Help me sell our TIPS
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Help me sell our TIPS
We have shares in Vanguard TIPS fund (VAIPX) within an IRA and now want out. My husband and I follow a mostly 3-fund investment plan, using Vanguard’s Total Stock, Total International, and Total Bond funds. When my husband retired a few years ago, we rolled the proceeds from his 457 and 403B plans into IRAs at Vanguard. At the time, based on what I read on this forum, we put part of the bond portion of those funds into the Vanguard TIPS fund. It seemed like a good idea at the time. However, a little bit of knowledge can be a dangerous thing, as I’ve come to learn that TIPS are way more complicated than we want our investments to be. As we get older, we want to simplify our finances even more, not make them more complex. So we want to get rid of the TIPS and move the money into his Total Bond (or Stock) fund (within his IRA). What’s the best time to do that? There is a distribution that’s normally paid in December, right? Should we wait until after that is paid? Does it matter?
As of now, our total portfolio is 45% stock and 55% bond/fixed investments. The TIPS portion makes up 4.5% of the total portfolio and 8.4% of the bond/fixed portion. I’ve learned a lot reading this forum and I hope in the future to avoid getting into things I don’t better understand. I just don’t know enough about TIPS to make the best use of them. Any help or advice would be much appreciated.
Thanks.
Ann
As of now, our total portfolio is 45% stock and 55% bond/fixed investments. The TIPS portion makes up 4.5% of the total portfolio and 8.4% of the bond/fixed portion. I’ve learned a lot reading this forum and I hope in the future to avoid getting into things I don’t better understand. I just don’t know enough about TIPS to make the best use of them. Any help or advice would be much appreciated.
Thanks.
Ann
Re: Help me sell our TIPS
Why do you feel you made a mistake? I have about 10% of my portfolio in individual TIP's and buy more every January. I'm happy to own them.
Gill
Gill
Cost basis is redundant. One has a basis in an investment |
One advises and gives advice |
One should follow the principle of investing one's principal
Re: Help me sell our TIPS
In an IRA it makes no difference when you do the exchange. If you have $100 in the fund and if pays and dividend that you reinvest, you still have exactly $100. There is sometimes value in timing such an exchange in a taxable account.
All of that said, I agree with Gill that you should reconsider making the change. For you, how are TIPS more complicated? How is holding VAIPX any different from holding VTSAX? The best "use case" for TIPS is for people who are retired for whom inflation is a real risk.
In terms of understanding behavior, we have discussed all of the intricacies of bond pricing on this forum, but it's generally not more complicated than knowing that inflation goes up to 5%, TIPS will outperform Total Bond; if it goes to 0%, Total Bond will outperform TIPS.
All of that said, I agree with Gill that you should reconsider making the change. For you, how are TIPS more complicated? How is holding VAIPX any different from holding VTSAX? The best "use case" for TIPS is for people who are retired for whom inflation is a real risk.
In terms of understanding behavior, we have discussed all of the intricacies of bond pricing on this forum, but it's generally not more complicated than knowing that inflation goes up to 5%, TIPS will outperform Total Bond; if it goes to 0%, Total Bond will outperform TIPS.
- Phineas J. Whoopee
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Re: Help me sell our TIPS
My opinion, which some well-respected posters disagree with, is if after careful thought and for good reason you've concluded your present portfolio is not appropriate for you, and a different one is clearly better, the rational course of action is to make the change immediately, or at least as immediately as is prudent taking any tax considerations into account. In your case, given that the assets are in an IRA, there are none.
The alternative is to knowingly retain an inappropriate asset allocation.
I am not expressing a view about whether inflation protection for part or all of your fixed income is right for you.
PJW
The alternative is to knowingly retain an inappropriate asset allocation.
I am not expressing a view about whether inflation protection for part or all of your fixed income is right for you.
PJW
- abuss368
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Re: Help me sell our TIPS
We removed the TIPS fund many years ago and combined with Total Bond. We are pleased with the simplicity and results. I like your plan regarding the Three Fund Portfolio.anncatchingup wrote:We have shares in Vanguard TIPS fund (VAIPX) within an IRA and now want out. My husband and I follow a mostly 3-fund investment plan, using Vanguard’s Total Stock, Total International, and Total Bond funds. When my husband retired a few years ago, we rolled the proceeds from his 457 and 403B plans into IRAs at Vanguard. At the time, based on what I read on this forum, we put part of the bond portion of those funds into the Vanguard TIPS fund. It seemed like a good idea at the time. However, a little bit of knowledge can be a dangerous thing, as I’ve come to learn that TIPS are way more complicated than we want our investments to be. As we get older, we want to simplify our finances even more, not make them more complex. So we want to get rid of the TIPS and move the money into his Total Bond (or Stock) fund (within his IRA). What’s the best time to do that? There is a distribution that’s normally paid in December, right? Should we wait until after that is paid? Does it matter?
As of now, our total portfolio is 45% stock and 55% bond/fixed investments. The TIPS portion makes up 4.5% of the total portfolio and 8.4% of the bond/fixed portion. I’ve learned a lot reading this forum and I hope in the future to avoid getting into things I don’t better understand. I just don’t know enough about TIPS to make the best use of them. Any help or advice would be much appreciated.
Thanks.
Ann
Best.
John C. Bogle: “Simplicity is the master key to financial success."
- saltycaper
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Re: Help me sell our TIPS
Few thoughts:
1) I only kinda sorta believe you. I mean, what made you suddenly feel TIPS are too complicated? Are you sure the Total Bond's outperformance for the past 3-year and 5-year time periods has nothing to do with your desire to jettison TIPS?
2) Careful on the "not understand" part. Do you fully understand how mortgage-backed securities work? There's a bunch of them in Total Bond. But I assume you have a plan for what to do with Total Bond, as far as how much you plan to allocate to Total Bond, when to rebalance, etc. despite not understanding everything about the bonds within.
3) There's an alternative to not investing in something just because you don't understand it. You can try to understand it. What's got you stumped on TIPS?
4) Yes, if you decide you want to get rid of TIPS, and there are no tax consequences, I too would just hit the sell/exchange button.
1) I only kinda sorta believe you. I mean, what made you suddenly feel TIPS are too complicated? Are you sure the Total Bond's outperformance for the past 3-year and 5-year time periods has nothing to do with your desire to jettison TIPS?
2) Careful on the "not understand" part. Do you fully understand how mortgage-backed securities work? There's a bunch of them in Total Bond. But I assume you have a plan for what to do with Total Bond, as far as how much you plan to allocate to Total Bond, when to rebalance, etc. despite not understanding everything about the bonds within.
3) There's an alternative to not investing in something just because you don't understand it. You can try to understand it. What's got you stumped on TIPS?
4) Yes, if you decide you want to get rid of TIPS, and there are no tax consequences, I too would just hit the sell/exchange button.
Quod vitae sectabor iter?
Re: Help me sell our TIPS
Taken all in all a fund of TIPS is a much LESS complicated investment than a total bond index fund. Maybe the problem is that there are more postings about TIPS on the forum these days than there are about all the individual parts of TBM. On the other hand at 8.4% of all your bonds, I would say that it is pointless to hold that asset. You can just sell whole thing any time and put the proceeds in TBM. It might be argued that a retiree should have the entire bond allocation in TIPS rather than the other way around, but personally it just seems somehow chancy to put well over half one's entire wealth in such a narrow part of the investment spectrum. I don't know if that is a rational objection or not. It doesn't bother the advocates of the TIPS ladder approach, but that is a different thing.
Re: Help me sell our TIPS
Yeah, I noticed a couple of things lately:dbr wrote:Taken all in all a fund of TIPS is a much LESS complicated investment than a total bond index fund. Maybe the problem is that there are more postings about TIPS on the forum these days than there are about all the individual parts of TBM. On the other hand at 8.4% of all your bonds, I would say that it is pointless to hold that asset. You can just sell whole thing any time and put the proceeds in TBM. It might be argued that a retiree should have the entire bond allocation in TIPS rather than the other way around, but personally it just seems somehow chancy to put well over half one's entire wealth in such a narrow part of the investment spectrum. I don't know if that is a rational objection or not. It doesn't bother the advocates of the TIPS ladder approach, but that is a different thing.
- talk of inflation in the media and now I see more postings about TIPs/Gold/Commodities on Bogleheads.
- some recent outperformance of small cap value and now lots of postings about whether and how much to tilt.
Coincidence?
- abuss368
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Re: Help me sell our TIPS
Vanguard investment experts recommend a two fund bond strategy that includes Toal Bond Index and Total International Bond Index.
John C. Bogle: “Simplicity is the master key to financial success."
- saltycaper
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Re: Help me sell our TIPS
"Vanguard" (whatever that means--there are lots of Vanguard investment advisors and experts) makes no such across-the-board recommendation for all investors. Also, they continue to include TIPS (short term) in Vanguard Target Retirement Income Fund.abuss368 wrote:
Vanguard investment experts recommend a two fund bond strategy that includes Toal Bond Index and Total International Bond Index.
Quod vitae sectabor iter?
Re: Help me sell our TIPS
[Deleted original post and completely rewrote.]
Rather than being "way more complicated", I submit that a TIPS fund is less complicated than a total bond fund, such as the Vanguard Total Bond Market Index Fund (TB). An investment is more complicated the more risks it is subject to. And TB is subject to many more than a TIPS fund.anncatchingup in original post wrote:... I’ve come to learn that TIPS are way more complicated than we want our investments to be. As we get older, we want to simplify our finances even more, not make them more complex. So we want to get rid of the TIPS and move the money into his Total Bond ...
- (As saltycaper points out here) TB holds mortgage backed securities which are subject to prepayment risk. TIPS funds have none.
- TB holds corporate bonds which are subject to credit risk and call risk. TIPS funds have none.
- TB holds all nominal bonds which are subject to inflation risk. TIPS have no inflation risk.
Last edited by #Cruncher on Wed Nov 30, 2016 10:36 pm, edited 1 time in total.
- elgob.bogle
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Re: Help me sell our TIPS
This Fund's TIPS allocation is worth considering:
Vanguard Target Retirement Income Fund composition as of 10/31/2016
Total Bond Market Index Fund 37.3%
Total International Bond Index Fund 15.9%
Short-Term Inflation-Protected Securities Index Fund 16.8%
Total Stock Market Index Fund 18.0%
Total International Stock Index Fund 12.0%
elgob
Vanguard Target Retirement Income Fund composition as of 10/31/2016
Total Bond Market Index Fund 37.3%
Total International Bond Index Fund 15.9%
Short-Term Inflation-Protected Securities Index Fund 16.8%
Total Stock Market Index Fund 18.0%
Total International Stock Index Fund 12.0%
elgob