Is it time to give-up on TIPS?

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Flashes1
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Is it time to give-up on TIPS?

Post by Flashes1 » Mon Jan 26, 2015 7:53 am

The forecasts of low inflation for several more years and possibly even deflation have me very concerned about my Vanguard TIPS mutual fund. Approximately 30% of my Bond portfolio is in TIPS mutual funds. I bought them as a hedge against runaway inflation due primarily to the effects of QE......which has clearly not happened. While employment #'s have improved, I see little risk of a major increase in wages.

On the flip-side, the contrarion side of me is screaming to stay in them, and selling them now would be poor timing. I've read that a diversified investor should have one part of their portfolio that they absolutely hate. Right now, that's TIPS for me----I'm okay with everything else in my portfolio.

Options:

#1: Sell all my TIPS and put in mixture of Short-Term and Intermediate Term bond funds. The risk of high inflation over the next 5 years is very low.
#2: Sell a portion of TIPS and put in mixture of Bonds. Not sure what % should be in TIPS if I do this---retirement is 15 yrs away----still concerned about black swan threat of runaway inflation.
#3: Keep my current TIPS holdings. The threat of high inflation in the next 5 years if real, and holding TIPS mutual fund is an effective hedge.

Thoughts?

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Re: Is it time to give-up on TIPS?

Post by TomatoTomahto » Mon Jan 26, 2015 7:59 am

Flashes1 wrote: I bought them as a hedge against runaway inflation due primarily to the effects of QE......which has clearly not happened. While employment #'s have improved, I see little risk of a major increase in wages.
Well, you didn't predict so well when you bought them, but now you're making predictions about wages. I haven't sold mine, but I'm sticking to TBM for additional purchases of bonds.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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Re: Is it time to give-up on TIPS?

Post by richard » Mon Jan 26, 2015 8:21 am

TIPS are insurance against unexpected inflation. The time to buy (or keep) such insurance would be when no one expects much inflation.

Just like everyone else, it seems you're not very good at forecasting inflation or interest rates. Therefore, I'd just keep what you have.

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Re: Is it time to give-up on TIPS?

Post by telemark » Mon Jan 26, 2015 8:22 am

Flashes1 wrote:On the flip-side, the contrarion side of me is screaming to stay in them,
Right.
and selling them now would be poor timing.
Right.
I've read that a diversified investor should have one part of their portfolio that they absolutely hate. Right now, that's TIPS for me----I'm okay with everything else in my portfolio.
And right. Junping in and out of asset classes is how investors end up underperforming. Stay the distance.

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Re: Is it time to give-up on TIPS?

Post by Index Fan » Mon Jan 26, 2015 8:34 am

I'm staying the course with my TIPS because nobody knows what's going to happen. That's the reason I diversify.

Case in point- we've heard 'bond rates have nowhere to go but up' for several years now. In all but 1 of those years, bonds have done fairly well. Bond rates have not gone up.

Timing is very hard to do, active management results show us that.

Best of luck!
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Re: Is it time to give-up on TIPS?

Post by Flashes1 » Mon Jan 26, 2015 8:42 am

telemark wrote:
Flashes1 wrote:On the flip-side, the contrarion side of me is screaming to stay in them,
Right.
and selling them now would be poor timing.
Right.
I've read that a diversified investor should have one part of their portfolio that they absolutely hate. Right now, that's TIPS for me----I'm okay with everything else in my portfolio.
And right. Junping in and out of asset classes is how investors end up underperforming. Stay the distance.
Yes, jumping in and out of asset classes can be a killer. I also have to fight the urge of what I see at work. I bank several large food & agriculture companies---so I monitor things that effect them like food costs, weather patterns, etc. When I see various food costs hit record levels---it makes me a little nervous, both professionally and personally, but I have to remember that food costs comprise just one very small part of inflation. The effects of QE and wage growth is beyond my level of expertise. I have my hunches....just not sure of the timing......

It's probably one of those things that in 10 years I'll regret not buying more TIPS right now.....but oh well.

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Re: Is it time to give-up on TIPS?

Post by grok87 » Mon Jan 26, 2015 8:53 am

richard wrote:TIPS are insurance against unexpected inflation. The time to buy (or keep) such insurance would be when no one expects much inflation..
Agree. The other thing i would add is that newly auctioned tips have a valuable "deflation put"

I just bought the 10 year tip at auction. Real yield was 0.3% (actually 0.315%). This means that my annual nominal return over the next 10 years (assuming i hold to maturity) will be 0.3% + inflation. So if average inflation is 2% my nominal return is 2.3% and my real return is 0.3%.

But wait, what if there is deflation? Say inflation is -2% per year for 10 years. This is where the "deflation put" kicks in. I will never get back less nominal dollars than i invested. So my nominal return for 10 years is "floored" at 0% which makes my average real return +2%.

Could this happen? Who knows. But japan has had average net deflation over 10 year periods...

http://web.stanford.edu/~mckinnon/paper ... ngover.pdf
Cheers
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Re: Is it time to give-up on TIPS?

Post by nisiprius » Mon Jan 26, 2015 9:11 am

Flashes1 wrote:...The forecasts of low inflation for several more years and possibly even deflation have me very concerned about my Vanguard TIPS mutual fund...
WHY?

First, unexpected inflation is just that--unexpected. If we don't get any unexpected inflation, we don't need TIPS. If you have a TIPS fund, then you must once at one point have wanted protection against unexpected inflation, even though there hasn't been any in the U.S. for twenty or thirty years. You read a report that says nobody is expecting inflation now. Why should that change your plan?

Second, think in real dollars. To me, keeping my eye on the ball means paying attention, not to money, but to the value of money. And it means measuring my investments against my needs and risk tolerance--not to competitive rival investors, and not to what I coulda-shoulda-if-only done in hindsight.

Case #1. Let's suppose for a moment that I do not know what is going to happen. If there is low inflation, TIPS do "poorly" measured in numbers of dollars but it doesn't matter because I don't need them to do well. If there is high inflation TIPS do "well" but it does me no particular good because everything costs more. TIPS are predictable. Measured against my needs, they do equally well whether inflation is low or high.

Case #2: Let's suppose I had an absolute guarantee that inflation was going to stay low for long time. Then yes, of course, I would ditch my TIPS for nominal bonds because nominal bonds would earn more. But there are lots of things I would do if I had absolute guarantees. If I had an absolute guarantee that stocks would grow at an average 7% real per year for the next twenty years with nothing worse than three 20% corrections over that time period I'd be 100% stocks.

In either case, I would be speculating I would basing action, not on the fundamental characteristics and historical behavior of investments, but on a prediction I believed in about the future being different from the past.

If the low inflation prediction comes true, everything is OK no matter whether I have TIPS or nominal bonds. (My fixed income is actually 40% TIPS, 20% series I savings bonds, 40% Vanguard Total Bond). I can live with that. Our retirement will be OK. I feel a bit of remorse because "I coulda had a V8," that is I could have done better in hindsight investing in something different from what I invested in, but that is always true in investing and it will drive you crazy if you let it. TIPS are meh if there is low inflation and they are meh if there is high inflation. They are just meh. Meh won't put me in the poorhouse.

Second of all, the longer I live the more I realize just how incredibly bad predictions and forecasts are. It seems to be human nature to forget bad predictions--I don't know why--you really have to pay attention and take notes. And what is worse, we all have a tendency to pick, choose, and fixate on predictions that resonate with us, for some reason. Inflation is an interesting one because I think you'll find if you look that for every pundit who is saying "warning! deflation ahead!" you can find another one saying "fiat money! currency collapse! inflation ahead!" So you first need to figure out if there really is any consensus. Unfortunately even if there is a consensus it can still be totally wrong.

In April 2014, Bloomberg surveyed 67 economists, all 67 of which--100% expected the 10-year Treasury note yield, then 2.73% to rise over the following half year. Not by small amounts, but up to perhaps 4%. It is currently 2.12%.

People say "ignore the noise." The investing community is a self-amplifying echo chamber, and we get fad-like waves of apparent certainty, during which smart, knowledgeable people convince other smart, knowledgeable people and soon "all" the smart, knowledgeable people are saying the same thing. It's still noise. Ignore it.
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Re: Is it time to give-up on TIPS?

Post by richard » Mon Jan 26, 2015 9:38 am

nisiprius wrote:<<>In April 2014, Bloomberg surveyed 67 economists, all 67 of which--100% expected the 10-year Treasury note yield, then 2.73% to rise over the following half year. Not by small amounts, but up to perhaps 4%. It is currently 2.12%.<>
It's currently 1.81%. http://www.bloomberg.com/markets/rates- ... -bonds/us/

I suppose this shows that people knowledgeable about finance can't predict the present, let alone the future. :P

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Re: Is it time to give-up on TIPS?

Post by Bill M » Mon Jan 26, 2015 9:47 am

One risk in retirement that I'd rather not think about is inflation. TIPS let me totally ignore the potential problem. Like all insurance, it isn't free; but its a good tradeoff. For me, its Stay the course.

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Re: Is it time to give-up on TIPS?

Post by TTBG » Mon Jan 26, 2015 10:14 am

nisiprius wrote:
TIPS are meh if there is low inflation and they are meh if there is high inflation. They are just meh. Meh won't put me in the poorhouse.
Thank you! That helps me understand TIPS better than anything else I've read!

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Re: Is it time to give-up on TIPS?

Post by Johno » Mon Jan 26, 2015 10:39 am

Up until pretty recently, even long after people starting saying 'rates have nowhere to go but up', the break even inflation rate between TIPS and nominal treasuries, the inflation rate at will the total return of the two would come out the same, was still in the range of long standing US inflation expectations moderately above 2%. Lately, mainly within recent months, it's dropped substantially: ~1.4% annual inflation break even for 5 yrs, and more remarkably only ~1.6% for 10 yrs. It's not 'predicting rates' to consider these break evens as an everyday investor and consumer, and with a view toward history, and consider how little margin nominal treasuries now give you against any movement of inflation back toward normal levels*.

Buying nominal treasuries and holding to maturity with a real $ return goal (it's rare for an individual investor to have a legitimate reason to target a nominal $ return, those who do are generally confused) is speculating on the inflation rate, with now little room for error. Investing in TIPS is forgoing that speculation. OTOH nominal treasuries can be useful as a source of liquidity, to sell in the midst of a crisis, where TIPS may cheapen (if 2008-09 is a guide).

*for the past 30yrs inflation has (geometrically) averaged ~2.6% in the US and that starts after the worst modern bout of inflation, ~4% last 50 yrs. ~3.2% last 100 yrs, all based on BLS statistics.

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Re: Is it time to give-up on TIPS?

Post by heyyou » Mon Jan 26, 2015 11:55 am

Is it time to give-up on TIPS?
I wish that I could say this in a softer way.

It is time to give up thinking that you can see into the future well enough to change your portfolio in advance of negative events. Try to get comfortable with living in an uncertain world.

Consider reading about behavioral finance issues in order to better see your own thinking. Your original post covers all there is on TIPS. It shows that you are well read on BH financial info, but but but you want more in order to make a better decision.

The Greek general asked the oracle about who would win the coming battle. The oracle replied that a great army would fall. The general interpreted that to mean that he would win, but he didn't. No one knows the future, including the oracle. Generals are known to use the strategy that would have won the previous war, and we investors are holding TIPS while still waiting for a 1970s style gas crisis. The next bad event will only be somewhat like previous ones, with enough differences to bypass the usual buffers, otherwise it won't be a noticeably bad event.

Having money is an excellent buffer for financial problems, as is being willing to adapt. You will have still have more money than most others. Fully owning your own home or being willing to move are both good inflation buffers. Having discretionary spending is another.

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Re: Is it time to give-up on TIPS?

Post by swaption » Mon Jan 26, 2015 12:03 pm

Why would your current expectations or concerns about the future be any more prescient or accurate than they were when you intitially invested in TIPS? You readily acknowledge that your fears regarding QE driven inflation have not come to fruition.

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Re: Is it time to give-up on TIPS?

Post by Flashes1 » Mon Jan 26, 2015 12:30 pm

swaption wrote:Why would your current expectations or concerns about the future be any more prescient or accurate than they were when you intitially invested in TIPS? You readily acknowledge that your fears regarding QE driven inflation have not come to fruition.
I have some financial acumen...I work in corporate banking for a major financial institution. The world has never seen trillions of QE----like I said in an earlier post, I have my hunches about the effects----just don't know about the timing.

I'm actually more concerned about the repayment of US treasury debt----as someone who sells large amounts of Debt to companies, I don't see how the math works unless everyone plays ball in perpetuity.....more than likely the U.S. Treasury will need to repay the debt with much cheaper dollars----but again, just don't know the timing, but I digress.

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Re: Is it time to give-up on TIPS?

Post by nisiprius » Mon Jan 26, 2015 1:03 pm

Flashes1 wrote:
swaption wrote:Why would your current expectations or concerns about the future be any more prescient or accurate than they were when you intitially invested in TIPS? You readily acknowledge that your fears regarding QE driven inflation have not come to fruition.
I have some financial acumen...I work in corporate banking for a major financial institution. The world has never seen trillions of QE----like I said in an earlier post, I have my hunches about the effects----just don't know about the timing.

I'm actually more concerned about the repayment of US treasury debt----as someone who sells large amounts of Debt to companies, I don't see how the math works unless everyone plays ball in perpetuity.....more than likely the U.S. Treasury will need to repay the debt with much cheaper dollars----but again, just don't know the timing, but I digress.
But it's not a digression at all. As I read this, your own financial acumen is telling you that "more than likely the U.S. Treasury will need to repay the debt with much cheaper dollars" which sounds like fear of inflation to me. So, at the same time, you are concerned about deflation and inflation.

So you are making a two-step prediction. No inflation or deflation near-term because of someone else's "forecasts," then high inflation later because of your own "acumen." Therefore you are thinking about a rather precise maneuver that involves timing of two different things. You will jump out of TIPS now so that you can gain an edge in real dollars by being in nominal bonds while there is low inflation or deflation, but then jump back into TIPS in time to be protected against the day when the Treasury will need to repay the debt with much cheaper dollars."

Do I understand you correctly?

Of course, you can spin out a storyline that says that when the Treasury defaults they will find some way to weasel out of the CPI-U adjustment on TIPS--I've even heard people speculate that they would default on TIPS first--but if predictions are bad, three-step predictions ("first there will be low inflation, then there will be high inflation, then the Treasury will selectively default on TIPS") are... very bad.

If I believed in "first low inflation or deflation, then fairly bad inflation later," I would do what I'm doing anyway. I will stay in TIPS and take my hit during deflation in order to be sure that I'm still in TIPS when the "unexpected inflation I expect" hits. By the time it's clear that we are in really bad inflation, it will be too late. (They might not even be issuing TIPS then). And of course even if there is deflation I am not taking a "hit" in real value. I am only "losing" relative to something else I could have done, I am not losing purchasing power.
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Re: Is it time to give-up on TIPS?

Post by richard » Mon Jan 26, 2015 1:20 pm

Flashes1 wrote:<>I'm actually more concerned about the repayment of US treasury debt----as someone who sells large amounts of Debt to companies, I don't see how the math works unless everyone plays ball in perpetuity.....more than likely the U.S. Treasury will need to repay the debt with much cheaper dollars----but again, just don't know the timing, but I digress.
What do you know that the markets don't know? They're currently buying treasuries at approximating all time low yields. Debt service costs are therefore relatively low.

I don't see much move away from low rates until the economy improves substantially. When the economy improves substantially, the ratio of debt/GDP improves along with it.

Your OP does not suggest your forecasting ability is high enough to be reliable. In any event, none of this means it's time to give up on TIPS.

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Re: Is it time to give-up on TIPS?

Post by RunningRad » Mon Jan 26, 2015 1:24 pm

The 1st RunningRad Law of Investing states that when multiple people query if it is time to give up on (blank)--TIPS, Intl, small caps, value, REITS, emerging markets, etc.-- that is precisely the time to not do so, and, if anything, increase one's exposure.

Now where are all of those darned threads asking if it's time to give up on S&P 500 funds? :)
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Re: Is it time to give-up on TIPS?

Post by grok87 » Tue Jan 27, 2015 10:42 am

heyyou wrote:
Is it time to give-up on TIPS?
Having money is an excellent buffer for financial problems, as is being willing to adapt.
Agree with both these points.
...
heyyou wrote:
Is it time to give-up on TIPS?
Fully owning your own home or being willing to move are both good inflation buffers. Having discretionary spending is another.
I agree with the second and third of these points but am not sure about the first: "fully owning your own home."
Isn't that a bit inconsistent with your first quote above "having money"?

If i'm worried about financial problems and want to be "willing to adapt" and "be willing to move" and have lots of liquidity/cash to get through some rough spots, don't i want to have as little tied up in my house as possible?

Isn't it better to have a large low-rate (tax-deductible) mortgage and a ton of cash in the bank, than a fully paid-off mortgage and somewhat less cash in the bank?
RIP Mr. Bogle.

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Re: Is it time to give-up on TIPS?

Post by thx1138 » Tue Jan 27, 2015 11:13 am

grok87 wrote:
heyyou wrote:Fully owning your own home or being willing to move are both good inflation buffers. Having discretionary spending is another.
...not sure about the first: "fully owning your own home."
Isn't that a bit inconsistent with your first quote above "having money"?

If i'm worried about financial problems and want to be "willing to adapt" and "be willing to move" and have lots of liquidity/cash to get through some rough spots, don't i want to have as little tied up in my house as possible?

Isn't it better to have a large low-rate (tax-deductible) mortgage and a ton of cash in the bank, than a fully paid-off mortgage and somewhat less cash in the bank?
Exactly. One very good hedge against inflation is to have a fixed rate nominal debt. Debtors love inflation. So to be clear that means a fixed rate mortgage is a good inflation hedge. An ARM, not so much (though some ARMs have adjustment caps that still make them good hedges against high inflation).

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Re: Is it time to give-up on TIPS?

Post by richard » Tue Jan 27, 2015 11:25 am

thx1138 wrote:<>Exactly. One very good hedge against inflation is to have a fixed rate nominal debt. Debtors love inflation. So to be clear that means a fixed rate mortgage is a good inflation hedge. An ARM, not so much (though some ARMs have adjustment caps that still make them good hedges against high inflation).
Debtors love inflation higher than expected. Creditors love inflation lower than expected.

A fixed rate mortgage protects you against higher than expected inflation, but not lower than expected inflation.

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Re: Is it time to give-up on TIPS?

Post by nisiprius » Tue Jan 27, 2015 11:40 am

thx1138 wrote:...One very good hedge against inflation is to have a fixed rate nominal debt. Debtors love inflation. So to be clear that means a fixed rate mortgage is a good inflation hedge...
Which still is missing the point, because you are still in the world where inflation matters to you and you win or lose depending on what inflation does. Fixed rate nominal debt sucks if you have DEflation. My parents knew all about that--my dad's mom had thoughtfully bought her son an "endowment policy," some kind of mixed life-insurance-and-savings vehicle, and handed it over to him to pay the premiums on when he turned 21. So he (and my mom) paid the premiums all through the Great Depression in deflated dollars, only to have it mature in the early 1950s after one of the worst inflationary periods in U.S. history.

The benefit of TIPS and/or I bonds is that they isolate you from uncertainty about inflation, either way.
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Re: Is it time to give-up on TIPS?

Post by Frank2012 » Tue Jan 27, 2015 1:03 pm

Assuming it is not time to give up on TIPs, is it a good time to buy TIPs? I look at the total bond index or the total stock index, and both are at all time highs. I'm confused when I look at a TIPs fund...can't tell if we are at all time highs or lows... :confused

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Re: Is it time to give-up on TIPS?

Post by swaption » Thu Jan 29, 2015 12:40 pm

Flashes1 wrote:
swaption wrote:Why would your current expectations or concerns about the future be any more prescient or accurate than they were when you intitially invested in TIPS? You readily acknowledge that your fears regarding QE driven inflation have not come to fruition.
I have some financial acumen...I work in corporate banking for a major financial institution. The world has never seen trillions of QE----like I said in an earlier post, I have my hunches about the effects----just don't know about the timing.

I'm actually more concerned about the repayment of US treasury debt----as someone who sells large amounts of Debt to companies, I don't see how the math works unless everyone plays ball in perpetuity.....more than likely the U.S. Treasury will need to repay the debt with much cheaper dollars----but again, just don't know the timing, but I digress.
Apologies Flashes1, I usually try to do a decent job of following up. Funny, I work in fixed income at a major financial institution as well. Been doing this for well over 20 years, while completing the CFA program along the way. I talk until I'm blue in the face with issuers in terms of expectations and how to manage around them. But even embedded in all of what I do is some discipline due to the vast uncertainty that everyone faces.

However, all the above not really my point. My point was that presumably that same acumen led you to TIPS in the first place and you further articulated your rationale, while achnowledging that the world did not necessarily transpire as you had expected. Why should it be any different now that you are having the opposite thoughts regarding TIPS? Given the nature of what I do, I always will have thoughts and opinions, and it is expected that I engage in discussions with issuers around those topics. But in my investment portfolio, I remain somewhat tied to the mast. While I may have opinions, I don't spend anywhere near enough time on that aspect of things to have the confidence necessary to make them actionable. Absent that, it's just speculation, and i won't do that.

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Re: Is it time to give-up on TIPS?

Post by Oliver » Thu Jan 29, 2015 10:37 pm

I really like TIPS. However, I am considering selling some of my TIPS and purchasing CDs. Swedroe had an interesting article about this.

http://www.etf.com/sections/index-inves ... s-tips-tip

PS Recently, TIPS have gone higher (yield lower) than mentioned in the article. Current 10 year TIPS yield is .15% I assume CD rates have also fallen.
http://www.treasury.gov/resource-center ... =realyield

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Re: Is it time to give-up on TIPS?

Post by Trader Joe » Thu Jan 29, 2015 11:04 pm

Yes I think it is time to give up on TIPS. I would choose Option #1.

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Re: Is it time to give-up on TIPS?

Post by ANC » Fri Jan 30, 2015 9:23 am

nisiprius wrote:Fixed rate nominal debt sucks if you have DEflation. My parents knew all about that--my dad's mom had thoughtfully bought her son an "endowment policy," some kind of mixed life-insurance-and-savings vehicle.
They are still around. My wife owns a few in Japan. She paid into them in deflationary times, and the Bank of Japan is doing its best to see that she gets paid back in inflationary times. She also took a haircut on one, as the insurer made promises in inflationary times that it could not keep in deflationary ones.

They do suck, but fortunately hers are small.

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Re: Is it time to give-up on TIPS?

Post by grok87 » Fri Jan 30, 2015 11:51 am

30 year tips real yield now at 0.485%. At this point I am stopping buying new 30 year tips. Still holding onto the ones I've got. If the real yield gets close to 0 I will be selling
RIP Mr. Bogle.

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Re: Is it time to give-up on TIPS?

Post by nobsinvestor » Fri Jan 30, 2015 1:19 pm

Why do Bogleheads love TIPS so much? I don't get it. The fed tries its best to control inflation (is it not their mandate?) and we haven't seen much unexpected inflation in decades.

Why not just hold Total Bond Market or Intermediate-Term Munis? Won't those, over the long run, keep up with inflation anyways? I don't get the obsession with TIPS. I blame David Swensen and his book :D

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Re: Is it time to give-up on TIPS?

Post by Bill M » Fri Jan 30, 2015 1:25 pm

nobsinvestor wrote:Why do Bogleheads love TIPS so much? I don't get it. The fed tries its best to control inflation (is it not their mandate?) and we haven't seen much unexpected inflation in decades.

Why not just hold Total Bond Market or Intermediate-Term Munis? Won't those, over the long run, keep up with inflation anyways? I don't get the obsession with TIPS. I blame David Swensen and his book :D
Speaking only for myself, I prefer to do retirement planning by using arithmetic, insted of statistics. While the Monte Carlo simulation fo Total Bond Market or Intermediate Term Munis may give a high probability of being better, it is only a probability, not certainty. There are other places to take risks.

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Re: Is it time to give-up on TIPS?

Post by thx1138 » Fri Jan 30, 2015 1:35 pm

@richard and @nisiprius - Yes, thanks for the clarification. I should have said "hedge against unexpectedly high inflation" - and of course that is only one direction for the problem to come about!

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Re: Is it time to give-up on TIPS?

Post by richard » Fri Jan 30, 2015 1:45 pm

grok87 wrote:30 year tips real yield now at 0.485%. At this point I am stopping buying new 30 year tips. Still holding onto the ones I've got. If the real yield gets close to 0 I will be selling
I was just noticing that 10 year TIPS was yielding approximately 0% and the 30 year approximately 0.5% and was considering selling if the trend continues. OTOH, short term nominal bonds are not exactly high yield instruments.

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Re: Is it time to give-up on TIPS?

Post by richard » Fri Jan 30, 2015 1:48 pm

nobsinvestor wrote:Why do Bogleheads love TIPS so much? I don't get it. The fed tries its best to control inflation (is it not their mandate?) and we haven't seen much unexpected inflation in decades.

Why not just hold Total Bond Market or Intermediate-Term Munis? Won't those, over the long run, keep up with inflation anyways? I don't get the obsession with TIPS. I blame David Swensen and his book :D
If inflation is as implied by the TIPS spread, you wouldn't do much better investing in nominal treasuries.

TBM and munis are somewhat higher risk, although there may not be a practical difference, at least not absent a financial crisis during which you are obligated to sell.

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Re: Is it time to give-up on TIPS?

Post by grok87 » Fri Jan 30, 2015 8:17 pm

richard wrote:
grok87 wrote:30 year tips real yield now at 0.485%. At this point I am stopping buying new 30 year tips. Still holding onto the ones I've got. If the real yield gets close to 0 I will be selling
I was just noticing that 10 year TIPS was yielding approximately 0% and the 30 year approximately 0.5% and was considering selling if the trend continues. OTOH, short term nominal bonds are not exactly high yield instruments.
7 year pen fed cds @ 1.75%?
RIP Mr. Bogle.

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Re: Is it time to give-up on TIPS?

Post by abuss368 » Fri Jan 30, 2015 8:39 pm

nobsinvestor wrote:Why do Bogleheads love TIPS so much? I don't get it. The fed tries its best to control inflation (is it not their mandate?) and we haven't seen much unexpected inflation in decades.

Why not just hold Total Bond Market or Intermediate-Term Munis? Won't those, over the long run, keep up with inflation anyways? I don't get the obsession with TIPS. I blame David Swensen and his book :D
I go back and forth with TIPS. We invested in the Vanguard Intermediate TIPS Fund for a while but sold many years ago. Since then, we simply invest in Total Bond Index in tax advantage and Intermediate Tax Exempt in taxable. This simple approach has worked well and we plan to stay the course for the foreseeable future. As a note, TIPS do offer tax benefits in terms of not being taxable at the state and local level.

Jack Bogle had mentioned many years ago that he invested in Vanguard's TIPS fund only to sell the investment as a result of poor yields. This interview was when yields were higher than today's rates. Mr. Bogle mentioned he invests in Total Bond and Short Term Bond in tax advantage and Limited Term with Intermediate Tax Exempt in taxable.

I would agree that David Swensen has recommended a substantial allocation, in terms of 50% of fixed income, to TIPS. I have not read of any other advisors who recommend such an approach not to imply it is somehow "wrong".

I would like the fund to pay income monthly in terms of dividends and be an index offering like the Short Term Fund. I do think it is notable that Vanguard removed the fund from the Target offerings considering these funds are designed by Vanguard experts. The new bond flavor of the month appears to be International Bonds.

I will continue to read about TIPS and learn like the rest of us.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: Is it time to give-up on TIPS?

Post by grok87 » Fri Jan 30, 2015 9:32 pm

abuss368 wrote:
nobsinvestor wrote:Why do Bogleheads love TIPS so much? I don't get it. The fed tries its best to control inflation (is it not their mandate?) and we haven't seen much unexpected inflation in decades.

Why not just hold Total Bond Market or Intermediate-Term Munis? Won't those, over the long run, keep up with inflation anyways? I don't get the obsession with TIPS. I blame David Swensen and his book :D
I go back and forth with TIPS. We invested in the Vanguard Intermediate TIPS Fund for a while but sold many years ago. Since then, we simply invest in Total Bond Index in tax advantage and Intermediate Tax Exempt in taxable. This simple approach has worked well and we plan to stay the course for the foreseeable future. As a note, TIPS do offer tax benefits in terms of not being taxable at the state and local level.

Jack Bogle had mentioned many years ago that he invested in Vanguard's TIPS fund only to sell the investment as a result of poor yields. This interview was when yields were higher than today's rates. Mr. Bogle mentioned he invests in Total Bond and Short Term Bond in tax advantage and Limited Term with Intermediate Tax Exempt in taxable.

I would agree that David Swensen has recommended a substantial allocation, in terms of 50% of fixed income, to TIPS. I have not read of any other advisors who recommend such an approach not to imply it is somehow "wrong".

I would like the fund to pay income monthly in terms of dividends and be an index offering like the Short Term Fund. I do think it is notable that Vanguard removed the fund from the Target offerings considering these funds are designed by Vanguard experts. The new bond flavor of the month appears to be International Bonds.

I will continue to read about TIPS and learn like the rest of us.
I think the best way to think about TIPs is as insurance. Insurance against a bad stagflationary environment that could wipe out your equities and your savings (in real terms) at the same time.
RIP Mr. Bogle.

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Re: Is it time to give-up on TIPS?

Post by richard » Fri Jan 30, 2015 9:43 pm

grok87 wrote:
richard wrote:
grok87 wrote:30 year tips real yield now at 0.485%. At this point I am stopping buying new 30 year tips. Still holding onto the ones I've got. If the real yield gets close to 0 I will be selling
I was just noticing that 10 year TIPS was yielding approximately 0% and the 30 year approximately 0.5% and was considering selling if the trend continues. OTOH, short term nominal bonds are not exactly high yield instruments.
7 year pen fed cds @ 1.75%?
I'm old enough to remember a time when 1.75% wasn't considered a high yield instrument :shock:

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Re: Is it time to give-up on TIPS?

Post by Quickfoot » Fri Jan 30, 2015 10:36 pm

The forecasts of low inflation for several more years and possibly even deflation have me very concerned about my Vanguard TIPS mutual fund. Approximately 30% of my Bond portfolio is in TIPS mutual funds
TIPS isn't about what *is* happening, TIPS is for what *might* happen. 30% of fixed income in TIPS is reasonable and that's actually what we will hold in retirement. If you are in the distribution phase of retirement I would absolutely continue to hold TIPS. It never fails, the day after you drop TIPS inflation will take off like a rocket and you'll be wishing you were still holding them. If it was good insurance a few years ago it's still good insurance today, stay the course.

Our retirement fixed income portfolio will be 1/3 Intermediate Bond Index (roughly 50% treasuries, 50% corporate bonds), 1/3 TIPS, and 1/3 international bond fund.

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Re: Is it time to give-up on TIPS?

Post by AndrewXnn » Fri Jan 30, 2015 11:59 pm

TIPS are for people not willing to accept any risk.

Soooo, returns will reflect that aversion.

Rarely are they ever "on sale".
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Re: Is it time to give-up on TIPS?

Post by saltycaper » Sat Jan 31, 2015 12:50 am

Should one sell TIPS? Did you buy them for insurance or because you thought the rate plus inflation would be better than a nominal bond? If it's the former, you should not sell. If the latter, maybe.

If you look at TIPS as insurance, most insurance products aren't that useful... until they are. Insurance policies (at least the ones I've heard of and use) don't start paying out as the chance of something happening increases. They only pay out when something DOES happen. The event is black and white. Only once the event occurs can you judge the benefit of the insurance on a scale.

Viewed in this light, trying to decide to hold TIPS based on projected inflation is like trying to judge whether you need life insurance based on the chances of you dying in the next three months rather than your overall life situation. (Spouse, children, job, savings, etc.)

Think of TIPS as insuring against unexpected inflation showing up during your investing lifetime. Over the long run, TIPS ought to under perform nominal bonds. They're a net gain for the government and a net loss for investors (compared to nominals) over a very long time-frame. But what if a period of major outperformance shows up during your lifetime? That's in a way, what you're insuring against (or rather, the events causing that outperformance).

If you are judging whether you should hold TIPS based on future expected performance vs. nominal bonds, then statistics like the Swedroe article above may suggest no. But I do not look at TIPS in this way.
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Re: Is it time to give-up on TIPS?

Post by abuss368 » Sat Jan 31, 2015 10:13 pm

I would be very interested in updated thoughts from Jack Bogle and David Swensen.
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Re: Is it time to give-up on TIPS?

Post by stlutz » Sun Feb 01, 2015 1:43 am

TIPS should not be thought of as "insurance" nor as a "hedge". They don't protect your overall portfolio from inflation, they simply protect the money actually invested in them from inflation. If you put 10% of your portfolio in TIPS, that is the percentage that is inflation-protected. They do nothing for the other 90%.

The statement that TIPS protect against "unexpected" inflation is unnecessarily confusing. When compared to nominal bonds, that is what TIPS do. As an investment on their own, the principal value of TIPS adjust to changes in actual inflation, whether it was expected by the bond market or not.

TIPS simply are a treasury bond that pay a lower coupon in exchange for a principal value that increases with inflation. They are a great choice for the "safe" bucket of one's portfolio.

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Re: Is it time to give-up on TIPS?

Post by saltycaper » Sun Feb 01, 2015 3:08 am

stlutz wrote:They don't protect your overall portfolio from inflation, they simply protect the money actually invested in them from inflation.
I see what you're saying, but I prefer to look at my portfolio as a whole. So protecting x% of my portfolio from inflation is protecting 100% of my portfolio from inflation by y%.

Insurance won't always make you whole, but it can help ease the pain.
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Re: Is it time to give-up on TIPS?

Post by abuss368 » Sun Feb 01, 2015 8:01 pm

I question if they are needed at all during the accumulation years when an investor typically has a high allocation to equities. Even in retirement, if a portfolio is 60% bonds and 40% stocks, are TIPS needed?

I found it compelling that Vanguard experts removed the Intermediate TIPS fund from the Target portfolios.

Best.
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Re: Is it time to give-up on TIPS?

Post by abuss368 » Sun Feb 01, 2015 8:10 pm

Does anyone know how to reach out to David Swensen at Yale University to inquire on an updated perspective regarding TIPS as an asset class?
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Re: Is it time to give-up on TIPS?

Post by Phineas J. Whoopee » Sun Feb 01, 2015 10:10 pm

abuss368 wrote:Does anyone know how to reach out to David Swensen at Yale University to inquire on an updated perspective regarding TIPS as an asset class?
I don't but Google does.
PJW

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Re: Is it time to give-up on TIPS?

Post by #Cruncher » Sun Feb 01, 2015 10:37 pm

grok87 in [url=https://www.bogleheads.org/forum/viewtopic.php?p=2349924#p2349924]this post[/url] wrote:... newly auctioned tips have a valuable "deflation put" ... I just bought the 10 year tip at auction. Real yield was ... 0.315% ... what if there is deflation? Say inflation is -2% per year for 10 years. ... I will never get back less nominal dollars than i invested. So my nominal return for 10 years is "floored" at 0% ...
I don't think the "put" has any value, Grok, because the chance of the CPI falling over ten years is so remote. Nonetheless, you have understated the nominal return should it happen. In addition to getting back, at a minimum, the original principal at maturity, you will also collect the 0.25% coupon interest every year. This coupled with the purchase price being below par produces a 0.315% nominal yield to maturity (YTM) should the CPI fall 2% every year for the next ten years.

Code: Select all

Year     CPI     Cash Flow
----   -------   ---------
   0   100.000    (991.03) [ 1 ]
   1    98.000       2.45  [ 2 ]
   2    96.040       2.40
   3    94.119       2.35
   4    92.237       2.31
   5    90.392       2.26
   6    88.584       2.21
   7    86.813       2.17
   8    85.076       2.13
   9    83.375       2.08
  10    81.707   1,002.04  [ 3 ] YTM = 0.315% [ 4 ]
  1. $1,000 face value at adjusted price of 99.102886% per auction results PDF file.
  2. Interest payments are adjusted downward if the CPI falls. The floor only applies to the principal repayment at maturity. For simplicity I'm assuming interest paid at the end of each year instead of semi-annually.
  3. The final payment in year 10 includes $2.04 interest plus $1,000 principal. The Treasury promises to pay at least the "original principal". (See What happens to TIPS if deflation occurs?.) I'm assuming by this it means the $1,000 on the 1/15/2015 Dated Date. However, it's possible it means the $997.38 principal on the 1/30/2015 Issue Date. In this case the nominal return would be 0.289% instead of 0.315%.
  4. The YTM is calculated with the Excel IRR function. It's only a coincidence that the nominal return equals the 0.315% real return.
Frank2012 in [url=https://www.bogleheads.org/forum/viewtopic.php?p=2351489#p2351489]this post[/url] wrote:I'm confused when I look at a TIPs fund...can't tell if we are at all time highs or lows...
I don't know why you're confused, Frank. It's just as easy to determine the high price of a TIPS mutual fund as any other mutual fund. For example, the graph at Yahoo Finance shows the high for the Vanguard TIPS Fund VIPSX was in the latter part of 2012. To be precise you can find out that the all-time high was $15.14 / share on 12/10/2012 at Vanguard VIPSX Price History. Since bond yields vary inversely with prices this is also reflected in the FRED 10-Year Constant Maturity TIPS Yield graph showing 10-year TIPS yields bottoming out in the latter part of 2012.

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Re: Is it time to give-up on TIPS?

Post by linenfort » Tue Feb 03, 2015 6:10 pm

Very useful thread!

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Re: Is it time to give-up on TIPS?

Post by Artsdoctor » Tue Feb 03, 2015 6:24 pm

TIPS threads are ALWAYS useful when #cruncher weighs in!

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Re: Is it time to give-up on TIPS?

Post by rotorhead » Tue Feb 03, 2015 6:55 pm

Re: Is it time to give-up on TIPS?

Post by linenfort » Tue Feb 03, 2015 7:10 pm

Very useful thread!
Very useful thread indeed!! I'm enjoying the discourse very much. I'm in draw down stage, with 30% of fixed in TIPS. I appreciate the "insurance" aspect, as my pension is fixed; and if I live long enough there will be no doubt some benefit from TIPS.

I probably think about it too much. :confused

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