100% TIPS and 0% in Nominal Bonds?

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neomutiny06
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100% TIPS and 0% in Nominal Bonds?

Post by neomutiny06 » Tue Dec 27, 2016 8:37 pm

Reading Larry Swedroe. And he writes "Philipp Illeditsch, author of the 2007 study "Idiosyncratic Inflation Risk and Inflation-Protected Bonds," concluded that because of the hedging benefits of TIPS, investors should hold, for the fixed-income portion of their portfolios, a 100 percent position in TIPS and a zero position in nominal bonds."

Do any Bogleheads own 100% of their fixed-income in TIPS?

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Sammy_M
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Re: 100% TIPS and 0% in Nominal Bonds?

Post by Sammy_M » Tue Dec 27, 2016 9:03 pm

If I consider my mortgage a negative nominal bond, I have close to 100% in TIPS.

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Re: 100% TIPS and 0% in Nominal Bonds?

Post by beardsworth » Tue Dec 27, 2016 9:10 pm

Entering "100% TIPS" in the Search box at the top of the forum page generates links to multiple previous threads on this subject.

https://www.google.com/search?sitesearc ... 00%25+TIPS

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Re: 100% TIPS and 0% in Nominal Bonds?

Post by neomutiny06 » Tue Dec 27, 2016 9:16 pm

beardsworth wrote:Entering "100% TIPS" in the Search box at the top of the forum page generates links to multiple previous threads on this subject.

https://www.google.com/search?sitesearc ... 00%25+TIPS
Yes, but I didn't find many from recent years.

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Re: 100% TIPS and 0% in Nominal Bonds?

Post by brad.clarkston » Tue Dec 27, 2016 9:23 pm

Nope I'm 50/50.

I do not consider my home as a investment. It's my home not a rental so mentally outside of my IPS.

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Diversification: A "Free Lunch"

Post by Taylor Larimore » Tue Dec 27, 2016 9:34 pm

neomutiny06 wrote:
Do any Bogleheads own 100% of their fixed-income in TIPS?
neomutiny06:

Holding 100% in any single type of bond could be a mistake. Diversification in bonds is similar to diversification in stocks--it is often called "the only free lunch in investing."[/url] This is the primary reason I choose Vanguard Total Bond Market Index Fund (now the largest fund in the world) for The Three-Fund Portfolio.

I might add that when bonds were needed during the 2008 bear market in stocks, our Total Bond Market Fund reduced our portfolio volatility more effectively than our former TIPS fund.

Happy Holidays!
Taylor
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Re: Diversification: A "Free Lunch"

Post by MorningstarFan » Tue Dec 27, 2016 9:45 pm

Taylor Larimore wrote:
Holding 100% in any single type of bond could be a mistake. Diversification in bonds is similar to diversification in stocks--it is often called "the only free lunch in investing."[/url] This is the primary reason I choose Vanguard Total Bond Market Index Fund (now the largest fund in the world) for The Three-Fund Portfolio.

Happy Holidays!
Taylor


I second to Taylor's idea. I do not believe in invest 100% in one narrow type of funds. Therefore, I do not recommend putting your money in one basket. I also want to note that TIPS are usually long-term bonds. There are different risks when you expose yourself with a higher percentage of your assets.

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Re: 100% TIPS and 0% in Nominal Bonds?

Post by basr518 » Tue Dec 27, 2016 9:45 pm

brad.clarkston wrote:Nope I'm 50/50.

I do not consider my home as a investment. It's my home not a rental so mentally outside of my IPS.
How is your home not an investment? I never understood that argument. Of course it's an investment. You buy the house with all cash included in the purchase price or get a mortgage at price x for the closing. 5, ten, thirty years later, the home is worth a different value. It could be lower than the price you paid or more likely higher. Either way how is this not an investment? You make/lose $ in the stock and bond markets the same way. Paint for your house is an investment. A new garage door is the same way. Buying hardwood floors v laminate ones, same idea. To me, it's a no Brainerd, real estate, even when it's your primary residence is an investment. Slow and steady just like bonds.
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Re: 100% TIPS and 0% in Nominal Bonds?

Post by FIREchief » Tue Dec 27, 2016 10:07 pm

neomutiny06 wrote:Do any Bogleheads own 100% of their fixed-income in TIPS?
Yes.
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: 100% TIPS and 0% in Nominal Bonds?

Post by Index Fan » Tue Dec 27, 2016 11:47 pm

Taylor nailed it.
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Re: Diversification: A "Free Lunch"

Post by Whakamole » Tue Dec 27, 2016 11:52 pm

Note that Vanguard Total Bond Index, like most total bond index funds, does not hold any TIPS.

Vanguard Core Bond (VCORX) does hold them.

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Re: Diversification: A "Free Lunch"

Post by patrick » Wed Dec 28, 2016 1:06 am

Taylor Larimore wrote:
neomutiny06 wrote:
Do any Bogleheads own 100% of their fixed-income in TIPS?
neomutiny06:

Holding 100% in any single type of bond could be a mistake. Diversification in bonds is similar to diversification in stocks--it is often called "the only free lunch in investing."[/url] This is the primary reason I choose Vanguard Total Bond Market Index Fund (now the largest fund in the world) for The Three-Fund Portfolio.

I might add that when bonds were needed during the 2008 bear market in stocks, our Total Bond Market Fund reduced our portfolio volatility more effectively than our former TIPS fund.

Happy Holidays!
Taylor


Diversification in stocks would help because some individual companies will probably do much better than others. For corporate bonds, diversification protects limits losses with a couple of them defaulting. But you wouldn't need such protection with treasuries unless you worry they will default too -- in which case other investments would probably also be in trouble. Diversifying within nominal bonds doesn't protect you from inflation risk which is shared by all the nominal bonds -- no safety there unless TIPS are used instead, and they only protect the portion of the portfolio in them.

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Re: 100% TIPS and 0% in Nominal Bonds?

Post by TinkerPDX » Wed Dec 28, 2016 1:27 am

basr518 wrote:
brad.clarkston wrote:Nope I'm 50/50.

I do not consider my home as a investment. It's my home not a rental so mentally outside of my IPS.
How is your home not an investment? I never understood that argument. Of course it's an investment. You buy the house with all cash included in the purchase price or get a mortgage at price x for the closing. 5, ten, thirty years later, the home is worth a different value. It could be lower than the price you paid or more likely higher. Either way how is this not an investment? You make/lose $ in the stock and bond markets the same way. Paint for your house is an investment. A new garage door is the same way. Buying hardwood floors v laminate ones, same idea. To me, it's a no Brainerd, real estate, even when it's your primary residence is an investment. Slow and steady just like bonds.
At least part of the answer is because ou buy/own it in order to "consume"/use it, and if you needed a little extra cash, you wouldn't sell it. At least for me, either of those alone makes it materially different from everything else in my portfolio.

Personally, I do consider my home an investment--but I do not count it within my IPS for those reasons. (Note even Brad didn't say his home isn't an investment - just that he doesn't consider it as one that falls within his IPS.

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Re: 100% TIPS and 0% in Nominal Bonds?

Post by Erwin » Wed Dec 28, 2016 1:53 am

If you are retired, where stable income is certainly the most important factor, an all TIPS bond portfolio (properly structured) is an excellent idea. This point has recently been discussed extensively in connection to DFA retirement funds that hold 100% TIPS following a liability driven strategy. The popular total bond strategy cannot deliver that commitment, thus in the view of many, it is not the proper tool in retirement.
Erwin

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Re: 100% TIPS and 0% in Nominal Bonds?

Post by FIREchief » Wed Dec 28, 2016 3:02 am

Erwin wrote:If you are retired, where stable income is certainly the most important factor, an all TIPS bond portfolio (properly structured) is an excellent idea. This point has recently been discussed extensively in connection to DFA retirement funds that hold 100% TIPS following a liability driven strategy. The popular total bond strategy cannot deliver that commitment, thus in the view of many, it is not the proper tool in retirement.
LMP = TIPS
RP = US TMI

The ultimate two "fund" portfolio. :sharebeer
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Re: Diversification: A "Free Lunch"

Post by beardsworth » Wed Dec 28, 2016 5:24 am

Whakamole wrote:Note that Vanguard Total Bond Index, like most total bond index funds, does not hold any TIPS.Vanguard Core Bond (VCORX) does hold them.
Well, VCORX can hold TIPS, but like any other actively managed fund, its composition at any given point in time is the result of management's current portfolio strategy.

Morningstar's most recent portfolio analysis of VCORX (09-30-16) shows less than 1% of fund assets in the "U.S. Treasury Inflation-Protected" category.

https://portfolios.morningstar.com/fund/summary?t=VCORX

I'm not commenting on VCORX as such, just pointing out that anyone seeking a certain reliable level of exposure to TIPS can't rely on an actively managed and changeable fund to meet that goal.

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Re: 100% TIPS and 0% in Nominal Bonds?

Post by Valuethinker » Wed Dec 28, 2016 5:31 am

neomutiny06 wrote:Reading Larry Swedroe. And he writes "Philipp Illeditsch, author of the 2007 study "Idiosyncratic Inflation Risk and Inflation-Protected Bonds," concluded that because of the hedging benefits of TIPS, investors should hold, for the fixed-income portion of their portfolios, a 100 percent position in TIPS and a zero position in nominal bonds."

Do any Bogleheads own 100% of their fixed-income in TIPS?
I don't know if this study considered deflation?

US TIPS are capital protected against inflation to an extent (you can't go below $100 redemption value at redemption). But deflation is still not good news (coupons are reduced, and say you bought them at $137 well you can lose $37 (up to)).

A diversified investor considers all scenarios, including the deflation one-- I entirely admit until about 5 years ago, I'd never seriously considered that latter, despite the 20 year+ evidence from Japan.

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Re: Diversification: A "Free Lunch"

Post by dcabler » Wed Dec 28, 2016 6:43 am

Taylor Larimore wrote:
neomutiny06 wrote:
Do any Bogleheads own 100% of their fixed-income in TIPS?
neomutiny06:

Holding 100% in any single type of bond could be a mistake. Diversification in bonds is similar to diversification in stocks--it is often called "the only free lunch in investing."[/url] This is the primary reason I choose Vanguard Total Bond Market Index Fund (now the largest fund in the world) for The Three-Fund Portfolio.

I might add that when bonds were needed during the 2008 bear market in stocks, our Total Bond Market Fund reduced our portfolio volatility more effectively than our former TIPS fund.

Happy Holidays!
Taylor


It's generally considered that the underperformance in TIPs relative to nominal bonds during 2008 was due to liquidity issues.

http://www.frbsf.org/economic-research/ ... ectations/

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Re: 100% TIPS and 0% in Nominal Bonds?

Post by Theoretical » Wed Dec 28, 2016 9:44 am

What about doing a split of TIPS and Nominal Brokered CDs? That way you hedge your bets on whether inflation is higher or lower than expected, and get the retail investor-only advantage of CD rates.

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Re: 100% TIPS and 0% in Nominal Bonds?

Post by brad.clarkston » Wed Dec 28, 2016 9:46 am

basr518 wrote:
brad.clarkston wrote:Nope I'm 50/50.

I do not consider my home as a investment. It's my home not a rental so mentally outside of my IPS.
How is your home not an investment? I never understood that argument. Of course it's an investment. You buy the house with all cash included in the purchase price or get a mortgage at price x for the closing. 5, ten, thirty years later, the home is worth a different value. It could be lower than the price you paid or more likely higher. Either way how is this not an investment? You make/lose $ in the stock and bond markets the same way. Paint for your house is an investment. A new garage door is the same way. Buying hardwood floors v laminate ones, same idea. To me, it's a no Brainerd, real estate, even when it's your primary residence is an investment. Slow and steady just like bonds.
It's just a difference in view points. Your looking at it as a math equation and I'm looking at it from the heart/family perspective. I'm never going to look at our current house as a money making opportunity (flip it for profit) I upgrade/fix it solely for our benefit not future gains.

Now if we were talking about a rental we do not live in then yes I'm all in with you.

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Re: 100% TIPS and 0% in Nominal Bonds?

Post by dbr » Wed Dec 28, 2016 9:46 am

To me it makes theoretical sense. I just can't emotionally commit to putting that large a fraction of assets in that one single narrow fraction of the fixed income market. Or, maybe better than emotional, it is a realization that diversification is a trump rule in investing. But that isn't because it is a free lunch, which would imply higher return for less risk; it is because one should diversify against black swans.

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Re: 100% TIPS and 0% in Nominal Bonds?

Post by brad.clarkston » Wed Dec 28, 2016 9:48 am

TinkerPDX wrote:
basr518 wrote:
brad.clarkston wrote:Nope I'm 50/50.

I do not consider my home as a investment. It's my home not a rental so mentally outside of my IPS.
How is your home not an investment? I never understood that argument. Of course it's an investment. You buy the house with all cash included in the purchase price or get a mortgage at price x for the closing. 5, ten, thirty years later, the home is worth a different value. It could be lower than the price you paid or more likely higher. Either way how is this not an investment? You make/lose $ in the stock and bond markets the same way. Paint for your house is an investment. A new garage door is the same way. Buying hardwood floors v laminate ones, same idea. To me, it's a no Brainerd, real estate, even when it's your primary residence is an investment. Slow and steady just like bonds.
At least part of the answer is because ou buy/own it in order to "consume"/use it, and if you needed a little extra cash, you wouldn't sell it. At least for me, either of those alone makes it materially different from everything else in my portfolio.

Personally, I do consider my home an investment--but I do not count it within my IPS for those reasons. (Note even Brad didn't say his home isn't an investment - just that he doesn't consider it as one that falls within his IPS.
Exactly, better than I put it.

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Re: 100% TIPS and 0% in Nominal Bonds?

Post by abuss368 » Wed Dec 28, 2016 7:46 pm

In my opinion and low cost and diversified short or intermediate term bond fund will provide safety and income to an investment portfolio.

That said, inflation bonds are a very small corner of the bond market. I believe 2% or less. I personally would not be comfortable holding only inflation bonds.
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Re: 100% TIPS and 0% in Nominal Bonds?

Post by FIREchief » Wed Dec 28, 2016 7:49 pm

abuss368 wrote:
That said, inflation bonds are a very small corner of the bond market. I believe 2% or less. I personally would not be comfortable holding only inflation bonds.
Assuming TIPS (i.e. full faith and credit of the United States), what would be your source of discomfort?
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Re: Diversification: A "Free Lunch"

Post by arcticpineapplecorp. » Wed Dec 28, 2016 8:26 pm

dcabler wrote:
Taylor Larimore wrote:
neomutiny06 wrote:
Do any Bogleheads own 100% of their fixed-income in TIPS?
neomutiny06:

Holding 100% in any single type of bond could be a mistake. Diversification in bonds is similar to diversification in stocks--it is often called "the only free lunch in investing."[/url] This is the primary reason I choose Vanguard Total Bond Market Index Fund (now the largest fund in the world) for The Three-Fund Portfolio.

I might add that when bonds were needed during the 2008 bear market in stocks, our Total Bond Market Fund reduced our portfolio volatility more effectively than our former TIPS fund.

Happy Holidays!
Taylor


It's generally considered that the underperformance in TIPs relative to nominal bonds during 2008 was due to liquidity issues.

http://www.frbsf.org/economic-research/ ... ectations/

For those who want to "see" what Taylor and dcabler are talking about, I've attached an image of TIPS (in blue below) vs Total Bond Market, hereafter referred to as TBM (in orange below). Looks like TIPS fund had higher "highs" than TBM, but then greater drops too (back down to where TBM was) in Oct 2008 and then again in June of 2013. The end result for both funds (over the past 10 years anyway) has been about the same turning $10,000 into $15,045.88 (in TIPS) and $15,135.18 (in TBM).

Image

Vanguard says the TIPS fund started in June 2000 (for index, not admiral shares) but morningstar goes back to that date even with VAIPX (TIPS admiral) and we see the following:

Image

TIPS fund did a little better over this period (June 2000 to present) turning $10,000 into $24,166.62 (TIPS) vs $22,293.94 (TBM). Past performance is no guarantee of future results.
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Re: 100% TIPS and 0% in Nominal Bonds?

Post by abuss368 » Wed Dec 28, 2016 8:56 pm

FIREchief wrote:
abuss368 wrote:
That said, inflation bonds are a very small corner of the bond market. I believe 2% or less. I personally would not be comfortable holding only inflation bonds.
Assuming TIPS (i.e. full faith and credit of the United States), what would be your source of discomfort?
For the intermediate Vanguard fund, the long duration and thus increased interest rate risk. Also TIPS did not hold value in the financial crisis. This has been attributed to Lehman Brothers. Do you have liquidity concerns in terms of TIPS?
Last edited by abuss368 on Wed Dec 28, 2016 10:12 pm, edited 1 time in total.
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Re: 100% TIPS and 0% in Nominal Bonds?

Post by oldcomputerguy » Wed Dec 28, 2016 9:15 pm

basr518 wrote: How is your home not an investment? I never understood that argument. Of course it's an investment. You buy the house with all cash included in the purchase price or get a mortgage at price x for the closing. 5, ten, thirty years later, the home is worth a different value. It could be lower than the price you paid or more likely higher. Either way how is this not an investment?
The change in market value of your home is only relevant if you plan at some point to sell. I owe nothing on my home, am happy here, and never plan to move again, so I do not care what the current market value of my home is, thus I do not consider my home as an investment.
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Re: 100% TIPS and 0% in Nominal Bonds?

Post by FIREchief » Wed Dec 28, 2016 9:57 pm

abuss368 wrote:
FIREchief wrote:
abuss368 wrote:
That said, inflation bonds are a very small corner of the bond market. I believe 2% or less. I personally would not be comfortable holding only inflation bonds.
Assuming TIPS (i.e. full faith and credit of the United States), what would be your source of discomfort?
For the intermediate Vanguard fund, the long duration and thus increased interest rate risk. Also TIPS did not hold value int he financial crisis. This has been attributed to Lehman Brothers. Do you have liquidity concerns in terms of TIPS?
Okay, I understand. I do not own any TIPS via a fund, only directly as individual securities. I see no reason to complicate things by owning TIPS via a mutual fund or, especially, an ETF.
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: 100% TIPS and 0% in Nominal Bonds?

Post by abuss368 » Wed Dec 28, 2016 10:13 pm

FIREchief wrote: Okay, I understand. I do not own any TIPS via a fund, only directly as individual securities. I see no reason to complicate things by owning TIPS via a mutual fund or, especially, an ETF.
Hi FIREchief,

We owned the Intermediate TIPS fund many years ago. As time went on and the yield declined we removed the fund and focused on simplicity by combining with Total Bond Index.

Best.
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Re: 100% TIPS and 0% in Nominal Bonds?

Post by Doc » Thu Dec 29, 2016 7:24 am

abuss368 wrote:Also TIPS did not hold value in the financial crisis. This has been attributed to Lehman Brothers. Do you have liquidity concerns in terms of TIPS?
YES

Our Treasury ladder was 100% TIPS in spring of '08. Our 100% perfectly safe, governmentt backed, inflation protected asset lost some 20% which we had to realize while rebalaning. Will the same thing occur in the next Lehman?
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Re: 100% TIPS and 0% in Nominal Bonds?

Post by plannerman » Thu Dec 29, 2016 8:14 am

Doc wrote:
abuss368 wrote:Also TIPS did not hold value in the financial crisis. This has been attributed to Lehman Brothers. Do you have liquidity concerns in terms of TIPS?
YES

Our Treasury ladder was 100% TIPS in spring of '08. Our 100% perfectly safe, governmentt backed, inflation protected asset lost some 20% which we had to realize while rebalaning. Will the same thing occur in the next Lehman?
"which we had to realize while rebalaning."

Which is a good reason not to holds 100% TIPs. I have about a 10-year TIPs ladder which I hold--not for return--but for "guaranteed" cash flow in retirement. I have no expectation of selling them before maturity. When TIPs dropped in price during the financial crisis, I bought more extending my ladder. I though it was an opportunity--not a problem.

plannerman

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Re: 100% TIPS and 0% in Nominal Bonds?

Post by nisiprius » Thu Dec 29, 2016 8:44 am

In theory, I don't see a problem with 100% TIPS. But I don't do it myself and don't think it's a great idea, just because I don't think it's a good idea to fixate on any single narrow asset class.

On the one hand
--warning, these are the kind of things people say when they have allowed themselves to get emotionally attached to an asset class--I see the 10% drop that occurred in 2008-2009, but I forgive it because it was immediately preceded by a 10% rise in 2007-2008. Thus, I think it's weird that people complain about the 2008-2009 behavior of TIPS and yet are fairly happy with the behavior of corporate bonds or even junk bonds. Second warning, you can get different "answers" by choosing different endpoints here. I happen to "like" the picture I get just accepting "last ten years" but there's personal bias here.

Anyway, you see that if what you wanted was safety during a crisis, Total Bond (blue) sailed right through; Morningstar's benchmark for intermediate-term bonds had an annoying 10% dip, and was closely matched by Fidelity's "investment-grade bond fund." If you compare these with Vanguard's TIPS fund (green) then, over this particular time period, I don't see that a 100%-TIPS investor has anything much to complain about.

Source

Image

Before analyzing these in too much detail, I suggest adding two more funds: junk bonds, which are (strangely to me) fairly popular in this forum, and stocks. Most of us don't hold 100% bonds (!) and I want bonds mostly as ballast, safety, to dilute the risk stocks which is too much for me.

Adding junk ("high-yield") bonds, VWEHX, dark red, and stocks (Vanguard Total Stock, aqua), I say that any of the investment grade bond funds did what I wanted my bond holdings to do. In hindsight you can say "might have been better to have this or that," but TIPS don't seem terrible.

Image

It seems to me that some people strain at the green TIPS gnats (VIPSX) and swallow the yellow and dark red camels (corporate bonds, junk bonds).

On the other hand: if you fasten on to some asset class because of some idea of how you expect it to behave, then you should take it seriously when it surprises you by behaving differently. The behavior of TIPS in 2007-2009 was surprising to me at the time, and I'm not sure I understand it after the fact. Clearly, despite being Treasuries, TIPS are not as liquid as nominal Treasuries, and have extra risk not compensated by return. This shows up in PortfolioVisualizer here in the form of a Sharpe ratio of 0.89 for Total Bond, VBMFX and only 0.64 for VIPSX. VIPSX had quite a bit higher return, but--in theory, over this time period, by this particular measurement--it wasn't "worth it" because of the higher volatility.
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Re: 100% TIPS and 0% in Nominal Bonds?

Post by nisiprius » Thu Dec 29, 2016 8:55 am

P.S. In 2004, Scott Burns suggested a lazy portfolio, and as is popular with people who create them he gave it a spiffy name, the "Margarita Portfolio." It was 1/3th each "total domestic stock index, one part international stock index, and one part inflation protected Treasury securities." I find this essay of his annoying and frankly irresponsible, and although he ends with a question and the words "stay tuned," I can't find that he ever revisited it. But, anyway, someone who writes on investment topics once suggested a portfolio in which the fixed income is 100% TIPS.

As I say I don't know if he ever revisited it, but we can, and since he published his suggestion in 2004 we'll compare results from 2004-present--here's the PortfolioVisualizer link.

Portfolio 1 is the Scott Burns "Margarita portfolio," 1/3rd each Total Stock (VTSMX), Total International (VGTSX), and Inflation-Protected Securities (VIPSX). Portfolio 2 is similar but with Total Bond (VBMFX, nominal bonds) in place of TIPS.

I say that since 2004 it would have made virtually no difference at all which you used. Notice the nearly identical Sharpe ratios, as well as all the other numbers.

The point is that one could have have imprudently indulged one's fan-like enthusiasm by going 100% TIPS without anything terrible happening.

Image

P.S. For all the people who are going to ask "well, would TIPS diversify nominal bonds, and would a 50/50 split be better than either by itself," I say go to PortfolioVisualizer yourself and see... but the answer is, no.
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Re: 100% TIPS and 0% in Nominal Bonds?

Post by beardsworth » Thu Dec 29, 2016 10:35 am

nisiprius, another thanks for all the perceptive, and common-sense, and interesting, analysis and commentary you so regularly bring to the Bogleheads forum.

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Re: 100% TIPS and 0% in Nominal Bonds?

Post by Doc » Thu Dec 29, 2016 11:15 am

plannerman wrote: Which is a good reason not to holds 100% TIPs. I have about a 10-year TIPs ladder which I hold--not for return--but for "guaranteed" cash flow in retirement. I have no expectation of selling them before maturity. When TIPs dropped in price during the financial crisis, I bought more extending my ladder. I though it was an opportunity--not a problem.
So where did you get the money to buy more TIPS? I was buying equities with whatever money I could scrounge. There was nothing left to buy TIPS at firesale prices.
nisiprius wrote:Anyway, you see that if what you wanted was safety during a crisis, Total Bond (blue) sailed right through; Morningstar's benchmark for intermediate-term bonds had an annoying 10% dip, and was closely matched by Fidelity's "investment-grade bond fund." If you compare these with Vanguard's TIPS fund (green) then, over this particular time period, I don't see that a 100%-TIPS investor has anything much to complain about.
Nisi you plotted everything but the kitchen sink and nominal bonds which is what this thread is about. :D

Imageupload a gif

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Re: 100% TIPS and 0% in Nominal Bonds?

Post by plannerman » Thu Dec 29, 2016 11:38 am

Doc wrote:So where did you get the money to buy more TIPS? I was buying equities with whatever money I could scrounge. There was nothing left to buy TIPS at firesale prices.
I was also buying equities at that time. I liquidated my allocation to HY and foreign bonds and cut my allocated to corporate bonds in half. That's where the funds came from. I can't tell you specifically which I used to buy TIPS and which I used to buy equities.

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Re: 100% TIPS and 0% in Nominal Bonds?

Post by nedsaid » Thu Dec 29, 2016 9:21 pm

neomutiny06 wrote:Reading Larry Swedroe. And he writes "Philipp Illeditsch, author of the 2007 study "Idiosyncratic Inflation Risk and Inflation-Protected Bonds," concluded that because of the hedging benefits of TIPS, investors should hold, for the fixed-income portion of their portfolios, a 100 percent position in TIPS and a zero position in nominal bonds."

Do any Bogleheads own 100% of their fixed-income in TIPS?
I think it is foolish to put 100% of fixed income in anything other than a broad index like US Total Bond Market, a low cost Investment Grade Intermediate Term Bond Fund, or a Intermediate Term Treasury Fund. TIPS were pretty volatile during the 2008-2009 financial crisis and that surprised me. I would not do more than 50%.
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Re: 100% TIPS and 0% in Nominal Bonds?

Post by FIREchief » Thu Dec 29, 2016 10:02 pm

I could care less about "volatility" in TIPS prices. I buy them to recoup my full purchasing power when they mature. Who gives a hoot about what they are worth in the interim? If I want risk/reward I put the next dollar in equities. If I want money to pay the rent 5, 10, 15, 20, 25, 30 years in the future, I buy TIPS. :sharebeer
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Re: 100% TIPS and 0% in Nominal Bonds?

Post by nisiprius » Thu Dec 29, 2016 10:19 pm

Doc wrote:...Nisi you plotted everything but the kitchen sink and nominal bonds which is what this thread is about. :D ...
In my first chart, three of the four curves (VBMFX, Morningstar's "intermediate-term bond" benchmark, and FBNDX) are for various kinds of investment-grade nominal bonds.
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Re: 100% TIPS and 0% in Nominal Bonds?

Post by slowmoney » Thu Dec 29, 2016 10:24 pm

Sometimes a big, endearing smile comes across my face.

Especially, when people find “free lunches” that nobody knows about. Yeah, go 100% TIPs. Those silly nominal bond people….they don’t even know about inflation and bonds. I wonder what would happened if all the nominal bond people “discovered” TIPs and sold all their nominal bonds and started buying TIPs. I assume that even CNBC would comment on the unbelievable spike in the “breakeven inflation” rate in one day. :mrgreen:

So, like, nominal bond prices would collapse and yields would spike. And yet, TIPs prices would skyrocket due to the crushing demand and their yields would go NEGATIVE yet again. An enormous smiling abyss would open between nominal bonds and TIPs regarding this trope “breakeven inflation” rate. Has 2016 taught us nothing about predictive models?

It does seem odd that US Treasury yields never experienced negative rates, in spite of being considered the most safe bonds available.
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Re: 100% TIPS and 0% in Nominal Bonds?

Post by jalbert » Fri Dec 30, 2016 1:10 am

I could care less about "volatility" in TIPS prices.... If I want money to pay the rent 5, 10, 15, 20, 25, 30 years in the future, I buy TIPS.
CPI-E is the inflation rate calculated by the US govt for the average retiree. TIPs are indexed to CPI-U. Housing has a higher weighting in CPI-E than it does in CPI-U, and housing is just one product sector in either measure. There is no guarantee that TIPs will keep pace with US housing prices.

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Re: 100% TIPS and 0% in Nominal Bonds?

Post by FIREchief » Fri Dec 30, 2016 1:18 am

jalbert wrote:
I could care less about "volatility" in TIPS prices.... If I want money to pay the rent 5, 10, 15, 20, 25, 30 years in the future, I buy TIPS.
CPI-E is the inflation rate calculated by the US govt for the average retiree. TIPs are indexed to CPI-U. Housing has a higher weighting in CPI-E than it does in CPI-U, and housing is just one product sector in either measure. There is no guarantee that TIPs will keep pace with US housing prices.
Okay, "pay the rent" was a bad choice of words. Fact is, I own my house free and clear and haven't paid rent for decades. I don't care if TIPS keep pace with housing prices. If inflation (however we measure it) cranks up, TIPS are still the best game in town.
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Re: 100% TIPS and 0% in Nominal Bonds?

Post by Erwin » Fri Dec 30, 2016 1:19 am

jalbert wrote:
I could care less about "volatility" in TIPS prices.... If I want money to pay the rent 5, 10, 15, 20, 25, 30 years in the future, I buy TIPS.
CPI-E is the inflation rate calculated by the US govt for the average retiree. TIPs are indexed to CPI-U. Housing has a higher weighting in CPI-E than it does in CPI-U, and housing is just one product sector in either measure. There is no guarantee that TIPs will keep pace with US housing prices.
How different are they?
Can you produce historical data comparing both inflation indicators?
Is there a better option?
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Re: 100% TIPS and 0% in Nominal Bonds?

Post by Erwin » Fri Dec 30, 2016 2:34 am

Doc wrote:
abuss368 wrote:Also TIPS did not hold value in the financial crisis. This has been attributed to Lehman Brothers. Do you have liquidity concerns in terms of TIPS?
YES

Our Treasury ladder was 100% TIPS in spring of '08. Our 100% perfectly safe, governmentt backed, inflation protected asset lost some 20% which we had to realize while rebalaning. Will the same thing loccur in the next Lehman?
Who cares a drop before maturity!
I suggest that you look at a bond ladder differently. Always keep them to maturity and either use to meet obligations (like in retirement) or continues the ladder by buying the year after the end of it.
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Re: 100% TIPS and 0% in Nominal Bonds?

Post by TinkerPDX » Fri Dec 30, 2016 2:49 am

15% of my bond allocation is in TIPS. Not sure that's the optimum amount, but its the amount I have chosen, so that's my story and I'm stickin' to it.

Of total fixed, I'm 50% total US bond (BND, SCHZ), 15% TIPS (SCHP, VTIP, I-Bonds at Treasury Direct), 35% ex-US (BNDX).

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Re: 100% TIPS and 0% in Nominal Bonds?

Post by telemark » Fri Dec 30, 2016 7:25 am

A home is illiquid, undiversified, generates no income, is subject to property tax and requires maintenance. Other than that, if you want to consider it an investment, go right ahead.

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Re: 100% TIPS and 0% in Nominal Bonds?

Post by Doc » Fri Dec 30, 2016 9:22 am

nisiprius wrote:
Doc wrote:...Nisi you plotted everything but the kitchen sink and nominal bonds which is what this thread is about. :D ...
In my first chart, three of the four curves (VBMFX, Morningstar's "intermediate-term bond" benchmark, and FBNDX) are for various kinds of investment-grade nominal bonds.
Sorry Nisi, my bad. When I think of TIPS I always think that since the "T" is for Treasury that they are compared with nominal Treasuries.

How about "Nisi you plotted everything but the kitchen sink and nominal [Treasury] bonds which is what this thread is about".
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Re: 100% TIPS and 0% in Nominal Bonds?

Post by Doc » Fri Dec 30, 2016 9:42 am

Erwin wrote:Who cares a drop before maturity!
I suggest that you look at a bond ladder differently. Always keep them to maturity and either use to meet obligations (like in retirement) or continues the ladder by buying the year after the end of it.
I would suggest that most of the 52 distinct TIPS mutual fund and their thousand (millions?) of investors do not hold bonds to maturity.

There is nothing wrong with having a Liability Matching Portfolio (LMP) using TIPS if that is what fits your needs but I do not belive that the LMP model is the norm.
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Re: 100% TIPS and 0% in Nominal Bonds?

Post by jocdoc » Fri Dec 30, 2016 10:27 am

Margaritaville portfolio can be followed at marketwatch; 100% tips
http://www.marketwatch.com/lazyportfoli ... aritaville
Data as of 12/29/16
FundAlloc1-yr rtn3-yr ann. rtns5-yr ann. rtns10-yr ann. rtnsVanguard Total Stock Market Index Fund;Investor
34%
12.37% 8.56% 14.75% 7.11% Vanguard Inflation-Protected Securities Fund;Investor
33%
4.04% 2.00% 0.61% 4.07% Vanguard Total International Stock Index Fund;Investor
33%
3.23% -1.44% 5.60% 0.78% Total Portfolio6.60% 3.10% 7.06% 4.02% S&P 50011.85% 9.18% 14.92%

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Re: 100% TIPS and 0% in Nominal Bonds?

Post by nedsaid » Fri Dec 30, 2016 12:39 pm

FIREchief wrote:I could care less about "volatility" in TIPS prices. I buy them to recoup my full purchasing power when they mature. Who gives a hoot about what they are worth in the interim? If I want risk/reward I put the next dollar in equities. If I want money to pay the rent 5, 10, 15, 20, 25, 30 years in the future, I buy TIPS. :sharebeer
I am a long term investor too and I have actually added to my TIPS a bit. But I count on bonds to be stable and I was quite surprised to see TIPS fall by 10% or more during the financial crisis while nominal treasuries surged! I was very surprised by this. Lesson learned.

A person in retirement might have a different view about bond volatility than you do. A 10% drop in a bond portfolio would at the very least raise an eyebrow. More likely, it would cause a lot of discomfort. I would not do a 100% TIPS fixed income portfolio.
A fool and his money are good for business.

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