in his portfolio.

In any case, I'm concerned about threads like this. Talking about nothing more than market noise that will ultimately become just a blip on the grand scheme of things. Not a very Boglehead-like thread.
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Re: TIPS - Going Down with the Ship?

Post by Erwin »

My view on TIPs is that a fund just does not do it, it really does not have a maturity. To protect against inflation (the only reason to own TIPs) you should buy individual bonds and hold them to maturity. A ladder will do great for those in retirement. Comments?
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Re: Why buy TIPS??

Post by Leesbro63 »

wbern wrote: 2) To defease future real living expenses at a fixed point in the future, ie, the maturity of the bond, at which point they become riskless in inflation-adjusted returns, the only asset class that does this. There's no reason why, if that's your goal, a TIPS ladder that matches your living expsnes needs, *not a fund,* can't hold even the lion's share of your sheltered nest egg.
Bill
Again, I feel compelled to point out that for MANY of us Bogleheads with at least a medium sized nest egg in a taxable portfolio, the above doesn't work. And since many (most?) people who are wealthy enough to be able to do the liability matching described above have that wealth outside tax sheltered accounts (because generally there isn't that much wealth that can get in there due to the yearly limits), this is false for more people than it's true for (my guess, I admit).
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Re: TIPS - Going Down with the Ship?

Post by pingo »

cflannagan wrote:In any case, I'm concerned about threads like this. Talking about nothing more than market noise that will ultimately become just a blip on the grand scheme of things. Not a very Boglehead-like thread.
The point of non-Bogleheadish titles is always to make us look! :D

OP is about simplicity and peace of mind (which in part results from simplicity), not market noise. Re-reading the OP, abuss368 pretty much says it's just a blip. If I am to nitpick...
abuss368 wrote:Having a bond fund drop while the stock market drops is not exactly safety.
Vanguard Inflation-Protected Securities (VIPSX)
Vanguard Total Bond Market Index Fund (VBMFX)
Vanguard Short-Term Treasury Index Fund (VFISX)
Image

...what happened in the dead center of that chart would have been unnerving, except for the owner of Short-Term Treasuries. TIPS sloped downward almost the same as the S&P 500 for a couple months. Total Bond got trimmed at the same time, but not as much. With the exception of the STTs, those that stayed the course ended up selling low to buy even lower (selling bonds to buy stocks), which worked out well because in roughly 6 months, stocks skyrocketed even more than TIPS did. As bonds, TIPS and Total Bond served their purposes, roughly, which is the best we can hope for. I suppose the purpose of TIPS as diversification against inflation never changed, even though it seems like VIPSX won't be "flavor of the month" anytime soon. When I compare what is happening right now...

Vanguard Inflation-Protected Securities (VIPSX)
Vanguard Total Bond Market Index Fund (VBMFX)
Vanguard Short-Term Treasury Index Fund (VFISX)
S&P 500 Index (total return)
Image

...it's still William Bernstein's preferred option (Short-Term Treasuries) that is nice and flat, just the way he likes them so he can use stocks as the purveyors of risk in his portfolio. For me, I see Total Bond being "down" and TIPS being even "downer", so rebalancing US stocks with TIPS and Total Bond kind of looks like selling high to buy lower. (I guess I can see the silver lining on anything if I want to.) Personally, I don't know where any of this will end up in the future, being it's all just a blip. Maybe I'm just going down with the ship?

To OPs chagrin, our bonds would have probably been Total Bond-only were it not for the fact that Mrs. Pingo insists we use Vanguard target funds in our IRAs for "simplicity". As such I'm left to fill the rest of our bond needs with my employer hybrid core bond thingy, my employer's super low-cost TIPS index fund, and/or Stable Value. I don't feel I get the right diversification, quality, costs and Total Bond-like duration without all three.

:oops:
Last edited by pingo on Tue Sep 10, 2013 5:23 pm, edited 1 time in total.
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Re: TIPS - Going Down with the Ship?

Post by baw703916 »

I'm not quite sure what the point is. With TIPS, it was kind of a no-brainer that investors weren't likely to accept a substantially negative real yield forever.

Anyway, if the TIPS fund has manager risk because it's "active", then how does Intermediate Term Tax Exempt (also "active") solve the problem?

(why the heck doesn't Vanguard just index the TIPS fund, though?)

If someone decides to stick to TBM and eschew TIPS, that's fine. But I'm not sure what the YTD performance has to do with this decision.

My TIPS fund is LTPZ, which has had a positive real yield all the way through. The way I look at it, I'm guaranteed to have a positive real return if I hang onto it for a sufficiently long time. So really the risk is very low since I have no intention of selling, whatever fluctuations ensue.

Brad
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Re: TIPS - Going Down with the Ship?

Post by Tom_T »

I don't see the point of this thread, either. I could say "Hey, I dumped TBM for Short-Term Investment Grade, and TBM is down two percent this year, and VFSUX is up, therefore TBM is bad and VFSUX is good." It means nothing. The OP has posted in the past that he dumped his TIPS, so I guess he's just looking at the results since then.
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Re: TIPS - Going Down with the Ship?

Post by ofcmetz »

It's a better time to buy TIP's now than it was in January, but how could one have known this is January. If TIP's were part of my fixed income I would take heart in knowing that I was getting a better deal now. Long term holders of TIP's funds experienced a nice run up in NAV prior to this years drop. Really the only thing one should pick up from this drop is that one may wish to hold individual TIP's in retirement vs bond funds. For accumulators you should just sigh, move on, and stick to your hopefully well thought out IPS.
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Re: TIPS - Going Down with the Ship?

Post by HomerJ »

stevewolfe wrote:Some folks are OK with only Total Bond. Some folks like I-Bonds. Some folks like TIPS. Some folks like some of each. Can't we all just get along? :beer
Reminds of when Homer Simpson was preaching to the different religions in the Middle East to get along (he was on holiday in Israel).

"Because in the end, aren't all religions the same? They tell us what to eat, when to pray, that this lump of clay called Man can somehow shape himself to resemble the divine. But we can never attain that perfect grace if we have hatred in our hearts. So let us celebrate our commonalites. Some of us don't eat pork. Some of us don't eat shellfish. But we all eat chicken. So spread the word: peace and chicken!"
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Re: TIPS - Going Down with the Ship?

Post by Carpe »

abuss368 wrote:Intermediate Term TIPS Fund - This drop is incredible!

Updated performance figures on Vanguard's website:

YTD - (9.45%)
1 year - (7.43%)

Total Bond Market has now pulled ahead for the YTD, 1 Year, 5 Year, and the 10 Year is not that far off. It really does appear to be a reversion to the mean and that over time is probably does not make much difference. For us then, the question is why complicate things?

Bond returns are a function of term and credit. Bonds should be for safety, income, and some dry powder to rebalance. Having a bond fund drop while the stock market drops is not exactly safety. I am thankful to learn Jack Bogle is no longer in the TIPS funds either but rather Total Bond Market and Intermediate Term Tax Exempt.

Diversification, safety, low costs, no manager risks, no long duration, monthly income from dividends, and best of all simplicity.

Keep investing simple.

Total Bond Market does just that.

Thank You Jack!
The term issue can be addressed by owning TIPS directly and holding to maturity, and NOT purchasing TIPS funds. Since TIPS are issued by the US Treasury, they are essentially risk free or at least as free of risk as one might achieve. Hold TIPS to maturity and you know what you will get - not so with TIPS funds.

Of course, if you restrict yourself to three mutual funds or even just mutual fund only investing you preclude the use of other, sometimes more appropriate tools for the job. It certainly appears you consider limiting the number of tools you use to be more important than what they do or don't do.

I'm all for simplicity, but I think it is a mistake to think of having three funds as some kind of achievement. It's not. It's a compromise.
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Re: TIPS - Going Down with the Ship?

Post by abuss368 »

The question for an investor in the accumulation phase should be if they have a risk of unexpected inflation. During your career you should receive adjustments in your human capital based on inflation or another factor. I would expect this to lesson the need for TIPS. An investor in retirement may (but not always) have a higher risk to unexpected inflation. Social Security, Pension, etc. may have an adjustment each year.

I understand the vehicle, but I just don't see a place for it.
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Re: TIPS - Going Down with the Ship?

Post by cflannagan »

abuss368 wrote:The question for an investor in the accumulation phase should be if they have a risk of unexpected inflation. During your career you should receive adjustments in your human capital based on inflation or another factor. I would expect this to lesson the need for TIPS. An investor in retirement may (but not always) have a higher risk to unexpected inflation. Social Security, Pension, etc. may have an adjustment each year.

I understand the vehicle, but I just don't see a place for it.
Yes, I want to be prepared for unexpected inflation. But I also acknowledge the chances of unexpected inflation is probably south of 30% or 25% chance per year (if past years is of good indication). Thus, I only allocate 20% of my bond holdings to inflation protection. I think that's pretty reasonable, and there are years where TIPS performs greatly compared to good ol' TBM. Rebalance those two into each other as necessary on annual basis.
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Re: TIPS - Going Down with the Ship?

Post by abuss368 »

cflannagan wrote: Anyone know what Jack Bogle have in his bond allocation currently? Back in 2006, he had money in TIPS. Curious if he still holds any TIPS in his portfolio.
That is an easy one!

In a video interview that has been published a few times on the forum in the last year or two (I also posted it), with Jack Bogle and Steve Forbes, Mr. Bogle notes that he sold out of the TIPS fund due to the "horrible" yield (around the 21 minute mark). He goes on to state that his taxable account is mostly Intermediate Term Tax Exempt with some Limited Term Tax Exempt. His tax advantaged accounts are mostly Total Bond Market with some Short Term Bond Index.

Simple and effective.

Thank you Jack!
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Re: TIPS - Going Down with the Ship?

Post by LH »

I hold 50 tips 50 nominal.

I hold REIT when it tanks, Europe when it tanks. Etc.

Tips dropping so what?

Get back to me if unexpected inflation hits, if it doesn't, that's ok, but nominals in right condition can take a hit, whereas tips would not.

I am glad I have tips fund. Good diversification.

Time is a smear, investing is not just in the current now with indexing, you have to account for all possible states.

Now if you can time, then time. Hint no one can time and succeed expectantly.

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Re: TIPS - Going Down with the Ship?

Post by abuss368 »

50% is a lot to keep in TIPS.
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Re: TIPS - Going Down with the Ship?

Post by richard »

The TIPS fund had a generally higher return than TBM until recently
Image

Inflation seems to be a very low risk at the moment, with central banks focusing more on the danger of possible inflation than on existing slow growth and high unemployment. This could make investing in an inflation protected security less attractive - if central banks are so vigilant against inflation now, when would they relax that vigilance? The danger is, of course, that we get an answer to that question. At that point, some may wish they owned more TIPS.
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Re: TIPS - Going Down with the Ship?

Post by gkaplan »

abuss368 wrote:50% is a lot to keep in TIPS.
I have fifty percent in TIPS, or at least I will have after I retire at the end of the year and transfer my TSP to Vanguard. I also believe Taylor has fifty percent in TIPS, at least he used to when he made a bet with Mel several years ago.
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Re: TIPS - Going Down with the Ship?

Post by ddb »

nedsaid wrote:Abuss368,
You will have to ask Vanguard. They don't consult me on the composition of their funds! You would have to think that as the amount of TIPS outstanding continues to grow that they would consider it. Thanks for your comment.
Vanguard's Total Bond Market Index Fund which tracks the Barclays U.S. Aggregate Float Adjusted Index. For information on this Index, please see the fact sheet on pages 37-38 of this document issued by Barclays. In particular (emphasis mine):
The U.S. Aggregate Index covers the USD-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. The index includes bonds from the Treasury, Government-Related, Corporate, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS sectors. The U.S. Aggregate Index is a component of the U.S. Universal Index in its entirety. The index was created in 1986, with index history backfilled to January 1, 1976.
I believe the term "fixed-rate" in the above definition of the index would exclude variable-coupon bonds such as TIPS or floating rate bonds.

In any event, as long as the TBM fund tracks this index, it isn't up to Vanguard to decide to add TIPS, but rather up to the index provider.

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Re: TIPS - Going Down with the Ship?

Post by Code Commit »

abuss368 wrote:50% is a lot to keep in TIPS.
I believe, David Swensen is one of your favorite authors. http://www.bogleheads.org/wiki/Lazy_por ... _portfolio (He recommends 50% of fixed income in TIPS. It does not seem all that outlandish).
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Re: TIPS - Going Down with the Ship?

Post by freebeer »

Code Commit wrote:
abuss368 wrote:50% is a lot to keep in TIPS.
I believe, David Swensen is one of your favorite authors. http://www.bogleheads.org/wiki/Lazy_por ... _portfolio (He recommends 50% of fixed income in TIPS. It does not seem all that outlandish).
I believed that should have been "has recommended 50%... in TIPS" and that this was circa 2009 (which was of course back-up-the-truck days for buying TIPS). Whether the results and volatlity since have caused him to change his recommended allocation would be interesting to know. For some reason TIPS seem to be the exception to no-market-timing for many folks (myself included).
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Re: TIPS - Going Down with the Ship?

Post by Code Commit »

freebeer wrote:I believed that should have been "has recommended 50%... in TIPS" and that this was circa 2009 (which was of course back-up-the-truck days for buying TIPS). Whether the results and volatlity since have caused him to change his recommended allocation would be interesting to know. For some reason TIPS seem to be the exception to no-market-timing for many folks (myself included).
Well, I don't know when he started recommending it or if he still recommends it. But the book "Unconventional Success" http://www.amazon.com/Unconventional-Su ... adswiki-20 was published in 2005. It still had 50% of FI in TIPS.
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Re: TIPS - Going Down with the Ship?

Post by smpatel »

I keep 30% in TIPS and will continue buying them. The only way I know other than I-bond to guarantee real return. I don't believe in historical stats of stocks outperforming etc. as it does not include average investors' actual performance due to emotional roller coaster.
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Re: TIPS - Going Down with the Ship?

Post by Valuethinker »

I am amazed anyone would consider an investment based on ONE YEAR's performance data-- yah or nay.

If we had a repeat of the 1970s (rising inflation) then in that decade we saw:

- money markets were the best performing investment (but after tax you still lost to inflation)
- government bonds were a disaster, inflicting large real losses on investors
- stock markets dropped by c. 40% in real value terms 1968-1979

TIPS or other Real Return Securities, had they existed, would, by construction, have paid a (pre tax) positive real return over that period.

So by holding TIPS, an investor hedges against one of the worst investing environments we have seen in the 20th century.

Because of their construction, TIPS should be highly diversifying against a nominal bonds- equity portfolio. TIPS in essence serve the purpose of investing-- the maintenance of a future standard of living, guaranteed. There is very little uncertainty about what you will get at maturity in buying power. Exception being the issue of reinvesting the coupons at what real rate? (ie a zero coupon TIP would be the ultimate instrument as a hedge).

It is empirically observable that TIPS are quite volatile: it is ST TIPS that have the greater correlation with CPI. This volatility arises from:

- in the case of the period after Lehmans use of TIPS as collateral in REPO transactions, which then unwound
- long duration
- general tendency of the market to use them as a forecast of inflation (ie the traders use them for that)

So 'buy directly and hold' strategies are favoured. However those who need to invest in TIPS directly should not feel too disadvantaged, in the long run it should work out (assuming reinvested coupons).

FWIW with both the US and UK markets suggesting interest rates will rise sooner than public statements by the Governor of the Bank of England, and to an extent the Fed, it seems to me that there must be *more*, not *less*, risk of inflation at this point in the economic cycle.
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Re: TIPS - Going Down with the Ship?

Post by Artsdoctor »

Of all of the risks that a retiree faces, inflation has to rank at or near the top. Buying individual TIPS at auction and holding until maturity is about as risk-free as you can get. Where else are you going to get that inflation protection? Stocks may hold up in the long run but is a retiree going to hold the majority of his portfolio in stocks? To you expect a retiree to hold gold bars somewhere? Social Security will most likely not make up the majority of your financial needs in retirement and the inflation benchmark is on the negotiating table now anyway. Your pension is almost certainly not going to keep up with significant inflation; many pensions don't have a COLA, the ones that do are often capped at 2%, and even if you had a generous COLA now, it will be one of the easiest benefits to scale back when pensions are inevitably modified in the future. You can't stay short during your entire retirement years and CDs are certainly not going to cut it if inflation takes off.
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Re: TIPS - Going Down with the Ship?

Post by Phineas J. Whoopee »

Valuethinker wrote:...
Exception being the issue of reinvesting the coupons at what real rate? (ie a zero coupon TIP would be the ultimate instrument as a hedge).
...
Hi Valuethinker,

I reluctantly disagree with one of your points, but perhaps I've misinterpreted what you wrote.

With respect to reinvestment risk, and setting aside both TIPS funds and taxable accounts, there is none for the inflation adjustments. That's one of the great advantages. Being added to principal value, the inflation adjustments not only compound properly, they continue to receive the same real interest.

Of course, in recent years we've seen real interest go negative. Nevertheless, for the inflation adjustments reinvestment risk is not an issue with TIPS.

PJW
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Re: TIPS - Going Down with the Ship?

Post by richard »

PJW, TIPS pay cash interest in addition to the inflation adjustment. There's reinvestment risk on that cash interest. VT is correct.
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Re: TIPS - Going Down with the Ship?

Post by ddb »

richard wrote:PJW, TIPS pay cash interest in addition to the inflation adjustment. There's reinvestment risk on that cash interest. VT is correct.
Right. Extreme example:

Year 0: Buy a 30-year TIPS with a coupon rate of 1.500% at par. Real yield is therefore 1.5000%.
Next day, the yield on your TIPS drops to 0.000%, and stays there for the duration of the bond.

Every six months, you receive a coupon which you're now reinvesting at a real rate of 0.000%. Plus, you have the practical problem that you can't reinvest a $75 coupon into an individual TIPS.

In this case, your 30-year holding period real rate of return will be less than 1.500%. You did NOT "lock in" that initial real return.

- 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
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Re: TIPS - Going Down with the Ship?

Post by Phineas J. Whoopee »

richard wrote:PJW, TIPS pay cash interest in addition to the inflation adjustment. There's reinvestment risk on that cash interest. VT is correct.
Thanks for the reminder Richard. That's why I was so very careful to limit my comments to the inflation adjustments. If I may be forgiven for quoting myself, and even adding emphasis:
Phineas J. Whoopee wrote:With respect to reinvestment risk, and setting aside both TIPS funds and taxable accounts, there is none for the inflation adjustments. That's one of the great advantages. Being added to principal value, the inflation adjustments not only compound properly, they continue to receive the same real interest.

Of course, in recent years we've seen real interest go negative. Nevertheless, for the inflation adjustments reinvestment risk is not an issue with TIPS.
Naturally it's still possible I've misunderstood Valuethinker. As I contemplated earlier in the same post:
Phineas J. Whoopee wrote:I reluctantly disagree with one of your points, but perhaps I've misinterpreted what you wrote.
Again, thanks for the reminder. Now I look forward to reading Valuethinker's considered response, should she feel inclined to post one.

PJW
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Re: TIPS - Going Down with the Ship?

Post by Phineas J. Whoopee »

ddb wrote:
richard wrote:PJW, TIPS pay cash interest in addition to the inflation adjustment. There's reinvestment risk on that cash interest. VT is correct.
Right. Extreme example:

Year 0: Buy a 30-year TIPS with a coupon rate of 1.500% at par. Real yield is therefore 1.5000%.
Next day, the yield on your TIPS drops to 0.000%, and stays there for the duration of the bond.

Every six months, you receive a coupon which you're now reinvesting at a real rate of 0.000%. Plus, you have the practical problem that you can't reinvest a $75 coupon into an individual TIPS.

In this case, your 30-year holding period real rate of return will be less than 1.500%. You did NOT "lock in" that initial real return.

- DDB
So long as you mean real Yield to Maturity, that's correct. It's also the case that the principal will keep up with inflation; although depending on the location of the asset the inflation adjustment may be subject to tax (like the inflation-equivalent of any other investment's return - that's not unique to TIPS).

It's become clear in recent weeks that some posters, not including you, are thinking of cash flow when they read the words yield or rate of return.

And in any event, your criticism applies to all fixed income except zero-coupon bonds. Maybe you should have made that clear in this explicitly TIPS-related thread.

PJW
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Re: TIPS - Going Down with the Ship?

Post by tetractys »

Paying a small premium for inflation protection seems a simple thing, as does paying a little less premium for nominals. Why the panic, or whatever it is abbus368? Investing with understanding should be the former, not the latter. -- Tet
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Re: TIPS - Going Down with the Ship?

Post by LH »

Look

No one knows what is coming.

No one.

Read the April 2007 IMF report, read death of equities business week circa 1979, read best selling financial books from 1981. Read newspaper financial articles from the late 20s.........

It's actually quite comical reading.

Take the etop economists, have thm predict....meaningless babble, no utility.

No one, knows anything.

This is because, the current price, the current prediction of inflation, etc, is set by the market which equilibrates around two lists of equally great sounding, but mutually exclusive and opposite reason lists, that reach polar opposite conclusion. To buy, to sell. To have high inflation, to have deflation, etc.

So, yeah, for my safe money, I use 50 real bonds, 50 nominal bonds.





If you say, looking in the rear view mirror, that (de)inflation risk is low, you are deluding yourself I posit. Hey it's good for cnbc, it's not a crime, you are entitled to our opinion, but if you actually act on it, you will expectantly cause yourself harm. Because as human, we straight Line extrapolate from recent past, the recent past will change, your extrapolation from recent past will change, and you will bob around timing, with predictable poor results.

So sure have an opinion on what interest rates, inflation will do, watch Cramer, fast money, but don't invest any serious money based on any of it. You don't know, thy don't know.
Last edited by LH on Wed Sep 11, 2013 4:03 pm, edited 1 time in total.
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Re: TIPS - Going Down with the Ship?

Post by Carpe »

ddb wrote:
richard wrote:PJW, TIPS pay cash interest in addition to the inflation adjustment. There's reinvestment risk on that cash interest. VT is correct.
Right. Extreme example:

Year 0: Buy a 30-year TIPS with a coupon rate of 1.500% at par. Real yield is therefore 1.5000%.
Next day, the yield on your TIPS drops to 0.000%, and stays there for the duration of the bond.

Every six months, you receive a coupon which you're now reinvesting at a real rate of 0.000%. Plus, you have the practical problem that you can't reinvest a $75 coupon into an individual TIPS.

In this case, your 30-year holding period real rate of return will be less than 1.500%. You did NOT "lock in" that initial real return.

- DDB
OK, since we are discussing extremes: If you are maintaining a ladder, you can "wash" the coupon payments into your next purchase.
Carpe: pick, pluck, pluck off, gather
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Re: TIPS - Going Down with the Ship?

Post by ddb »

Phineas J. Whoopee wrote:And in any event, your criticism applies to all fixed income except zero-coupon bonds. Maybe you should have made that clear in this explicitly TIPS-related thread.
I'm not criticizing anything here, just pointing out a component of investing in fixed income securities that pay coupons.

Yes, reinvestment risk is a component of any bond which pays more than a single payment at maturity. I apologize if I implied that this is a feature which is specific to TIPS.

- DDB
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Re: TIPS - Going Down with the Ship?

Post by abuss368 »

Excellent thoughts and feedback thus far.

Thanks!
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Re: TIPS - Going Down with the Ship?

Post by richard »

Carpe wrote:OK, since we are discussing extremes: If you are maintaining a ladder, you can "wash" the coupon payments into your next purchase.
Or if you're investing in a fund, you can wash the payments into your next purchase. There's little if any meaningful difference in this context between a rolling ladder and a fund.
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Re: TIPS - Going Down with the Ship?

Post by abuss368 »

Are we as a group over thinking this?
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Re: TIPS - Going Down with the Ship?

Post by Bustoff »

Apologies in advance for the very basic question, but in the context of a TIPS fund, how do we measure risk/reward ?
I mean how is "unexpected inflation" defined and/or quantified ?
Does the Federal Reserve or Treasury determine when and if "unexpected inflation" is occurring and to what extent ?
In other words how do we determine if a TIPS fund is a good investment let alone the decision to use short or long term TIPS ?
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