ST TIPS Volatility

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trasmuss
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ST TIPS Volatility

Post by trasmuss » Sun Mar 12, 2017 6:01 am

In three years I will have to start making RMD's. For this reason I am considering moving some of my Total Bond Index to shorter duration bonds to at least have enough to make a couple of years worth of RMD's.

I am considering the Short Term Inflation Protected Securities fund for several reasons. It is second in expense ratio to the Total Bond fund so I wouldn't be giving up much in expenses. It contains bonds that are not in the Total Bond fund so I would be adding diversification. It is shorter duration to hopefully provide more safety than Total Bond in case interest rates go up considerable over the next three years. It is the short term bond fund that Vanguard uses in their Target Retirement funds. And yes, it may help if inflation should surge.

When looking at the graph showing performance on the Vanguard site, however, it shows a very erratic performance with lots of volatility. Much more volatility than other short term bond funds. I have no idea why. Would the short term volatility negate its value for use with RMD's?

I won't be needing the money from the RMD's so I will simply reinvest it in taxable funds (less the one third or so for taxes).

Would you just stick with Total Bond, take a chance with ST Tips, or use a different ST bond fund (e.g. Ultra Short fund, ST Investment Grade, ST Bond Index, etc.?

Thank you for your thoughts.

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Sandtrap
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Re: ST TIPS Volatility

Post by Sandtrap » Sun Mar 12, 2017 7:44 am

Curious about this as well for the same purpose.
(Beyond CD's, TIPS ladder, etc)

As far as short term funds:
Between:

Short Term Inflation Protected Securities Fund (TIPS) (VTAPX)
Short Term Tips Fund vs Short Term Treasury (VFISX)
Short Term Federal Fund (VSGDX)

Stability vs volatility, etc? :?:
Or just stick with Total Bond?

dbr
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Re: ST TIPS Volatility

Post by dbr » Sun Mar 12, 2017 10:51 am

It is completely unnecessary to "bucket" cash for RMDs, not in ST funds, CDs, cash, or anything else.

If you are going to reinvest the money, it doesn't even make sense.

stlutz
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Re: ST TIPS Volatility

Post by stlutz » Sun Mar 12, 2017 11:04 am

When looking at the graph showing performance on the Vanguard site, however, it shows a very erratic performance with lots of volatility. Much more volatility than other short term bond funds. I have no idea why
In 2013 and 2014, inflation was lower than expected and inflation expectations went lower. That hurt TIPS returns. Conversely, in 2016 inflation expectations began going up (along with a small bump in actual inflation). That helped the returns.

Depending upon changes in nominal interest rates and inflation expectations, short term TIPS will sometimes be more volatile that comparable nominal bonds and they will be less volatile at other times. There really isn't a hard and fast rule.
For this reason I am considering moving some of my Total Bond Index to shorter duration bonds to at least have enough to make a couple of years worth of RMD's.
I'm not picturing how this would work. If you always have a couple of years of shorter duration bonds, then aren't you in reality still taking your RMD's from Total Bond?

Valuethinker
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Re: ST TIPS Volatility

Post by Valuethinker » Sun Mar 12, 2017 11:06 am

trasmuss wrote:In three years I will have to start making RMD's. For this reason I am considering moving some of my Total Bond Index to shorter duration bonds to at least have enough to make a couple of years worth of RMD's.

I am considering the Short Term Inflation Protected Securities fund for several reasons. It is second in expense ratio to the Total Bond fund so I wouldn't be giving up much in expenses. It contains bonds that are not in the Total Bond fund so I would be adding diversification. It is shorter duration to hopefully provide more safety than Total Bond in case interest rates go up considerable over the next three years. It is the short term bond fund that Vanguard uses in their Target Retirement funds. And yes, it may help if inflation should surge.

When looking at the graph showing performance on the Vanguard site, however, it shows a very erratic performance with lots of volatility. Much more volatility than other short term bond funds. I have no idea why. Would the short term volatility negate its value for use with RMD's?

I won't be needing the money from the RMD's so I will simply reinvest it in taxable funds (less the one third or so for taxes).

Would you just stick with Total Bond, take a chance with ST Tips, or use a different ST bond fund (e.g. Ultra Short fund, ST Investment Grade, ST Bond Index, etc.?

Thank you for your thoughts.
At these interest rates, which instrument you use, as long as ST (maturity less than 5 years) probably won't make much odds.

TIPS are volatile because:

- TIPS bonds are illiquid relative to other types of US Treasury securities. Buyers buy them and hold them for long term inflation protection

- TIPS respond to changes in expectations of real interest rates, whereas other bonds it is nominal rates. That tends to make them more volatile (probably it shouldn't in theory, but in practice it does)

VG did a study and found that only ST TIPS bonds really correlate well with the inflation rate. Since market expectations of inflation rate fluctuate with each breath of a move by the Fed, by who is elected/ not elected (UK, US, France, Germany in particular right now), TIPS bonds tend to move around a lot.

I would suggest ST TIPS funds don't make good ST savings vs. CDs, ibonds, ST US govt securities funds (nominal return).

RetiredinKaty
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Re: ST TIPS Volatility

Post by RetiredinKaty » Sun Mar 12, 2017 2:54 pm

stlutz wrote:
When looking at the graph showing performance on the Vanguard site, however, it shows a very erratic performance with lots of volatility. Much more volatility than other short term bond funds. I have no idea why
For this reason I am considering moving some of my Total Bond Index to shorter duration bonds to at least have enough to make a couple of years worth of RMD's.
I'm not picturing how this would work. If you always have a couple of years of shorter duration bonds, then aren't you in reality still taking your RMD's from Total Bond?
I agree with stlutz that withdrawals are coming from your longer term investments. You do not want to tap those investments more than once or twice per year, so it helps to use a money market fund or short term bond bond to hold regular and unexpected withdrawals.

Note that Vanguard almost always waives their frequent trading restrictions for money market and short term bond funds, but not so for the short term tips fund. When you take money out, you have to wait 30 days to put money in. This is in the fund's prospectus.

I use ST Investment Grade.

Regards.

trasmuss
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Re: ST TIPS Volatility

Post by trasmuss » Sun Mar 12, 2017 3:06 pm

A wide variety of replies. Thank you.

I guess another option would be to open a money market fund within the IRA and then have Total Bond dividends fund it.

There are many options. I'm not sure any are better than Total Bond and taking RMD's from Total Bond or Total Stock depending upon which way the market goes. Of course if rates are moving up both Total Bond and Total Stock could have moved down.

The future is unknown. If rates move up 1 % it will take my Total Bond over two years to get back to even.

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bobcat2
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Re: ST TIPS Volatility

Post by bobcat2 » Sun Mar 12, 2017 3:37 pm

trasmuss wrote: Much more volatility than other short term bond funds. I have no idea why. Would the short term volatility negate its value for use with RMD's?
Thank you for your thoughts.
Going to Morningstar I see the annual standard deviation of Vanguard's Short-Term Investment-Grade Fund (VFSTX) has a three year annual standard deviation of 1.29%. This compares to Vanguard's Short-Term Inflation-Protected Securities Index Fund ( VTAPX), which has a three year annual standard deviation of 1.76%. The difference of a SD of 1.29% vs. 1.76% doesn't strike me as much more volatility. This is particularly true since the lower SD is nominal. I would expect a real bond fund to have slightly higher volatility than a nominal fund and that's the way it is playing out - slightly higher volatility.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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bobcat2
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Duration Matching of ST & LT TIPS bond funds

Post by bobcat2 » Sun Mar 12, 2017 3:55 pm

Duration Matching of ST & LT TIPS bond funds to replicate a TIPS ladder

Here is an example of using the weighted duration of two TIPS funds in lieu of a TIPS ladder for a targeted stream of retirement payments (annual income).

Example ā€“ A 63 year old wants $10,000/year in real income starting in two years at age 65 for a ten year period ending at age 74.

The duration of the spending stream is 7 years ā€“ the average of the spending range of 2 through 12 years.

Calculate the present value (PV) of each yearā€™s $10,000 by discounting each $10,000 by the current yield on TIPS for each year.

The sum of the ten PVs is the amount to be invested. If the ST TIPS fund currently has a duration of two years and the LT TIPS fund has a duration of eight years, find the asset allocation (AA) between the two funds that gives a duration of seven years. That is -

2X +8(1-X) = 7
2X -8X+8 = 7
6X = 1
X= 1/6
And (1-X) = 5/6

One sixth of the assets should currently be in the ST TIPS fund and five sixths of the assets should be in the LT TIPS fund. Redo this calculation at least once a quarter as the duration of the income stream shortens and the duration of the funds change as interest rates move and the fund managers change the maturities of the bond portfolios in the funds.

When a step in this pseudo ladder is inside a year of being spent the assets in the TIPS funds are moved into an ultra short bond fund and a money market fund and spent from the MMF on a monthly basis.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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