TIPS or no TIPS again

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AntsOnTheMarch
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TIPS or no TIPS again

Post by AntsOnTheMarch »

Ok, I've read every thread I can find here dating back 5 years or so. I still can't decide if TIPS are recommended in my case. My "feeling" is yes, they would be good at this point in time given our situation.
  • Wife and I are both 60.
  • Still working but no longer accumulating savings (may need to draw some from savings in next decade but hopefully not much).
  • We both plan to retire and take SS at 70.
  • 1M savings, conservatively invested (33/67 AA). I know it's too conservative for most people here but this is where we are for now.
  • No debt.
  • 3 fund portfolio
  • 40/60 split between taxable and tax-advantaged (most of tax advantaged is VBTLX). That's where the funds for TIPS would come from. If I went with TIPS, I'd go with ~15-20% of bonds to VTAPX. How did I come up with that? IIRC, Taylor uses a 50/50 mix of TIPS and VBTLX. I looked a three vanguard funds (Target Income, Target 2015 and Target 2020). They have 24.0%, 18.7% and 7.3% TIPS respectively.
Thoughts?
Last edited by AntsOnTheMarch on Mon Jun 26, 2017 10:03 am, edited 2 times in total.
dbr
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Re: TIPS or no TIPS again

Post by dbr »

There is no investment that anyone "needs." You are asking an unanswerable question. If you want to put half your bonds in TIPS that would not be some kind of fatal mistake. It would be mildly helpful at offsetting some impact of inflation. It will make little difference in the prospective overall results in anything likely to be important.
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AntsOnTheMarch
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Re: TIPS or no TIPS again

Post by AntsOnTheMarch »

dbr wrote:There is no investment that anyone "needs." You are asking an unanswerable question. If you want to put half your bonds in TIPS that would not be some kind of fatal mistake. It would be mildly helpful at offsetting some impact of inflation. It will make little difference in the prospective overall results in anything likely to be important.
Thanks. I agree regarding "need" so I've edited the OP to read "recommended in my case."

I'd welcome opinions and I thank you for yours. :sharebeer
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saltycaper
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Re: TIPS or no TIPS again

Post by saltycaper »

If it were my situation, and if I were to go with a heavy 67% fixed income allocation, then I would include TIPS. If the rest of the bonds were in an intermediate-term bond fund like Total Bond, perhaps 50% of fixed income in TIPS. If using shorter duration instruments like direct bank CDs or short-term bond funds, then maybe 25% of the fixed income allocation in TIPS. No definitive answer here.
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AntsOnTheMarch
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Re: TIPS or no TIPS again

Post by AntsOnTheMarch »

saltycaper wrote:If it were my situation, and if I were to go with a heavy 67% fixed income allocation, then I would include TIPS. If the rest of the bonds were in an intermediate-term bond fund like Total Bond, perhaps 50% of fixed income in TIPS. If using shorter duration instruments like direct bank CDs or short-term bond funds, then maybe 25% of the fixed income allocation in TIPS. No definitive answer here.
Thank you! Exactly the sort of concise opinion I'm looking for. I appreciate it.

BTW: All bonds are in VBTLX in tax advantaged. There is also an additional 90k in CDs/cash in taxable but that is not included in the 1M figure.
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Re: TIPS or no TIPS again

Post by nedsaid »

People assume that stocks will protect them from inflation. In the longer run, this is true. In the shorter run, it ain't necessarily so. Inflation spikes are bad for stocks and bonds. The big example was the 1973-1974 bear market which was triggered largely by the oil shocks to the economy. It was also a time of stagflation, that is a relatively stagnant economy coupled with higher than normal inflation. Pretty much, stock investors had to wait for a decade or more to get their inflation adjustment. The 1980's say falling inflation and falling interest rates, which were great for stocks. Much different than the 1970's which saw rising inflation and later in the decade, rising interest rates.

TIPS give you the best shot of coping with unexpected inflation. The reason I say "best shot" is that TIPS did not exist back in the 1970's, they were introduced by the US Treasury back in 1997. We don't have historical data to show how these instruments would act in a stagflation scenario. My best guess is that they would do what they are designed to do.

I have TIPS as a part of my fixed income portfolio as I want inflation protection on the fixed income side of my portfolio as well as the equity side. Note that nominal bonds have inflation expectations built into them, TIPS protect you from unexpected inflation.
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dbr
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Re: TIPS or no TIPS again

Post by dbr »

There is an argument that all of the bond allocation should be in TIPS because it is irrational to choose inflation risk in fixed income. A counter argument is that all TIPS is a very narrow allocation to a very specific type of bond that has not been around that long (as others point out). A compromise would be 50% TIPS if one has a significant bond allocation. I am a little lost on how Vanguard and other companies come up with those small allocations to TIPS as that would seem to be pointless. Note that a portion of a portfolio indexed to inflation does not offset the problem with inflation risk in other assets; it merely dilutes it. A different concept in using TIPS would be that of building a liability matching portfolio TIPS ladder.
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ruralavalon
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Re: TIPS or no TIPS again

Post by ruralavalon »

AntsOnTheMarch wrote:Ok, I've read every thread I can find here dating back 5 years or so. I still can't decide if TIPS are recommended in my case. My "feeling" is yes, they would be good at this point in time given our situation.
  • Wife and I are both 60.
  • Still working but no longer accumulating savings (may need to draw some from savings in next decade but hopefully not much).
  • We both plan to retire and take SS at 70.
  • 1M savings, conservatively invested (33/67 AA). I know it's too conservative for most people here but this is where we are for now.
  • No debt.
  • 3 fund portfolio
  • 40/60 split between taxable and tax-advantaged (most of tax advantaged is VBTLX). That's where the funds for TIPS would come from. If I went with TIPS, I'd go with ~15-20% of bonds to VTAPX. How did I come up with that? IIRC, Taylor uses a 50/50 mix of TIPS and VBTLX. I looked a three vanguard funds (Target Income, Target 2015 and Target 2020). They have 24.0%, 18.7% and 7.3% TIPS respectively.
Thoughts?
I would not use TIPS in your situation -- very high bond allocation, 10 years from retirement, and planning to take Social Security at 70.

We are both 71, retired, asset allocation of 50/50 with no TIPS.

I question whether a minority of the portfolio (your case, 67% x .2 = 33% of portfolio) in TIPS could even possibly produce a significant impact overall.
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saltycaper
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Re: TIPS or no TIPS again

Post by saltycaper »

ruralavalon wrote:
I would not use TIPS in your situation -- very high bond allocation, 10 years from retirement, and planning to take Security at 70.

We are both 71, retired, asset allocation of 50/50 with no TIPS.

I question whether a minority of the portfolio (your case, 67% x .2 = 33% of portfolio) in TIPS could even possibly produce a significant impact overall.
TIPS seem more appropriate for large bond allocations than small bond allocations. What's your reasoning for the opposite suggestion?

33% is a significant portion of a portfolio. The difference is unlikely to be material if the performance of TIPS and nominal bonds is minor, but that's rather circular logic, as of course TIPS are unnecessary if they perform similar to nominal bonds. Nominal bonds also would be unnecessary in that instance.
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AntsOnTheMarch
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Re: TIPS or no TIPS again

Post by AntsOnTheMarch »

Thank you, one and all for contributing!

@nedsaid, I especially appreciate your detailed explanation of underlying factors. I had gathered as much from my readings but not being fluent in these matters, it helps to have them rephrased and restated. :beer

@dbr, thanks for responses. FYI, I am not considering a TIPS ladder because I want to keep things simple.
RetiredinKaty
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Re: TIPS or no TIPS again

Post by RetiredinKaty »

[quote="AntsOnTheMarch"]Thank you, one and all for contributing!

@nedsaid, I especially appreciate your detailed explanation of underlying factors. I had gathered as much from my readings but not being fluent in these matters, it helps to have them rephrased and restated. :beer

@dbr, thanks for responses. FYI, I am not considering a TIPS ladder because I want to keep things simple.[/quote]

This is and was my philosophy. However, I very recently revised my TIPS strategy. As concisely as I can state it, the old strategy:

50% of bonds in Intermediate TIPS fund, with a duration of about 8.

New strategy:

Break up the TIPS allocation into 3 nearly equal parts:

1/3 in a TIPS bond that matures when I am 90.
1/3 in the Intermediate TIPS fund.
1/3 in a short bond fund, which could be (and may someday be) short TIPS but isn’t now for tactical reasons.

Reason for change:

8 year duration is a little too far beyond the sweet spot for a general purpose bond fund. Real TIPS yields on the short end are still negative. A single long bond provides a decent yield and inflation adjusted cash later in life when we might need it.

In my very limited experience, buying a single bond in bulk reduces secondary market markups and would seem to mitigate liquidity issues if I ever need to sell the bond. And, it is very simple to own.
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Re: TIPS or no TIPS again

Post by FactualFran »

About 15 years ago I was in a situation similar to what was described in the opening post: I was about 10 years from retirement. I invested the part of my portfolio that I wanted to grow at the rate of the CPI-U in TIPS bought at auction. I held them to maturity.

I have never directly invested in a TIPS fund. I don't think a TIPS fund is appropriate for me. I am indirectly invested in a TIPS fund because some of my 401(k) money is in a fund of funds that includes a TIPS fund.
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Re: TIPS or no TIPS again

Post by ruralavalon »

saltycaper wrote:
ruralavalon wrote:
I would not use TIPS in your situation -- very high bond allocation, 10 years from retirement, and planning to take Security at 70.

We are both 71, retired, asset allocation of 50/50 with no TIPS.

I question whether a minority of the portfolio (your case, 67% x .2 = 33% of portfolio) in TIPS could even possibly produce a significant impact overall.
TIPS seem more appropriate for large bond allocations than small bond allocations. What's your reasoning for the opposite suggestion?

33% is a significant portion of a portfolio. The difference is unlikely to be material if the performance of TIPS and nominal bonds is minor, but that's rather circular logic, as of course TIPS are unnecessary if they perform similar to nominal bonds. Nominal bonds also would be unnecessary in that instance.
Sorry for the confusion, probably caused by what I underlined.

My view was more holistic. 10 years is too far before retirement to go to TIPS, target retirement funds don't do that, Vanguard 2025 and 2030 hold no TIPS. Social Security at 70 means a large inflation protected income stream anyway. A very large bond allocation is relatively safe, is harmed by high inflation. How probable is it really that we will again see 10% annual inflation, as we once saw? And if that happens how much will it help to have 33% of portfolio protected from that?

I acknowledge that guesswork is necessarily involved in any decision about this.
Last edited by ruralavalon on Mon Jun 26, 2017 3:28 pm, edited 1 time in total.
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nedsaid
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Re: TIPS or no TIPS again

Post by nedsaid »

My comments about TIPS is not a market prediction. The situation now is different from the 1970's and I view a future stagflation scenario as unlikely. Interest rates and inflation are both lower than in the 1970's. Commodities, particularly energy have been falling in price. Though we are at "full employment", the labor participation rate is still low by historical standards and formerly discouraged workers are re-entering the job market. Thus there are no big wage pressures. I don't see the case for the return of inflation now. A couple of years ago, I was actually concerned about deflation.

The thing is, the unexpected can and does happen. Though my view of inflation is benign, I do not rule out the possibility of inflation spikes. I don't bet my future on my economic forecasts, the TIPS are there in case I am wrong about inflation expectations. Another factor is that TIPS, like many things, are not cheap. I am not just piling into them now for that reason.

It used to be standard Boglehead wisdom that a fixed income portion of the portfolio should be 50% US Total Bond Market and 50% TIPS. There are relatively few people around here recommending that now. Folks around here seem to be discouraged with TIPS. I still own mine.
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Re: TIPS or no TIPS again

Post by saltycaper »

ruralavalon wrote:
Sorry for the confusion, probably caused by what I underlined.

My view was more holistic. 10 years is too far before retirement to go to TIPS, target retirement funds don't do that, Vanguard 2025 and 2030 hold no TIPS. Social Security at 70 means a large inflation protected income stream anyway. A very large bond allocation is relatively safe, is harmed by high inflation. How probable is it really that we will again see 10% annual inflation, as we once saw? And if that happens how much will it help to have 33% of portfolio protected from that?

I acknowledge that guesswork is necessarily involved in any decision about this.
I added the underlining to emphasize the part I was most curious about, but I was lazy and didn't note that--sorry.

Though OP is 10 years before retirement, they're no longer accumulating savings and may have to tap savings a bit. While their wages may keep up with inflation, that's not going to help their portfolio keep up with inflation since they aren't adding to it. In this way they are very near to retirement.

I agree 10% inflation is highly unlikely, but the consequences to a 67% bond allocation could be severe, depending on how we get there, how long unexpected inflation occurs, and whether there is any reward on the downside. (Reward being, assuming inflation does not stay at such a high level, when it falls, it may fall faster than the bond market predicts, which would be a good time to hold nominal bonds.)

I'd put it all in TIPS if it were not for the fact that inflation is not the only concern. The nominal bonds help protect against a deflationary event and can benefit from disinflation. It could be argued the TIPS over time will maintain their purchasing power (or better) even in the event of deflation, and therefore it is not as much of a concern, but I would want to have something that stands a chance to be uncorrelated to stocks when they are tanking, whether due to inflation or deflation.

I also have a general rule that when I'm down to guessing, sometimes the easiest way to put the question to bed is just to split the difference. TIPS bring some peace to me, which is in part what my fixed income allocation is for, and I think the premium paid is worth it. Still, I'm aware my stock allocation is almost certain to dominate portfolio swings under all likely conditions.
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AntsOnTheMarch
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Re: TIPS or no TIPS again

Post by AntsOnTheMarch »

saltycaper wrote: Though OP is 10 years before retirement, they're no longer accumulating savings and may have to tap savings a bit. While their wages may keep up with inflation, that's not going to help their portfolio keep up with inflation since they aren't adding to it. In this way they are very near to retirement.
Correct.

And in fact, due to our particular circumstances, the very real possibility exists that our wages will probably not keep up with inflation. All the more reason to add TIPS, I would think.
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Re: TIPS or no TIPS again

Post by dgt »

ruralavalon wrote:
AntsOnTheMarch wrote:Ok, I've read every thread I can find here dating back 5 years or so. I still can't decide if TIPS are recommended in my case. My "feeling" is yes, they would be good at this point in time given our situation.
  • Wife and I are both 60.
  • Still working but no longer accumulating savings (may need to draw some from savings in next decade but hopefully not much).
  • We both plan to retire and take SS at 70.
  • 1M savings, conservatively invested (33/67 AA). I know it's too conservative for most people here but this is where we are for now.
  • No debt.
  • 3 fund portfolio
  • 40/60 split between taxable and tax-advantaged (most of tax advantaged is VBTLX). That's where the funds for TIPS would come from. If I went with TIPS, I'd go with ~15-20% of bonds to VTAPX. How did I come up with that? IIRC, Taylor uses a 50/50 mix of TIPS and VBTLX. I looked a three vanguard funds (Target Income, Target 2015 and Target 2020). They have 24.0%, 18.7% and 7.3% TIPS respectively.
Thoughts?
I would not use TIPS in your situation -- very high bond allocation, 10 years from retirement, and planning to take Social Security at 70.

We are both 71, retired, asset allocation of 50/50 with no TIPS.

I question whether a minority of the portfolio (your case, 67% x .2 = 33% of portfolio) in TIPS could even possibly produce a significant impact overall.
Doesn't 67% x .2 = 13%?
Don't know if that changes anything substantially.
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siamond
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Re: TIPS or no TIPS again

Post by siamond »

OP, let me preface this by saying that I am extremely skeptic about TIPS (short-lived, unproven and rather erratic track record; speculative effects due to 'expected inflation' seem very suspicious to me; what's the point when you have equities and think beyond a few years horizon; I strongly suspect that in times of great distress -e.g. war-, the government will change the rules right when protection is needed the most; etc).

This being said, in your case, you are taking a MAJOR risk with all those bonds (2/3rd of your portfolio). The inflation risk can absolutely decimate bonds, as was clearly experienced by desperate retirees, notably after WW-II and during the oil crisis of the 70s. Drops of more than 40% in inflation-adjusted terms, taking decades to recover, and this was even worse in other developed countries. Bonds come with their own risks, a hard fact that seem often forgotten due to recency bias and a time of relative peace.

It doesn't seem reasonable to keep such risk unaddressed. Either you increase the % of equities, or you convert a big chunk (at least half) of your bonds to TIPS. Then 2/3rd of your portfolio will come with a form of inflation protection. Personally, I went the equity way and I cannot see the case for TIPS, but in your case, if you're really set on a bonds-heavy portfolio, then I don't see how you can do without a big dose of TIPS. My 2 cents! Good luck.
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Re: TIPS or no TIPS again

Post by Dude2 »

The 50/50 TIPS/Nominal approach has its charms, but people like Abuss368 gradually swayed me to do less. In a non-inflationary environment, it is hard to justify (especially if you believe that the Fed has figured out how to manage it -- otherwise, why would they sell us TIPS in the first place).

Now I take the same approach with TIPS as I do with International. I do 30% (of stocks) International [in taxable] and 30% (of bonds) TIPS [in tax-deferred].
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Re: TIPS or no TIPS again

Post by ruralavalon »

dgt wrote:
ruralavalon wrote:
AntsOnTheMarch wrote:Ok, I've read every thread I can find here dating back 5 years or so. I still can't decide if TIPS are recommended in my case. My "feeling" is yes, they would be good at this point in time given our situation.
  • Wife and I are both 60.
  • Still working but no longer accumulating savings (may need to draw some from savings in next decade but hopefully not much).
  • We both plan to retire and take SS at 70.
  • 1M savings, conservatively invested (33/67 AA). I know it's too conservative for most people here but this is where we are for now.
  • No debt.
  • 3 fund portfolio
  • 40/60 split between taxable and tax-advantaged (most of tax advantaged is VBTLX). That's where the funds for TIPS would come from. If I went with TIPS, I'd go with ~15-20% of bonds to VTAPX. How did I come up with that? IIRC, Taylor uses a 50/50 mix of TIPS and VBTLX. I looked a three vanguard funds (Target Income, Target 2015 and Target 2020). They have 24.0%, 18.7% and 7.3% TIPS respectively.
Thoughts?
I would not use TIPS in your situation -- very high bond allocation, 10 years from retirement, and planning to take Social Security at 70.

We are both 71, retired, asset allocation of 50/50 with no TIPS.

I question whether a minority of the portfolio (your case, 67% x .2 = 33% of portfolio) in TIPS could even possibly produce a significant impact overall.
Doesn't 67% x .2 = 13%?
Don't know if that changes anything substantially.
That was a typo :oops: . Correct, that's 13% of OP's portfolio in TIPS. My thought was 13% of portfolio was unlikely to be significant help even with inflation getting far out of control, in addition to my other reasons.
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Re: TIPS or no TIPS again

Post by nedsaid »

siamond wrote:OP, let me preface this by saying that I am extremely skeptic about TIPS (short-lived, unproven and rather erratic track record; speculative effects due to 'expected inflation' seem very suspicious to me; what's the point when you have equities and think beyond a few years horizon; I strongly suspect that in times of great distress -e.g. war-, the government will change the rules right when protection is needed the most; etc).

This being said, in your case, you are taking a MAJOR risk with all those bonds (2/3rd of your portfolio). The inflation risk can absolutely decimate bonds, as was clearly experienced by desperate retirees, notably after WW-II and during the oil crisis of the 70s. Drops of more than 40% in inflation-adjusted terms, taking decades to recover, and this was even worse in other developed countries. Bonds come with their own risks, a hard fact that seem often forgotten due to recency bias and a time of relative peace.

It doesn't seem reasonable to keep such risk unaddressed. Either you increase the % of equities, or you convert a big chunk (at least half) of your bonds to TIPS. Then 2/3rd of your portfolio will come with a form of inflation protection. Personally, I went the equity way and I cannot see the case for TIPS, but in your case, if you're really set on a bonds-heavy portfolio, then I don't see how you can do without a big dose of TIPS. My 2 cents! Good luck.
Siamond, this is why I hedged my comments about TIPS saying that they would give you the "best shot" of beating unexpected inflation and that I would expect in the 1970's stagflation scenario that TIPS would work as designed. The thing is, TIPS have existed only since 1997 and we have about 20 years of market history to go on. They did not respond well during the 2008-2009 financial crisis which really surprised me but a lot of that probably had to do with the relative liquidity of nominal treasuries vs. TIPS. I have often posted that asset classes have no obligation to act in a crisis the way we expect. People can get crazy during panics and crazy people can cause crazy asset class behavior. Crazy behavior can cause carefully constructed efficient frontiers to be sent to the recycle bin.

Hate to say it, I am not 100% certain of anything and I have a bit a skepticism towards even the most trusted asset classes. So the Nedsaid approach is to throw enough asset classes at the problem of market volatility, cross my fingers, say a prayer, and hope it all works in a crisis. We just really don't know how asset classes while behave until the crisis happens. History is the best guide we have but each bear market has somewhat different causes. Like the old saying that history does not repeat, is just rhymes.
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Shazb0t
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Re: TIPS or no TIPS again

Post by Shazb0t »

I would switch to 50% TIPS if in your position.
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Re: TIPS or no TIPS again

Post by Money Market »

I used to consider 20% of my bond allocation for TIPS after retirement, but then decided to stick to a 50/50 stock/nominal bond allocation after age 60 until forever. I feel the slight extra in the stock allocation will be sufficient to guard me against inflation over the long-term as well as to allow for slight growth if a crash or correction hits while taking drawdowns. 50/50 is a retirement AA I'm quite comfortable with and represents a safe balance between risk and returns.
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Re: TIPS or no TIPS again

Post by siamond »

nedsaid wrote:Hate to say it, I am not 100% certain of anything and I have a bit a skepticism towards even the most trusted asset classes. So the Nedsaid approach is to throw enough asset classes at the problem of market volatility, cross my fingers, say a prayer, and hope it all works in a crisis. We just really don't know how asset classes while behave until the crisis happens. History is the best guide we have but each bear market has somewhat different causes. Like the old saying that history does not repeat, is just rhymes.
Hedging bets does seem a wise approach.
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Re: TIPS or no TIPS again

Post by markcoop »

I help a retiree out with their finances and have about 20% of the fixed income invested in TIPS (75% nominal bonds, 5% bank/CDs). Most of the bonds are taxable and in the 28% Fed tax bracket (+state taxes). Therefore decided to put most of that 75% into muni-bond funds. I debated how much to put into TIPS vs muni-bond fund and concluded 20% was a big enough chunk to have at least some impact.
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Re: TIPS or no TIPS again

Post by Phineas J. Whoopee »

Dude2 wrote:The 50/50 TIPS/Nominal approach has its charms, but people like Abuss368 gradually swayed me to do less. In a non-inflationary environment, it is hard to justify (especially if you believe that the Fed has figured out how to manage it -- otherwise, why would they sell us TIPS in the first place).
...
The Fed does not sell us TIPS. The Treasury does, although as with all marketable Treasury securities the Fed, in its capacity as the federal government's banker, conducts the auctions on its behalf.
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AntsOnTheMarch
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Re: TIPS or no TIPS again

Post by AntsOnTheMarch »

siamond wrote:OP, let me preface this by saying that I am extremely skeptic about TIPS (short-lived, unproven and rather erratic track record; speculative effects due to 'expected inflation' seem very suspicious to me; what's the point when you have equities and think beyond a few years horizon; I strongly suspect that in times of great distress -e.g. war-, the government will change the rules right when protection is needed the most; etc).

This being said, in your case, you are taking a MAJOR risk with all those bonds (2/3rd of your portfolio). The inflation risk can absolutely decimate bonds, as was clearly experienced by desperate retirees, notably after WW-II and during the oil crisis of the 70s. Drops of more than 40% in inflation-adjusted terms, taking decades to recover, and this was even worse in other developed countries. Bonds come with their own risks, a hard fact that seem often forgotten due to recency bias and a time of relative peace.

It doesn't seem reasonable to keep such risk unaddressed. Either you increase the % of equities, or you convert a big chunk (at least half) of your bonds to TIPS. Then 2/3rd of your portfolio will come with a form of inflation protection. Personally, I went the equity way and I cannot see the case for TIPS, but in your case, if you're really set on a bonds-heavy portfolio, then I don't see how you can do without a big dose of TIPS. My 2 cents! Good luck.
siamond, thank you for your well-considered remarks. This is something I'm grappling with now so the inflation risk is not lost on me. I have recently revisited and and now re-evaluating our AA due to the dust clearing from some personal circumstances in the last 5 years, so I guess I'm not completely set on TIPS, increasing equities or something else. I may go the increase equities route after all is said and done. Right now, I'm thinking of doing nothing for ~6 months and taking my temperature again at that point.
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Re: TIPS or no TIPS again

Post by gkaplan »

Dude2 wrote:The 50/50 TIPS/Nominal approach has its charms, but people like Abuss368 gradually swayed me to do less. . . .
Abuss368 gradually swayed me to do less.

There, I corrected that for you.
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Re: TIPS or no TIPS again

Post by FIREchief »

siamond wrote: I strongly suspect that in times of great distress -e.g. war-, the government will change the rules right when protection is needed the most; etc).
I doubt very many would agree with this statement. What kind of "rule changes" are you thinking about?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
Thesaints
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Re: TIPS or no TIPS again

Post by Thesaints »

The TIPS you can buy now will protect that part of your capital from inflation (CPI-U inflation, to be precise) and no more. Is it that what you want/need from that fraction of your capital ?
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AntsOnTheMarch
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Re: TIPS or no TIPS again

Post by AntsOnTheMarch »

Thesaints wrote:The TIPS you can buy now will protect that part of your capital from inflation (CPI-U inflation, to be precise) and no more. Is it that what you want/need from that fraction of your capital ?
I assume this is directed at me. A good question. My answer is, I'm not sure. Maybe not—because that part of capital may be put to other (better?) use. Which is why I am doing nothing for now.
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Re: TIPS or no TIPS again

Post by Thesaints »

Then, the question you should ask yourself is why you want to invest part of your capital in bonds. From that answer one can try to assess whether TIPS are an appropriate choice or not for that part of your portfolio.
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Re: TIPS or no TIPS again

Post by Dude2 »

Phineas J. Whoopee wrote:
Dude2 wrote:The 50/50 TIPS/Nominal approach has its charms, but people like Abuss368 gradually swayed me to do less. In a non-inflationary environment, it is hard to justify (especially if you believe that the Fed has figured out how to manage it -- otherwise, why would they sell us TIPS in the first place).
...
The Fed does not sell us TIPS. The Treasury does, although as with all marketable Treasury securities the Fed, in its capacity as the federal government's banker, conducts the auctions on its behalf.
PJW
gkaplan wrote:
Dude2 wrote:The 50/50 TIPS/Nominal approach has its charms, but people like Abuss368 gradually swayed me to do less. . . .
Abuss368 gradually swayed me to do less.

There, I corrected that for you.
That's it. I'm going on a shooting spree. :annoyed
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VictoriaF
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Re: TIPS or no TIPS again

Post by VictoriaF »

OP,

I am struggling with my own TIPS allocation. I have some reserves I have acquired "on sale" in 2007-2009. Now as my TIPS are maturing I can't find even nearly as good rates as I had before, and so I am trying to decide whether to bite the bullet and get TIPS at the current rates, or invest in CDs and wait for better TIPS rates.

nedsaid will say that if an unexpected inflation strikes while I am waiting, my waiting will backfire.

Kevin will say that the difference between CDs and TIPS is so large that there is not much downside, especially when the early withdrawal penalties (EWP) are low.

Important: If you do buy TIPS, do it in your IRA account.

Victoria
Inventor of the Bogleheads Secret Handshake | Winner of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)
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AntsOnTheMarch
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Re: TIPS or no TIPS again

Post by AntsOnTheMarch »

VictoriaF wrote:
Important: If you do buy TIPS, do it in your IRA account.
Yes, this question was asked in reference to current VBTLX holdings in SEP IRA.
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Re: TIPS or no TIPS again

Post by rattlenap »

AntsOnTheMarch wrote:Thank you, one and all for contributing!

@nedsaid, I especially appreciate your detailed explanation of underlying factors. I had gathered as much from my readings but not being fluent in these matters, it helps to have them rephrased and restated. :beer

@dbr, thanks for responses. FYI, I am not considering a TIPS ladder because I want to keep things simple.
If it helps, I am only 41, but I keep 20% of my bond allocation in both my 401k and IRA in TIPS. TIPS serve a very specific role in a portfolio and that is a to protect you from unanticipated inflation. Being 60, you do remember the rampant inflation of the 70's and early 80's, correct? Also, with bond yields so low now if inflation were to rear its ugly head again you'd be happy to have an allocation in TIPS especially since you're near retirement.
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Re: TIPS or no TIPS again

Post by markcoop »

AntsOnTheMarch wrote:
VictoriaF wrote:
Important: If you do buy TIPS, do it in your IRA account.
Yes, this question was asked in reference to current VBTLX holdings in SEP IRA.
But remember that TIPS are exempt from state taxes making them not so bad in a taxable account if you live in a high income tax state.
Mark
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Taylor Larimore
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Re: TIPS or no TIPS again

Post by Taylor Larimore »

Taylor uses a 50/50 mix of TIPS and VBTLX.
Bogleheads:

Several years ago I simplified my portfolio by selling my TIPS fund and putting the proceeds into Total Bond Market--now my only bond fund. Both funds were, in my IRA.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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AntsOnTheMarch
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Re: TIPS or no TIPS again

Post by AntsOnTheMarch »

Taylor Larimore wrote:
Taylor uses a 50/50 mix of TIPS and VBTLX.
Bogleheads:

Several years ago I simplified my portfolio by selling my TIPS fund and putting the proceeds into Total Bond Market--now my only bond fund. Both funds were, in my IRA.

Best wishes.
Taylor
Taylor, thank you for the clarification/update.
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Re: TIPS or no TIPS again

Post by saltycaper »

Anecdotally, it seems some Bogleheads, even some well-respected members, have failed to stay the course when it comes to TIPS, just as some failed to stay the course when it comes to international stocks or even stocks in general, going back to 2008-09. Good on them for admitting it, but I hope readers aren't being influenced to abandon their strategy too.
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Re: TIPS or no TIPS again

Post by ruralavalon »

saltycaper wrote:Anecdotally, it seems some Bogleheads, even some well-respected members, have failed to stay the course when it comes to TIPS, just as some failed to stay the course when it comes to international stocks or even stocks in general, going back to 2008-09. Good on them for admitting it, but I hope readers aren't being influenced to abandon their strategy too.
I thought about using a TIPS fund when Vanguard first introduced one, formed a poor opinion of the idea, still have a poor opinion of the idea, and still don't use one.

But I don't think that simplifying a portfolio as years pass is failing to stay the course. I am 71, am concerned that my wife (for lack of interest or and lack of knowledge) could not manage the portfolio we have now, and am seriously considering moving to a balanced fund.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Re: TIPS or no TIPS again

Post by nedsaid »

saltycaper wrote:Anecdotally, it seems some Bogleheads, even some well-respected members, have failed to stay the course when it comes to TIPS, just as some failed to stay the course when it comes to international stocks or even stocks in general, going back to 2008-09. Good on them for admitting it, but I hope readers aren't being influenced to abandon their strategy too.
I stayed the course with my TIPS. Taylor Larimore is the most famous example of Bogleheads who abandoned TIPS, there are others out there too. Inflation is benign and there are really no signs of higher inflation in the future, so this is not an irrational choice. As I said, bonds already have inflation expectations built into them, what TIPS protect you against is unexpected inflation. At least that is the hope.
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Re: TIPS or no TIPS again

Post by saltycaper »

ruralavalon wrote:
saltycaper wrote:Anecdotally, it seems some Bogleheads, even some well-respected members, have failed to stay the course when it comes to TIPS, just as some failed to stay the course when it comes to international stocks or even stocks in general, going back to 2008-09. Good on them for admitting it, but I hope readers aren't being influenced to abandon their strategy too.
I thought about using a TIPS fund when Vanguard first introduced one, formed a poor opinion of the idea, still have a poor opinion of the idea, and still don't use one.

But I don't think that simplifying a portfolio as years pass is failing to stay the course. I am 71, am concerned that my wife (for lack of interest or and lack of knowledge) could not manage the portfolio we have now, and am seriously considering moving to a balanced fund.
If you always had a poor opinion of them, then you wouldn't be part of the group of members I was referring to. :happy And even if someone once owned an investment and later changed their AA and got rid of that investment, I wouldn't necessarily criticize such a decision either. But a few years ago, when TIPS started to underperform Total Bond for some time, I started to see more people critical of TIPS, and some members got rid of them. I'm suspicious of the timing, just like with international stock underperformance and the selling of stocks during the Great Recession. You can't get into someone's head to determine their motivation, but sometimes they make it known quite explicitly, or a suspicious pattern or correlation develops.
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Re: TIPS or no TIPS again

Post by gkaplan »

nedsaid wrote:
saltycaper wrote:Anecdotally, it seems some Bogleheads, even some well-respected members, have failed to stay the course when it comes to TIPS, just as some failed to stay the course when it comes to international stocks or even stocks in general, going back to 2008-09. Good on them for admitting it, but I hope readers aren't being influenced to abandon their strategy too.
I stayed the course with my TIPS. Taylor Larimore is the most famous example of Bogleheads who abandoned TIPS, there are others out there too. Inflation is benign and there are really no signs of higher inflation in the future, so this is not an irrational choice. As I said, bonds already have inflation expectations built into them, what TIPS protect you against is unexpected inflation. At least that is the hope.
I too stayed the course with my Vanguard Inflation-Protected Securities Fund. (I didn't transfer the fund to the short-term fund when it became available.)
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Re: TIPS or no TIPS again

Post by saltycaper »

nedsaid wrote:
I stayed the course with my TIPS. Taylor Larimore is the most famous example of Bogleheads who abandoned TIPS, there are others out there too. Inflation is benign and there are really no signs of higher inflation in the future, so this is not an irrational choice. As I said, bonds already have inflation expectations built into them, what TIPS protect you against is unexpected inflation. At least that is the hope.

(Underlining added.)
If one understood TIPS when they purchased them and then decided to sell them because they thought that inflation was benign and that there were no signs of higher inflation in the future, I think that is irrational. (If one didn't understand them, that would be different.) If inflation was not benign, and if there were signs of higher inflation in the future, the expectations of future inflation that are built into the yields of nominal bonds (as you note) would be higher, and it would be "too late" to make the switch, unless one thinks they are better at making inflation predictions than the rest of the bond market or could somehow get into TIPS "just in time." I think that would be a major mistake, insofar as it would violate some general investing principles most here try to follow. Not saying you think that though.

As for Taylor's choice, I can't say that it is rational or irrational, because I don't know why he made the change; however, and with all due respect to Taylor, that the change was made (I believe) after TIPS had suffered somewhat compared to Total Bond, and taking into account the timing of other changes he shared with us, including the "Plan B" controversy of 2008-09, I'm skeptical of the motivation. (I think he reduced international somewhat too in the past 5-10 years, when it was underperforming US stocks.) It's true he's not alone though. Others made similar changes. Some of them undoubtedly had good reasons. Some might not have been totally honest with themselves.
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Re: TIPS or no TIPS again

Post by Taylor Larimore »

"Taylor Larimore is the most famous example of Bogleheads who abandoned TIPS."
Bogleheads:

I want to be clear. I did not "abandoned TIPS" based on disappointment or clairvoyant forecast."

I eliminated my long held TIPS fund only to simplify my portfolio for myself, my caregivers and heirs.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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nedsaid
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Re: TIPS or no TIPS again

Post by nedsaid »

Taylor Larimore wrote:
"Taylor Larimore is the most famous example of Bogleheads who abandoned TIPS."
Bogleheads:

I want to be clear. I did not "abandoned TIPS" based on disappointment or clairvoyant forecast."

I eliminated my long held TIPS fund only to simplify my portfolio for myself, my caregivers and heirs.

Best wishes.
Taylor
Thank you for clarifying this. I didn't mean to say that you made an inflation forecast but my comments reflected the the sense that I get from reading dozens of posts from various posters. I suppose everyone has their own reasons for making changes.
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Re: TIPS or no TIPS again

Post by Doc »

dbr wrote:There is an argument that all of the bond allocation should be in TIPS because it is irrational to choose inflation risk in fixed income. A counter argument is that all TIPS is a very narrow allocation to a very specific type of bond that has not been around that long (as others point out). A compromise would be 50% TIPS if one has a significant bond allocation. I am a little lost on how Vanguard and other companies come up with those small allocations to TIPS as that would seem to be pointless. Note that a portion of a portfolio indexed to inflation does not offset the problem with inflation risk in other assets; it merely dilutes it. A different concept in using TIPS would be that of building a liability matching portfolio TIPS ladder.
Building on the liability matching ladder concept consider building a ten year ladder to meet your obligations for only 10 years while the rest of your portfolio recovers from the bad events others have discussed. If you take this course it is relatively easy to calculate how much you need in TIPS.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
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Re: TIPS or no TIPS again

Post by Always passive »

Your question is more relevant now with zero interest rates, and I have been struggling with this issue for the past months.

I am a retiree with about 50% in the Total bond and 50% in a 10 year ladder of TIPS bonds, exactly as referred above by Doc. BTW 70% of my portfolio is in fixed income, the other 30% in stocks. I have had this allocation for a long time, therefore my TIPS bonds (individual) have a positive real yield. Today the real yield is negative across all maturities, but the total return is better than holding CDs or cash, and certainly significantly less risky that holding nominal bonds like the Total US Bond index. Given this reality, I am seriously considering moving all my fixed income to TIPS only.

This article from Bridgewater (Ray Dalio) is the basis for my logic...

https://www.bridgewater.com/grappling-w ... everywhere
It is a long article and very worth reading, but I extracted some significant points. See below...

“In terms of building a balanced strategic asset allocation, it is pretty obvious that with interest rates near zero and being held stable by central banks, bonds (they mean nominal bonds) can provide neither returns nor risk reduction.

Considering the range of outcomes looking out over the next three years, a “best case” bond rally to -1% (they assume that interest rates may go negative) would bring bond returns to a cumulative 17%. Whereas if we were to see real yields return to their long-term average (a little over 2%) and a moderate rise in inflation to 4%, that would produce about -30% returns over the three years.”
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Re: TIPS or no TIPS again

Post by bigskyguy »

Always passive wrote: Wed Aug 12, 2020 12:46 am Your question is more relevant now with zero interest rates, and I have been struggling with this issue for the past months.

I am a retiree with about 50% in the Total bond and 50% in a 10 year ladder of TIPS bonds, exactly as referred above by Doc. BTW 70% of my portfolio is in fixed income, the other 30% in stocks. I have had this allocation for a long time, therefore my TIPS bonds (individual) have a positive real yield. Today the real yield is negative across all maturities, but the total return is better than holding CDs or cash, and certainly significantly less risky that holding nominal bonds like the Total US Bond index. Given this reality, I am seriously considering moving all my fixed income to TIPS only.

This article from Bridgewater (Ray Dalio) is the basis for my logic...

https://www.bridgewater.com/grappling-w ... everywhere
It is a long article and very worth reading, but I extracted some significant points. See below...

“In terms of building a balanced strategic asset allocation, it is pretty obvious that with interest rates near zero and being held stable by central banks, bonds (they mean nominal bonds) can provide neither returns nor risk reduction.

Considering the range of outcomes looking out over the next three years, a “best case” bond rally to -1% (they assume that interest rates may go negative) would bring bond returns to a cumulative 17%. Whereas if we were to see real yields return to their long-term average (a little over 2%) and a moderate rise in inflation to 4%, that would produce about -30% returns over the three years.”
I believe you are asking precisely the correct question. Go back to the basics as to why one holds fixed income in one’s portfolio in the first place. When I was in the accumulation phase, my goal was portfolio growth. I held fixed income in order to dampen portfolio volatility, so that I could handle the swings of the market. So the vast amount of my portfolio was held in equities. Fixed income was nothing more than a glorified savings account that I didn’t think much about. Focus was on growth, and risk was the name of the day.
Fast forward to today, and now I’m in the decumulation phase. My goal is no longer growth. Why? Well, My wife and I have taken the time to outline a withdrawal plan, setting an annual budget for both basic living expenses, additional wish list expenses that are reasonable for the style of life enjoyment we wish to have, and a modest (5-10% of portfolio) buffer for the purpose of gifting or should our kids or grandkids hit a significant bump in their life roads. And we have developed a withdrawal timeline that is modestly in excess of what the chats tell us is our expected longevity. With that in hand we have figured out about what our total portfoilio should be. So going forward we have an annual withdrawal number.
But that leaves us with three variables still that we need to deal with. Longevity (what if we live longer than our plan says we will), interest rate (what if the return on our portfolio going forward is less than we need to achieve the withdrawals we have set), and inflation (what if the cost of living is greater than we had expected). Addressing inflation, since ALL future expenditures will be in real and not nominal dollars, ALL of our fixed income investments are now in inflation indexed bonds. Addressing interest rate risk, for our basic needs, we have a bond ladder (ALL inflation indexed) that has a duration that matches our estimated life expectancy. And finally, regarding longevity, we have a portion of fixed income above and beyond the ladder (also ALL in inflation indexed bonds) set aside to purchase a longevity annuity, likely at 80-85.
So to answer your question, we see no need to hold nominal bonds now that we are in our decumulation phase. And earlier when we were building our nest egg, we held only a small (25% max) of our portfolio in bonds of any flavor, solely to allow us to tolerate the swings of the market. And we transitioned from accumulation to decumulation over about 5 years.
Have a plan, make certain your life partner is with you on it, stay with it. Be honest about your risk tolerance, read the experts (for us that has been Bill Bernstein first and foremost, Zvi Bodie, Stephen Sexauer and Bill Cassidy, David Blanchett). And be humble. Investing for retirement is among the most difficult aspects of life planning.
One couples’ journey.
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