Value of having TIPS funds?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
cresive
Posts: 171
Joined: Sat Nov 26, 2016 12:12 pm
Location: Virginia, USA
Contact:

Value of having TIPS funds?

Post by cresive » Thu Apr 06, 2017 3:17 pm

Background: I have almost all of my retirement assets in 400-level accounts and a Roth IRA. I am hoping to retire in about 7 years, and am looking for ways to minimize any sequence risk to my portfolio. To help with this process, I have been researching how to build a bond ladder to rely on as ballast for market instability. Through listening to podcasts, and researching the archives to this group (great stuff!), I have decided to abandon the bond ladder and remain in my bond funds. I don’t wish to rehash the bond ladder/bond fund debate, but for my situation, the bond funds are more suitable.

One aspect of relying on bond funds is the decreased sensitivity to rising interest rates. The way I understand it, that through dollar cost averaging and re-investing coupon payments, I am able to more easily take advantage of new bonds, with the higher returns, as they come online. This, presumably, decreases the interest rate issues with buying bonds in a low interest rate environment.

This brings me to my main question: If bond funds have less sensitivity to rising rates (versus owning a bond), do I need to have a TIPS bond fund in my portfolio? What advantage would the TIPS fund give me over the Barclay’s-based passive fund that I have. I bought into the TIPS funds because of the potential for interest rates to rise. However, the TIPS funds have a lower return and a higher E/R than a basic bond fund. If the increased expenses are not balanced by some advantage, I plan to sell off my TIPS funds and move the money to the regular bond fund.

Do you have any thoughts on my action question, or my reasoning on this topic?

learning_head
Posts: 836
Joined: Sat Apr 10, 2010 6:02 pm

Re: Value of having TIPS funds?

Post by learning_head » Thu Apr 06, 2017 3:49 pm

cresive wrote:One aspect of relying on bond funds is the decreased sensitivity to rising interest rates.
IMO, your premise is wrong: bond fund of duration X years and individual bond that matures in X years should have either
- same sensitivity to interest rates, or
- some would argue individual bond would have less sensitivity if you for sure hold it to maturity and don't sell along the way (again, this is arguably true or false)
... but I have not heard anyone saying bond fund would have less sensitivity.

As for whether to own TIPS fund vs Nominal bond fund, the former protects you against unexpected inflation while the latter protects you more from unexpected deflation. To clarify: "expected"/"unexpected" is based on the "expected" inflation which is the difference between the two payouts. Also, TIPS fund is sensitive to real interest rates, while nominal fund is sensitive to nominal interest rates.

Another potential difference: corporations issue nominal bonds, not inflation protected bonds. So your nominal bond fund may have some of those higher-paying and higher-default-risk bonds vs just having nominal Treasury bonds. Profile / prospectus of your fund would tell you percentage and quality of corporate bonds it contains.

User avatar
abuss368
Posts: 12832
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: Value of having TIPS funds?

Post by abuss368 » Thu Apr 06, 2017 10:18 pm

I would consider keeping it simple and effective with Total Bond Index.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

User avatar
abuss368
Posts: 12832
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: Value of having TIPS funds?

Post by abuss368 » Thu Apr 06, 2017 11:21 pm

We sold the Vanguard TIPS fund many years ago and consolidated with Total Bond. This has worked very well and we are pleased with both the results and simplicity.

In my opinion any low cost and diversified short or intermediate bond fund will provide safety and income to an investment portfolio.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

User avatar
TheTimeLord
Posts: 5284
Joined: Fri Jul 26, 2013 2:05 pm

Re: Value of having TIPS funds?

Post by TheTimeLord » Thu Apr 06, 2017 11:24 pm

I understand holding individual TIPS used in liability matching not as clear on the value of TIPS funds.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

taguscove
Posts: 135
Joined: Sun Dec 11, 2016 6:49 pm

Re: Value of having TIPS funds?

Post by taguscove » Thu Apr 06, 2017 11:45 pm

TIPS are safer than corresponding nominal bonds and offer great portfolio diversification. As a downside, TIPS offer very low return to match the low risk.

TIPS perform best when inflation is above expectations and growth is below expectations.
Nominal bonds perform best when inflation is below expectations and growth is below expectations

Real interest rate
+ inflation expectation (i.e. breakeven inflation)
= nominal interest rates

Buying a 10 year us treasury exposes you to nominal interest rate risk.

Buying a 10 year us TIPS exposes you only to real interest risk because changes in inflation expectations are offset.

Valuethinker
Posts: 35949
Joined: Fri May 11, 2007 11:07 am

Re: Value of having TIPS funds?

Post by Valuethinker » Fri Apr 07, 2017 4:50 am

taguscove wrote:TIPS are safer than corresponding nominal bonds and offer great portfolio diversification. As a downside, TIPS offer very low return to match the low risk.

TIPS perform best when inflation is above expectations and growth is below expectations.
Nominal bonds perform best when inflation is below expectations and growth is below expectations

Real interest rate
+ inflation expectation (i.e. breakeven inflation)
= nominal interest rates

Buying a 10 year us treasury exposes you to nominal interest rate risk.

Buying a 10 year us TIPS exposes you only to real interest risk because changes in inflation expectations are offset.
This is all good stuff, and what I believed, too.

However empirical data seems to show a TIPS fund is *more* volatile than a conventional US Treasury Bond Fund. I haven't seen analysis which determines whether this is simply about long duration (with TIPS funds, more of the payout comes later in the life of the bond, and at maturity) or whether real interest rates are actually more volatile than nominal ones.

Another thing in the data was the extraordinary volatility of TIPS post Lehman. I think that is now widely understood to be hedge funds selling collateral, TIPS are illiquid, those sales caused prices to fall to (in retrospect) "bargain" levels. That burst of volatility might make the data on volatility overall be a poor guide to future volatility.

I still think TIPS are, under the right circumstances, an excellent investment because of their real return characteristic-- the hedge against unexpected inflation. However Vanguard produced one paper which showed that only the Short Term TIPS correlated well with inflation (and they then introduced a ST TIPS fund).

So I think we need to qualify the overall comments.

grok87
Posts: 8368
Joined: Tue Feb 27, 2007 9:00 pm

Re: Value of having TIPS funds?

Post by grok87 » Fri Apr 07, 2017 7:19 am

Can you explain a bit more about the higher expense ratio. Is it some crazy pimcco fund?
Keep calm and Boglehead on. KCBO.

zuma
Posts: 378
Joined: Thu Dec 29, 2016 12:15 pm

Re: Value of having TIPS funds?

Post by zuma » Fri Apr 07, 2017 7:27 am

The Schwab TIPS ETF, which tracks the Bloomberg Barclays U.S. TIPS Index, has an expense ratio of 0.05%.

https://www.schwabfunds.com/public/csim ... ymbol=SCHP

We're using this in combination with Total Bond Market (BND) with a 50/50 split. I look at our TIPS allocation as an extra layer of protection that comes with the risk/cost of potentially lower returns if inflation stays within expectations. We also have a long time horizon and can tolerate the volatility that comes with the TIPS fund.

cresive
Posts: 171
Joined: Sat Nov 26, 2016 12:12 pm
Location: Virginia, USA
Contact:

Re: Value of having TIPS funds?

Post by cresive » Fri Apr 07, 2017 9:25 am

zuma wrote:The Schwab TIPS ETF, which tracks the Bloomberg Barclays U.S. TIPS Index, has an expense ratio of 0.05%.

https://www.schwabfunds.com/public/csim ... ymbol=SCHP

We're using this in combination with Total Bond Market (BND) with a 50/50 split. I look at our TIPS allocation as an extra layer of protection that comes with the risk/cost of potentially lower returns if inflation stays within expectations. We also have a long time horizon and can tolerate the volatility that comes with the TIPS fund.

Thanks. And thanks to everyone who chimed in. I have learned a lot.

slowmoney
Posts: 167
Joined: Tue Dec 28, 2010 4:41 pm
Location: Louisiana Purchase

Re: Value of having TIPS funds?

Post by slowmoney » Sat Apr 08, 2017 8:41 am

Karen Wallace of Morningstar wrote in “Handy Weapons in an Inflation Fighter's Arsenal” (please feel free to read her article) :
This is important to note because although TIPS mutual funds and ETFs hold bonds whose principal values adjust along with inflation, the funds themselves don't have a maturity date. Therefore, there is no explicit guarantee of principal protection; it's possible that you could lose money in a TIPS mutual fund over the course of your holding period.
Year………VIPSX…………..............VBMFX…………..........I-bonds….…….......…Inflation
2006……….0.43%.....................4.27%....................4.52%...................3.20%
2007………11.59%....................6.92%....................4.08%...................2.80%
2008………-2.85%....................5.05%.....................2.76%...................3.80%
2009………10.80%....................5.93%....................2.86%...................-0.40%
2010……….6.17%.....................6.42%....................2.96%...................1.60%
2011……….13.24%...................7.56%....................2.76%...................3.20%
2012……….6.78%.....................4.05%....................2.76%...................2.10%
2013……….-8.92%..................-2.26%.....................2.76%...................1.50%
2014……….3.83%.....................5.76%....................2.86%....................1.60%
2015………-1.83%....................0.30%.....................2.76%....................0.10%

So, TIPS had a 40% FAILURE rate against inflation over the past decade in 2006, 2008, 2013 and 2015. Wow…that’s some kind of inflation hedge. The worst performer in the table!!

Nominal bonds had only a 10% failure rate, in the year 2013. I-bonds lost out to inflation in 2008 and 2011 for a 20% failure rate.

I realize this is only one ten year time period. Going forward it seems unlikely that, given TIPS historical results, TIPS will suddenly stop LOSING to inflation. It is likely that TIPS will continue to LOSE to inflation given the varieties of any year.

Every time I go down the TIPS rabbit hole, I find out different hideous and terrible things about TIPS (Terrible Inflictors of Pain). Slowmoney and Abuss368 and a few other Bogleheads are unconvinced about TIPS. Morningstar, to their credit, seems to have moved to a more objective stance regarding TIPS.
Information is more valuable sold than used. - Fischer Black (1938-1995)

User avatar
TheTimeLord
Posts: 5284
Joined: Fri Jul 26, 2013 2:05 pm

Re: Value of having TIPS funds?

Post by TheTimeLord » Sat Apr 08, 2017 9:34 am

slowmoney wrote:Karen Wallace of Morningstar wrote in “Handy Weapons in an Inflation Fighter's Arsenal” (please feel free to read her article) :
This is important to note because although TIPS mutual funds and ETFs hold bonds whose principal values adjust along with inflation, the funds themselves don't have a maturity date. Therefore, there is no explicit guarantee of principal protection; it's possible that you could lose money in a TIPS mutual fund over the course of your holding period.
Year………VIPSX…………..............VBMFX…………..........I-bonds….…….......…Inflation
2006……….0.43%.....................4.27%....................4.52%...................3.20%
2007………11.59%....................6.92%....................4.08%...................2.80%
2008………-2.85%....................5.05%.....................2.76%...................3.80%
2009………10.80%....................5.93%....................2.86%...................-0.40%
2010……….6.17%.....................6.42%....................2.96%...................1.60%
2011……….13.24%...................7.56%....................2.76%...................3.20%
2012……….6.78%.....................4.05%....................2.76%...................2.10%
2013……….-8.92%..................-2.26%.....................2.76%...................1.50%
2014……….3.83%.....................5.76%....................2.86%....................1.60%
2015………-1.83%....................0.30%.....................2.76%....................0.10%

So, TIPS had a 40% FAILURE rate against inflation over the past decade in 2006, 2008, 2013 and 2015. Wow…that’s some kind of inflation hedge. The worst performer in the table!!

Nominal bonds had only a 10% failure rate, in the year 2013. I-bonds lost out to inflation in 2008 and 2011 for a 20% failure rate.

I realize this is only one ten year time period. Going forward it seems unlikely that, given TIPS historical results, TIPS will suddenly stop LOSING to inflation. It is likely that TIPS will continue to LOSE to inflation given the varieties of any year.

Every time I go down the TIPS rabbit hole, I find out different hideous and terrible things about TIPS (Terrible Inflictors of Pain). Slowmoney and Abuss368 and a few other Bogleheads are unconvinced about TIPS. Morningstar, to their credit, seems to have moved to a more objective stance regarding TIPS.
I love and use TIPS, added some just this week, but I don't like or hold TIPS mutual funds. The role I prefer for TIPS as insurance against a specific liability on a specific date not as a general asset class. That said, personally I would max out I Bonds before buying individual TIPS because I prefer their flexibility.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

zuma
Posts: 378
Joined: Thu Dec 29, 2016 12:15 pm

Re: Value of having TIPS funds?

Post by zuma » Sat Apr 08, 2017 9:51 am

slowmoney wrote: So, TIPS had a 40% FAILURE rate against inflation over the past decade in 2006, 2008, 2013 and 2015. Wow…that’s some kind of inflation hedge. The worst performer in the table!!
Here's another set of numbers based on an arbitrary date range which doesn't really prove anything.

Total Return % (04/07/2017) / 15-year
VIPSX = 4.97%
VBMFX = 4.32%
(Morningstar)

User avatar
TheTimeLord
Posts: 5284
Joined: Fri Jul 26, 2013 2:05 pm

Re: Value of having TIPS funds?

Post by TheTimeLord » Sat Apr 08, 2017 10:11 am

zuma wrote:
slowmoney wrote: So, TIPS had a 40% FAILURE rate against inflation over the past decade in 2006, 2008, 2013 and 2015. Wow…that’s some kind of inflation hedge. The worst performer in the table!!
Here's another set of numbers based on an arbitrary date range which doesn't really prove anything.

Total Return % (04/07/2017) / 15-year
VIPSX = 4.97%
VBMFX = 4.32%
(Morningstar)
I guess this illustrates before starting a job you need to figure out if you need a hammer, screwdriver or shovel. Each tool has a specific purpose it is designed for and when used properly it will perform that purpose, try to use it for something it wasn't designed for and things aren't nearly as efficient.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

caliguy1
Posts: 72
Joined: Fri Jan 15, 2016 9:25 pm

Re: Value of having TIPS funds?

Post by caliguy1 » Sat Apr 08, 2017 10:20 am

slowmoney wrote:Karen Wallace of Morningstar wrote in “Handy Weapons in an Inflation Fighter's Arsenal” (please feel free to read her article) :
This is important to note because although TIPS mutual funds and ETFs hold bonds whose principal values adjust along with inflation, the funds themselves don't have a maturity date. Therefore, there is no explicit guarantee of principal protection; it's possible that you could lose money in a TIPS mutual fund over the course of your holding period.
Year………VIPSX…………..............VBMFX…………..........I-bonds….…….......…Inflation
2006……….0.43%.....................4.27%....................4.52%...................3.20%
2007………11.59%....................6.92%....................4.08%...................2.80%
2008………-2.85%....................5.05%.....................2.76%...................3.80%
2009………10.80%....................5.93%....................2.86%...................-0.40%
2010……….6.17%.....................6.42%....................2.96%...................1.60%
2011……….13.24%...................7.56%....................2.76%...................3.20%
2012……….6.78%.....................4.05%....................2.76%...................2.10%
2013……….-8.92%..................-2.26%.....................2.76%...................1.50%
2014……….3.83%.....................5.76%....................2.86%....................1.60%
2015………-1.83%....................0.30%.....................2.76%....................0.10%

So, TIPS had a 40% FAILURE rate against inflation over the past decade in 2006, 2008, 2013 and 2015. Wow…that’s some kind of inflation hedge. The worst performer in the table!!

Nominal bonds had only a 10% failure rate, in the year 2013. I-bonds lost out to inflation in 2008 and 2011 for a 20% failure rate.

I realize this is only one ten year time period. Going forward it seems unlikely that, given TIPS historical results, TIPS will suddenly stop LOSING to inflation. It is likely that TIPS will continue to LOSE to inflation given the varieties of any year.

Every time I go down the TIPS rabbit hole, I find out different hideous and terrible things about TIPS (Terrible Inflictors of Pain). Slowmoney and Abuss368 and a few other Bogleheads are unconvinced about TIPS. Morningstar, to their credit, seems to have moved to a more objective stance regarding TIPS.
I view medium to long term duration TIPS as more of a hedge against stagflation because when the economy is bad real rates are more likely to go down, which increases the value of your longer duration TIPS. I view short term duration TIPS as more of a hedge against short term inflation, whether due to stagflation or inflation related to growth. I prefer medium to long term duration TIPS because there are not many other asset classes that perform like that other than gold but gold is a lot more volatile.

grok87
Posts: 8368
Joined: Tue Feb 27, 2007 9:00 pm

Re: Value of having TIPS funds?

Post by grok87 » Sat Apr 08, 2017 5:25 pm

slowmoney wrote:Karen Wallace of Morningstar wrote in “Handy Weapons in an Inflation Fighter's Arsenal” (please feel free to read her article) :
This is important to note because although TIPS mutual funds and ETFs hold bonds whose principal values adjust along with inflation, the funds themselves don't have a maturity date. Therefore, there is no explicit guarantee of principal protection; it's possible that you could lose money in a TIPS mutual fund over the course of your holding period.
Year………VIPSX…………..............VBMFX…………..........I-bonds….…….......…Inflation
2006……….0.43%.....................4.27%....................4.52%...................3.20%
2007………11.59%....................6.92%....................4.08%...................2.80%
2008………-2.85%....................5.05%.....................2.76%...................3.80%
2009………10.80%....................5.93%....................2.86%...................-0.40%
2010……….6.17%.....................6.42%....................2.96%...................1.60%
2011……….13.24%...................7.56%....................2.76%...................3.20%
2012……….6.78%.....................4.05%....................2.76%...................2.10%
2013……….-8.92%..................-2.26%.....................2.76%...................1.50%
2014……….3.83%.....................5.76%....................2.86%....................1.60%
2015………-1.83%....................0.30%.....................2.76%....................0.10%

So, TIPS had a 40% FAILURE rate against inflation over the past decade in 2006, 2008, 2013 and 2015. Wow…that’s some kind of inflation hedge. The worst performer in the table!!

Nominal bonds had only a 10% failure rate, in the year 2013. I-bonds lost out to inflation in 2008 and 2011 for a 20% failure rate.

I realize this is only one ten year time period. Going forward it seems unlikely that, given TIPS historical results, TIPS will suddenly stop LOSING to inflation. It is likely that TIPS will continue to LOSE to inflation given the varieties of any year.

Every time I go down the TIPS rabbit hole, I find out different hideous and terrible things about TIPS (Terrible Inflictors of Pain). Slowmoney and Abuss368 and a few other Bogleheads are unconvinced about TIPS. Morningstar, to their credit, seems to have moved to a more objective stance regarding TIPS.
Thanks for the data, very interesting.

So for the 10 years you posted i got these averages
Vbmfx: 4.35% cagr
Vipsx: 3.7% cagr
Inflation 1.95% (average)

Your point about the volatility of the tips fund is noted. But for the 10 year period i think the results were largely as expected.
I.e. In a period of quiet inflation nominal bonds outperformed. And also the credit and other risks in vbmfx larely paid off. Yes the period contains the credit crisis which had bankruptcies. But the fed rode to the rescue and calamity was averted.

I am a big believer in tips as a hedge against a stagflation scenario. But i think one should also hold nominal treasuries as well to hedge against deflation. Basically i follow david swensen's advice to put your bonds in treasuries and tips/ibonds and skip corporates, mbs, etc.
take your risk on the equity side!
Keep calm and Boglehead on. KCBO.

Theoretical
Posts: 1421
Joined: Tue Aug 19, 2014 10:09 pm

Re: Value of having TIPS funds?

Post by Theoretical » Sat Apr 08, 2017 6:18 pm

slowmoney wrote:Karen Wallace of Morningstar wrote in “Handy Weapons in an Inflation Fighter's Arsenal” (please feel free to read her article) :
This is important to note because although TIPS mutual funds and ETFs hold bonds whose principal values adjust along with inflation, the funds themselves don't have a maturity date. Therefore, there is no explicit guarantee of principal protection; it's possible that you could lose money in a TIPS mutual fund over the course of your holding period.
Year………VIPSX…………..............VBMFX…………..........I-bonds….…….......…Inflation
2006……….0.43%.....................4.27%....................4.52%...................3.20%
2007………11.59%....................6.92%....................4.08%...................2.80%
2008………-2.85%....................5.05%.....................2.76%...................3.80%
2009………10.80%....................5.93%....................2.86%...................-0.40%
2010……….6.17%.....................6.42%....................2.96%...................1.60%
2011……….13.24%...................7.56%....................2.76%...................3.20%
2012……….6.78%.....................4.05%....................2.76%...................2.10%
2013……….-8.92%..................-2.26%.....................2.76%...................1.50%
2014……….3.83%.....................5.76%....................2.86%....................1.60%
2015………-1.83%....................0.30%.....................2.76%....................0.10%

So, TIPS had a 40% FAILURE rate against inflation over the past decade in 2006, 2008, 2013 and 2015. Wow…that’s some kind of inflation hedge. The worst performer in the table!!

Nominal bonds had only a 10% failure rate, in the year 2013. I-bonds lost out to inflation in 2008 and 2011 for a 20% failure rate.

I realize this is only one ten year time period. Going forward it seems unlikely that, given TIPS historical results, TIPS will suddenly stop LOSING to inflation. It is likely that TIPS will continue to LOSE to inflation given the varieties of any year.

Every time I go down the TIPS rabbit hole, I find out different hideous and terrible things about TIPS (Terrible Inflictors of Pain). Slowmoney and Abuss368 and a few other Bogleheads are unconvinced about TIPS. Morningstar, to their credit, seems to have moved to a more objective stance regarding TIPS.
Actually, looking at your data, the TIPS seem to have a one year delayed reaction to the inflation news, rather than a failure rate. For example, 2007 they bite with a vengeance after "failing" in 2006. Then they underperform in 2008, not due to inflation, but because the asset class got subjected to institutional investors having to sell TIPS to simply keep the lights on. But look at the 2009-11 performance, where the fears of inflation due to quantitative easing were in full swing. After a huge runup like this, it's not surprising that there'd be a drop in 2013 when inflation was even lower. They bounced back in 2016 and then they again outperformed inflation and BND in 2016.

2016: VIPSX - 4.52% VBMFX - 2.50% - Inflation - 0.9%

It would appear that there's a bit of a momentum factor going on here in that it takes a little while for the market to digest news of higher inflation, but when it does, it keeps going for awhile.

slowmoney
Posts: 167
Joined: Tue Dec 28, 2010 4:41 pm
Location: Louisiana Purchase

Re: Value of having TIPS funds?

Post by slowmoney » Sat Apr 08, 2017 8:45 pm

grok87 wrote:
I am a big believer in tips as a hedge against a stagflation scenario. But i think one should also hold nominal treasuries as well to hedge against deflation. Basically i follow david swensen's advice to put your bonds in treasuries and tips/ibonds and skip corporates, mbs, etc.
take your risk on the equity side!
Yes, I agree to take risk on equity side.

IMO, TIPS have been sold as an inflation hedge. Something like, "If you hold TIPS, you cannot loose to inflation." Clearly the record shows this is not the case.

In general, hedges are expensive and have a tendency fail to deliver when they are needed.
Information is more valuable sold than used. - Fischer Black (1938-1995)

User avatar
abuss368
Posts: 12832
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: Value of having TIPS funds?

Post by abuss368 » Sat Apr 08, 2017 9:23 pm

slowmoney wrote:
Yes, I agree to take risk on equity side.

IMO, TIPS have been sold as an inflation hedge. Something like, "If you hold TIPS, you cannot loose to inflation." Clearly the record shows this is not the case.

In general, hedges are expensive and have a tendency fail to deliver when they are needed.
Hi slowmoney -

I agree and nice post. I thought TIPS were a low risk investment especially considering they are Treasury bonds. They have been anything but that. The dropped during the financial crisis when they were needed most. The intermediate fund has a duration of 8 or 9 and thus is volatile.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

RetiredinKaty
Posts: 112
Joined: Mon Sep 09, 2013 6:52 pm

Re: Value of having TIPS funds?

Post by RetiredinKaty » Sat Apr 08, 2017 9:31 pm

I think this is key to why some people see no value in TIPS funds and others like me see a lot of value in them. The posts by slowmoney suggest an expectation of a short duration, clearly indicated by the suggestion that every year the fund loses to inflation is a “failure”. The posts by grok87 show an expectation of performance over a decade, much more in line with the fund’s duration of 7 to 8 years.

Vanguard did a study concluding that a short TIPS fund would do a better job tracking inflation month to month and year to year, and clearly this is what most investors are comfortable with. But why is it important to track inflation month to month or year to year? A 30 year TIPS ladder has a duration of 13 to 14 years (and the actual price of the ladder is very volatile, although one doesn’t care so much after the purchase.)

We expect low volatility from nominal bonds. We accept high volatility from stocks in order to get growth. Why is the moderate volatility of intermediate TIPS so objectionable, if the TIPS can protect the portfolio from serious inflation over the long term?

zuma
Posts: 378
Joined: Thu Dec 29, 2016 12:15 pm

Re: Value of having TIPS funds?

Post by zuma » Sat Apr 08, 2017 11:47 pm

abuss368 wrote:
slowmoney wrote:
Yes, I agree to take risk on equity side.

IMO, TIPS have been sold as an inflation hedge. Something like, "If you hold TIPS, you cannot loose to inflation." Clearly the record shows this is not the case.

In general, hedges are expensive and have a tendency fail to deliver when they are needed.
Hi slowmoney -

I agree and nice post. I thought TIPS were a low risk investment especially considering they are Treasury bonds. They have been anything but that. The dropped during the financial crisis when they were needed most. The intermediate fund has a duration of 8 or 9 and thus is volatile.

Best.
TIPS are a hedge against unexpected inflation. This is a detail that seems to get lost whenever the topic comes up.

TIPS funds are not risk-free investments. They are a kind of insurance (loosely speaking) that you might have to pay for (in negative yield) in order to protect against something that may never happen.

As Rick Ferri explains:
An inflation expectation is part of the expected return of all asset classes. The expected returns of corporate bonds, common stocks, and real estate all have an inflation expectation. TIPS also have an inflation expectation, and that expectation may be higher than the yield of the fund. This is why most TIP funds have a negative yield currently. You’ll actually be paying to own TIPS while you’re waiting for inflation.

Paying the government to own TIPS while you wait for inflation may sound like a crazy idea, but there’s a potential benefit. The par value of the bonds will automatically adjust higher if there’s an “unexpected” jump in inflation, which means you’ll earn more interest income and the bonds will be worth more at maturity.
And John W. Hollyer:
“Investors certainly should not judge TIPS by taking a backward view of how they have performed,” said John W. Hollyer, a manager of the $35 billion Vanguard Inflation-Protected Securities fund, which returned 3.4 percent in the second quarter. “They are not a risk-free asset because they have a high sensitivity to changes in interest rates. But if inflation makes a sudden move upward, you will be compensated, and that’s important.”
And Christine Benz:
But even if TIPS don't outperform in the short term, a bigger reason to consider them is as a strategic hedge against unexpected inflation increases. And it's better to add that protection when the securities are undervalued--or at least reasonably priced--versus doing so when inflation is heating up and demand for inflation hedges is high.
(Emphasis mine.)

TIPS funds can be volatile and are subject to interest rate risk. They are better suited for investors with a long time horizon. This should not be a surprise, especially when considering a fund like VIPSX with an average duration of 8 years.

Stock funds are also volatile, but investors somehow find a way to use them effectively in their portfolios.

I see the same arguments repeatedly by people who want a TIPS fund to do something it's clearly not designed to do. Then they blame the investment itself for not meeting their (unrealistic) expectations.

As TheTimeLord pointed out, understand the tool you need for the job. I would add that if you mistakenly choose a hammer instead of a shovel, don't blame the hammer.
Last edited by zuma on Sun Apr 09, 2017 5:26 am, edited 1 time in total.

zuma
Posts: 378
Joined: Thu Dec 29, 2016 12:15 pm

Re: Value of having TIPS funds?

Post by zuma » Sun Apr 09, 2017 4:49 am

RetiredinKaty wrote: We expect low volatility from nominal bonds. We accept high volatility from stocks in order to get growth. Why is the moderate volatility of intermediate TIPS so objectionable, if the TIPS can protect the portfolio from serious inflation over the long term?
It seems that many Bogleheads will not tolerate a moderate-to-high level of volatility in their fixed income allocation. "Bonds are for safety" and "Take your risk on the equity side" are reasonable mantras and many investors are wise to follow them. But in my opinion they shouldn't be treated as universal truths. As with most investing decisions, it depends on your particular situation.

Valuethinker
Posts: 35949
Joined: Fri May 11, 2007 11:07 am

Re: Value of having TIPS funds?

Post by Valuethinker » Sun Apr 09, 2017 6:39 am

zuma wrote:
RetiredinKaty wrote: We expect low volatility from nominal bonds. We accept high volatility from stocks in order to get growth. Why is the moderate volatility of intermediate TIPS so objectionable, if the TIPS can protect the portfolio from serious inflation over the long term?
It seems that many Bogleheads will not tolerate a moderate-to-high level of volatility in their fixed income allocation. "Bonds are for safety" and "Take your risk on the equity side" are reasonable mantras and many investors are wise to follow them. But in my opinion they shouldn't be treated as universal truths. As with most investing decisions, it depends on your particular situation.
there is this confusion between *nominal* safety and *real* safety.

Nominal securities (bonds) give you nominal safety but not safety in real terms.

zuma
Posts: 378
Joined: Thu Dec 29, 2016 12:15 pm

Re: Value of having TIPS funds?

Post by zuma » Sun Apr 09, 2017 6:53 am

Valuethinker wrote:
zuma wrote:
RetiredinKaty wrote: We expect low volatility from nominal bonds. We accept high volatility from stocks in order to get growth. Why is the moderate volatility of intermediate TIPS so objectionable, if the TIPS can protect the portfolio from serious inflation over the long term?
It seems that many Bogleheads will not tolerate a moderate-to-high level of volatility in their fixed income allocation. "Bonds are for safety" and "Take your risk on the equity side" are reasonable mantras and many investors are wise to follow them. But in my opinion they shouldn't be treated as universal truths. As with most investing decisions, it depends on your particular situation.
there is this confusion between *nominal* safety and *real* safety.

Nominal securities (bonds) give you nominal safety but not safety in real terms.
Yes, and some also use the word safety to mean low volatility.

So there is confusion regarding the definition of the word itself, which further clouds the discussion. (I'll admit that I've been lazy in my own usage of the word.)

Valuethinker
Posts: 35949
Joined: Fri May 11, 2007 11:07 am

Re: Value of having TIPS funds?

Post by Valuethinker » Sun Apr 09, 2017 6:56 am

slowmoney wrote:Karen Wallace of Morningstar wrote in “Handy Weapons in an Inflation Fighter's Arsenal” (please feel free to read her article) :
This is important to note because although TIPS mutual funds and ETFs hold bonds whose principal values adjust along with inflation, the funds themselves don't have a maturity date. Therefore, there is no explicit guarantee of principal protection; it's possible that you could lose money in a TIPS mutual fund over the course of your holding period.
Year………VIPSX…………..............VBMFX…………..........I-bonds….…….......…Inflation
2006……….0.43%.....................4.27%....................4.52%...................3.20%
2007………11.59%....................6.92%....................4.08%...................2.80%
2008………-2.85%....................5.05%.....................2.76%...................3.80%
2009………10.80%....................5.93%....................2.86%...................-0.40%
2010……….6.17%.....................6.42%....................2.96%...................1.60%
2011……….13.24%...................7.56%....................2.76%...................3.20%
2012……….6.78%.....................4.05%....................2.76%...................2.10%
2013……….-8.92%..................-2.26%.....................2.76%...................1.50%
2014……….3.83%.....................5.76%....................2.86%....................1.60%
2015………-1.83%....................0.30%.....................2.76%....................0.10%

So, TIPS had a 40% FAILURE rate against inflation over the past decade in 2006, 2008, 2013 and 2015. Wow…that’s some kind of inflation hedge. The worst performer in the table!!

Nominal bonds had only a 10% failure rate, in the year 2013. I-bonds lost out to inflation in 2008 and 2011 for a 20% failure rate.
"failure rate" defined as "a year in which performance did not match inflation" is a really poor definition of inflation protection. A year is an arbitrary sub period (see post above pointing out performance the *next year*). So FAILURE RATE is not a meaningful rate of failure ;-).

Take the geometric return of the 2 series, eyeballing it, TIPS beat inflation?

Also TIPS protect against *unexpected* inflation, for the comparable nominal bond expected inflation is built into the yield.

I realize this is only one ten year time period. Going forward it seems unlikely that, given TIPS historical results, TIPS will suddenly stop LOSING to inflation. It is likely that TIPS will continue to LOSE to inflation given the varieties of any year.
The underlying assumptions in those statements are quite likely to be incorrect:

- we've seen real yields on TIPS fall to unprecedented low levels
- we've seen nominal yields on straight bonds fall by even more
- we've seen inflation outcomes far below market expectations at the start of the period

This has been an extraordinary period in financial markets-- last time in comparison would be the 1930s (or Japan since 1990).

You cannot project the future in bonds by linear extrapolation of the past.

Every time I go down the TIPS rabbit hole, I find out different hideous and terrible things about TIPS (Terrible Inflictors of Pain). Slowmoney and Abuss368 and a few other Bogleheads are unconvinced about TIPS. Morningstar, to their credit, seems to have moved to a more objective stance regarding TIPS.
You need to go back and read some of the investors' books and articles re TIPS. Anti Ilmanen for example? (Expected Returns). Also Zvi Bodie.

The one thing one can say about TIPS is they are very volatile.

Partly due to technical factors i.e. illiquidity. The big buyers of LT TIPS are institutional investors and they generally buy-and-hold them to maturity, because from an actuarial point of view they hedge liabilities better than any other instrument-- institutional investors can't buy ibonds ;-).
For example, Canada had to pass a law to prevent Ontario Teachers Pension Fund (c. $154bn as at end 2014) from holding more than 20% of any issue of Real Return Bonds (Canadian TIPS). So they then switched to buying US TIPS, which were paying much higher yields ;-).

beardsworth
Posts: 2121
Joined: Fri Jun 15, 2007 4:02 pm

Re: Value of having TIPS funds?

Post by beardsworth » Sun Apr 09, 2017 7:48 am

slowmoney wrote:
Year………VIPSX…………..............VBMFX…………..........I-bonds….…….......…Inflation
2006……….0.43%.....................4.27%....................4.52%...................3.20%
2007………11.59%....................6.92%....................4.08%...................2.80%
2008………-2.85%....................5.05%.....................2.76%...................3.80%
2009………10.80%....................5.93%....................2.86%...................-0.40%
2010……….6.17%.....................6.42%....................2.96%...................1.60%
2011……….13.24%...................7.56%....................2.76%...................3.20%
2012……….6.78%.....................4.05%....................2.76%...................2.10%
2013……….-8.92%..................-2.26%.....................2.76%...................1.50%
2014……….3.83%.....................5.76%....................2.86%....................1.60%
2015………-1.83%....................0.30%.....................2.76%....................0.10%
This chart has now been re-quoted by a number of other posters. Perhaps I'm mistaken about the figures, or perhaps I'm confused, but what is giving me pause about this chart is all those I-Bond columns showing that I-Bonds were returning 2.76%, 2.86%, and 2.96% in certain past years.

The current inflation component of I-Bonds is 2.76% per year. And we know that the fixed rate component of I Bonds in recent years has ranged from zero to 0.2%. Combining the two, an I-Bond with a fixed rate of zero would currently be paying 2.76% annualized; an I-Bond with a fixed rate of 0.10% would currently be paying 2.86%; and an I Bond with a fixed rate of 0.2% would currently be paying 2.96%.

But that is the current rate of an I-Bond previously issued, which is not the same thing as saying that each of those I-bonds was also returning that same rate in the year they were originally issued, or in any other year on the chart. All those I-Bond lines of 2.76% to 2.96% are suggesting to me that the chart is listing current composite (fixed + inflation) rates for existing I-Bonds as if they were also those bonds' past-year returns. If so, then the I-Bond column in the chart may also be making an "apples to oranges" comparison with the columns for the inflation rate and the two mutual fund returns, depending on how they were computed.

User avatar
#Cruncher
Posts: 2669
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: Value of having TIPS funds?

Post by #Cruncher » Mon Apr 10, 2017 12:24 pm

beardsworth in previous post wrote:... the chart is listing current composite (fixed + inflation) rates for existing I-Bonds as if they were also those bonds' past-year returns. If so, then the I-Bond column in the chart may also be making an "apples to oranges" comparison with the columns for the inflation rate and the two mutual fund returns,
You're correct, beardsworth. The chart first shown in slowmoney's post above is showing the current composite rates for I Bonds issued in May of the years shown. [1]

Since I Bonds issued at different times can have different fixed rates, there is no good way to just show "I Bond" returns in a way that is consistent with the annual returns of a bond fund like VIPSX or VBMFX, or with the annual increase in the CPI. [2] But a better way than the chart's method would be to show the first year increase for an I Bond bought in January of each year. It would look like this.

Code: Select all

           Fixed   Inflation Rate    Composite Rate    --- $25 Grows To In ---
 Bought     Rate  Jan-Jun  Jul-Dec  Jan-Jun  Jul-Dec    6 mo    12 mo    Incr
--------   -----  -------  -------  -------  -------   ------  -------  ------
Jan 2006   1.00%    2.85%    0.50%    6.73%    2.01%   $25.84   $26.10   4.40%
Jan 2007   1.40%    1.55%    1.21%    4.52%    3.84%   $25.57   $26.06   4.24%
Jan 2008   1.20%    1.53%    2.42%    4.28%    6.07%   $25.54   $26.32   5.28%
Jan 2009   0.70%    2.46%   (2.78%)   5.64%    0.00%   $25.71   $25.71   2.84%
Jan 2010   0.30%    1.53%    0.77%    3.36%    1.84%   $25.42   $25.65   2.60%
Jan 2011   0.00%    0.37%    2.30%    0.74%    4.60%   $25.09   $25.67   2.68%
Jan 2012   0.00%    1.53%    1.10%    3.06%    2.20%   $25.38   $25.66   2.64%
Jan 2013   0.00%    0.88%    0.59%    1.76%    1.18%   $25.22   $25.37   1.48%
Jan 2014   0.20%    0.59%    0.92%    1.38%    2.04%   $25.17   $25.43   1.72%
Jan 2015   0.00%    0.74%   (0.80%)   1.48%    0.00%   $25.19   $25.19   0.76%
For example a $25 I Bond purchased in January 2006 would grow 4.40% to $26.10 in January 2007. But one bought January 2015 would only grow 0.76% to $25.19 in January 2016. [3]
  1. You can see this in the "1116" column of this rates triangle. For example an I Bond purchased May 2007 had a fixed rate of 1.30%. Combining this with the current 1.38% semi-annual inflation rate produces the 4.08% shown in the chart for 2007. This is true for all the years 2007 - 2015. (However, following this method 2006 should be 4.18%, not the 4.52% shown.)
  2. The chart shows the annual increase in each year's average CPI as shown here in the "1 yr" column. A better comparison to a TIPS fund would be October versus October (as shown here) since that is what the annual inflation adjustment to a TIPS is based upon.
  3. These values ignore the 3 month interest penalty if one were to redeem an I Bond before 5 years. You can see the "Grows To" values by clicking Jan 2006 - Jan 2015 on this web page.
Last edited by #Cruncher on Tue Apr 11, 2017 5:59 am, edited 1 time in total.

kolea
Posts: 1234
Joined: Fri Jul 11, 2014 5:30 pm
Location: Maui and Columbia River Gorge

Re: Value of having TIPS funds?

Post by kolea » Mon Apr 10, 2017 2:00 pm

zuma wrote: It seems that many Bogleheads will not tolerate a moderate-to-high level of volatility in their fixed income allocation. "Bonds are for safety" and "Take your risk on the equity side" are reasonable mantras and many investors are wise to follow them. But in my opinion they shouldn't be treated as universal truths. As with most investing decisions, it depends on your particular situation.
As someone who likes the mantra about keeping risk with equities, I think it is important to understand the exact nature of the risk we are worrying about. For me, the risk is not volatility per se, it is the 30% drops in equity value that happens every few years. In that sense, the issue is not whether bonds have volatility, it is whether they have volatility that is correlated or uncorrelated with equity volatility. For me, the volatility of bonds (US Treasuries, at least) is acceptable because it is largely uncorrelated to market crashes.
Kolea (pron. ko-lay-uh). Golden plover.

grok87
Posts: 8368
Joined: Tue Feb 27, 2007 9:00 pm

Re: Value of having TIPS funds?

Post by grok87 » Mon Apr 10, 2017 6:25 pm

kolea wrote:
zuma wrote: It seems that many Bogleheads will not tolerate a moderate-to-high level of volatility in their fixed income allocation. "Bonds are for safety" and "Take your risk on the equity side" are reasonable mantras and many investors are wise to follow them. But in my opinion they shouldn't be treated as universal truths. As with most investing decisions, it depends on your particular situation.
As someone who likes the mantra about keeping risk with equities, I think it is important to understand the exact nature of the risk we are worrying about. For me, the risk is not volatility per se, it is the 30% drops in equity value that happens every few years. In that sense, the issue is not whether bonds have volatility, it is whether they have volatility that is correlated or uncorrelated with equity volatility. For me, the volatility of bonds (US Treasuries, at least) is acceptable because it is largely uncorrelated to market crashes.
Additionally when you hold individual treasuries to maturity you are guaranteed to get your principal back. And When you buy tips at original auction you get a double barrelled guarantee,of the greater of your original real principal or your original nominal principal.

The same cannot of course be said of stocks. Recent experience has conditioned us to believe that when stocks crash they will always come back. But the experience of japan since 1990 provides a cautionary tale. The market hit about 39,000 in 1990 crashed to about 7,000 by 2009 (a 19 year crash!) and is today at around 19,000- ie still has not recovered after 27 years.
Keep calm and Boglehead on. KCBO.

slowmoney
Posts: 167
Joined: Tue Dec 28, 2010 4:41 pm
Location: Louisiana Purchase

Re: Value of having TIPS funds?

Post by slowmoney » Tue Apr 11, 2017 7:05 pm

#Cruncher wrote:
Since I Bonds issued at different times can have different fixed rates, there is no good way to just show "I Bond" returns in a way that is consistent with the annual returns of a bond fund like VIPSX or VBMFX, or with the annual increase in the CPI. [2] But a better way than the chart's method would be to show the first year increase for an I Bond bought in January of each year. It would look like this. (Please see #Cruncher table.)
Thanks for the improvement to my table. Yes, I confess, I did not know a good way to show I-Bond returns which would be consistent with VIPSX and VBMFX. Thanks for your help. From your table it would appear that I-Bonds returned 2.68% in 2011 but inflation was 3.20%. Also, in 2013, inflation was 1.50% and the I-Bond return was 1.48%. A very slight loss, some might call it a tie.

It would appear that even with Uncle Sam’s “gift” of I-Bonds to US citizens, inflation is a tough nut to crack.
Information is more valuable sold than used. - Fischer Black (1938-1995)

User avatar
#Cruncher
Posts: 2669
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: Value of having TIPS funds?

Post by #Cruncher » Tue Apr 11, 2017 10:24 pm

slowmoney in previous post wrote:... it would appear that I-Bonds returned 2.68% in 2011 but inflation was 3.20%.
The annual average CPI did increase 3.2% from 218.056 in 2010 to 224.939 in 2011 (source). And this did indeed exceed the 2.7% one year growth of a 0% fixed rate I Bond purchased in January 2011 (as shown in the table in my post above). However, the January 2012 value of an I Bond purchased in January 2011 reflects the change in the CPI from March 2010 to March 2011, not the change in the annual average. And the March year-over-year increase was only 2.7% from 217.631 to 223.467 (source), equaling the I Bond's growth.

When compared against the appropriate CPI change, the growth of an I Bond will usually exceed inflation by an amount equal to its fixed rate. And in cases where a six-month change in the CPI is negative, the I Bond's value may exceed inflation by more than this. This is illustrated in the table below where the right-most column equals the I Bond's growth compared to the March - March change in the CPI.

Code: Select all

      -- I Bond ---    --- Annual Avg CPI ---    ----- March CPI ------
Year  Fixed  Growth     Index    Chg      Vs      Index    Chg      Vs
2005                   195.292                   193.300 
2006   1.0%    4.4%    201.592   3.2%    1.1%    199.800   3.4%    1.0% 
2007   1.4%    4.2%    207.342   2.9%    1.3%    205.352   2.8%    1.4% 
2008   1.2%    5.3%    215.303   3.8%    1.4%    213.528   4.0%    1.2% 
2009   0.7%    2.8%    214.537  (0.4%)   3.2%    212.709  (0.4%)   3.2% 
2010   0.3%    2.6%    218.056   1.6%    0.9%    217.631   2.3%    0.3% 
2011   0.0%    2.7%    224.939   3.2%   (0.5%)   223.467   2.7%    0.0%
2012   0.0%    2.6%    229.594   2.1%    0.6%    229.392   2.7%    0.0%
2013   0.0%    1.5%    232.957   1.5%    0.0%    232.773   1.5%    0.0% 
2014   0.2%    1.7%    236.736   1.6%    0.1%    236.293   1.5%    0.2% 
2015   0.0%    0.8%    237.017   0.1%    0.6%    236.119  (0.1%)   0.8%
For all years except 2009 and 2015 the right-most column equals the fixed rate. For 2009 and 2015 it exceeds the fixed rate. This is because in those years the second six-month semi-annual inflation rate was negative to a degree more than offsetting the fixed rate. This caused the 0% composite rate floor feature to kick in. (See the TreasuryDirect FAQ: Can I ever lose money in I bonds?.)

slowmoney
Posts: 167
Joined: Tue Dec 28, 2010 4:41 pm
Location: Louisiana Purchase

Re: Value of having TIPS funds?

Post by slowmoney » Wed Apr 12, 2017 8:24 pm

#Cruncher wrote:
The annual average CPI did increase 3.2% from 218.056 in 2010 to 224.939 in 2011 (source). And this did indeed exceed the 2.7% one year growth of a 0% fixed rate I Bond purchased in January 2011.
OK. The point of my post.
When compared against the appropriate CPI change, the growth of an I Bond will USUALLY exceed inflation by an amount equal to its fixed rate.
OK. Usually is the point of my post.
(See the TreasuryDirect FAQ: Can I ever lose money in I bonds?.)

Treasury Direct FAQ wrote:

Can I ever lose money in I bonds?

No. They are U.S. Treasury securities backed by the U.S. Government. I bonds even protect you from the effects of severe deflation—the earnings rate can't go below zero and the redemption value of your I bonds can't decline.
[OT comments removed by admin LadyGeek]

Look folks, this is what I did. I used Yahoo finance for TIPS and Total Bond data. I used the Treasury Direct website for I bonds data. I used the US Inflation Calculator website for inflation data. Then I built a very simple table. I looked at the results. If TIPS and I bond always beat inflation, I WOULD NOT HAVE MADE THE POST. I did not change the terms, change the measurement or back fit the data.
Information is more valuable sold than used. - Fischer Black (1938-1995)

Angst
Posts: 1838
Joined: Sat Jun 09, 2007 11:31 am

Re: Value of having TIPS funds?

Post by Angst » Wed Apr 12, 2017 8:38 pm

slowmoney wrote:Look folks, this is what I did. I used Yahoo finance for TIPS and Total Bond data. I used the Treasury Direct website for I bonds data. I used the US Inflation Calculator website for inflation data. Then I built a very simple table. I looked at the results. If TIPS and I bond always beat inflation, I WOULD NOT HAVE MADE THE POST. I did not change the terms, change the measurement or back fit the data.
[OT comment removed by moderator triceratop] There's a world of difference between buying a new TIPS bond at auction with the intention of holding until maturity and in investing in a TIPS fund; it's like night and day. And annual CPI numbers do not directly line up, chronologically, with the way I Bonds address CPI numbers, but it all "comes out in the wash", if you're willing to read a bit more about how it works. [OT comment removed by moderator triceratop]

User avatar
wintermute
Posts: 190
Joined: Mon Mar 15, 2010 10:36 pm

Re: Value of having TIPS funds?

Post by wintermute » Wed Apr 12, 2017 11:55 pm

zuma wrote:The Schwab TIPS ETF, which tracks the Bloomberg Barclays U.S. TIPS Index, has an expense ratio of 0.05%.
https://www.schwabfunds.com/public/csim ... ymbol=SCHP
The ER is great, but watch the premium/discount. It can get large at times. I always had to wait days trying to trading it, a year or so back. I eventually got rid of it for that reason. Too time consuming.

zuma
Posts: 378
Joined: Thu Dec 29, 2016 12:15 pm

Re: Value of having TIPS funds?

Post by zuma » Thu Apr 13, 2017 2:49 am

wintermute wrote:
zuma wrote:The Schwab TIPS ETF, which tracks the Bloomberg Barclays U.S. TIPS Index, has an expense ratio of 0.05%.
https://www.schwabfunds.com/public/csim ... ymbol=SCHP
The ER is great, but watch the premium/discount. It can get large at times. I always had to wait days trying to trading it, a year or so back. I eventually got rid of it for that reason. Too time consuming.
That might be true, but as a long-term investor, I will continue to ignore premiums and discounts. :)

Valuethinker
Posts: 35949
Joined: Fri May 11, 2007 11:07 am

Re: Value of having TIPS funds?

Post by Valuethinker » Thu Apr 13, 2017 6:31 am

zuma wrote:
Valuethinker wrote:
zuma wrote:
RetiredinKaty wrote: We expect low volatility from nominal bonds. We accept high volatility from stocks in order to get growth. Why is the moderate volatility of intermediate TIPS so objectionable, if the TIPS can protect the portfolio from serious inflation over the long term?
It seems that many Bogleheads will not tolerate a moderate-to-high level of volatility in their fixed income allocation. "Bonds are for safety" and "Take your risk on the equity side" are reasonable mantras and many investors are wise to follow them. But in my opinion they shouldn't be treated as universal truths. As with most investing decisions, it depends on your particular situation.
there is this confusion between *nominal* safety and *real* safety.

Nominal securities (bonds) give you nominal safety but not safety in real terms.
Yes, and some also use the word safety to mean low volatility.

So there is confusion regarding the definition of the word itself, which further clouds the discussion. (I'll admit that I've been lazy in my own usage of the word.)
You've made some excellent points here and upthread.

I think we are agreed:

- risk is often measured as annual volatility (standard deviation). That has several issues:

-- the well known existence of "fat tails" in financial market outcomes (see Mandelbrot, Taleb)
-- the existence of skewed returns for many financial assets (eg small cap growth stocks)
-- performance of different asset classes is not uncorrelated
-- the existence of correlation in the time series of annual returns (I hope that I am using the right statistical term) ie if we have a bear market this year, bear markets usually last more than 1 year, so returns next year are more likely than average to be negative (and also more likely than average to be highly positive, the rebound effect)

-- in addition, actuarial risk (which is the risk investors face here) is the risk of your assets not meeting your future spending needs (to death, + bequests etc.).

That latter is a more appropriate definition of "risk" than simply annualized volatility.

Post Reply