TIPS at a young age?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
simplesauce
Posts: 129
Joined: Tue Jan 17, 2017 8:22 am

TIPS at a young age?

Post by simplesauce » Thu Nov 09, 2017 7:53 am

I am a big fan of David Swensen’s book Unconventional Success. In it, he describes his ideal bond portfolio being:

50% intermediate-term Treasuries (I use VGIT)
50% intermediate-term TIPS (I use VIPSX)


For a younger person who has, say 25% of their portfolio in bonds, does this seem like an acceptable bond allocation? Any issues with letting this ride for decades?

Valuethinker
Posts: 35377
Joined: Fri May 11, 2007 11:07 am

Re: TIPS at a young age?

Post by Valuethinker » Thu Nov 09, 2017 8:54 am

simplesauce wrote:
Thu Nov 09, 2017 7:53 am
I am a big fan of David Swensen’s book Unconventional Success. In it, he describes his ideal bond portfolio being:

50% intermediate-term Treasuries (I use VGIT)
50% intermediate-term TIPS (I use VIPSX)


For a younger person who has, say 25% of their portfolio in bonds, does this seem like an acceptable bond allocation? Any issues with letting this ride for decades?
Intrinsically this is OK.

However real yields on TIPS are a lot lower than they were, then. So the case for them is not as strong.

And they are very volatile-- the longer term TIPS don't track inflation that well. That is why VG introduced a short term TIPS fund.

You run the risk of the stock market going down *and* the TIPS market going down. That happened in late 08 for technical reasons (forced liquidation of TIPS bonds that had been used as collateral for Repos, in an illiquid market). Which hurts your rebalancing premium.

I conclude that it is still not a bad strategy albeit less attractive than it once was.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: TIPS at a young age?

Post by dbr » Thu Nov 09, 2017 9:04 am

Valuethinker wrote:
Thu Nov 09, 2017 8:54 am
simplesauce wrote:
Thu Nov 09, 2017 7:53 am
I am a big fan of David Swensen’s book Unconventional Success. In it, he describes his ideal bond portfolio being:

50% intermediate-term Treasuries (I use VGIT)
50% intermediate-term TIPS (I use VIPSX)


For a younger person who has, say 25% of their portfolio in bonds, does this seem like an acceptable bond allocation? Any issues with letting this ride for decades?
Intrinsically this is OK.

However real yields on TIPS are a lot lower than they were, then. So the case for them is not as strong.

This is very true but a little misleading as real yields on all bonds are lower than they were then. You can't even get 5% CDs any more.

And they are very volatile-- the longer term TIPS don't track inflation that well. That is why VG introduced a short term TIPS fund.

I would comment about this the same way. Any bond of longer term is more volatile than shorter term bonds. But the comment is misleading; not tracking inflation because there is variation in value due to interest rate changes does not mean the bond is not perfectly compensated for inflation. It would be true that if you want an inflation indexed bond and a bond that has short duration, then short TIPS do that. It is not clear how much inflation risk exists for short bonds in the first place, so I think the need for short TIPS is dubious.

You run the risk of the stock market going down *and* the TIPS market going down. That happened in late 08 for technical reasons (forced liquidation of TIPS bonds that had been used as collateral for Repos, in an illiquid market). Which hurts your rebalancing premium.

I conclude that it is still not a bad strategy albeit less attractive than it once was.

The question would be what alternative would be better. It is not as if nominal bonds have high yields either. real or nominal. An investor can always take more risk, but more risk is not an answer; it is more risk. Or there is Harden the Heck Up and take what you are handed.

simplesauce
Posts: 129
Joined: Tue Jan 17, 2017 8:22 am

Re: TIPS at a young age?

Post by simplesauce » Thu Nov 09, 2017 9:21 am

Thank you for the great replies. Can you also address the portion of the question about how appropriate this bond allocation is for a young person? Did David Swensen mean for this recommendation to be for all ages?

User avatar
nisiprius
Advisory Board
Posts: 36232
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: TIPS at a young age?

Post by nisiprius » Thu Nov 09, 2017 9:24 am

TIPS aren't that complicated. People like to make them sound complicated because they don't like TIPS (there isn't any way for anybody to make a lot of money out of them). I think the investment industry hates them because they used to be able to sell you stocks on the premise that you simply must have stocks to protect you against inflation, and TIPS gum up that simplistic picture.

TIPS are Treasuries, and the ratings agencies give them the same rating as other Treasuries--AAA (or Aaa) from three agencies, AA+ from Standard & Poor's. So with respect to default risk and "black swans" you can spin scenarios if you like, but for planning purposes they should be assumed to have virtually no default risk.

With regard to market fluctuations, and suitability for various purposes, the first approximation is that they shouldn't be terribly different from anything else in the same style box, and you'll notice they're in the top right where most "core" bond funds are in the top center, but I think it's a case of both being close to a style box borderline.

Image

They protect against one risk that normal "core" bonds don't protect against: inflation risk. If you believe there is no such thing as a free lunch, that extra protection has to be at the expense of something else. Rationally, you'd expect that other things pay you a "risk premium," then to eliminate a risk that other bond funds have, you would have to pay a "safety premium." In real life, what seems to have happened is that TIPS are issued in relatively small numbers and have turned out to have real but minor liquidity issues, particularly in 2007-2008. But, in a portfolio that has stocks in it, they are just another kind of bond.

I think that when you talk about, say Vanguard Total Bond Market versus the TIPS fund, you are in just the same territory as with other investment-grade, intermediate-term candidates for a "core" bond holdings... maybe just intermediate-term Treasuries, maybe the Vanguard Intermediate-Term Bond Index Fund so as to not hold mortgage-backed securities (MBS), maybe the GNMA fund because you like government-insured MBS, maybe someone's actively managed bond fund like PIMCO Total Return because you don't think indexing applies to bonds, maybe, maybe, maybe. They should all be fine, and compared to stocks they are all pretty similar.

I haven't read Swensen's book, I think he's suggesting that there's some low-correlation benefit to holding a mix of TIPS and nominal bonds. I tend more and more to ignore "correlation" arguments. Even if they're true, they don't really amount to much.

Vanguard's reasoning for only including TIPS at older ages in their Target Retirement funds is that near-retirees and retirees need inflation protection, but also need to cut down on the stock allocation, so if you are getting less inflation protection from the stock allocation, you need to be getting more in the bond allocation. This only makes sense if you feel that TIPS are somewhat less desirable than nominal bonds, a "necessary evil" if you like. I'm skeptical, though, and I think Vanguard might also be motivated by Total Bond being easier to manage, more scalable, and better for them.

I remember the double-digit inflation of the 1970s, and inflation spooks me. I prefer the certainty and simplicity of an investment that is tied directly by contract to the CPI, over investments that traditionally sorta-kinda-tend-to track inflation. I bought my first TIPS in 1988. I wasn't young but that was well before retirement.

I think it is perfectly rational for an investor of any age to tilt toward TIPS based on their personal feelings about inflation risk. Maybe you're sacrificing something to get that inflation protection, maybe not, it's hard to tell, but whatever it is it's not that big a deal.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
Doc
Posts: 8385
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: TIPS at a young age?

Post by Doc » Thu Nov 09, 2017 9:29 am

simplesauce wrote:
Thu Nov 09, 2017 9:21 am
Thank you for the great replies. Can you also address the portion of the question about how appropriate this bond allocation is for a young person? Did David Swensen mean for this recommendation to be for all ages?
In Swedroe's Bond Book he addressed the % TIPS in terms of total Treasuries. The range was 0 TIPS at a 2% real rate and all TIPS at 3% real rate. The exact recommendations is probably dated but the analysis is informative. (IIRC correctly some of the ideas are in the appendix of the book.)
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.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: TIPS at a young age?

Post by dbr » Thu Nov 09, 2017 9:33 am

simplesauce wrote:
Thu Nov 09, 2017 9:21 am
Thank you for the great replies. Can you also address the portion of the question about how appropriate this bond allocation is for a young person? Did David Swensen mean for this recommendation to be for all ages?
I would offer a perhaps devil's advocate position that if you are going to own bonds at any age they should be default free and inflation indexed, aka 100% TIPS. The question would be what argument you would make for holding any other kind of bond.

When it comes to younger people it would often be the case that there is more need, more ability, and more willingness to take risk than for older people, which means more in stocks rather than more risky bonds.

AlohaJoe
Posts: 3579
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: TIPS at a young age?

Post by AlohaJoe » Thu Nov 09, 2017 9:36 am

Valuethinker wrote:
Thu Nov 09, 2017 8:54 am
simplesauce wrote:
Thu Nov 09, 2017 7:53 am
I am a big fan of David Swensen’s book Unconventional Success. In it, he describes his ideal bond portfolio being:

50% intermediate-term Treasuries (I use VGIT)
50% intermediate-term TIPS (I use VIPSX)


For a younger person who has, say 25% of their portfolio in bonds, does this seem like an acceptable bond allocation? Any issues with letting this ride for decades?
Intrinsically this is OK.

However real yields on TIPS are a lot lower than they were, then. So the case for them is not as strong.
This isn't actually true :happy . In 2005, when Swensen's book came out, the real yield on TIPS was 0.8% (nominal yield of 4.2% minus 3.4% inflation). Today it is 0.6%.

And as dodecahedron pointed out, since taxes are based on nominal returns instead of real returns, a taxable TIPS investor today is doing even better than when Swensen's book came out.

User avatar
nisiprius
Advisory Board
Posts: 36232
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: TIPS at a young age?

Post by nisiprius » Thu Nov 09, 2017 9:37 am

valuethinker wrote:...And they are very volatile...
Very volatile?

60/40, Total Stock and Total Bond (VBMFX), portfolio 1, blue;
60/40, Total Stock and Vanguard Inflation-Protected Securities, VIPSX, portfolio 2, red.
80/20, Total Stock and Total Bond, portfolio 3, orange.

Source
Image

Yes, the difference in volatility was there, but it didn't amount to much. Plugging in VIPSX in place of Total Bond only increases the standard deviation by less than 0.5%, and it increased the return commensurately, not changing the Sharpe ratio. By comparison, upping the stock allocation to 80% boosts the standard deviation by 3% (and noticeably changes the Sharpe ratio). In other words, goosing the stock allocation from 60% to 80% has about six times as large an effect as swapping in TIPS.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
Watty
Posts: 13505
Joined: Wed Oct 10, 2007 3:55 pm

Re: TIPS at a young age?

Post by Watty » Thu Nov 09, 2017 9:43 am

Because of the tax issues with TIPS I would assume that you are only looking at this within a retirement account.

I have not read that book but I would be concerned that it would not be diversified enough and if deflation happens then the TIPS mutual fund could do poorly and that could be at a time when your stocks are doing badly too. If you owned individual TIPS you could hold them to maturity which would help some but with a mutual fund the value of the TIPS will be recalculated each day.

With the very low or negative interest rates that TIPS are paying a huge potential problem is that people may be overpaying for the perceived safety and inflation protection. When you think about it is it pretty absurd that people will buy short term TIPS with a negative yield just to get the inflation protection. It may be true that there is nothing better so it may be a valid "least bad" choice for fixed income but this could be an effect of the trillions of dollars that have been spent on the quantitative easing to prevent a collapse during the financial crisis. I would assume that eventually this will end.

It is hard to predict just how things will play out so giving up the diversification of owning a mix of bond types could backfire on you in several ways. This is especially true for a young person with a long investing horizon.
simplesauce wrote:
Thu Nov 09, 2017 7:53 am
For a younger person who has, say 25% of their portfolio in bonds

You didn't say what you would be trying to accomplish with using TIPS. If it was to have safer investments that might really not be needed.

For example if interest rates go up a lot and cause your bond values to drop by 20% then that would cause your overall portfolio to drop by 5% since you only have part of your portfolio in bonds. In the next few years that would be at least partially offset by getting a higher interest rate on the bond your owned, the bonds you bought when you reblanced, and your money from net saving contributions. For a retied person that is living on their portfolio that might be more of a concern but for a young person would barely be a blip on a graph of their long term investments.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: TIPS at a young age?

Post by dbr » Thu Nov 09, 2017 9:44 am

nisiprius wrote:
Thu Nov 09, 2017 9:37 am
valuethinker wrote:...And they are very volatile...
Very volatile?

60/40, Total Stock and Total Bond (VBMFX), portfolio 1, blue;
60/40, Total Stock and Vanguard Inflation-Protected Securities, VIPSX, portfolio 2, red.
80/20, Total Stock and Total Bond, portfolio 3, orange.

Source
Image

Yes, the difference in volatility was there, but it didn't amount to much. Plugging in VIPSX in place of Total Bond only increases the standard deviation by less than 0.5%, and it increased the return commensurately, not changing the Sharpe ratio. By comparison, upping the stock allocation to 80% boosts the standard deviation by 3% (and noticeably changes the Sharpe ratio). In other words, goosing the stock allocation from 60% to 80% has about six times as large an effect as swapping in TIPS.
Well said. Anyway you can get whatever TIPS duration you want, short, medium, or long. And TIPS duration should be relative to real interest rate fluctuations which I suppose are less than nominal interest rate fluctuations.

I especially appreciate recognizing that the whole issue is about the portfolio and not about picking bonds and the fact that stock/bond allocation is the lever on almost everything important unless one is nearly all stocks or nearly no stocks.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: TIPS at a young age?

Post by dbr » Thu Nov 09, 2017 9:46 am

Watty wrote:
Thu Nov 09, 2017 9:43 am
Because of the tax issues with TIPS I would assume that you are only looking at this within a retirement account.
The only tax issue with TIPS is that they are exempt from state income tax and therefore more tax efficient in a taxable account than are nominal bonds. It is true that bonds in general might be better off in tax deferred accounts, but that is not unique to TIPS.

Valuethinker
Posts: 35377
Joined: Fri May 11, 2007 11:07 am

Re: TIPS at a young age?

Post by Valuethinker » Thu Nov 09, 2017 11:00 am

dbr wrote:
Thu Nov 09, 2017 9:04 am
Valuethinker wrote:
Thu Nov 09, 2017 8:54 am
simplesauce wrote:
Thu Nov 09, 2017 7:53 am
I am a big fan of David Swensen’s book Unconventional Success. In it, he describes his ideal bond portfolio being:

50% intermediate-term Treasuries (I use VGIT)
50% intermediate-term TIPS (I use VIPSX)


For a younger person who has, say 25% of their portfolio in bonds, does this seem like an acceptable bond allocation? Any issues with letting this ride for decades?
Intrinsically this is OK.

However real yields on TIPS are a lot lower than they were, then. So the case for them is not as strong.

This is very true but a little misleading as real yields on all bonds are lower than they were then. You can't even get 5% CDs any more.

And they are very volatile-- the longer term TIPS don't track inflation that well. That is why VG introduced a short term TIPS fund.

I would comment about this the same way. Any bond of longer term is more volatile than shorter term bonds. But the comment is misleading; not tracking inflation because there is variation in value due to interest rate changes does not mean the bond is not perfectly compensated for inflation. It would be true that if you want an inflation indexed bond and a bond that has short duration, then short TIPS do that. It is not clear how much inflation risk exists for short bonds in the first place, so I think the need for short TIPS is dubious.

You run the risk of the stock market going down *and* the TIPS market going down. That happened in late 08 for technical reasons (forced liquidation of TIPS bonds that had been used as collateral for Repos, in an illiquid market). Which hurts your rebalancing premium.

I conclude that it is still not a bad strategy albeit less attractive than it once was.

The question would be what alternative would be better. It is not as if nominal bonds have high yields either. real or nominal. An investor can always take more risk, but more risk is not an answer; it is more risk. Or there is Harden the Heck Up and take what you are handed.
Hi

The point was greater volatility than equivalent nominal bonds. Thus potentially cutting the rebalancing premium.

VG was fairly clear about its logic for a ST TIPS fund - greater correlation with inflation, thus greater inflation protection. Purer play.

I felt we had to cover off late 2008 as well-- that's significant, if an investment does the opposite of what you think it should do.

Agree nominal bonds don't look great but they should outperform when stocks are in a bear market.

I grant you Indexed Linked Gilts (UK) are trading at really lousy real yields ( minus 1.5%, about). But I have used nominal bonds rather than ILGs in m portfolio, whereas my bias would be towards inflation linked bonds, generally.

User avatar
oldcomputerguy
Posts: 3130
Joined: Sun Nov 22, 2015 6:50 am
Location: In the middle of five acres of woods

Re: TIPS at a young age?

Post by oldcomputerguy » Thu Nov 09, 2017 11:01 am

dbr wrote:
Thu Nov 09, 2017 9:46 am
Watty wrote:
Thu Nov 09, 2017 9:43 am
Because of the tax issues with TIPS I would assume that you are only looking at this within a retirement account.
The only tax issue with TIPS is that they are exempt from state income tax and therefore more tax efficient in a taxable account than are nominal bonds. It is true that bonds in general might be better off in tax deferred accounts, but that is not unique to TIPS.
I don’t believe this is quite right. As I understand it, the inflation adjustments to TIPS’ principal value are taxed as regular income even though it is not actually “income” as we normally think of it. So to my way of thinking they are even more tax-inefficient than nominal Treasury bonds.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

Valuethinker
Posts: 35377
Joined: Fri May 11, 2007 11:07 am

Re: TIPS at a young age?

Post by Valuethinker » Thu Nov 09, 2017 11:03 am

nisiprius wrote:
Thu Nov 09, 2017 9:37 am
valuethinker wrote:...And they are very volatile...
Very volatile?
Nisi. I'd have to go back and look. But the long TIPS bond did some impressive gyrations in late 2008. Real yields shot back to 3.0%-- in retrospect the apparent bargain of the century.

That's what I meant. I take your point in a balanced portfolio, but in terms of having that fund and watching the price move. Bonds function as a kind of insurance for the portfolio, so one wants to be wary of the possibility that insurance is no longer functional
.

I love the idea of TIPS, and have some sympathy for the Zvi Bodie argument that we should be 90% in TIPS. Except at these real yields you'd need a *lot* of money invested to retire.

Valuethinker
Posts: 35377
Joined: Fri May 11, 2007 11:07 am

Re: TIPS at a young age?

Post by Valuethinker » Thu Nov 09, 2017 11:06 am

AlohaJoe wrote:
Thu Nov 09, 2017 9:36 am
Valuethinker wrote:
Thu Nov 09, 2017 8:54 am
simplesauce wrote:
Thu Nov 09, 2017 7:53 am
I am a big fan of David Swensen’s book Unconventional Success. In it, he describes his ideal bond portfolio being:

50% intermediate-term Treasuries (I use VGIT)
50% intermediate-term TIPS (I use VIPSX)


For a younger person who has, say 25% of their portfolio in bonds, does this seem like an acceptable bond allocation? Any issues with letting this ride for decades?
Intrinsically this is OK.

However real yields on TIPS are a lot lower than they were, then. So the case for them is not as strong.
This isn't actually true :happy . In 2005, when Swensen's book came out, the real yield on TIPS was 0.8% (nominal yield of 4.2% minus 3.4% inflation). Today it is 0.6%.
You amaze me. I was almost certain TIPS real yields were something like 2.5% in 2005?

Do you have a link to a graph?
And as dodecahedron pointed out, since taxes are based on nominal returns instead of real returns, a taxable TIPS investor today is doing even better than when Swensen's book came out.
Interesting. Thank you. Yes the phantom tax drag of higher inflation.

Pravin Lol
Posts: 18
Joined: Wed Oct 09, 2013 12:40 am

Re: TIPS at a young age?

Post by Pravin Lol » Thu Nov 09, 2017 11:06 am

I know some people, myself included, view inflation protection as less important at a young age. When you are young, your human capital/future earnings are the biggest part of your portfolio, broadly defined. Your future salary is inflation-indexed, unless somehow you are under a long-term contract or otherwise don't expect your salary to increase with inflation. The same would be true for any physical assets you have, like a house, though physical assets might depreciate faster than inflation, and are of course undiversified.

For this reason, I didn't buy TIPS in my 30s, and am only now starting to consider them as I approach my 40s. If I were nearing retirement on the other hand I might have a substantial part of my bond allocation in TIPS.

As always, YMMV. Think of TIPS as inflation insurance, for which you pay a premium in the form of lower yield than other bonds. Do you need or want this insurance? If you do, are you willing to pay this premium?

User avatar
triceratop
Moderator
Posts: 5475
Joined: Tue Aug 04, 2015 8:20 pm
Location: la la land

Re: TIPS at a young age?

Post by triceratop » Thu Nov 09, 2017 11:58 am

dbr wrote:
Thu Nov 09, 2017 9:46 am
Watty wrote:
Thu Nov 09, 2017 9:43 am
Because of the tax issues with TIPS I would assume that you are only looking at this within a retirement account.
The only tax issue with TIPS is that they are exempt from state income tax and therefore more tax efficient in a taxable account than are nominal bonds. It is true that bonds in general might be better off in tax deferred accounts, but that is not unique to TIPS.
Nominal treasuries are also state tax-exempt.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

carolinaman
Posts: 3148
Joined: Wed Dec 28, 2011 9:56 am
Location: North Carolina

Re: TIPS at a young age?

Post by carolinaman » Thu Nov 09, 2017 12:26 pm

IMO, TIPS are not as important for a young person as they are for someone nearing or in retirement. Inflation is not nearly as impactful to a young person with a portfolio like yours (75/25). It is a much bigger deal for retirees because they typically have a large allocation of fixed income and they are living on some combination of SS, pensions, annuities and their investments, some of which may not be indexed to inflation. Also, they are no longer working.

Inflation is retirees greatest enemy. However, working people are not as affected by inflation because wages tend to go up with inflation.

User avatar
Doc
Posts: 8385
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: TIPS at a young age?

Post by Doc » Thu Nov 09, 2017 12:39 pm

oldcomputerguy wrote:
Thu Nov 09, 2017 11:01 am
I don’t believe this is quite right. As I understand it, the inflation adjustments to TIPS’ principal value are taxed as regular income even though it is not actually “income” as we normally think of it. So to my way of thinking they are even more tax-inefficient than nominal Treasury bonds.
You are correct. The TIPS inflation portion is taxed annually but you don't get the actual cash.

But it's a red herring.

This is exactly the same situation as reinvesting dividends in other types of bond funds. :shock:

And if you invest in a TIPS fund you do get the cash if you so choose.
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.

jalbert
Posts: 3461
Joined: Fri Apr 10, 2015 12:29 am

Re: TIPS at a young age?

Post by jalbert » Thu Nov 09, 2017 1:00 pm

simplesauce wrote:
Thu Nov 09, 2017 9:21 am
Thank you for the great replies. Can you also address the portion of the question about how appropriate this bond allocation is for a young person? Did David Swensen mean for this recommendation to be for all ages?
Yes. He presents it as a risk-management bond portfolio, i.e. to diversify equity risk. He also recommends holding 30% in bonds, 15% each in nominal and inflation-linked bonds.
Index fund investor since 1987.

User avatar
neurosphere
Posts: 2929
Joined: Sun Jan 17, 2010 1:55 pm

Re: TIPS at a young age?

Post by neurosphere » Thu Nov 09, 2017 3:18 pm

I've had 50/50 TIPS/Nominals for the past 15 or so years. Every year I re-think this strategy when I read that younger people don't need TIPS. But inertia keeps me from making a change. Threads like this re-trigger my deliberations.

Now I'm almost 46 and just realized, shoot, I'm not sure I count as a "younger" person any more, and perhaps I've aged into my TIPS, like a set of pants bought way too long so that a growing boy can keep them for a while. Perhaps a little uncomfortable at first, and certainly not attractive, but serviceable and serve the purpose of providing coverage and warmth and perhaps pockets. But then they eventually fit just fine, and one can strut around knowing they have a good looking and functioning pair of pants. :D

User avatar
oldcomputerguy
Posts: 3130
Joined: Sun Nov 22, 2015 6:50 am
Location: In the middle of five acres of woods

Re: TIPS at a young age?

Post by oldcomputerguy » Thu Nov 09, 2017 3:18 pm

Doc wrote:
Thu Nov 09, 2017 12:39 pm
You are correct. The TIPS inflation portion is taxed annually but you don't get the actual cash.

But it's a red herring.

This is exactly the same situation as reinvesting dividends in other types of bond funds. :shock:
You're right. I never thought of it that way, but the two scenarios are very similar. Thanks.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: TIPS at a young age?

Post by dbr » Thu Nov 09, 2017 4:57 pm

triceratop wrote:
Thu Nov 09, 2017 11:58 am
dbr wrote:
Thu Nov 09, 2017 9:46 am
Watty wrote:
Thu Nov 09, 2017 9:43 am
Because of the tax issues with TIPS I would assume that you are only looking at this within a retirement account.
The only tax issue with TIPS is that they are exempt from state income tax and therefore more tax efficient in a taxable account than are nominal bonds. It is true that bonds in general might be better off in tax deferred accounts, but that is not unique to TIPS.
Nominal treasuries are also state tax-exempt.
Right, I munged this a little, but the point is that TIPS don't have a special tax problem. People get upset over the fact that TIPS bonds don't pay out the inflation increment so the tax can be funded from it. TIPS funds do pay out the increment, but that doesn't help because you have to reinvest that payout if you want an investment that compounds with inflation. The same thing is true if you want the compound return for nominal bonds as well.

Post Reply