TIPS - Did you give up?

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#Cruncher
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Re: TIPS - Did you give up?

Post by #Cruncher » Wed Jun 29, 2016 12:13 pm

saltycaper in [url=https://www.bogleheads.org/forum/viewtopic.php?p=2956771#p2956771]this post[/url] wrote:Breakeven inflation rate looks to be about 1.30-1.35% currently.
Yes, it is currently quite low. It has dropped from 0.7% points to 1.2% points (depending on maturity) from what it was when TIPS yields bottomed out in late 2012. Here is a comparison of constant maturity rates for nominal Treasuries and TIPS and the derived breakeven inflation rates for 6/28/2016 versus 12/10/2012:
Nominal Treasury Constant Maturity Yields

Code: Select all

              5Yr     7Yr    10Yr    20Yr    30Yr
12/10/2012   0.62    1.04    1.63    2.38    2.80 
06/28/2016   1.00    1.26    1.46    1.83    2.27 
Difference   0.38    0.22   (0.17)  (0.55)  (0.53)
TIPS Constant Maturity Yields

Code: Select all

              5Yr     7Yr    10Yr    20Yr    30Yr
12/10/2012  (1.43)  (1.17)  (0.87)  (0.16)   0.24 
06/28/2016  (0.32)  (0.13)   0.09    0.49    0.70 
Difference   1.11    1.04    0.96    0.65    0.46
Breakeven Inflation Rates (nominal yields minus TIPS yields)

Code: Select all

              5Yr     7Yr    10Yr    20Yr    30Yr
12/10/2012   2.05    2.21    2.50    2.54    2.56 
06/28/2016   1.32    1.39    1.37    1.34    1.57 
Difference  (0.73)  (0.82)  (1.13)  (1.20)  (0.99)
Here is a graphical comparison of the (o)ld and (n)ew breakeven inflation ratess:

Code: Select all

 5Yr  12/10/12  2.05  ooooooooooooooooooooooooooooooooooooooooo
 5Yr  06/28/16  1.32  nnnnnnnnnnnnnnnnnnnnnnnnnn

10Yr  12/10/12  2.50  oooooooooooooooooooooooooooooooooooooooooooooooooo
10Yr  06/28/16  1.37  nnnnnnnnnnnnnnnnnnnnnnnnnnn

30Yr  12/10/12  2.56  ooooooooooooooooooooooooooooooooooooooooooooooooooo
30Yr  06/28/16  1.57  nnnnnnnnnnnnnnnnnnnnnnnnnnnnnnn
abuss368 in [url=https://www.bogleheads.org/forum/viewtopic.php?p=2958190#p2958190]this post[/url] wrote:So if actual inflation agrees to expected inflation, the yield should be 1.30-1.35%? Why does the intermediate fund feel like it yields even less than that?
Abuss368, you don't seem to realize that expected inflation refers to the future, while actual inflation refers to the past. If the breakeven inflation rate on 5-year TIPS is 1.3% it means that over the next five years the market expects the CPI to rise about 1.3% per year. But the dividends that TIPS funds pay out includes the increase in inflation-adjusted principal based on the past increase in the CPI.

For example the $0.0981 / share in regular dividends paid in 2015 by Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX) indeed was low: about 0.8% ($0.0981 divided by a $12.85 NAV). But it was completely unaffected by what the market expected inflation to be in the future. Rather, it included the actual increase in TIPS principal during 2015. But this was only a 0.2% increase from a CPI of 237.433 on 1/1/2015 to a CPI of 237.838 on 1/1/2016. (See Reference CPI for 2015.)

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Re: TIPS - Did you give up?

Post by Angst » Wed Jun 29, 2016 2:34 pm

Doesn't it seem like yesterday, everyone was anticipating rampant inflation due to post-crash Fed/Treasury policies? Things sure have changed... And surely they will again!

Anyhow, thank you #Cruncher for your post above explicating the "Breakeven inflation rate" and your nicely organized way of shedding some favorable light on this ugly duckling, TIPS. As your post helps show, TIPS' ugliness might be rooted in a lack of understanding as much as in fact.

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Re: TIPS - Did you give up?

Post by abuss368 » Wed Jun 29, 2016 5:22 pm

Thank you for that explanation.
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Re: TIPS - Did you give up?

Post by abuss368 » Thu Jun 30, 2016 4:33 pm

Bogleheads,

Is anyone aware of David Swensen's recommendation presently? Back in 2005, he recommended one half of a bond allocation to TIPS. In my opinion, that is a lot of protection from unexpected inflation.
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Re: TIPS - Did you give up?

Post by Portfolio7 » Fri Aug 12, 2016 5:18 pm

Really key thread. It took me 20 yrs to finally settle on a portfolio I felt I understood to some degree. I've had TIPS funds in the past, none at this point. In fact, I've been trying to figure out if I should add some.
I have used Portfolio Visualizer to back test my current asset allocation 43 years. I had 20% of my portfolio in Intermediate Trsy, 10% in Long Trsy. That is my entire Bond allocation. This has been a real nice combo for 30 odd years, as interest rates have declined. When I realized that linkage, I decided to move to 30% Int Trsy, which I'll finish moving shortly. However, with rates apparently set to turn, it might make sense to lean towards the protection that TIPS provide.
The back tests I ran, using TIPS to replace Int Treasuries, suggest there is no value to holding tips. My portfolio performance was better (return and risk) using Int Tr. Even during the time period 1972 to 1981, significant for very high inflation, the IT Portfolio had only 2 bpts less annual return (and significantly less volatility.) I think different portfolios might respond a different way, but that's what I saw for my allocation.
Then I read that real vs nominal rates made a difference in the effectiveness of various portfolio results. On the surface, that made no sense to me, since the math is mostly commutative (?! I'll admit I haven't sat down to try to work through a detailed model) the only thing I can think of is that sequence of returns must play into the assertion that Tips have value. Rick Ferri, if I remember right, has recommended about 20% of a bond allocation in tips as a general sort of thing (not to speak for Mr Ferri, who I'm sure would have much more pertinent advice to offer a specific person with a specific set of circumstances). For me, 20% of bonds would be 6% of my total portfolio - but in the article I read I saw no clues as to how the numbers support this. Until I do, I will stay out of tips. It's difficult to think I'm not missing something when so many experts recommend TIPS, but if the worst decade of inflation since the Great Depression yields a break-even case on TIPS, as it seems to do for my allocation, I'm hesitant to buy in.
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Re: TIPS - Did you give up?

Post by dbr » Fri Aug 12, 2016 5:37 pm

I think TIPS is more about risk management than optimizing return. That would be most relevant to someone almost entirely invested in TIPS while it would make little sense to add some minor allocation to a larger portfolio. It would be interesting to dig out the rationale from those that do make small allocations to TIPS. An idea I can understand for TIPS is a TIPS ladder as a liability matching portfolio. In that case the LMP is 100% TIPS.

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Re: TIPS - Did you give up?

Post by woof755 » Sun Aug 21, 2016 8:36 pm

Reading through this thread, some takeaways include:

1. Many investors don't understand TIPS, leading to moving into and out of the funds for reasons that have nothing to do with the purpose of TIPS in the first place.
2. I don't fully understand TIPS, either.
3. It's not understanding investments that leads to a lack of a courage of our convictions.

But, here's what I've learned through my most recent TIPS self-education deep-dive.

This http://www.etf.com/sections/index-inves ... nopaging=1

is a nice article from one person who understands these things inside and out, our own Larry Swedroe. I found it helpful to review this important function of TIPS in one's portfolio. It's what makes me able to set it and forget it and not sweat the returns.

If I may quote from the article:
The first is that the research shows the standard deviation of a portfolio using inflation-indexed bonds is less than the standard deviation of a portfolio using conventional bonds.

This is especially true for more conservative portfolios. Thus, an investor who includes inflation-protected bonds can hold a higher allocation to equities—without increasing overall portfolio volatility—than an investor who only holds nominal bonds. The result is a higher expected return from the overall portfolio.
I use my allocation to TIPS on the bond side to allow me to take more risk with the equities I have--I employ a small value tilt.
I am, though, in the middle of rolling over former employer 401(k)s to a VG brokerage IRA. Now that I will have access to short term TIPS ETF for the first time, I am trying to figure out how to employ them in my portfolio.

And I've been studying for two days and I'm still not sure. This is a convincing argument: https://personal.vanguard.com/pdf/s328.pdf because if I want TIPS for reduced portfolio volatility, the short term fund should do a better job than the long term fund for that specific purpose.

And Rick Ferri has a conclusion in this article http://www.forbes.com/sites/rickferri/2 ... 8a2dd83ed6 that speaks to me because my time frame is still ~20yrs from retirement. So, does the volatility matter that much?

So, I'm tempted to split the difference and divide my TIPS portfolio evenly among the two of them. Sorta like giving up, but I could console myself with the knowledge that I know why I am not giving up on them entirely.

If this inspires advice from anyone, rather than me just working to put my thoughts down formally, I'm absolutely all ears.
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Re: TIPS - Did you give up?

Post by FIREchief » Mon Aug 22, 2016 1:34 am

That is a great article by Larry. I think he cuts through a lot of the confusion around TIPS in a very effective (and efficient) manner. When I establish my post-retirement portfolio, I expect that a TIPS ladder will provide at least half of the fixed income component. I like the idea of buying individual bonds at auction and holding them to maturity, so TIPS will fit in well with that. I may be paying a small amount for "inflation insurance," but the primary purpose of my fixed income allocation will be "preservation of purchasing power." I am not aware of anything that can provide this more securely and predictably than TIPS.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: TIPS - Did you give up?

Post by woof755 » Mon Aug 22, 2016 12:37 pm

What about your current portfolio? (just curious)
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Re: TIPS - Did you give up?

Post by FIREchief » Mon Aug 22, 2016 1:47 pm

woof755 wrote:What about your current portfolio? (just curious)
woof755 - I'll assume from context that your question was directed towards me. I'm still in accumulation phase with investable assets at 100/0 AA.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: TIPS - Did you give up?

Post by rnitz » Mon Aug 22, 2016 9:12 pm

FIREchief wrote:
That is a great article by Larry. I think he cuts through a lot of the confusion around TIPS in a very effective (and efficient) manner. When I establish my post-retirement portfolio, I expect that a TIPS ladder will provide at least half of the fixed income component. I like the idea of buying individual bonds at auction and holding them to maturity, so TIPS will fit in well with that. I may be paying a small amount for "inflation insurance," but the primary purpose of my fixed income allocation will be "preservation of purchasing power." I am not aware of anything that can provide this more securely and predictably than TIPS.
Yes, that is a great article by Larry. Thanks for the link Woof (and thanks for the article Larry). In particular, I liked his identification of factors that help protect against inflation (or in my alternative case, reasons why I'm exposed to inflation risk):

1. Long working life/wages ahead of you (nope, I'm retired).
2. Fixed rate mortgage (nope, paid it off).
3. Allocation to commodities (nope).

TIPS' mitigation of (unexpected) inflation risk for that portion of my portfolio just means it's one less financial risk I have to worry about. I can go back to worrying about everyday risks, like looking both ways before crossing the street so I don't get hit by a buss.

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Re: TIPS - Did you give up?

Post by PaFromFL » Mon Aug 22, 2016 9:47 pm

When I did my Bogle-no-no in Jan 2015 by selling all my target retirement funds and replacing them with roughly the same proportions of non-global funds, I also got rid of the TIPS portion. I'll be happy to buy in again if we stay out the global negative interest rate black hole.

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Re: TIPS - Did you give up?

Post by Phineas J. Whoopee » Mon Aug 22, 2016 10:12 pm

PaFromFL wrote:When I did my Bogle-no-no in Jan 2015 by selling all my target retirement funds and replacing them with roughly the same proportions of non-global funds, I also got rid of the TIPS portion. I'll be happy to buy in again if we stay out the global negative interest rate black hole.
Just to help clarify for other readers, presumably you're talking about global negative nominal interest rates, yes(?), which are not the same as the real interest rates, positive or negative, that TIPS pay, is that right?

With TIPS you know how much more (or in recent years for some maturities, less) you will get than CPI-U, but you don't know how many dollars that will be. With nominal bonds you know how many dollars you get, but you don't know how much they will buy.

Just clarifying that nominal and real rates are different concepts. Both are set by auction. No direct bond market participant receives less than they signed up for. The bond funds we own are direct participants, and wind up returning the same as if we were running our own equivalent rolling ladder bond portfolios, if we could reduce spreads like Vanguard and others, with their economies of scale, can.

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Re: TIPS - Did you give up?

Post by StevieG72 » Mon Aug 22, 2016 10:19 pm

I gave up...

I use VTBLX (Total Bond) and VTABX (Total International Bond)

I briefly used Vangaurd High Yield Tax Exempt which had some healthy returns, but I sold it when I decided to weight stocks a little heavier in my portfolio.

I made 1 purchase of TIPS and redeemed at six months, no looking back....
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Re: TIPS - Did you give up?

Post by PaFromFL » Tue Aug 23, 2016 9:37 pm

Phineas J. Whoopee wrote:
PaFromFL wrote:When I did my Bogle-no-no in Jan 2015 by selling all my target retirement funds and replacing them with roughly the same proportions of non-global funds, I also got rid of the TIPS portion. I'll be happy to buy in again if we stay out the global negative interest rate black hole.
Just to help clarify for other readers, presumably you're talking about global negative nominal interest rates, yes(?), which are not the same as the real interest rates, positive or negative, that TIPS pay, is that right?
...
I've heard that TIPS don't work very well when inflation rates are below 2% (I don't remember WHICH inflation rates), and am worried that we are about to be dragged into Japanese-style deflation for long time. I am sort of timing the market, but inflation/deflation cycles are slow enough that you get advance warning when fundamentals change. Can TIPS actually provide a decent yield in a deflationary environment?

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Re: TIPS - Did you give up?

Post by Phineas J. Whoopee » Tue Aug 23, 2016 10:05 pm

PaFromFL wrote:...
I've heard that TIPS don't work very well when inflation rates are below 2% (I don't remember WHICH inflation rates), and am worried that we are about to be dragged into Japanese-style deflation for long time. I am sort of timing the market, but inflation/deflation cycles are slow enough that you get advance warning when fundamentals change. Can TIPS actually provide a decent yield in a deflationary environment?
It depends on what one means by work very well. They will continue to have their face values, and consequently coupon payouts, adjusted based on CPI-U (with a two-month lag). Should their adjusted face values be lower than original par at maturity, they'll pay original. That's what they're supposed to do, and I for one am confident they will.

If working very well means reliably returning more than other fixed income investments, TIPS aren't a good choice at all. They have no credit or inflation risk. They're pure term risk, admittedly maybe with some liquidity risk too, although the 2008 problem arguably was idiosyncratic to the Lehman failure. One can dial in desired average real duration. If that isn't what one wants as a portfolio component one shouldn't buy them.

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Re: TIPS - Did you give up?

Post by Doc » Wed Aug 24, 2016 8:06 am

Phineas J. Whoopee wrote:They have no credit or inflation risk. They're pure term risk, admittedly maybe with some liquidity risk too, although the 2008 problem arguably was idiosyncratic to the Lehman failure.
Larry Swedroe our in house bond expert, makes a very good argument that the poor TIPS performance during the Lehman crisis was due to poor liquidity and with the much larger TIPS market today liquidity is less of an issue than it was in '08.

That being said some non-experts also noticed an abnormality in the '08/'09 TIPS yield curve around the on the run issues. Simply put the on the run issue price held up better than adjacent issues. Speculation was that this due to deflation fears. (The on the run issues have little deflation risk since they were trading near par.) If the next market crisis raises recession fears again this deflation risk could occur the next time and TIPS will again perform poorly. (Of course there is also a liquidity factor in on the run issues and you can't separate the two. Or at least I can't.)

Our ten year TIPS ladder was completed in the spring of '08 and was completely gone by the end of the year being sold off to buy equities. This spring our Treasury ladder was almost rebuilt having some missing rungs and some double rungs and a lower duration than a true ten year ladder. But more importan half the rungs are nominal Treasuries. JIC Larry was not correct about a "Lehman" not likely to be repeated.
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Re: TIPS - Did you give up?

Post by dcabler » Wed Aug 24, 2016 8:40 am

All - please note that Portfolio Visualizer uses the Simba spreadsheet for Tips returns and includes synthetic returns for the time period before VIPSX existed. The synthetic returns originally came from an academic paper without tables of data. As I recall, the person who generated the annual return sequence did so by eyeballing a graph from the paper. siamond (current owner of the Simba spreadsheet) and I are looking at other sources to generate synthetic returns and hopefully there will be an update at some point.

Standard disclaimer about the "accuracy" of synthetic returns applies....

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Re: TIPS - Did you give up?

Post by siamond » Wed Aug 24, 2016 10:53 am

dcabler wrote:All - please note that Portfolio Visualizer uses the Simba spreadsheet for Tips returns and includes synthetic returns for the time period before VIPSX existed. The synthetic returns originally came from an academic paper without tables of data. As I recall, the person who generated the annual return sequence did so by eyeballing a graph from the paper. siamond (current owner of the Simba spreadsheet) and I are looking at other sources to generate synthetic returns and hopefully there will be an update at some point.
Yup, very true. VIPSX inception date is June 2000. And the 'synthetic' model used so far for earlier years appears quite weak. Therefore every such annual return pre-2001 is HIGHLY suspect, and this applies to Simba as well as any derived tool like PortfolioVisualizer, PortfolioCharts, etc. Will aim at improving this by the early 2017 Simba update.

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Re: TIPS - Did you give up?

Post by woof755 » Wed Aug 24, 2016 1:38 pm

PaFromFL wrote:
I've heard that TIPS don't work very well when inflation rates are below 2% (I don't remember WHICH inflation rates), and am worried that we are about to be dragged into Japanese-style deflation for long time. I am sort of timing the market, but inflation/deflation cycles are slow enough that you get advance warning when fundamentals change. Can TIPS actually provide a decent yield in a deflationary environment?
It's not really related to when inflation is below a certain %.
It's about the breakeven inflation rate (nominal bond yields - TIPS yields of same duration) in comparison to future inflation expectations.

If future inflation were expected to be 1.5% (right now it is expected to be 2.1% for the next 5 years and 2.2% going out 10 years https://www.philadelphiafed.org/researc ... 6/survq216) and the spread between nominal bond yields and TIPS yields were for example 1.1%, then future inflation expectation would be 0.4% higher than the breakeven inflation rate of 1.1%. So even in this example, TIPS would be the better investment than nominal bonds.

We are still in a weird place. 7 years after a market collapse and several years out of a recession--a time which saw very low inflation despite interest rates at 0% for an extended period of time. Everybody is looking everywhere for yield that just isn't there. The blame goes to the recession, not to the TIPS!

For our portfolio purposes, TIPS aren't good or bad in a vacuum. They have to be considered in comparison to nominal bonds.
In my opinion, though, for the reasons I posted from Larry in my earlier post, I will continue to allocate at least a small portion of my bonds to TIPS to reduce overall portfolio volatility. It's not about the returns.

Larry's bond book and his book on Alternative investments are both great (as is the Black Swans offering)
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Re: TIPS - Did you give up?

Post by Tigermoose » Wed Aug 24, 2016 2:29 pm

So based on the method in Larry's article, here are the calculations:

5 YR TIPS Real Yield is -.21
5 YR Treasury Yield is 1.1429

So 1.1429 + .21 = 1.3529%. So if inflation is greater than 1.3529% in a 5 year period, then TIPS is the way to go. The Expected Inflation rate is 2.1% for the next 5 years. So that's a premium of .7471% for the 5 yr TIPS over the 5 yr Treasury.

Of course, this assumes that the Survey of Professional Forecasters is accurate in their inflation forecast.
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Re: TIPS - Did you give up?

Post by SpaceCowboy » Wed Aug 24, 2016 3:11 pm

I still like TIPS and as an early retiree am concerned about long-term inflation risk. Inflation risk IMHO and per Bernstein's Deep Risks is more likely than deflation. Don't like the negative real yields on short TIPS and thus avoid them. Honestly don't know why anyone would buy TIPS with negative real yields. Nominal CDs are better for the shorter terms 1-5 years. I do buy the 10 year TIPS at auction, but try to wait for auctions when the real yield will be at least 0.5%.

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Re: TIPS - Did you give up?

Post by Tigermoose » Wed Aug 24, 2016 3:19 pm

rrppve wrote:I still like TIPS and as an early retiree am concerned about long-term inflation risk. Inflation risk IMHO and per Bernstein's Deep Risks is more likely than deflation. Don't like the negative real yields on short TIPS and thus avoid them. Honestly don't know why anyone would buy TIPS with negative real yields. Nominal CDs are better for the shorter terms 1-5 years. I do buy the 10 year TIPS at auction, but try to wait for auctions when the real yield will be at least 0.5%.
Read the article referenced above by Larry Swedroe to find out why.

http://www.etf.com/sections/index-inves ... nopaging=1
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Re: TIPS - Did you give up?

Post by SpaceCowboy » Wed Aug 24, 2016 3:54 pm

Looks like Swedroe agrees that CDs are preferable, certainly in the short term. Last time I checked the real yield curve on Bloomberg, TIPS were negative real yield out to 7 years. CDs are the better buy for shorter than 7 year terms. Also, short term inflation risk is very different than long term inflation risk. If you're wrong by 50 bps for 5 years or less, no biggie. However, if you buy long term treasuries and inflation rears it head over a 20 year period and is 200 bps above expectation, that's a really big deal. So no negative rate TIPS for me.
It's not just about returns, it's also about risk. In retirement, long term inflation is a real risk that should be protected against.

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Re: TIPS - Did you give up?

Post by Tigermoose » Wed Aug 24, 2016 4:39 pm

rrppve wrote:Looks like Swedroe agrees that CDs are preferable, certainly in the short term. Last time I checked the real yield curve on Bloomberg, TIPS were negative real yield out to 7 years. CDs are the better buy for shorter than 7 year terms. Also, short term inflation risk is very different than long term inflation risk. If you're wrong by 50 bps for 5 years or less, no biggie. However, if you buy long term treasuries and inflation rears it head over a 20 year period and is 200 bps above expectation, that's a really big deal. So no negative rate TIPS for me.
It's not just about returns, it's also about risk. In retirement, long term inflation is a real risk that should be protected against.
TIPS give you a return of the inflation rate combined with the real yield. So if Inflation is 200bps above expectation, you will get that 200bps. TIPS gives you the protection against long term inflation risk. The only question is how much one is willing to pay for that protection, and Larry's article explains this and how to determine that cost.
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Re: TIPS - Did you give up?

Post by House Blend » Wed Aug 24, 2016 5:06 pm

siamond wrote:
dcabler wrote:All - please note that Portfolio Visualizer uses the Simba spreadsheet for Tips returns and includes synthetic returns for the time period before VIPSX existed. The synthetic returns originally came from an academic paper without tables of data. As I recall, the person who generated the annual return sequence did so by eyeballing a graph from the paper. siamond (current owner of the Simba spreadsheet) and I are looking at other sources to generate synthetic returns and hopefully there will be an update at some point.
Yup, very true. VIPSX inception date is June 2000. And the 'synthetic' model used so far for earlier years appears quite weak. Therefore every such annual return pre-2001 is HIGHLY suspect, and this applies to Simba as well as any derived tool like PortfolioVisualizer, PortfolioCharts, etc. Will aim at improving this by the early 2017 Simba update.
Speaking of other sources, perhaps you are unaware that the inception date on the CREF Inflation-Linked Bond variable annuity is 5/1/1997, so it provides a few more years of real world TIPS data prior to VIPSX. Price history can be downloaded from the TIAA website. What I don't recall, and may be harder to dig up, is what the benchmark was in those days. (Was there a Lehman Brothers TIPS benchmark available from Day 1?) Also would be good to know if/when there was a ramp-up period before it became fully invested in TIPS. I do believe the expense ratios at CREF in those days were roughly competitive with Investor Class Vanguard funds.

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Re: TIPS - Did you give up?

Post by SpaceCowboy » Wed Aug 24, 2016 6:25 pm

Tigermoose wrote:
rrppve wrote:Looks like Swedroe agrees that CDs are preferable, certainly in the short term. Last time I checked the real yield curve on Bloomberg, TIPS were negative real yield out to 7 years. CDs are the better buy for shorter than 7 year terms. Also, short term inflation risk is very different than long term inflation risk. If you're wrong by 50 bps for 5 years or less, no biggie. However, if you buy long term treasuries and inflation rears it head over a 20 year period and is 200 bps above expectation, that's a really big deal. So no negative rate TIPS for me.
It's not just about returns, it's also about risk. In retirement, long term inflation is a real risk that should be protected against.
TIPS give you a return of the inflation rate combined with the real yield. So if Inflation is 200bps above expectation, you will get that 200bps. TIPS gives you the protection against long term inflation risk. The only question is how much one is willing to pay for that protection, and Larry's article explains this and how to determine that cost.
No argument here. The point is short term inflation risk is small. Long term inflation risk is large. Negative rates are only on short term TIPS <7 years. Thus, don't buy short term TIPS with negative rates. Your hedging against the wrong risk. The real risk is long term inflation being above expectations.

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Re: TIPS - Did you give up?

Post by Tigermoose » Wed Aug 24, 2016 6:38 pm

rrppve wrote:
Tigermoose wrote:
rrppve wrote:Looks like Swedroe agrees that CDs are preferable, certainly in the short term. Last time I checked the real yield curve on Bloomberg, TIPS were negative real yield out to 7 years. CDs are the better buy for shorter than 7 year terms. Also, short term inflation risk is very different than long term inflation risk. If you're wrong by 50 bps for 5 years or less, no biggie. However, if you buy long term treasuries and inflation rears it head over a 20 year period and is 200 bps above expectation, that's a really big deal. So no negative rate TIPS for me.
It's not just about returns, it's also about risk. In retirement, long term inflation is a real risk that should be protected against.
TIPS give you a return of the inflation rate combined with the real yield. So if Inflation is 200bps above expectation, you will get that 200bps. TIPS gives you the protection against long term inflation risk. The only question is how much one is willing to pay for that protection, and Larry's article explains this and how to determine that cost.
No argument here. The point is short term inflation risk is small. Long term inflation risk is large. Negative rates are only on short term TIPS <7 years. Thus, don't buy short term TIPS with negative rates. Your hedging against the wrong risk. The real risk is long term inflation being above expectations.
Oh, ok. You are advising that if you buy TIPS, you should buy longer duration TIPs. What about interest rate risk? Does that bother you given the historically extremely low rates?
Institutions matter

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Re: TIPS - Did you give up?

Post by SpaceCowboy » Wed Aug 24, 2016 7:04 pm

Tigermoose wrote:
rrppve wrote:
Tigermoose wrote:
rrppve wrote:Looks like Swedroe agrees that CDs are preferable, certainly in the short term. Last time I checked the real yield curve on Bloomberg, TIPS were negative real yield out to 7 years. CDs are the better buy for shorter than 7 year terms. Also, short term inflation risk is very different than long term inflation risk. If you're wrong by 50 bps for 5 years or less, no biggie. However, if you buy long term treasuries and inflation rears it head over a 20 year period and is 200 bps above expectation, that's a really big deal. So no negative rate TIPS for me.
It's not just about returns, it's also about risk. In retirement, long term inflation is a real risk that should be protected against.
TIPS give you a return of the inflation rate combined with the real yield. So if Inflation is 200bps above expectation, you will get that 200bps. TIPS gives you the protection against long term inflation risk. The only question is how much one is willing to pay for that protection, and Larry's article explains this and how to determine that cost.
No argument here. The point is short term inflation risk is small. Long term inflation risk is large. Negative rates are only on short term TIPS <7 years. Thus, don't buy short term TIPS with negative rates. Your hedging against the wrong risk. The real risk is long term inflation being above expectations.
Oh, ok. You are advising that if you buy TIPS, you should buy longer duration TIPs. What about interest rate risk? Does that bother you given the historically extremely low rates?
Yes, of course it bother me with any debt investment in this low rate environment. Like I said I buy the 10 year at auction. I don't buy longer duration TIPS directly. Most of the TIPS funds have durations under 10 years, around 8 if memory serves me for Vanguard's.
Like I said, I disagree that short duration TIPS with negative interest rates make sense as an investment.

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Re: TIPS - Did you give up?

Post by FIREchief » Wed Aug 24, 2016 8:28 pm

rrppve wrote: Yes, of course it bother me with any debt investment in this low rate environment. Like I said I buy the 10 year at auction. I don't buy longer duration TIPS directly. Most of the TIPS funds have durations under 10 years, around 8 if memory serves me for Vanguard's.
Like I said, I disagree that short duration TIPS with negative interest rates make sense as an investment.
I hate that negative sign as much as the next guy. That said, the only real difference between the 5 year TIPS and all other low risk FI investments with that duration, is that the negative sign is right in front of us rather than hidden in the nominal return to real-expected-return translation. While I would like a +.19% rather than a -.19% on the TIPS, if a person is buying a TIPS for preservation of purchasing power, it makes very little difference.

When I do start building my retirement TIPS ladder, I'll be starting with mostly five years at auction. I'm hoping that when those mature, we'll be much further away from this bizarre ZIRP world and, consequently, I'll come out ahead over the (hopefully) 30+ year timeframe. In the meantime, I would rather give up the -.19% knowing that I won't be locking in +.08% for that extra five years.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: TIPS - Did you give up?

Post by woof755 » Wed Aug 24, 2016 8:36 pm

rrppve wrote: No argument here. The point is short term inflation risk is small. Long term inflation risk is large. Negative rates are only on short term TIPS <7 years. Thus, don't buy short term TIPS with negative rates. Your hedging against the wrong risk. The real risk is long term inflation being above expectations.
I'm not sure I get your argument. The current yield on a 7 year nominal Treasury is 1.4%. With 7 year inflation expectations at 2.1% to 2.2%, the 7 year nominal yield is negative, also. And it's more negative (0.6ish%) than the current TIPS yield is negative.

Now, inflation hasn't been even 2% for several years, so if the inflation rate falls short of expectations, then nominal bonds are the winner, I guess. It's just a matter of whether you trust yourself more than the judgment of the Federal Open Market Committee to predict 2016-2020/2025 inflation.

And I make that statement with no prejudgment on my part, honestly. Just outlining the rules of the game.
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Re: TIPS - Did you give up?

Post by woof755 » Wed Aug 24, 2016 8:39 pm

FIREchief wrote:
I hate that negative sign as much as the next guy. That said, the only real difference between the 5 year TIPS and all other low risk FI investments with that duration, is that the negative sign is right in front of us rather than hidden in the nominal return to real-expected-return translation. While I would like a +.19% rather than a -.19% on the TIPS, if a person is buying a TIPS for preservation of purchasing power, it makes very little difference.
Sorry, FireChief, we just said sorta the same thing but I was typing as you were posting.
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Re: TIPS - Did you give up?

Post by siamond » Wed Aug 24, 2016 9:24 pm

House Blend wrote:Speaking of other sources, perhaps you are unaware that the inception date on the CREF Inflation-Linked Bond variable annuity is 5/1/1997, so it provides a few more years of real world TIPS data prior to VIPSX. Price history can be downloaded from the TIAA website. What I don't recall, and may be harder to dig up, is what the benchmark was in those days. (Was there a Lehman Brothers TIPS benchmark available from Day 1?) Also would be good to know if/when there was a ramp-up period before it became fully invested in TIPS. I do believe the expense ratios at CREF in those days were roughly competitive with Investor Class Vanguard funds.
Thanks for the pointer. I downloaded the CREF R1 (QCILRX) price history from this Web page, and checked against the documented 5yrs return and 10yrs return as of 7/31/2016, and it does match.

The index of reference is documented as Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L) until Jan 1st, 2016, where it changed to Barclays U.S. 1-10 Year Treasury Inflation Protected Securities (TIPS) Index.

Let's compare against VIPSX to see if this is similar... The average maturity doesn't fully match (CREF is 5.86 years, while VIPSX is 8.9 years). The annual returns are pretty similar though, although VIPSX is usually a tad better. Note that, in 2016, the CREF ER is 0.61% while VIPSX is 0.20%, and that the VIPSX returns include the ER (subtracted), while the QCILRX prices probably do not.

Code: Select all

YEAR	QCILRX	QCILRX		VIPSX
2015	$65.23	-1.94%		-1.83%
2014	$66.52	 3.32%		 3.83%
2013	$64.38	-9.02%		-8.92%
2012	$70.77	 6.40%		 6.78%
2011	$66.51	13.16%		13.24%
2010	$58.77	 5.89%		 6.17%
2009	$55.50	 9.58%		10.80%
2008	$50.65	-1.78%		-2.85%
2007	$51.56	11.01%		11.59%
2006	$46.45	 0.02%		 0.43%
2005	$46.44	 2.52%		 2.59%
2004	$45.30	 8.01%		 8.27%
2003	$41.94	 7.61%		 8.00%
2002	$38.97	16.32%		16.61%
2001	$33.50	 7.70%		 7.61%
2000	$31.11	12.73%		
1999	$27.60	 2.10%		
1998	$27.03	 3.48%		
1997	$26.12			
				
	CAGR 98-15:	5.22%		 #N/A
	CAGR 01-15:	4.56%		 4.81%
Now, if we compare CREF to the 'synthetic' returns from Simba for 1998-2000, well, the synthetic returns do not seem very credible.

Code: Select all

12.73%		4.80%
 2.10%		7.90%
 3.48%		2.80%
So... Yes, I would tend to agree that it would not be unreasonable to use the CREF numbers for 1998-2000. Great input, thank you!

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Re: TIPS - Did you give up?

Post by FIREchief » Wed Aug 24, 2016 10:13 pm

woof755 wrote: Sorry, FireChief, we just said sorta the same thing but I was typing as you were posting.
:thumbsup
woof755 wrote:
I'm not sure I get your argument. The current yield on a 7 year nominal Treasury is 1.4%. With 7 year inflation expectations at 2.1% to 2.2%, the 7 year nominal yield is negative, also. And it's more negative (0.6ish%) than the current TIPS yield is negative.

Now, inflation hasn't been even 2% for several years, so if the inflation rate falls short of expectations, then nominal bonds are the winner, I guess. It's just a matter of whether you trust yourself more than the judgment of the Federal Open Market Committee to predict 2016-2020/2025 inflation.
Well put. I think those who speak unfavorably regarding shorter duration TIPS are in two camps: a) those who just don't fully understand how to properly compare the TIPS yields with nominal yields and b) those who do, but are betting that inflation falls short of the FED's projections. Since I think low inflation and low interest rates are good for my equities, I would rather err by having my FI in TIPS and missing a small amount of return there.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: TIPS - Did you give up?

Post by SpaceCowboy » Thu Aug 25, 2016 3:32 am

FIREchief wrote:
woof755 wrote: Sorry, FireChief, we just said sorta the same thing but I was typing as you were posting.
:thumbsup
woof755 wrote:
I'm not sure I get your argument. The current yield on a 7 year nominal Treasury is 1.4%. With 7 year inflation expectations at 2.1% to 2.2%, the 7 year nominal yield is negative, also. And it's more negative (0.6ish%) than the current TIPS yield is negative.

Now, inflation hasn't been even 2% for several years, so if the inflation rate falls short of expectations, then nominal bonds are the winner, I guess. It's just a matter of whether you trust yourself more than the judgment of the Federal Open Market Committee to predict 2016-2020/2025 inflation.
Well put. I think those who speak unfavorably regarding shorter duration TIPS are in two camps: a) those who just don't fully understand how to properly compare the TIPS yields with nominal yields and b) those who do, but are betting that inflation falls short of the FED's projections. Since I think low inflation and low interest rates are good for my equities, I would rather err by having my FI in TIPS and missing a small amount of return there.
I'm basically in Camp B, but as I posted earlier believe that 5 yr. CDs have an expected positive real yield, as does Swedroe in his piece, even with current inflation projections. The other point is that I believe that there is much less risk of inflation greatly exceeding expectations over relatively short duration of <5 years than over a 10 year period. That just seems to be common sense to me.
I primarily see TIPS as a risk hedging tool and not as a way to make a few extra basis points in the short term. Hedging inflation risk is TIPS real purpose.

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Re: TIPS - Did you give up?

Post by abuss368 » Thu Aug 25, 2016 5:32 am

How great is the risk of unexpected inflation today? I believe for the most part we are not hitting the Feds target rates correct? It feels like there are many inflation watchers and Hawks that I am not sure the risk is the same as the 70s and early 80s. Over time a large allocation to TIPS could hurt performance correct?
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Re: TIPS - Did you give up?

Post by dcabler » Thu Aug 25, 2016 6:23 am

siamond wrote:
House Blend wrote:Speaking of other sources, perhaps you are unaware that the inception date on the CREF Inflation-Linked Bond variable annuity is 5/1/1997, so it provides a few more years of real world TIPS data prior to VIPSX. Price history can be downloaded from the TIAA website. What I don't recall, and may be harder to dig up, is what the benchmark was in those days. (Was there a Lehman Brothers TIPS benchmark available from Day 1?) Also would be good to know if/when there was a ramp-up period before it became fully invested in TIPS. I do believe the expense ratios at CREF in those days were roughly competitive with Investor Class Vanguard funds.
Thanks for the pointer. I downloaded the CREF R1 (QCILRX) price history from this Web page, and checked against the documented 5yrs return and 10yrs return as of 7/31/2016, and it does match.

The index of reference is documented as Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L) until Jan 1st, 2016, where it changed to Barclays U.S. 1-10 Year Treasury Inflation Protected Securities (TIPS) Index.

Let's compare against VIPSX to see if this is similar... The average maturity doesn't fully match (CREF is 5.86 years, while VIPSX is 8.9 years). The annual returns are pretty similar though, although VIPSX is usually a tad better. Note that, in 2016, the CREF ER is 0.61% while VIPSX is 0.20%, and that the VIPSX returns include the ER (subtracted), while the QCILRX prices probably do not.

Code: Select all

YEAR	QCILRX	QCILRX		VIPSX
2015	$65.23	-1.94%		-1.83%
2014	$66.52	 3.32%		 3.83%
2013	$64.38	-9.02%		-8.92%
2012	$70.77	 6.40%		 6.78%
2011	$66.51	13.16%		13.24%
2010	$58.77	 5.89%		 6.17%
2009	$55.50	 9.58%		10.80%
2008	$50.65	-1.78%		-2.85%
2007	$51.56	11.01%		11.59%
2006	$46.45	 0.02%		 0.43%
2005	$46.44	 2.52%		 2.59%
2004	$45.30	 8.01%		 8.27%
2003	$41.94	 7.61%		 8.00%
2002	$38.97	16.32%		16.61%
2001	$33.50	 7.70%		 7.61%
2000	$31.11	12.73%		
1999	$27.60	 2.10%		
1998	$27.03	 3.48%		
1997	$26.12			
				
	CAGR 98-15:	5.22%		 #N/A
	CAGR 01-15:	4.56%		 4.81%
Now, if we compare CREF to the 'synthetic' returns from Simba for 1998-2000, well, the synthetic returns do not seem very credible.

Code: Select all

12.73%		4.80%
 2.10%		7.90%
 3.48%		2.80%
So... Yes, I would tend to agree that it would not be unreasonable to use the CREF numbers for 1998-2000. Great input, thank you!
There is one easy update to the TIPs sequence on Simba's spreadsheet that could be done. PRTNX is a (mostly) TIPs fund that started in 1998. I use it in my own spreadsheets to fill the gap between the synthetic returns and the starting year of VIPSX. While not a perfect match, it does agree fairly well with VIPSX for the years they coexist and with a synthetic sequence I have.

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Re: TIPS - Did you give up?

Post by Quark » Thu Aug 25, 2016 7:06 am

abuss368 wrote:How great is the risk of unexpected inflation today? I believe for the most part we are not hitting the Feds target rates correct? It feels like there are many inflation watchers and Hawks that I am not sure the risk is the same as the 70s and early 80s. Over time a large allocation to TIPS could hurt performance correct?
The unexpected happens much more frequently than many expect. Think of TIPS as insurance against unexpected inflation.

Remember that whatever happens, you get the promised real rate if you hold. You give up some possible upside, but are protected against possible downside.

There will always be investments that perform better than your portfolio.

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Re: TIPS - Did you give up?

Post by Angst » Thu Aug 25, 2016 8:47 am

abuss368 wrote:How great is the risk of unexpected inflation today? I believe for the most part we are not hitting the Feds target rates correct? It feels like there are many inflation watchers and Hawks that I am not sure the risk is the same as the 70s and early 80s. Over time a large allocation to TIPS could hurt performance correct?
"Today?" As it's already been said, more than once, CD's are probably a reasonable choice. I have zero interest in short-term TIPS.

"Tomorrow?" Well, let's see... The further out you go in time, what's that they say about the crystal ball? I don't expect rates to rise anytime in particular, but nor do I buy into the notion that we're in some "new normal". The future's as cloudy as ever - same as it's always been, and that's the future I'm trying to plan for.

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Re: TIPS - Did you give up?

Post by SpaceCowboy » Thu Aug 25, 2016 10:04 am

Angst wrote:
abuss368 wrote:How great is the risk of unexpected inflation today? I believe for the most part we are not hitting the Feds target rates correct? It feels like there are many inflation watchers and Hawks that I am not sure the risk is the same as the 70s and early 80s. Over time a large allocation to TIPS could hurt performance correct?
"Today?" As it's already been said, more than once, CD's are probably a reasonable choice. I have zero interest in short-term TIPS.

"Tomorrow?" Well, let's see... The further out you go in time, what's that they say about the crystal ball? I don't expect rates to rise anytime in particular, but nor do I buy into the notion that we're in some "new normal". The future's as cloudy as ever - same as it's always been, and that's the future I'm trying to plan for.
+1 Eloquently stated

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Re: TIPS - Did you give up?

Post by House Blend » Thu Aug 25, 2016 10:28 am

siamond wrote:
House Blend wrote:Speaking of other sources, perhaps you are unaware that the inception date on the CREF Inflation-Linked Bond variable annuity is 5/1/1997, so it provides a few more years of real world TIPS data prior to VIPSX. Price history can be downloaded from the TIAA website. What I don't recall, and may be harder to dig up, is what the benchmark was in those days. (Was there a Lehman Brothers TIPS benchmark available from Day 1?) Also would be good to know if/when there was a ramp-up period before it became fully invested in TIPS. I do believe the expense ratios at CREF in those days were roughly competitive with Investor Class Vanguard funds.
Thanks for the pointer. I downloaded the CREF R1 (QCILRX) price history from this Web page, and checked against the documented 5yrs return and 10yrs return as of 7/31/2016, and it does match.

The index of reference is documented as BarclaQCILRXys U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L) until Jan 1st, 2016, where it changed to Barclays U.S. 1-10 Year Treasury Inflation Protected Securities (TIPS) Index.

Let's compare against VIPSX to see if this is similar... The average maturity doesn't fully match (CREF is 5.86 years, while VIPSX is 8.9 years). The annual returns are pretty similar though, although VIPSX is usually a tad better. Note that, in 2016, the CREF ER is 0.61% while VIPSX is 0.20%, and that the VIPSX returns include the ER (subtracted), while the QCILRX prices probably do not.
BTW: The CREF variable annuity unit prices do have the ER baked in, along with dividends as well. (Similar to unit investment trusts, they never distribute dividends.) So the NAV history tells the whole story as far as returns go.

Also, the CREF VAs ERs have been trending up while Vanguard ERs trend down. I happen to have paperwork laying around showing that the ER of QCILRX in 1999 was 0.31%.

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Re: TIPS - Did you give up?

Post by siamond » Thu Aug 25, 2016 11:40 am

dcabler wrote:There is one easy update to the TIPs sequence on Simba's spreadsheet that could be done. PRTNX is a (mostly) TIPs fund that started in 1998. I use it in my own spreadsheets to fill the gap between the synthetic returns and the starting year of VIPSX. While not a perfect match, it does agree fairly well with VIPSX for the years they coexist and with a synthetic sequence I have.
I took a look at PRTNX, on the Morningstar Web site and on the Pimco Web site.

Pros:
- composed primarily of TIPS
- seems to follow the Barclays index pretty well
- average maturity is closer to VIPSX (currently 9.1 years)
- it's a real fund, not an annuity product

Cons:
- high ER (0.83%)
- active fund
- comparing with VIPSX on Morningstar, the correlation is obviously very strong, but VIPSX trajectory slowly and surely separates from PRTNX

No more and no less history than the CREF fund, both started in the course of 1997, although Pimco started in Jan-97, so I guess we could use its 1997 number more safely. I guess it's a toss, maybe a slight preference for PRTNX... Any more views?

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Re: TIPS - Did you give up?

Post by siamond » Thu Aug 25, 2016 11:46 am

House Blend wrote:BTW: The CREF variable annuity unit prices do have the ER baked in, along with dividends as well. (Similar to unit investment trusts, they never distribute dividends.) So the NAV history tells the whole story as far as returns go.

Also, the CREF VAs ERs have been trending up while Vanguard ERs trend down. I happen to have paperwork laying around showing that the ER of QCILRX in 1999 was 0.31%.
Ah, very good, thank you for the very useful inputs, I had figured out the dividends part, but I wasn't sure about the ER. So the slight performance difference is probably due to the average maturity, then. Which isn't a big deal if we just fill the few missing years. Please check my previous post, and tell us what you think.

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Re: TIPS - Did you give up?

Post by dcabler » Thu Aug 25, 2016 12:07 pm

siamond wrote:
dcabler wrote:There is one easy update to the TIPs sequence on Simba's spreadsheet that could be done. PRTNX is a (mostly) TIPs fund that started in 1998. I use it in my own spreadsheets to fill the gap between the synthetic returns and the starting year of VIPSX. While not a perfect match, it does agree fairly well with VIPSX for the years they coexist and with a synthetic sequence I have.
I took a look at PRTNX, on the Morningstar Web site and on the Pimco Web site.

Pros:
- composed primarily of TIPS
- seems to follow the Barclays index pretty well
- average maturity is closer to VIPSX (currently 9.1 years)
- it's a real fund, not an annuity product

Cons:
- high ER (0.83%)
- active fund
- comparing with VIPSX on Morningstar, the correlation is obviously very strong, but VIPSX trajectory slowly and surely separates from PRTNX

No more and no less history than the CREF fund, both started in the course of 1997, although Pimco started in Jan-97, so I guess we could use its 1997 number more safely. I guess it's a toss, maybe a slight preference for PRTNX... Any more views?
When I use it PRTNX in my backtesting, I subtract its e/r and add back in VIPSX's.
VIPSX is also a managed fund, though relatively inexpensive. I use it in my Vanguard portfolio, but I use FSIYX in my Fidelity accounts.

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Re: TIPS - Did you give up?

Post by FIREchief » Thu Aug 25, 2016 12:09 pm

rrppve wrote: I'm basically in Camp B, but as I posted earlier believe that 5 yr. CDs have an expected positive real yield, as does Swedroe in his piece, even with current inflation projections. The other point is that I believe that there is much less risk of inflation greatly exceeding expectations over relatively short duration of <5 years than over a 10 year period. That just seems to be common sense to me.
I primarily see TIPS as a risk hedging tool and not as a way to make a few extra basis points in the short term. Hedging inflation risk is TIPS real purpose.
I checked Fidelity's website and the highest yield for 5 year CD's is currently 1.6%. The 5 year TIPS was trading at -.19% at yesterday's close. That is a difference of 1.79%. If inflation runs any higher over the next five years, then the TIPS buyer comes out ahead.

I didn't read Larry's article as suggesting that CD's would have a positive real yield, but it really doesn't matter. When it comes to rates and inflation, Larry has exactly one opinion. It may be an educated opinion, but it is nothing more than an opinion. As of yesterday, the five year Treasury was trading at 1.13%. That means that the market as a whole (i.e. all opinions being expressed through actual trades) believes that inflation will average 1.32% over the next five years. Nobody likes that negative sign, but I don't believe there is a conclusive case for going one way or the other. Inflation could very easily return to the 2% to 3% range in the next year or two. The fact that Washington and the Fed would both like to see this can only increase the chances.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: TIPS - Did you give up?

Post by SpaceCowboy » Thu Aug 25, 2016 12:32 pm

FIREchief wrote:
rrppve wrote: I'm basically in Camp B, but as I posted earlier believe that 5 yr. CDs have an expected positive real yield, as does Swedroe in his piece, even with current inflation projections. The other point is that I believe that there is much less risk of inflation greatly exceeding expectations over relatively short duration of <5 years than over a 10 year period. That just seems to be common sense to me.
I primarily see TIPS as a risk hedging tool and not as a way to make a few extra basis points in the short term. Hedging inflation risk is TIPS real purpose.
I checked Fidelity's website and the highest yield for 5 year CD's is currently 1.6%. The 5 year TIPS was trading at -.19% at yesterday's close. That is a difference of 1.79%. If inflation runs any higher over the next five years, then the TIPS buyer comes out ahead.

I didn't read Larry's article as suggesting that CD's would have a positive real yield, but it really doesn't matter. When it comes to rates and inflation, Larry has exactly one opinion. It may be an educated opinion, but it is nothing more than an opinion. As of yesterday, the five year Treasury was trading at 1.13%. That means that the market as a whole (i.e. all opinions being expressed through actual trades) believes that inflation will average 1.32% over the next five years. Nobody likes that negative sign, but I don't believe there is a conclusive case for going one way or the other. Inflation could very easily return to the 2% to 3% range in the next year or two. The fact that Washington and the Fed would both like to see this can only increase the chances.
Look at direct bought CDs on depositaccounts.com. Last I checked Melrose was offering 2.32% albeit with a poor EWP. I for one don't think inflation "could very easily" return to 2 to 3% in the next year or two and more importantly neither does the market. However over a 10 year period, it is much more likely IMHO. Think you're still missing my point that the real purpose that TIPS serve in a portfolio, especially for a retiree, is to hedge inflation risk and not eke out a few more bps of return in the short term.

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FIREchief
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Re: TIPS - Did you give up?

Post by FIREchief » Thu Aug 25, 2016 12:41 pm

rrppve wrote: Think you're still missing my point that the real purpose that TIPS serve in a portfolio, especially for a retiree, is to hedge inflation risk and not eke out a few more bps of return in the short term.
Not missing it all. I absolutely agree with you on this point. I want my risk/return on the equities side of the AA.
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Re: TIPS - Did you give up?

Post by SpaceCowboy » Thu Aug 25, 2016 1:44 pm

FIREchief wrote:
rrppve wrote: Think you're still missing my point that the real purpose that TIPS serve in a portfolio, especially for a retiree, is to hedge inflation risk and not eke out a few more bps of return in the short term.
Not missing it all. I absolutely agree with you on this point. I want my risk/return on the equities side of the AA.
Unfortunately equities don't hedge inflation risk nearly as well as TIPS. Every part of your portfolio contributes risk and return. It's true that equities have higher expected risk and return than fixed income.

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woof755
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Re: TIPS - Did you give up?

Post by woof755 » Thu Aug 25, 2016 2:21 pm

abuss368 wrote:How great is the risk of unexpected inflation today? I believe for the most part we are not hitting the Feds target rates correct? It feels like there are many inflation watchers and Hawks that I am not sure the risk is the same as the 70s and early 80s. Over time a large allocation to TIPS could hurt performance correct?
At this point, even an improving jobs picture, a soaring Dow (compared to 2008), interest rates at zero, and quantitative easing were not enough to budge inflation much, let alone have the effect as you allude to that the "hawks" were predicting. At this point, legislative action that we don't delve into on this site would seem to be necessary to get inflation back to the 3% the Fed would like to see. A huge election coming up with lots of congressional seats up for reelection only adds to the phrase *unexpected* inflation.

[disclaimer that I intended that phrasing to be completely politically neutral. Emphasis on the "who knows" aspect]

Also, I didn't mean to discount the possibility that CDs might have a yield which is higher than expected inflation. I took a look at PenFed, saw 1.3% for a 7 year CD. It's not in my nature to go too much further to seek a higher yielding CD. Tried to look at the VG 2ary market for CDs a few times and I went cross-eyed. I think vanilla is the way for me. Fortunately over the past few weeks I've had the opportunity to dive into TIPS to try to understand them better.

I still don't know, though, whether the short term TIPs fund or the standard VIPSX is the better way to go. I might just go all short term, keep it to 20% of my bonds, and kick up my equity allocation a bit.
"By singing in harmony from the same page of the same investing hymnal, the Diehards drown out market noise." | | --Jason Zweig, quoted in The Bogleheads' Guide to Investing

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Re: TIPS - Did you give up?

Post by Tigermoose » Thu Aug 25, 2016 2:24 pm

For fighting inflation, keep the following advice from Larry Swedroe in mind:

1. By taking a longer term TIPS, you can add some more equities to your portfolio.
2. By taking some commodities, you can increase the term length of your bonds.

So based on these two, I would say add longer term TIPS and then increase your equity and commodities exposure.
Institutions matter

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