Vanguard TIPS

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brak
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Vanguard TIPS

Post by brak » Tue Feb 13, 2018 6:42 am

For a retiree portfolio, what is people's thinking about having a portion of the portfolio in the Vanguard TIPS (short-term?, long-term?) fund? And at what percentage of the total portfolio? I have been basically invested in the three-fund portfolio to date. Thanks.

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elgob.bogle
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Re: Vanguard TIPS

Post by elgob.bogle » Tue Feb 13, 2018 7:37 am

We used to have a 10-year rolling TIPS ladder, but DW didn't want to deal with the auctions and the process of rolling over unused TIPS. Our fixed income now is about 1/2 total bond market and 1/2 short term TIPS. This shortens the overall duration of our fixed income, and increases the ratio of US Treasuries (real plus nominal) to other bonds. Since our short-term TIPS fund seldom receives any dividends, this decreases the monthly interest payments we could receive if we just used total bond market. All bonds are in tax-deferred or ROTH IRA accounts. We are comfortable with this mix.

elgob

dbr
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Re: Vanguard TIPS

Post by dbr » Tue Feb 13, 2018 10:04 am

The thought is that a lot of people like some TIPS in their portfolio, some people like a lot of TIPS in their portfolio, and some people don't want to hold TIPS at all because they think the yield is too low and they don't worry about inflation. TIPS bought at real interest rates of 2% or more start looking pretty good.

I personally think that if you have a large bond allocation and have reason to think inflation might be an important risk for you that using only TIPS for your bonds could make sense. There is an approach of setting up part of the retirement income stream by building a 30 year ladder of TIPS.

While Vanguard seems to be enamored of adding a little allocation to TIPS to some of its retirement funds, I am lost on the concept of putting part of a part of a portfolio in TIPS.

PS It is not true that TIPS are excessively tax inefficient. While one would normally hold TIPS in tax deferred accounts, the actual tax efficiency is better than nominal bonds of similar yield because TIPS (and all Treasuries) are state tax exempt.

brak
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Re: Vanguard TIPS

Post by brak » Tue Feb 13, 2018 10:07 am

Where would there be available info. on setting up a TIPS ladder. And, if you don't mind my asking dbr, what do you do? Thanks much.

dbr
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Re: Vanguard TIPS

Post by dbr » Tue Feb 13, 2018 10:14 am

brak wrote:
Tue Feb 13, 2018 10:07 am
Where would there be available info. on setting up a TIPS ladder. And, if you don't mind my asking dbr, what do you do? Thanks much.
I hold a lot of TIPS because I like holding most of my bonds in Treasuries and I like having more rather than less stability vs. inflation. I use a TIPS fund

There have been numerous threads on TIPS ladders. I don't like that idea because I think the idea of setting up a so-called Liability Matching Portfolio tries to over engineer investing and makes too many assumptions about what retiree spending is going to look like and that if one wants a safe income stream in retirement it should be an annuity. No holding in TIPS actually immunizes a whole portfolio against inflation unless there are only TIPS. This entire conversation needs to be in the context of the stock/bond asset allocation.

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billyo44
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Re: Vanguard TIPS

Post by billyo44 » Tue Feb 13, 2018 10:22 am

My understanding is that TIPS protect against unexpected inflation as measured by the Consumer Price Index. Personally, I believe that the stated rates aren't even close to the actual inflation percentages that most consumers experience. This is the reason I sold all TIPS and put the money in VBTLX...at least I get the much larger dividend payments that help in keeping up with inflation.

Just my thoughts...
Independence = Financial assets working for you versus you working for them.

dbr
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Re: Vanguard TIPS

Post by dbr » Tue Feb 13, 2018 10:35 am

billyo44 wrote:
Tue Feb 13, 2018 10:22 am
My understanding is that TIPS protect against unexpected inflation as measured by the Consumer Price Index. Personally, I believe that the stated rates aren't even close to the actual inflation percentages that most consumers experience. This is the reason I sold all TIPS and put the money in VBTLX...at least I get the much larger dividend payments that help in keeping up with inflation.

Just my thoughts...
TIPS are specifically indexed exactly for all CPI inflation and hence "protect" against all inflation. The comment about unexpected inflation refers to the idea that inflation expectations are "built in" to the pricing of all bonds hence there is no special difference between TIPS and nominal bonds concerning expected inflation. That does not mean TIPS do not protect against expected inflation.

The comment about dividends may be misleading. Individual TIPS pay the real dividend and add the inflation increment back to the principal. If an investor wants to use nominal dividends and protect against inflation then a fraction of the nominal dividend, maybe more than the nominal dividend, needs to be reinvested leaving only the real part of the dividend as a plus. Naturally bonds with more risk than TIPS in duration and credit quality will yield higher. A different option is to seek more return in stocks rather than bonds. The portfolio has to be considered as a whole.

It is a valid point that the cost increases an individual experiences over time are not necessarily the same as general inflation. Calling that change in costs "inflation" can be dubious and confusing, but investors and retirees do have to keep their wits about them regarding what they spend and note that protection against general inflation is not the same thing. However, it can also turn out that personal spending can increase at less than general inflation. People are notorious for focusing on how much they are being "screwed" and ignoring when they are well off. Certain costs such as health care and college tuition are the the ones notorious for faster than inflation increases.

Prudence
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Re: Vanguard TIPS

Post by Prudence » Tue Feb 13, 2018 10:40 am

brak wrote:
Tue Feb 13, 2018 10:07 am
Where would there be available info. on setting up a TIPS ladder. And, if you don't mind my asking dbr, what do you do? Thanks much.
FYI, this thread includes a posting with a spreadsheet to assist with building a TIPs bond ladder using secondary market TIPs.
viewtopic.php?f=1&t=208540

Chuck
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Re: Vanguard TIPS

Post by Chuck » Tue Feb 13, 2018 10:58 am

billyo44 wrote:
Tue Feb 13, 2018 10:22 am
My understanding is that TIPS protect against unexpected inflation as measured by the Consumer Price Index. Personally, I believe that the stated rates aren't even close to the actual inflation percentages that most consumers experience. This is the reason I sold all TIPS and put the money in VBTLX...at least I get the much larger dividend payments that help in keeping up with inflation.

Just my thoughts...
There is also a belief that CPI-U understates actual inflation, and that the chained CPI-U is a better measure.

If this is true (and I'm not saying one way or the other), TIPS factor adjustment will provide a return higher than "actual" inflation. How much? Well, from 2000 to 2016 CPI-U increased 40%, and chained CPU-U 35%. (~0.3% annualized.) Does that mean anything? I don't know.

My bond allocation is split 50/50 between nominal bonds and inflation-protected bonds. Because I know nothin.

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Svensk Anga
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Re: Vanguard TIPS

Post by Svensk Anga » Tue Feb 13, 2018 11:44 am

We hold some TIPS in early retirement. I elected this because I felt vulnerable to rising inflation with my no-COLA pension and my wife's fixed COLA (maybe inadequate fixed COLA?) pension.

I built a TIPS ladder to get from early retirement to SS claiming age (70 for me). Once SS starts, we will have a good bit of inflation protected income, so I am not so inclined to hold TIPS then. Over my early retirement to SS horizon, it looked quite possible that a TIPS fund could suffer substantial decline in NAV if real interest rates rebounded. The ladder looked like a safer way to translate a given purchasing power into those out years. I don't think Vanguard had created the short-term TIPS fund when I started this, or that may have been an option. The duration of the longer term TIPS fund was too long for this window.

jpdion
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Re: Vanguard TIPS

Post by jpdion » Tue Feb 13, 2018 12:10 pm

Retired 3 years ago and put a small allocation of TIRA into Vanguard TIPS fund. Last year I reallocated that and a healthy allocation of Vanguard Intermediate Term Bond fund to the Total Bond Fund (Admiral) for the lowest cost ER I could get. I just wasn't seeing the value of the small TIPS allocation (small benefit IF inflation spiked relative to total portfolio), nor the tilt to intermediate term in bonds. As far as inflation is concerned, I read an article that asked "What is your personal rate of inflation?" and found it insightful. Basically one needs to understand how much their financial life and general lifestyle exposes them to specific inflation risks. No mortgage or low interest fixed rate mortgage? Check. No interest bearing consumer debt? Check. Insurance premiums and property taxes will rise for sure, so some exposure there. Consumption based expenditures will drift up, but I expect household spending to decrease overall as we get older (based on research I've read). So my inflation fears are substantially dampened by that, along with a 50 - 60 percent total stock market allocation.

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