Vanguard's long-term outlook for TIPS

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FIREchief
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Re: Vanguard's long-term outlook for TIPS

Post by FIREchief » Mon Oct 09, 2017 3:45 pm

garlandwhizzer wrote:
Mon Oct 09, 2017 1:31 pm
Currently, little if any inflation is priced into TIPS and it may be a good time to pick up some protection for unexpected inflation with a modest portion of the bond portfolio.
Isn't "buying" inflation protection for only a modest portion of your bond portfolio like buying fire insurance only for a modest portion of your house?
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Re: Vanguard's long-term outlook for TIPS

Post by nedsaid » Mon Oct 09, 2017 3:48 pm

grok87 wrote:
Mon Oct 09, 2017 2:40 pm
nedsaid wrote:
Sun Oct 08, 2017 10:26 am
A few thoughts on Vanguard's view of TIPS:

1) TIPS Market size:
The size of tips markets is $1.7 Trillion =about 1/20th of the Aggregate Bond Market (i.e. Vanguard Bond Market index which does not include TIPs). See here for a reference- page 7. https://www.nuveen.com/Home/Documents/D ... leId=56370

Nedsaid: Hopefully, that is enough liquidity for the TIPS market. During the 2008-2009 financial crisis, TIPS fell about 10-11% or so, and that was a big surprise to me. They rebounded nicely but didn't provide the diversification benefit that nominal Treasuries provided. I own TIPs myself and have been buying more recently as I have been rebalancing.
grok87 wrote:
Mon Oct 09, 2017 2:40 pm
Here's how David Swensen approaches the "bonds as diversifiers" in his two books

1) Pioneering Portfolio Management: For institutional investors, written first in 2000.
Recommends long term treasuries as a diversifier

2) Unconventional Success: for individual investors, written second in 2005.
recommends 50/50 mix of treasuries and tips.
Well, I am so old that I remember that putting 50% of a bond allocation in TIPS was standard advice by many Bogleheads. It seems that the forum has soured on TIPS in recent years and you see more Bogleheads just going with nominal bonds. I kept my TIPS and have been adding to them as I rebalance from stocks to bonds.
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Re: Vanguard's long-term outlook for TIPS

Post by nedsaid » Mon Oct 09, 2017 3:51 pm

FIREchief wrote:
Mon Oct 09, 2017 3:45 pm
garlandwhizzer wrote:
Mon Oct 09, 2017 1:31 pm
Currently, little if any inflation is priced into TIPS and it may be a good time to pick up some protection for unexpected inflation with a modest portion of the bond portfolio.
Isn't "buying" inflation protection for only a modest portion of your bond portfolio like buying fire insurance only for a modest portion of your house?
Garland also owns stocks. I think he has a 75% stocks/25% bonds allocation if I remember right.
A fool and his money are good for business.

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Re: Vanguard's long-term outlook for TIPS

Post by dbr » Mon Oct 09, 2017 3:52 pm

FIREchief wrote:
Mon Oct 09, 2017 3:45 pm
garlandwhizzer wrote:
Mon Oct 09, 2017 1:31 pm
Currently, little if any inflation is priced into TIPS and it may be a good time to pick up some protection for unexpected inflation with a modest portion of the bond portfolio.
Isn't "buying" inflation protection for only a modest portion of your bond portfolio like buying fire insurance only for a modest portion of your house?
Yes, logically speaking that is true. On the other hand it doesn't make sense to try to buy inflation protection for equities. The idea there is to outrun inflation. Perhaps differently, means of production should have positive real return while inflation indexed investments might have zero real return. This is also applicable to real estate and gold. Your point might support in part the idea that all the fixed income you do hold should be inflation indexed. I do find it odd to see portfolios recommended with 25% of fixed income in TIPS. What would be the point?

Added to this is that retirees should be aware of what fraction of pensions and annuities they have are COLAd. To the extent one has fixed nominal income streams other sources of income have to be more than even with inflation to compensate, hence equities.

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Re: Vanguard's long-term outlook for TIPS

Post by jalbert » Mon Oct 09, 2017 4:01 pm

Someone with years of working life ahead of them is less exposed to inflation than a retiree.

A homeowner is less exposed to inflation than a renter.

A homeowner with a mortgage is less exposed to inflation than a homeowner who owns their home free and clear.

There is not a 1-size-fits-all answer to the question of the ideal allocation to TIPs.
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Re: Vanguard's long-term outlook for TIPS

Post by FIREchief » Mon Oct 09, 2017 4:30 pm

dbr wrote:
Mon Oct 09, 2017 3:52 pm
FIREchief wrote:
Mon Oct 09, 2017 3:45 pm
garlandwhizzer wrote:
Mon Oct 09, 2017 1:31 pm
Currently, little if any inflation is priced into TIPS and it may be a good time to pick up some protection for unexpected inflation with a modest portion of the bond portfolio.
Isn't "buying" inflation protection for only a modest portion of your bond portfolio like buying fire insurance only for a modest portion of your house?
Yes, logically speaking that is true. On the other hand it doesn't make sense to try to buy inflation protection for equities. The idea there is to outrun inflation. Perhaps differently, means of production should have positive real return while inflation indexed investments might have zero real return. This is also applicable to real estate and gold. Your point might support in part the idea that all the fixed income you do hold should be inflation indexed. I do find it odd to see portfolios recommended with 25% of fixed income in TIPS. What would be the point?

Added to this is that retirees should be aware of what fraction of pensions and annuities they have are COLAd. To the extent one has fixed nominal income streams other sources of income have to be more than even with inflation to compensate, hence equities.
Thanks. That makes sense. I should have added that I utilize an LMP/RP allocation approach, so buying inflation protection for 100% of my LMP likely makes more sense in my situation than it would in others. I am planning for LMP + SS to meet retirement needs, so with 100% TIPS all income for required living expenses would be COLAd. To jalbert's point, if I weren't already FIREd, I might approach things differently. 8-)
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Re: Vanguard's long-term outlook for TIPS

Post by Doc » Mon Oct 09, 2017 7:01 pm

It's too expensive to use TIPS for a entire retirement LMP. Way back when, I decided to use a 10 year TIPS LMP to cover a "worse case" stock market crash/recovery cycle. In 2008 my 10 year LMP lasted about 3 months because of rebalancing and few nominal Treasuries. Each of us has to reach a position which is good for OUR own personal situation. What's good for the goose may not be good for the gander.
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Re: Vanguard's long-term outlook for TIPS

Post by columbia » Mon Oct 09, 2017 7:39 pm

I still get it why people would be surprised by TIPS dropping in the face of a market crash: who exactly would be gobbling them up to fight inflation after a crash?

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Re: Vanguard's long-term outlook for TIPS

Post by nedsaid » Mon Oct 09, 2017 10:21 pm

columbia wrote:
Mon Oct 09, 2017 7:39 pm
I still get it why people would be surprised by TIPS dropping in the face of a market crash: who exactly would be gobbling them up to fight inflation after a crash?
Larry Swedroe for one. Some folks here followed his advice and scooped them up in the aftermath of the 2008-2009 financial crisis.
A fool and his money are good for business.

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Re: Vanguard's long-term outlook for TIPS

Post by FIREchief » Tue Oct 10, 2017 12:37 am

Doc wrote:
Mon Oct 09, 2017 7:01 pm
It's too expensive to use TIPS for a entire retirement LMP.
??!! There is absolutely no "expense" to using TIPS. There are zero expenses to purchasing them at auction and no recurring ERs. I'm even getting a semiannual coupon that I can use to buy a few more bonds or take a nice vacation.
Doc wrote:
Mon Oct 09, 2017 7:01 pm
Way back when, I decided to use a 10 year TIPS LMP to cover a "worse case" stock market crash/recovery cycle. In 2008 my 10 year LMP lasted about 3 months because of rebalancing and few nominal Treasuries. Each of us has to reach a position which is good for OUR own personal situation. What's good for the goose may not be good for the gander.
Well, just keep in mind that some of us "ganders" are doing just fine with TIPS! :sharebeer
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Re: Vanguard's long-term outlook for TIPS

Post by Doc » Tue Oct 10, 2017 6:43 am

FIREchief wrote:
Tue Oct 10, 2017 12:37 am
??!! There is absolutely no "expense" to using TIPS. There are zero expenses to purchasing them at auction and no recurring ERs. I'm even getting a semiannual coupon that I can use to buy a few more bonds or take a nice vacation.
There is an "insurance premium" built into the price which is an expense that has to be considered along with the historically low real yield. Determining that cost is another matter. I seem to have a recollection before Lehman of 10 to 20 bps.

I added "not" to the goose/gander proverb so if TIPS are good for you then you are the goose and if they are not good for me then I am the gander. Not the other way around. BTW the original proverb used "sauce" not "good". :D
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Re: Vanguard's long-term outlook for TIPS

Post by Doc » Tue Oct 10, 2017 6:51 am

nedsaid wrote:
Mon Oct 09, 2017 10:21 pm
columbia wrote:
Mon Oct 09, 2017 7:39 pm
I still get it why people would be surprised by TIPS dropping in the face of a market crash: who exactly would be gobbling them up to fight inflation after a crash?
Larry Swedroe for one. Some folks here followed his advice and scooped them up in the aftermath of the 2008-2009 financial crisis.
In the early 2000's the accepted storey was that TIPS were just like nominal except for the inflation protection. The drop in price in the market crash of '08 when nominals increases was unexpected.

This price drop made them an excellent buy after the crash at least until markets stablelized.
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Re: Vanguard's long-term outlook for TIPS

Post by dbr » Tue Oct 10, 2017 9:00 am

FIREchief wrote:
Tue Oct 10, 2017 12:37 am
Doc wrote:
Mon Oct 09, 2017 7:01 pm
It's too expensive to use TIPS for a entire retirement LMP.
??!! There is absolutely no "expense" to using TIPS. There are zero expenses to purchasing them at auction and no recurring ERs. I'm even getting a semiannual coupon that I can use to buy a few more bonds or take a nice vacation.
TIPS are too expensive in the sense that the yield is too low and you have to invest too much for the income provided.

Actually the point is arguable. If all your TIPS yield 0.00% real, then you get a withdrawal rate of 3.33%. At 1.00% real you get 3.8%. All this being a 30 year LMP. It is not necessarily completely crazy.

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Re: Vanguard's long-term outlook for TIPS

Post by siamond » Tue Oct 10, 2017 11:11 am

dbr wrote:
Tue Oct 10, 2017 9:00 am
TIPS are too expensive in the sense that the yield is too low and you have to invest too much for the income provided.

Actually the point is arguable. If all your TIPS yield 0.00% real, then you get a withdrawal rate of 3.33%. At 1.00% real you get 3.8%. All this being a 30 year LMP. It is not necessarily completely crazy.
It does seem a little crazy to me... :wink:

After 30 years, your money is gone. A 3.x% return on an investment preserving the capital is ok-ish for people who really can't stand the stock market gyrations. A 3.x% return on an investment consuming the capital is NOT ok. First, it's way low. Next, it is actually risky, what if your lifetime does extend past the 30 years? If you're in the ballpark where it is not too likely (e.g. you're at least 70), then an inflation-adjusted annuity should provide more return AND a lifetime guarantee (you never know what medicine will be capable of in a couple of decades).

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Re: Vanguard's long-term outlook for TIPS

Post by dbr » Tue Oct 10, 2017 11:21 am

siamond wrote:
Tue Oct 10, 2017 11:11 am
dbr wrote:
Tue Oct 10, 2017 9:00 am
TIPS are too expensive in the sense that the yield is too low and you have to invest too much for the income provided.

Actually the point is arguable. If all your TIPS yield 0.00% real, then you get a withdrawal rate of 3.33%. At 1.00% real you get 3.8%. All this being a 30 year LMP. It is not necessarily completely crazy.
It does seem a little crazy to me... :wink:

After 30 years, your money is gone. A 3.x% return on an investment preserving the capital is ok-ish for people who really can't stand the stock market gyrations. A 3.x% return on an investment consuming the capital is NOT ok. First, it's way low. Next, it is actually risky, what if your lifetime does extend past the 30 years? If you're in the ballpark where it is not too likely (e.g. you're at least 70), then an inflation-adjusted annuity should provide more return AND a lifetime guarantee (you never know what medicine will be capable of in a couple of decades).
I personally would not recommend a TIPS ladder LMP, but the arguments are there. Personally I would advocate that the only really logical concept for an LMP is an inflation indexed annuity. There is still the problem that there is great risk in estimating what the liability is. My point was that the comment about "expensive" was both sort of right and sort of wrong.

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Re: Vanguard's long-term outlook for TIPS

Post by nedsaid » Tue Oct 10, 2017 11:29 am

Doc wrote:
Tue Oct 10, 2017 6:51 am
nedsaid wrote:
Mon Oct 09, 2017 10:21 pm
columbia wrote:
Mon Oct 09, 2017 7:39 pm
I still get it why people would be surprised by TIPS dropping in the face of a market crash: who exactly would be gobbling them up to fight inflation after a crash?
Larry Swedroe for one. Some folks here followed his advice and scooped them up in the aftermath of the 2008-2009 financial crisis.
In the early 2000's the accepted storey was that TIPS were just like nominal except for the inflation protection. The drop in price in the market crash of '08 when nominals increases was unexpected.

This price drop made them an excellent buy after the crash at least until markets stablelized.
Well yes, I was surprised at the performance of TIPS during the financial crisis. My recollection is that they dropped about 10%-11%. Markets never cease to surprise.
A fool and his money are good for business.

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Re: Vanguard's long-term outlook for TIPS

Post by Doc » Tue Oct 10, 2017 11:45 am

dbr wrote:
Tue Oct 10, 2017 11:21 am
I personally would not recommend a TIPS ladder LMP, but the arguments are there.
If I did want to build a 30 year TIPS LMP in today's market I would start buying tens (or even fives). In ten years when the the first one matured I would roll it into another ten and buy a second ten for that year. I would continue this process until retirement at which point I would have a ten year ladder with triple rungs. I would then spend one of the maturing notes and roll the other two. Ten years into retirement I would have two notes maturing each year and you would spend one and roll the second. And so on.

In this was you still wind up with your 30 year LMP but without having to commit to 1% real for thirty years at the outset. If real yields get back into the 2 to 3 % range sometime in the process you can start buying longer term "rolled" notes at that time.

(You could use a similar type procedure if you were building your LMP portfolio in a shorter time with a little modification of the same idea.)
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Re: Vanguard's long-term outlook for TIPS

Post by Doc » Tue Oct 10, 2017 11:50 am

nedsaid wrote:
Tue Oct 10, 2017 11:29 am
Well yes, I was surprised at the performance of TIPS during the financial crisis. My recollection is that they dropped about 10%-11%. Markets never cease to surprise.
More like 15%.

http://quotes.morningstar.com/chart/fun ... 2%3A955%7D
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Re: Vanguard's long-term outlook for TIPS

Post by garlandwhizzer » Tue Oct 10, 2017 12:03 pm

FIREchief wrote:
Isn't "buying" inflation protection for only a modest portion of your bond portfolio like buying fire insurance only for a modest portion of your house?
If TIPS were my only inflation protection that would be true. As nedsaid pointed out my portfolio is equity heavy, (66 stock/34 bond). Stocks perform better in real terms during inflation than bonds. Also, half of my equity portfolio is in INTL which further diversifies inflation risk. Japan has been struggling against deflation for 27 years and Europe still is in QE mode and struggling to raise inflation. Inflation is often country specific and owning equity in all countries diversifies that risk considerably.

The only TIPS fund I use is the Vanguard Short Term Tips Fund, which according to a Vanguard study, is a more accurate inflation hedge than their standard TIPS fund with a much longer duration (2.6 yr versus 8.1yr). The Short Term Tips Fund Investor Shares currently has an inflation adjusted yield of -0.23%. Inflation has been about 1.9% over the last year, so adjusting for that, the nominal yield would be about 1.67%, which is significantly higher than the Vanguard Short Term Treasury Fund Investor Shares' SEC yield of 1.20%. Yes that's right, in nominal terms you currently get paid about one third more in yield to have inflation protection. That is because no one fears inflation now. I own the fund for two reasons: because it is a bargain at current prices relative to ST Treasuries and to provide some inflation hedge in the bond portion of my portfolio should unexpected inflation occur.

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Re: Vanguard's long-term outlook for TIPS

Post by nedsaid » Tue Oct 10, 2017 12:14 pm

Doc wrote:
Tue Oct 10, 2017 11:50 am
nedsaid wrote:
Tue Oct 10, 2017 11:29 am
Well yes, I was surprised at the performance of TIPS during the financial crisis. My recollection is that they dropped about 10%-11%. Markets never cease to surprise.
More like 15%.

http://quotes.morningstar.com/chart/fun ... 2%3A955%7D
Well then, I stand corrected. Looks to me like a 15.4% drop. Thanks.
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Re: Vanguard's long-term outlook for TIPS

Post by #Cruncher » Tue Oct 10, 2017 2:17 pm

Mel Lindauer wrote:
Sun Oct 08, 2017 6:30 pm
One benefit of Savings Bonds vs those 30-year TIPS you mentioned is that Savings Bonds ... can be redeemed ... for a guaranteed increase in value, whereas ... TIPS' value is set by the market.
This would have been a benefit if real interest rates had risen. But since they have fallen, the non-marketability of these high-yield I Bonds has turned out to be a disadvantage compared to TIPS issued at that time. Take a 3.6% fixed rate I Bond purchased in October 2000 for example. If redeemed today one would get a real return of 3.6%. [1]

Also in October 2000 one could have purchased at a reopening auction the 3.875% TIPS maturing 28.5 years later in April 2029. This was priced at 98.673 to yield 3.953%. If one had sold this bond last Friday at the bid price of 135.5 (see WSJ TIPS Quotes 10/6/2017 one would have earned a real return of 5.3% [2], 1.7% points more than the I Bond's.

In effect the Treasury will redeem an I Bond "at par" regardless of what I Bond fixed rates are at the time of redemption. This is good if fixed rates rise. But the sword is two-edged: one can only redeem at par. This is bad if yields have fallen and one wants to redeem before the full 30 year term. In order to fully benefit from the I Bond's above-market yield one must hold it to maturity. With TIPS, on the other hand, if yields fall, one can sell above par and not have to wait to maturity to reap all the benefit of its above market coupon.

However, this comparison ignores one of the I Bond's advantages versus TIPS: namely that its interest is compounded at the initial rate, while TIPS coupons are not. This is a benefit when rates fall. Assume the I Bond and TIPS compared above were held until maturity. We know that the I Bond will return 3.6% [1] real over that time. And if the coupon interest from the TIPS is spent, we know its real yield will be 3.953%. [3]

But if the TIPS' coupons are re-invested, the total value at maturity will depend on the reinvestment rate. To get a return equal to the stated 3.953% yield, coupons would have to be reinvested at that rate. However, TIPS yields have fallen significantly since this TIPS auction so it is unrealistic to expect this high a reinvestment rate. The following little table shows the total return if coupons were reinvested at 3.953%, 3%, 2%, 1%, or 0% real yields. For any reinvestment rate less than 3%, the TIPS return would be less than the 3.6% real return from the I Bond.

Code: Select all

Reinvest  Coupons  Prin-   Total
 Yield    Grow to  cipal  Return
 ------   -------  -----   -----		
 3.953%    2,011   1,000   3.95%
 3.000%    1,726   1,000   3.60% [4]
 2.000%    1,479   1,000   3.26%
 1.000%    1,274   1,000   2.95%
 0.000%    1,104   1,000   2.68%
  1. Actually the real return is a touch more because of the 0% composite floor feature (see here). As shown here from October 2009 through March 2009 -- despite a -2.78% semi-annual inflation rate -- the composite rate was 0.00%. Without the floor it would have been -2.06% as calculated with the composite rate formula:
    -0.0206 = 0.036 + (2 * -0.0278) + (0.036 * -0.0278)
  2. Calculated with the Excel RATE function:
    5.3% = 2 * RATE(2 * 17, 3.875 / 2, -98.67, 135.5, 0, 0)
  3. 3.953% = 2* RATE(2 * 28.5, 3.875 / 2, -98.67, 100, 0, 0)
  4. Example calculation using the Excel FV function:
    1,726 = FV(3% / 2, 2 * 28.5, -1000 * 3.875% / 2, 0, 0)
    3.60% = 2 * (((1726 + 1000) / 986.73) ^ (1 / 57) - 1)

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Re: Vanguard's long-term outlook for TIPS

Post by Fundhunter » Tue Oct 10, 2017 7:00 pm

From looking over this thread, it is obvious that there is no consensus on inclusion of TIPS (or how much) in a portfolio, including by our "experts". Kind of reminds me of the threads on international equity investing, where nobody seems to agree either.

If Vanguard doesn't like TIPS now, then why are they still included in their Target Retirement Income Fund (VTINX)??? All their Target Retirement funds morph into this fund after the fund's retirement year.

The TIPS % in that fund (of the fixed income portion of the portfolio, which is about 70% of the entire portfolio) = about 25%.

I am about to begin my withdrawal from my retirement plan next month and although I do not own VTINX, I have had my TIPS at 25% for a while. I will withdraw only from the fixed income part of the portfolio, likely in a manner that keeps this % between rebalancing, which will be every 4 years for me.

The TIPS fund that Vanguard uses in VTINX is their Short Term TIPS fund. (I have both long and short, and that is another subject to discuss).

Stay the course!

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Re: Vanguard's long-term outlook for TIPS

Post by 2015 » Tue Oct 10, 2017 7:11 pm

Fundhunter wrote:
Tue Oct 10, 2017 7:00 pm
From looking over this thread, it is obvious that there is no consensus on inclusion of TIPS (or how much) in a portfolio, including by our "experts". Kind of reminds me of the threads on international equity investing, where nobody seems to agree either.

If Vanguard doesn't like TIPS now, then why are they still included in their Target Retirement Income Fund (VTINX)??? All their Target Retirement funds morph into this fund after the fund's retirement year.

The TIPS % in that fund (of the fixed income portion of the portfolio, which is about 70% of the entire portfolio) = about 25%.

I am about to begin my withdrawal from my retirement plan next month and although I do not own VTINX, I have had my TIPS at 25% for a while. I will withdraw only from the fixed income part of the portfolio, likely in a manner that keeps this % between rebalancing, which will be every 4 years for me.

The TIPS fund that Vanguard uses in VTINX is their Short Term TIPS fund. (I have both long and short, and that is another subject to discuss).

Stay the course!
Exactly. Whenever I come across threads like these, I put the whole idea in Munger/Buffet's "too hard" pile. I agree with their philosophy that to win in investing it's not about trying to be brilliant as much as it's not doing anything stupid. A stupid move for me anyway is investing in anything where there's no consensus.

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Re: Vanguard's long-term outlook for TIPS

Post by FIREchief » Tue Oct 10, 2017 7:30 pm

2015 wrote:
Tue Oct 10, 2017 7:11 pm
A stupid move for me anyway is investing in anything where there's no consensus.
So what do you invest in? There isn't even a consensus on this forum that stocks and bonds are optimum investments. Some argue for rental properties and bitcoin. Others may argue for gold, commodities, antiques, etc. :greedy

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Re: Vanguard's long-term outlook for TIPS

Post by columbia » Tue Oct 10, 2017 8:08 pm

nedsaid wrote:
Mon Oct 09, 2017 10:21 pm
columbia wrote:
Mon Oct 09, 2017 7:39 pm
I still get it why people would be surprised by TIPS dropping in the face of a market crash: who exactly would be gobbling them up to fight inflation after a crash?
Larry Swedroe for one. Some folks here followed his advice and scooped them up in the aftermath of the 2008-2009 financial crisis.
That's great for Larry, if he snapped them up at the time. However, that doesn't change the fact that rational people should not expect the NAV of TIPS to bloom in face of a stock market crash. Yet, we see consistently see people perplexed that TIPS tumbled; it's pretty obvious as to why they would.

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Re: Vanguard's long-term outlook for TIPS

Post by Fundhunter » Tue Oct 10, 2017 8:09 pm

FIREchief wrote:
Tue Oct 10, 2017 7:30 pm
2015 wrote:
Tue Oct 10, 2017 7:11 pm
A stupid move for me anyway is investing in anything where there's no consensus.
So what do you invest in? There isn't even a consensus on this forum that stocks and bonds are optimum investments. Some argue for rental properties and bitcoin. Others may argue for gold, commodities, antiques, etc. :greedy

"I'm investing a million in a mint condition 1970 hemi cuda! That has to do better than the stock market."
I do not mean a unanimous agreement. For example, I think MOST people on this forum would agree that market timing schemes are a BAD idea, that low cost mutual funds are a better idea than individual stocks, that SOME (although no agreement on how much) international equity investment is a good idea, that rebalancing is a good way to lessen risk to a portfolio, and that index funds with their very low expenses ARE a good idea. I just can't get anything near consensus on this TIPS thread.

Funny you brought up the Plymouth muscle car example- I actually owned a 1970 Hemi Cuda coupe for many years (the extremely rare convertibles bring the REALLY big bucks). After restoration expenses and sale at Mecum, I broke even. But it was never an investment to me- just a fun hobby and I enjoyed the car while I had it.

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Re: Vanguard's long-term outlook for TIPS

Post by Fundhunter » Tue Oct 10, 2017 8:14 pm

Fundhunter wrote:
Tue Oct 10, 2017 8:09 pm
FIREchief wrote:
Tue Oct 10, 2017 7:30 pm
2015 wrote:
Tue Oct 10, 2017 7:11 pm
A stupid move for me anyway is investing in anything where there's no consensus.
So what do you invest in? There isn't even a consensus on this forum that stocks and bonds are optimum investments. Some argue for rental properties and bitcoin. Others may argue for gold, commodities, antiques, etc. :greedy

"I'm investing a million in a mint condition 1970 hemi cuda! That has to do better than the stock market."
I do not mean a unanimous agreement. For example, I think MOST people on this forum would agree that market timing schemes are a BAD idea, that low cost mutual funds are a better idea than individual stocks, that SOME (although no agreement on how much) international equity investment is a good idea, that rebalancing is a good way to lessen risk to a portfolio, and that index funds with their very low expenses ARE a good idea. I just can't see anything near consensus on this TIPS thread.

Funny you brought up the Plymouth muscle car example- I actually owned a 1970 Hemi Cuda coupe for many years (the extremely rare convertibles bring the REALLY big bucks). After restoration expenses and sale at Mecum, I broke even. But it was never an investment to me- just a fun hobby and I enjoyed the car while I had it.

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Re: Vanguard's long-term outlook for TIPS

Post by nedsaid » Tue Oct 10, 2017 8:18 pm

columbia wrote:
Tue Oct 10, 2017 8:08 pm
nedsaid wrote:
Mon Oct 09, 2017 10:21 pm
columbia wrote:
Mon Oct 09, 2017 7:39 pm
I still get it why people would be surprised by TIPS dropping in the face of a market crash: who exactly would be gobbling them up to fight inflation after a crash?
Larry Swedroe for one. Some folks here followed his advice and scooped them up in the aftermath of the 2008-2009 financial crisis.
That's great for Larry, if he snapped them up at the time. However, that doesn't change the fact that rational people should not expect the NAV of TIPS to bloom in face of a stock market crash. Yet, we see consistently see people perplexed that TIPS tumbled; it's pretty obvious as to why they would.
I didn't expect TIPS to tumble either but again this illustrates what I have said many, many times here. Asset classes, particularly in a crisis, have no obligation to perform according to investor expectations. In a crisis, markets do crazy batspit things. Markets have a way of doing the very thing that even the experts don't expect. Never say never. Could there be a scenario where nominal treasuries would act poorly in a crisis? Unlikely, but it could happen.
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Re: Vanguard's long-term outlook for TIPS

Post by FIREchief » Tue Oct 10, 2017 8:29 pm

Fundhunter wrote:
Tue Oct 10, 2017 8:09 pm
FIREchief wrote:
Tue Oct 10, 2017 7:30 pm
2015 wrote:
Tue Oct 10, 2017 7:11 pm
A stupid move for me anyway is investing in anything where there's no consensus.
So what do you invest in? There isn't even a consensus on this forum that stocks and bonds are optimum investments. Some argue for rental properties and bitcoin. Others may argue for gold, commodities, antiques, etc. :greedy

"I'm investing a million in a mint condition 1970 hemi cuda! That has to do better than the stock market."
I do not mean a unanimous agreement. For example, I think MOST people on this forum would agree that market timing schemes are a BAD idea, that low cost mutual funds are a better idea than individual stocks, that SOME (although no agreement on how much) international equity investment is a good idea, that rebalancing is a good way to lessen risk to a portfolio, and that index funds with their very low expenses ARE a good idea. I just can't get anything near consensus on this TIPS thread.

Funny you brought up the Plymouth muscle car example- I actually owned a 1970 Hemi Cuda coupe for many years (the extremely rare convertibles bring the REALLY big bucks). After restoration expenses and sale at Mecum, I broke even. But it was never an investment to me- just a fun hobby and I enjoyed the car while I had it.
Yeah, I get that. Your list is interesting. I agree that there does seem to be a strong majority agreement on the forum about the following:
a) low cost mutual funds are good versus a non-diversified portfolio of individual stocks
b) market timing is bad

I don't think there is a strong majority agreement on the following:
a) some international is good
b) rebalancing is a good way to lessen risk (manage risk, yes; lessen risk, no)

Most posts (on about any topic) seem to be from a vocal minority. Poke at any of the above and you'll likely be met with a clear divergence of opinions, suggesting that we are nowhere near consensus. That's just been one man's experience.

Back on topic.....that '70 cuda and a '67 vette are two very enjoyable ways to get to a destination. I think the same can be true of TIPS and nominal treasuries (note the parallel placement of the TIPS with the 'cuda - now I want to watch Phantasm 8-) )
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: Vanguard's long-term outlook for TIPS

Post by Fundhunter » Wed Oct 11, 2017 12:31 am

FIREchief wrote:
Mon Oct 09, 2017 3:45 pm
garlandwhizzer wrote:
Mon Oct 09, 2017 1:31 pm
Currently, little if any inflation is priced into TIPS and it may be a good time to pick up some protection for unexpected inflation with a modest portion of the bond portfolio.
Isn't "buying" inflation protection for only a modest portion of your bond portfolio like buying fire insurance only for a modest portion of your house?
Not a good analogy, because in a fire you are likely to lose ALL of your house. Market crash/inflation could hurt, but not destroy, your portfolio. Also, portfolio can recover.....unlikely your house will after a fire absent insurance.

On your other reply, I do not understand how you say rebalancing "manages" risk, but does not reduce it.

Another funny coincidence is that I STILL own my '67 Corvette convertible that I got 35 years ago, although it is a small block (327), not a 427 that get the 6 figure prices. Need to put a power steering pump on it though as I am getting too old to wrestle that old manual steering!!!

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Re: Vanguard's long-term outlook for TIPS

Post by FIREchief » Wed Oct 11, 2017 1:51 am

Fundhunter wrote:
Wed Oct 11, 2017 12:31 am
FIREchief wrote:
Mon Oct 09, 2017 3:45 pm
garlandwhizzer wrote:
Mon Oct 09, 2017 1:31 pm
Currently, little if any inflation is priced into TIPS and it may be a good time to pick up some protection for unexpected inflation with a modest portion of the bond portfolio.
Isn't "buying" inflation protection for only a modest portion of your bond portfolio like buying fire insurance only for a modest portion of your house?
Not a good analogy, because in a fire you are likely to lose ALL of your house. Market crash/inflation could hurt, but not destroy, your portfolio. Also, portfolio can recover.....unlikely your house will after a fire absent insurance.

On your other reply, I do not understand how you say rebalancing "manages" risk, but does not reduce it.

Another funny coincidence is that I STILL own my '67 Corvette convertible that I got 35 years ago, although it is a small block (327), not a 427 that get the 6 figure prices. Need to put a power steering pump on it though as I am getting too old to wrestle that old manual steering!!!
That is crazy/funny/scary!!

That said, I used to think you were right about rebalancing, but then this very forum educated me. When I saw the light, I switched from a percentage based AA to a LMP/RP strategy. Way beyond the scope of this discussion.....

I'll retract my fire insurance analogy, as it may be lost on the audience. Lost fixed income doesn't "recover" like stocks. Once gone, it is lost forever...
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: Vanguard's long-term outlook for TIPS

Post by grok87 » Wed Oct 11, 2017 7:02 am

siamond wrote:
Tue Oct 10, 2017 11:11 am
dbr wrote:
Tue Oct 10, 2017 9:00 am
TIPS are too expensive in the sense that the yield is too low and you have to invest too much for the income provided.

Actually the point is arguable. If all your TIPS yield 0.00% real, then you get a withdrawal rate of 3.33%. At 1.00% real you get 3.8%. All this being a 30 year LMP. It is not necessarily completely crazy.
It does seem a little crazy to me... :wink:

After 30 years, your money is gone. A 3.x% return on an investment preserving the capital is ok-ish for people who really can't stand the stock market gyrations. A 3.x% return on an investment consuming the capital is NOT ok. First, it's way low. Next, it is actually risky, what if your lifetime does extend past the 30 years? If you're in the ballpark where it is not too likely (e.g. you're at least 70), then an inflation-adjusted annuity should provide more return AND a lifetime guarantee (you never know what medicine will be capable of in a couple of decades).
Thanks

I think there is a middle ground here. I'm building a tips ladder for my retirement. But what i really want is a federally insured inflation indexed annuity (basically more social security!) but it is not available. So i plan to use my tips ladder till i'm in my mid 80s (Deo Volente) and then buy some sort of annuity. I hope tbere are better optiona then because i'm not impressed with the options now...
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: Vanguard's long-term outlook for TIPS

Post by grok87 » Wed Oct 11, 2017 7:07 am

grok87 wrote:
Mon Oct 09, 2017 2:29 pm
#Cruncher wrote:
Sun Oct 08, 2017 7:41 am
grok87 wrote:
Sat Oct 07, 2017 3:18 pm
The size of tips markets is $1.7 Trillion ... At $4 Trillion in assets Vanguard is, IMHO, increasingly being forced in both its investing actions and its general investing guidance toward the broadest possible of world assets ... if they told everyone that they should have 10% in TIPs, that is potentially $400 Billion or 25% of the TIPS market. That would have an incredibly distorting effect on the TIPS market. Consequently, Vanguard is NOT going to make that recommendation.
Excellent point, grok! I'd never considered that Vanguard's advice might be colored by such a concern. By the way, the TIPS market is even smaller than you say. According to the Public Debt Statement 9/30/2017 the inflation-indexed principal outstanding is $1,286 billion. (The market value outstanding is about $1,346 billion as shown in cell K49 on the Weight sheet of my 9/30/2017 YTM / Duration calculator.)
thanks for the correction.

one wonders if someday the US treasury will ramp up tips issuance.
Looks like there is a new update- vanguard is up to 4.7 trillion in assets.
https://www.google.com/amp/s/www.wsj.co ... 1507671188
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: Vanguard's long-term outlook for TIPS

Post by Doc » Wed Oct 11, 2017 9:34 am

grok87 wrote:
Wed Oct 11, 2017 7:02 am
I think there is a middle ground here. I'm building a tips ladder for my retirement. But what i really want is a federally insured inflation indexed annuity (basically more social security!) but it is not available. So i plan to use my tips ladder till i'm in my mid 80s (Deo Volente) and then buy some sort of annuity. I hope tbere are better optiona then because i'm not impressed with the options now...
My only objection to groks ideas is that he is using 30 year bonds. In today's market I would not want to take the term risk so I would use 3 times as many ten's instead.

I don't have the same objective as grok but his reasoning is good except for the duration aspects. And if current real yields were more like historic norms I wouldn't have a problem with using 30's.
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Re: Vanguard's long-term outlook for TIPS

Post by 2015 » Wed Oct 11, 2017 2:04 pm

FIREchief wrote:
Tue Oct 10, 2017 7:30 pm
2015 wrote:
Tue Oct 10, 2017 7:11 pm
A stupid move for me anyway is investing in anything where there's no consensus.
So what do you invest in? There isn't even a consensus on this forum that stocks and bonds are optimum investments. Some argue for rental properties and bitcoin. Others may argue for gold, commodities, antiques, etc. :greedy

"I'm investing a million in a mint condition 1970 hemi cuda! That has to do better than the stock market."
Plain old fashion boring VTBLX. There isn't consensus on a lot of things on this forum, all falling into the category of noise for me (although highly instructional noise!). Again, I'm not trying to be brilliant, just not trying to do anything stupid (at least for me). :wink:

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Re: Vanguard's long-term outlook for TIPS

Post by #Cruncher » Thu Oct 12, 2017 2:17 pm

Doc wrote:
Tue Oct 10, 2017 11:50 am
nedsaid wrote:
Tue Oct 10, 2017 11:29 am
Well yes, I was surprised at the performance of TIPS during the financial crisis. My recollection is that they dropped about 10%-11%. ...
More like 15%.
http://quotes.morningstar.com/chart/fun ... 2%3A955%7D
A couple of things:
  • What does "during the financial crisis" mean? NBER says the latest recession started in December 2007 and ended June 2009. From 12/1/2007 to 6/30/2009 $10,000 invested in the Vanguard VIPSX TIPS fund grew to $10,235. So in one sense, TIPS actually rose "during the financial crisis". But I don't think this is what nedsaid means. What he (and most of us) probably mean is "from the high point to the low point" that occurred during the recession.
  • Your link is to a Price chart of VIPSX, Doc. It would be better to use a Growth chart like this VIPSX Morningstar one 12/1/2007 - 6/30/2009.
Unfortunately, the Morningstar chart shows only weekly values (when you cursor over it). To get daily values I used the NAV reported here for VIPSX along with the dividends reported here to compute the daily values of an initial $10,000:

Code: Select all

                    NAV     Chg      Value      Chg
                   -----   -----   ---------   -----
      12/01/2007   12.58           10,000.00
High  03/10/2008   13.31           10,674.68
Low   11/24/2008   10.77  -19.1%    9,058.40  -15.1%
      06/30/2009   12.15           10,235.44
From the high on 3/10/2008 to the low 11/24/2008 was a decline in value of -15.1%. Because it includes the effect of three dividends, this is a better measure of the decline than the -19.1% fall in Net Asset Value per share [NAV].

Here is an abstract of the daily value detail. It starts out by computing the number of shares equivalent to a $10,000 investment. Then for each dividend it shows the increased shares as the dividend is reinvested. The values agree with the Morningstar chart.

Code: Select all

  Date      NAV     Div    Shares     Value

Code: Select all

12/01/07   12.58          794.913   10,000.00
12/03/07   12.63          794.913   10,039.75
...
12/14/07   12.35          794.913    9,817.17
12/17/07   12.39          794.913    9,848.97
12/18/07   12.46          794.913    9,904.61
12/19/07   12.50          794.913    9,936.41
12/20/07   12.53          794.913    9,960.25
12/21/07   12.33   0.110  802.004    9,888.71
12/24/07   12.29          802.004    9,856.63
12/26/07   12.24          802.004    9,816.53
12/27/07   12.30          802.004    9,864.65
12/28/07   12.36          802.004    9,912.77
...
03/07/08   13.20          802.004   10,586.46
03/10/08   13.31          802.004   10,674.68 <=== high
03/11/08   13.17          802.004   10,562.40
03/12/08   13.29          802.004   10,658.64
03/13/08   13.22          802.004   10,602.50
03/14/08   13.22          802.004   10,602.50
03/17/08   13.09          802.004   10,498.24
03/18/08   13.09          802.004   10,498.24
03/19/08   13.14          802.004   10,538.34
03/20/08   13.15          802.004   10,546.36
03/24/08   12.93          802.004   10,369.91
03/25/08   12.91          802.004   10,353.87
03/26/08   12.95          802.004   10,385.95
03/27/08   12.82   0.160  812.014   10,410.01
03/28/08   12.90          812.014   10,474.98
...
06/20/08   12.65          812.014   10,271.97
06/23/08   12.66          812.014   10,280.09
06/24/08   12.74          812.014   10,345.05
06/25/08   12.74          812.014   10,345.05
06/26/08   12.62   0.240  827.456   10,442.50
06/27/08   12.67          827.456   10,483.87
06/30/08   12.69          827.456   10,500.42 <-- added 8:40 PM
...
09/19/08   12.51          827.456   10,351.48
09/22/08   12.56          827.456   10,392.85
09/23/08   12.44          827.456   10,293.55
09/24/08   12.39          827.456   10,252.18
09/25/08   12.15   0.200  841.077   10,219.08
09/26/08   12.13          841.077   10,202.26
...
11/21/08   10.94          841.077    9,201.38
11/24/08   10.77          841.077    9,058.40 <=== low
11/25/08   10.90          841.077    9,167.74
11/26/08   10.90          841.077    9,167.74
11/28/08   10.96          841.077    9,218.20
...
12/12/08   11.34          841.077    9,537.81
12/15/08   11.29          841.077    9,495.76
12/16/08   11.52          841.077    9,689.20
12/17/08   11.78          841.077    9,907.88
12/18/08   11.84          841.077    9,958.35
12/19/08   11.77   0.014  842.077    9,911.25
12/22/08   11.71          842.077    9,860.72
12/23/08   11.68          842.077    9,835.46
12/24/08   11.66          842.077    9,818.62
12/26/08   11.67          842.077    9,827.04
...
03/20/09   11.99          842.077   10,096.51
03/23/09   12.02          842.077   10,121.77
03/24/09   12.06          842.077   10,155.45
03/25/09   12.04          842.077   10,138.61
03/26/09   12.16   0.005  842.423   10,243.87
03/27/09   12.14          842.423   10,227.02
...
06/29/09   12.09          842.423   10,184.90
06/30/09   12.15          842.423   10,235.44
8:40 PM: edited to add 6/30/2008 row to detail table so can refer to it in follow-up post.
Last edited by #Cruncher on Thu Oct 12, 2017 7:40 pm, edited 1 time in total.

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Re: Vanguard's long-term outlook for TIPS

Post by Doc » Thu Oct 12, 2017 3:29 pm

#Cruncher wrote:
Thu Oct 12, 2017 2:17 pm
A couple of things:
What does "during the financial crisis" mean? NBER says the latest recession started in December 2007 and ended June 2009. From 12/1/2007 to 6/30/2009 $10,000 invested in the Vanguard VIPSX TIPS fund grew to $10,235. So in one sense, TIPS actually rose "during the financial crisis". But I don't think this is what nedsaid means. What he (and most of us) probably mean is "from the high point to the low point" that occurred during the recession.
Your link is to a Price chart of VIPSX, Doc. It would be better to use a Growth chart like this
1) I picked up "during the financial crisis" from another post. I didn't want to get into the nuances of correction vs. crash.
Correction Vs. Crash
A stock market crash is when the 10 percent price drop occurs in just one day. Crashes can lead to a bear market. That's when the market falls another 10 percent, for a total decline of 20 percent or more.
https://www.thebalance.com/stock-market ... on-3305863

2) I completely disagree with your second point of price (or rolling returns) vs. growth. The choice of which is better depends on what your objective is. If you are looking at your FI portfolio in isolation then the growth chart is appropriate. On the other hand if you are concerned with your overall portfolio or how much you will be able to take out of your account each quarter than I belive a price chart or a rolling return chart is more important. (The price chart is most useful for rebalncing concerns in a stock market crash and the rolling return chart may bee more useful if you need to take monthly withdrawals from your portfolio.) Another way to look at it is the growth chart is a long term metric and the price or rolling return chart is a short term metric.

I think too many times when we get into these FI threads the only concern is the FI in isolation. And yet most Bogleheads belive in rebalncing. :(
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Re: Vanguard's long-term outlook for TIPS

Post by #Cruncher » Thu Oct 12, 2017 9:19 pm

Doc wrote:
Thu Oct 12, 2017 3:29 pm
#Cruncher wrote:
Thu Oct 12, 2017 2:17 pm
... Your link is to a Price chart of VIPSX, Doc. It would be better to use a Growth chart like this
... 2) I completely disagree with your second point of price (or rolling returns) vs. growth.
Doc, are you aware that Morningstar's "Rolling Returns" chart is based on the values from the Growth chart, not on the NAVs from the Price chart? To see this, in the Morningstar VIPSX growth chart referenced in my previous post, choose "Rolling Returns" instead of "Growth" and then choose "12 months" as the "Rolling Period". Then move the cursor over the bar on the far right. The upper left of the chart will show "-2.52%" for "2008-07 to 2009-06". As shown in the table in my previous post, this is the percent change in the "Value" from 6/30/2008 to 6/30/2009 (-2.52% = 10235.44 / 10500.42 - 1). It is not the percent change in the "NAV" (-4.26% = 12.15 / 12.69 - 1).
Doc in same post wrote:If you are looking at your FI portfolio in isolation then the growth chart is appropriate. On the other hand if you are concerned with your overall portfolio ... [then] I [believe] a price chart or a rolling return chart is more important.
I see no reason why a growth chart is any less useful when looking at the entire portfolio. Assume a portfolio of a bond fund and a stock fund. I may want to view a chart comparing their performance over some period. I think graphs of their overall returns with dividends reinvested (e.g., a Morningstar Growth chart) do this better than graphs of their NAVs (e.g., a Morningstar Price chart).

10/13/08 8:45 AM: Edited to add the following:
Doc in same post wrote:Another way to look at it is the growth chart is a long term metric and the price or rolling return chart is a short term metric.
A Price chart can be a poor metric even over a short period. Say today a stock fund is priced at $10.00 per share. Tomorrow it pays a $0.20 dividend and the price drops to $9.80. A price chart covering the two days would show a 2% decline while one actually had a 0% return. This is true whether the dividend is reinvested or not.
Last edited by #Cruncher on Fri Oct 13, 2017 7:46 am, edited 2 times in total.

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Re: Vanguard's long-term outlook for TIPS

Post by Doc » Fri Oct 13, 2017 6:24 am

#Cruncher wrote:
Thu Oct 12, 2017 9:19 pm
Doc, are you aware that Morningstar's "Rolling Returns" chart is based on the values from the Growth chart, not on the NAVs from the Price chart?
Chicken and egg. Rolling returns are simply total returns over multiple overlapping time periods. They have some advantages over growth charts. They are not susceptible to end point problems. They also show short term fluctuations in returns with more clarity than the wiggles in a total return chart. The total return chart does show the growth of your investment better over longer time periods assuming that you reinvest all your dividends.

If you want to compare the total return of two or more investments over a long period a total return chart is obviously more appropriate than a price chart provided you adhere to the reinvestment qualification. A better measure would be an IRR calculation but you would need to have all your own data to do that.
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Re: Vanguard's long-term outlook for TIPS

Post by longinvest » Fri Oct 13, 2017 8:04 am

Doc wrote:
Thu Oct 12, 2017 3:29 pm
2) I completely disagree with your second point of price (or rolling returns) vs. growth. The choice of which is better depends on what your objective is. If you are looking at your FI portfolio in isolation then the growth chart is appropriate. On the other hand if you are concerned with your overall portfolio or how much you will be able to take out of your account each quarter than I belive a price chart or a rolling return chart is more important. (The price chart is most useful for rebalncing concerns in a stock market crash and the rolling return chart may bee more useful if you need to take monthly withdrawals from your portfolio.) Another way to look at it is the growth chart is a long term metric and the price or rolling return chart is a short term metric.
(Note the statements I underlined in the citation).

Doc,

I don't see how a price chart can be more important than a total-return chart in a multi-assets portfolio. I personally think that a price chart is of no interest whatsoever to an investor, regardless of whether he's in his accumulation phase or in retirement.

There is a huge distinction between an internal portfolio event, such as a fund distribution, and a portfolio withdrawal. This can be seen quite clearly with tax-advantaged accounts, where taking a withdrawal usually involves a separate step.

To illustrate why one should only care about total returns, let's pick an example of a rebalanced two-assets portfolio (plus cash, after a distribution and before reinvestment), a portfolio made of a TIPS fund and a stocks fund. Let's have two versions of that portfolio, one using traditional index funds which pay regular distributions, and another version using two synthetic index ETFs which promise to match their total-return index but make no distributions.

Let's invest $10,000 in each version of the portfolio, half in stocks, half in TIPS, and let it fluctuate for one quarter at the end of which both TIPS and stock funds make a distribution. Let's assume that the TIPS fund distributes $47.84 and its ending value is $4,927.34 and the stocks fund distributes $41.22 and its ending value is $4,635.02. Assuming all funds and ETFs perfectly matched their index and there was no tracking error, the ending value of the TIPS ETF would be $4,975.18 and the ending value of the stock ETF would be $4,676.24.

If we rebalanced both versions of the portfolio, we would end up at the exact same point:

Code: Select all

Traditional fund version
  - Before rebalance: TIPS = $4,927.34, stocks = $4,635.02, cash = $89.06
    - Total portfolio: $9,651.42
  - After rebalance: TIPS = $4,825.71, stocks = $4,825.71

Synthetic ETF version
  - Before rebalance: TIPS = $4,975.18, stocks = $4,676.24, cash = $0.00
    - Total portfolio: $9,651.42
  - After rebalance: TIPS = $4,825.71, stocks = $4,825.71
Both portfolios end up at the same point after rebalancing, as it should be. Taking a $1,000.00 withdrawal just before rebalancing would change nothing; both versions of the portfolio would end up with ($9,651.42 - $1,000.00) = $8,651.42, divided equally between TIPS and stocks.

Distributions change nothing. A price chart is irrelevant.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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Re: Vanguard's long-term outlook for TIPS

Post by Doc » Sat Oct 14, 2017 10:12 am

longinvest wrote:
Fri Oct 13, 2017 8:04 am
I don't see how a price chart can be more important than a total-return chart in a multi-assets portfolio. I personally think that a price chart is of no interest whatsoever to an investor, regardless of whether he's in his accumulation phase or in retirement.
The price or rolling return chart is important if you are doing TLH or trying to rebalnce in an equity market crash. A distribution can be declared but not paid for some time so you are out that amount of assets for several days.

Since this thread is about TIPS lets look at SPDR® Bloomberg Barclays TIPS ETF. the most recent distribution went ex-dividend on September 1st but was not payable until September 12th, eleven days later.

This topic is way down in the weeds and not many people will care. If you like to use a total return chart just make sure you use a relatively short time period and look at that short term period over many years. It is easier to do with a rolling return chart but many people are not familiar with that type of presentation.

Here's an example of a 3 month rolling return chart for two TIPS funds/ETFs over the last ten years. The market downturns almost jump of the screen at you. A total return chart for those ten years is less dramatic.

Image
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: Vanguard's long-term outlook for TIPS

Post by longinvest » Sat Oct 14, 2017 10:37 am

Doc,
Doc wrote:
Sat Oct 14, 2017 10:12 am
longinvest wrote:
Fri Oct 13, 2017 8:04 am
I don't see how a price chart can be more important than a total-return chart in a multi-assets portfolio. I personally think that a price chart is of no interest whatsoever to an investor, regardless of whether he's in his accumulation phase or in retirement.
The price or rolling return chart is important if you are doing TLH or trying to rebalnce in an equity market crash. A distribution can be declared but not paid for some time so you are out that amount of assets for several days.

Since this thread is about TIPS lets look at SPDR® Bloomberg Barclays TIPS ETF. the most recent distribution went ex-dividend on September 1st but was not payable until September 12th, eleven days later.

This topic is way down in the weeds and not many people will care. If you like to use a total return chart just make sure you use a relatively short time period and look at that short term period over many years. It is easier to do with a rolling return chart but many people are not familiar with that type of presentation.

Here's an example of a 3 month rolling return chart for two TIPS funds/ETFs over the last ten years. The market downturns almost jump of the screen at you. A total return chart for those ten years is less dramatic.

Image
My explanations were not included in the quote, artificially weakening my statement.

So, let me insist. As I explained with a full example, the distributed cash has to be taken into account, when rebalancing. As a consequence, a price-only chart is irrelevant. One must look at the entire portfolio when rebalancing, which necessarily involves considering total returns. It just cannot be otherwise, mathematically.

As for the delay between the distribution settlement date and payment date of an ETF, it's usually only a few days. This delay is simply immaterial except, maybe, for those constantly trading the ETF (like the market maker). Furthermore, the distribution amount is such a tiny percentage of the entire holding* that its impact on rebalancing is lost in the noise of the bid-ask spread of the ETF. I don't think that any of this should be of concern for Bogleheads.

* The inflation-indexed bond ETF I use has monthly distributions of approximately 17 basis points (0.17%). So, we're talking of an impact of 8 basis points on rebalancing a 50/50 portfolio. That won't be visible on a chart!
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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Re: Vanguard's long-term outlook for TIPS

Post by Doc » Sat Oct 14, 2017 11:06 am

@longinvest

We are talking about two different scenarios. I am addressing how TIPS might response in an equity market crash and how you can get some feeling for what that might be. You are addressing rebalncing in a normal non-crisis environment. In the latter case distributions and therefore total return is meaningful. But given that I don't see how a total return chart is relevant. What is relevant for rebalncing is your AA at that moment in time.

All this has almost nothing at all to do with the thread. Enough. :beer
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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