TIPS as part of fixed income allocation

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corner559
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TIPS as part of fixed income allocation

Post by corner559 »

A while ago I posted a question about including TIPS as part of your fixed income allocation and it seemed like there were differing opinions. I had two questions about TIPS and the Total Bond Index Fund....

1) Historically, how do bonds do during period of inflation?
2) To what extent do you think one should include TIPS as part of your portfolio given the fact that Vanguard includes TIPS in some of their all-in-one retirement funds? Currently, I have my fixed income split 50/50 between a Total Bond Index fund and a TIPS fund, but the TIPS fund has lagged over the past few years.
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Re: TIPS as part of fixed income allocation

Post by watchnerd »

corner559 wrote: Fri Jan 24, 2020 10:21 am A while ago I posted a question about including TIPS as part of your fixed income allocation and it seemed like there were differing opinions. I had two questions about TIPS and the Total Bond Index Fund....

1) Historically, how do bonds do during period of inflation?
2) To what extent do you think one should include TIPS as part of your portfolio given the fact that Vanguard includes TIPS in some of their all-in-one retirement funds? Currently, I have my fixed income split 50/50 between a Total Bond Index fund and a TIPS fund, but the TIPS fund has lagged over the past few years.
I hold short duration TIPS, both individually and as a fund, as part of my bond allocation.

Currently, they're 1/3 of my fixed income AA.

I don't hold Total Bond at all because I don't want corporate debt as part of my fixed income; I prefer to take my business risk on the equity side.
Last edited by watchnerd on Fri Jan 24, 2020 11:20 am, edited 1 time in total.
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Re: TIPS as part of fixed income allocation

Post by CyberBob »

corner559 wrote: Fri Jan 24, 2020 10:21 am To what extent do you think one should include TIPS as part of your portfolio given the fact that Vanguard includes TIPS in some of their all-in-one retirement funds?
Here is the paper on Vanguard’s approach to target-date funds that shows their stance on TIPS.

https://www.vanguard.com/pdf/s167.pdf
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Re: TIPS as part of fixed income allocation

Post by Elysium »

corner559 wrote: Fri Jan 24, 2020 10:21 am A while ago I posted a question about including TIPS as part of your fixed income allocation and it seemed like there were differing opinions. I had two questions about TIPS and the Total Bond Index Fund....

1) Historically, how do bonds do during period of inflation?
2) To what extent do you think one should include TIPS as part of your portfolio given the fact that Vanguard includes TIPS in some of their all-in-one retirement funds? Currently, I have my fixed income split 50/50 between a Total Bond Index fund and a TIPS fund, but the TIPS fund has lagged over the past few years.
#1 Historically nominal bonds do very poorly during periods of high inflation, longer maturity more and shorter maturity less. Although you need to look at this within the context of overall portfolio, since investors in accumulation have both income replacement ability and higher equity exposure, which will protect against inflation. Therefore, nominal bonds are fine when they offer higher yield spreads.

#2 I agree with Vanguard approach to including TIPS as explained in their TDF strategy. Start including them at 5 years before retirement age, then gradually increase as you age. Vanguard tops this at 17% of overall portfolio, but an individual may chose higher AA, depending on their exposure to inflation. The fact that they have trailed nominal bonds lately is not a consideration in this context, as you are protecting purchasing power of immediate future 5 years or so with this allocation.

Vanguard considers that most investors have access to inflation adjusted SS income, and at least 30% exposure to equities to off set effects of inflation. Therefore, 17% in TIPS at full allocation may be enough. One may chose 20% or 25% give or take.

Vanguard also recommends Short TIPS for this purpose since they are more correlated with sudden spike in inflation and without significant term risk. While they suggest that, they also acknowledge the returns are expected to be lower. One may chose intermediate or long dated TIPS when spreads are higher, although it comes with heightened term risk. I think for retirees trying to simplify things, Vanguard recommendation of Short TIPS may be best since the risk they are protecting is against sudden inflation spikes and lower term risk.

Lastly, investors in accumulation may not need any exposure to TIPS since they have income replacement ability and higher savings rates going into retirement accounts, as opposed to retirees who aren't saving anymore.
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Re: TIPS as part of fixed income allocation

Post by dbr »

An alternative approach to using TIPS in retirement is a TIPS ladder as a liability matching portfolio. I am not personally enthusiastic about this method but the thought behind it is credible. https://www.google.com/search?ei=bCMrXo ... CAo&uact=5

I mention it for completeness regarding use of TIPS.

Another argument that can be made is that because inflation is the classic enemy of being a creditor, all fixed income should be inflation indexed, meaning 100% TIPS or I bonds.

I know Vanguard has analysis for their allocation to TIPS, but it does not impress that small fractions of anything make enough difference to bother. This is not magic fairy dust that if sprinkled over a portfolio turns lead to gold.
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Re: TIPS as part of fixed income allocation

Post by watchnerd »

dbr wrote: Fri Jan 24, 2020 12:06 pm
I know Vanguard has analysis for their allocation to TIPS, but it does not impress that small fractions of anything make enough difference to bother. This is not magic fairy dust that if sprinkled over a portfolio turns lead to gold.
That's why I allocate 1/3 of fixed income to short TIPS: if it doesn't move the needle, why bother?
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Re: TIPS as part of fixed income allocation

Post by Elysium »

watchnerd wrote: Fri Jan 24, 2020 5:37 pm
dbr wrote: Fri Jan 24, 2020 12:06 pm
I know Vanguard has analysis for their allocation to TIPS, but it does not impress that small fractions of anything make enough difference to bother. This is not magic fairy dust that if sprinkled over a portfolio turns lead to gold.
That's why I allocate 1/3 of fixed income to short TIPS: if it doesn't move the needle, why bother?
There is a clear reason for Vanguard's inclusion of TIPS into TR Funds. The objective is clearly not to protect the entire portfolio from inflation, or even the entire bond portion. That may be an objective some investors have, and they need to figure out what's the best way to achieve that.

My understanding of Vanguard's approach, and my own plans as of now aligns with this. The intent is to protect immediate future income streams from sudden spikes in inflation. In other words short to intermediate terms spending needs, say 5 to 7 years of income in Short TIPS will guarantee future spending is protected both from sudden spikes in inflation and rate hikes.

What about rest of the portfolio? well, there are equities, anywhere from 30% to 50%, that will cover inflation protection needs beyond intermediate needs to long term, say 7 years and above. The idea is to sell some of the equities each year and purchase Short TIPS to replace the income taken out. If equities perform poorly, there is time to recover, and you don't sell just wait it out. Use the S-TIPS funds for spending.

What about nominal bonds? why have them? well, for one depending on yield spreads you do not wish to accept lower returns from Short TIPS for all of your bond portfolio. You can leave aside nominal bond allocation for recovery from inflationary periods or rate hike periods. Same idea, use Short TIPS for spending and replace from either equities or nominal bonds depending on what is doing well.

One can also use Long TIPS, Intermediate TIPS, or TIPS ladder with individual bonds instead of this nominal bond allocation, again depending on the yield curve between nominal bonds vs TIPS.

In summary, the relatively smaller allocation to TIPS is all about protecting current income stream from inflationary / rate spikes, while the rest of the portfolio works on generating growth and/on nominal income. Replace TIPS as needed to keep current income going.
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Re: TIPS as part of fixed income allocation

Post by watchnerd »

Elysium wrote: Fri Jan 24, 2020 6:12 pm
watchnerd wrote: Fri Jan 24, 2020 5:37 pm
dbr wrote: Fri Jan 24, 2020 12:06 pm
I know Vanguard has analysis for their allocation to TIPS, but it does not impress that small fractions of anything make enough difference to bother. This is not magic fairy dust that if sprinkled over a portfolio turns lead to gold.
That's why I allocate 1/3 of fixed income to short TIPS: if it doesn't move the needle, why bother?
There is a clear reason for Vanguard's inclusion of TIPS into TR Funds. The objective is clearly not to protect the entire portfolio from inflation, or even the entire bond portion. That may be an objective some investors have, and they need to figure out what's the best way to achieve that.

My understanding of Vanguard's approach, and my own plans as of now aligns with this. The intent is to protect immediate future income streams from sudden spikes in inflation. In other words short to intermediate terms spending needs, say 5 to 7 years of income in Short TIPS will guarantee future spending is protected both from sudden spikes in inflation and rate hikes.

What about rest of the portfolio? well, there are equities, anywhere from 30% to 50%, that will cover inflation protection needs beyond intermediate needs to long term, say 7 years and above. The idea is to sell some of the equities each year and purchase Short TIPS to replace the income taken out. If equities perform poorly, there is time to recover, and you don't sell just wait it out. Use the S-TIPS funds for spending.

What about nominal bonds? why have them? well, for one depending on yield spreads you do not wish to accept lower returns from Short TIPS for all of your bond portfolio. You can leave aside nominal bond allocation for recovery from inflationary periods or rate hike periods. Same idea, use Short TIPS for spending and replace from either equities or nominal bonds depending on what is doing well.

One can also use Long TIPS, Intermediate TIPS, or TIPS ladder with individual bonds instead of this nominal bond allocation, again depending on the yield curve between nominal bonds vs TIPS.

In summary, the relatively smaller allocation to TIPS is all about protecting current income stream from inflationary / rate spikes, while the rest of the portfolio works on generating growth and/on nominal income. Replace TIPS as needed to keep current income going.
All of this makes sense in an environment where there is a decent yield from intermediate nominals.

But I'm not confident we live in a world for the next 10 years where the 'income' part of 'fixed income' will deliver much.
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Re: TIPS as part of fixed income allocation

Post by Elysium »

watchnerd wrote: Fri Jan 24, 2020 6:21 pm
Elysium wrote: Fri Jan 24, 2020 6:12 pm
watchnerd wrote: Fri Jan 24, 2020 5:37 pm
dbr wrote: Fri Jan 24, 2020 12:06 pm
I know Vanguard has analysis for their allocation to TIPS, but it does not impress that small fractions of anything make enough difference to bother. This is not magic fairy dust that if sprinkled over a portfolio turns lead to gold.
That's why I allocate 1/3 of fixed income to short TIPS: if it doesn't move the needle, why bother?
There is a clear reason for Vanguard's inclusion of TIPS into TR Funds. The objective is clearly not to protect the entire portfolio from inflation, or even the entire bond portion. That may be an objective some investors have, and they need to figure out what's the best way to achieve that.

My understanding of Vanguard's approach, and my own plans as of now aligns with this. The intent is to protect immediate future income streams from sudden spikes in inflation. In other words short to intermediate terms spending needs, say 5 to 7 years of income in Short TIPS will guarantee future spending is protected both from sudden spikes in inflation and rate hikes.

What about rest of the portfolio? well, there are equities, anywhere from 30% to 50%, that will cover inflation protection needs beyond intermediate needs to long term, say 7 years and above. The idea is to sell some of the equities each year and purchase Short TIPS to replace the income taken out. If equities perform poorly, there is time to recover, and you don't sell just wait it out. Use the S-TIPS funds for spending.

What about nominal bonds? why have them? well, for one depending on yield spreads you do not wish to accept lower returns from Short TIPS for all of your bond portfolio. You can leave aside nominal bond allocation for recovery from inflationary periods or rate hike periods. Same idea, use Short TIPS for spending and replace from either equities or nominal bonds depending on what is doing well.

One can also use Long TIPS, Intermediate TIPS, or TIPS ladder with individual bonds instead of this nominal bond allocation, again depending on the yield curve between nominal bonds vs TIPS.

In summary, the relatively smaller allocation to TIPS is all about protecting current income stream from inflationary / rate spikes, while the rest of the portfolio works on generating growth and/on nominal income. Replace TIPS as needed to keep current income going.
All of this makes sense in an environment where there is a decent yield from intermediate nominals.

But I'm not confident we live in a world for the next 10 years where the 'income' part of 'fixed income' will deliver much.
True. At current rates, even with slightly modest hike in inflation, say 3% annual, we could be looking at nominal bonds just about break even or even lose a bit over the next decade.

That said, what to do with this depends on the individual situation. Those in accumulation stage can continue to generate income from salary and possibly have higher allocation to equities to compensate. While those in retirement with a TIPS allocation for the next 5-7 years have their immediate spending needs protected, along with SS possibly, and they can wait out the decade for their nominal bonds to recover and/or hope equities do well. Alternatively they can increase bond portion to all inflation linked bonds, although at current rates it doesn't look like you'll come out ahead. There is the option to go searching for yield in Corporate bonds for some extra risk, and it may come out ahead after inflation in the next decade even if there is some temporary set backs from credit defaults along the way. I would think a combination of TIPS+Corporate Bonds+Equities will cover most scenarios.
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Re: TIPS as part of fixed income allocation

Post by abuss368 »

corner559 wrote: Fri Jan 24, 2020 10:21 am A while ago I posted a question about including TIPS as part of your fixed income allocation and it seemed like there were differing opinions. I had two questions about TIPS and the Total Bond Index Fund....

1) Historically, how do bonds do during period of inflation?
2) To what extent do you think one should include TIPS as part of your portfolio given the fact that Vanguard includes TIPS in some of their all-in-one retirement funds? Currently, I have my fixed income split 50/50 between a Total Bond Index fund and a TIPS fund, but the TIPS fund has lagged over the past few years.
In my opinion any short or intermediate term investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio.

We had TIPS fund many years back but consolidated to Total Bond. More simplified.

For good reason Total Bond is the largest bond fund on the PLANET!
John C. Bogle: “Simplicity is the master key to financial success."
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Re: TIPS as part of fixed income allocation

Post by watchnerd »

abuss368 wrote: Fri Jan 24, 2020 8:01 pm
For good reason Total Bond is the largest bond fund on the PLANET!
What reason is that?

It's big and cheap, I'll give you that.
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Re: TIPS as part of fixed income allocation

Post by smectym »

Not much in TIPS but quite a large allocation to I bonds, which are supposed to be conceptually similar, though in practice there are significant differences, which to me tend to favor the I bond modality. And I do consider the I bonds as part of our fixed income allocation
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Re: TIPS as part of fixed income allocation

Post by abuss368 »

Vanguard used to recommend intermediate tips but switched to short term tips.
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Re: TIPS as part of fixed income allocation

Post by JBTX »

As to stocks being inflation hedge, what does the historical data say? It clearly didn't work late 70s.

You can theorize that nominal revenues and profits will increase with inflation (I'd like to see the data on that also) but the PE ratio goes down with the increase of nominal interest rates, correct?

I suspect if inflation just stayed consistently higher, then it would wash. But inflation doesn't really behave that way. The higher it rises, the greater the fear it will rise more >> higher nominal and real rates and whipsawing of economic output as inflation rises and falls.
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Re: TIPS as part of fixed income allocation

Post by watchnerd »

smectym wrote: Fri Jan 24, 2020 8:17 pm Not much in TIPS but quite a large allocation to I bonds, which are supposed to be conceptually similar, though in practice there are significant differences, which to me tend to favor the I bond modality. And I do consider the I bonds as part of our fixed income allocation
I'm curious what % of your fixed income you have in I-bonds?

I don't own any, and if I started now, assuming even a modest 5% portfolio growth per year, I'd never be able to allocate more than low single digit percentages to I-bonds due to the annual purchase limits.
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Re: TIPS as part of fixed income allocation

Post by Horton »

corner559 wrote: Fri Jan 24, 2020 10:21 am A while ago I posted a question about including TIPS as part of your fixed income allocation and it seemed like there were differing opinions. I had two questions about TIPS and the Total Bond Index Fund....

1) Historically, how do bonds do during period of inflation?
2) To what extent do you think one should include TIPS as part of your portfolio given the fact that Vanguard includes TIPS in some of their all-in-one retirement funds? Currently, I have my fixed income split 50/50 between a Total Bond Index fund and a TIPS fund, but the TIPS fund has lagged over the past few years.
I’ve been a proponent of TIPS, but I wouldn’t sweat this decision too much. You could use Vanguard’s Target Date Funds as a good benchmark or just “do half” (50/50).

Total Bond will probably do better in a disinflationary environment and TIPS will do better in an inflationary environment. Doing half gives you some protection in both scenarios.

The LMP approach may also be useful if you are in/ near retirement.

There are different approaches that work well. You just need to find one that works for you.
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Re: TIPS as part of fixed income allocation

Post by fredflinstone »

corner559 wrote: Fri Jan 24, 2020 10:21 am Currently, I have my fixed income split 50/50 between a Total Bond Index fund and a TIPS fund.
Excellent. No need to change a thing.
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Re: TIPS as part of fixed income allocation

Post by abuss368 »

CyberBob wrote: Fri Jan 24, 2020 11:04 am
corner559 wrote: Fri Jan 24, 2020 10:21 am To what extent do you think one should include TIPS as part of your portfolio given the fact that Vanguard includes TIPS in some of their all-in-one retirement funds?
Here is the paper on Vanguard’s approach to target-date funds that shows their stance on TIPS.

https://www.vanguard.com/pdf/s167.pdf
I have read this before. I always thought that Vanguard has provided very good research advice over the years.
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Re: TIPS as part of fixed income allocation

Post by SlowMovingInvestor »

watchnerd wrote: Sat Jan 25, 2020 12:17 am I don't own any, and if I started now, assuming even a modest 5% portfolio growth per year, I'd never be able to allocate more than low single digit percentages to I-bonds due to the annual purchase limits.
If it were possible to keep an I-Bond portfolio outside Treasury Direct, and move it between brokerages (even if the only action allowed was redemption) I'd go for it. But it's not worth keeping an extra account at TD for possibly decades just for this small amount.
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Re: TIPS as part of fixed income allocation

Post by lazyday »

watchnerd wrote: Sat Jan 25, 2020 12:17 amI'd never be able to allocate more than low single digit percentages to I-bonds due to the annual purchase limits.
They still might be useful for flexibility in emergency spending. Another place to draw funds if you need to, without losing space in your Roth or taking capital gains in taxable.

There’s potential upsides like tax deferral or tax free for education. If rates rise, there’s no capital loss like with most bonds. Downsides too. I’d prefer not to die with I bonds.
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Re: TIPS as part of fixed income allocation

Post by Elysium »

abuss368 wrote: Fri Jan 24, 2020 8:01 pm In my opinion any short or intermediate term investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio.

We had TIPS fund many years back but consolidated to Total Bond. More simplified.

For good reason Total Bond is the largest bond fund on the PLANET!
Actually this is not true at all. I know what you meant, and it's based on recent past history. But let's also consider that bond yields were starting much higher in the past 30 years. If you started investing in bonds in 1985, 1995, or 2005, you were starting at 8%, 6%, or 4% rates. Today we are starting at 2% rates. The best predictor of future returns are current rates. At the beginning of 2010 rates for 10 year Treasury were at 3.5% and the total returns were about 3.6% over the same period. Today, it is at 1.8%, Total Bond slightly better at 2.2%, based this expected returns in next decade for 10 YR T/Total Bond is anywhere from 1.5% to 2.8%. We could lag inflation with bonds in next decade, or just about break even. A lot depends on whether rates would go up, down, or stay in a narrow range, but all indications are towards lower bond returns. It may make sense for near-retirees and retirees to invest in TIPS for the money they must protect from inflation, because Total Bond may not for the first time in many years.
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Re: TIPS as part of fixed income allocation

Post by abuss368 »

Elysium wrote: Sat Jan 25, 2020 11:52 am
abuss368 wrote: Fri Jan 24, 2020 8:01 pm In my opinion any short or intermediate term investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio.

We had TIPS fund many years back but consolidated to Total Bond. More simplified.

For good reason Total Bond is the largest bond fund on the PLANET!
Actually this is not true at all. I know what you meant, and it's based on recent past history. But let's also consider that bond yields were starting much higher in the past 30 years. If you started investing in bonds in 1985, 1995, or 2005, you were starting at 8%, 6%, or 4% rates. Today we are starting at 2% rates. The best predictor of future returns are current rates. At the beginning of 2010 rates for 10 year Treasury were at 3.5% and the total returns were about 3.6% over the same period. Today, it is at 1.8%, Total Bond slightly better at 2.2%, based this expected returns in next decade for 10 YR T/Total Bond is anywhere from 1.5% to 2.8%. We could lag inflation with bonds in next decade, or just about break even. A lot depends on whether rates would go up, down, or stay in a narrow range, but all indications are towards lower bond returns. It may make sense for near-retirees and retirees to invest in TIPS for the money they must protect from inflation, because Total Bond may not for the first time in many years.
Actually your response is incorrect.

My post made three points:

1) Any short or intermediate term investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio.

2) We owned the TIPS fund and consolidated our funds.

3) Total Bond is the largest fund on the planet.

If you read my earlier thread perhaps you will notice that I avoid discussion on inflation and performance.
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Re: TIPS as part of fixed income allocation

Post by Elysium »

abuss368 wrote: Sat Jan 25, 2020 2:50 pm
Actually your response is incorrect.

My post made three points:

1) Any short or intermediate term investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio.

2) We owned the TIPS fund and consolidated our funds.

3) Total Bond is the largest fund on the planet.

If you read my earlier thread perhaps you will notice that I avoid discussion on inflation and performance.
Your statement #1 is the important point in the context of the topic OP raised. You may not have specifically said anything about real bond returns, but the topic is about OP asking whether TIPS makes sense in a portfolio, so the statement any low cost and diversified fund will provide safety and income to a portfolio is not addressing the issue. We cannot speak about safety and income without also thinking about whether it will meet our goals. Given the yields are at 2% today, they may not provide safety and income, especially after inflation. Those who are in accumulation phase do not have to worry too much about this since they have current income, but for those near retirement or in retirement should think about including TIPS for meeting at the minimum short term needs, if not entire bond portion.

There are exceptions obviously, for instance if someone has a large pension, their current expenses in relation to their SS payout, whether they have any SPIA allocation, other sources of income such as rental / royalties, all of those matters when considering how much inflation protection they need.
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Re: TIPS as part of fixed income allocation

Post by corner559 »

CyberBob wrote: Fri Jan 24, 2020 11:04 am
corner559 wrote: Fri Jan 24, 2020 10:21 am To what extent do you think one should include TIPS as part of your portfolio given the fact that Vanguard includes TIPS in some of their all-in-one retirement funds?
Here is the paper on Vanguard’s approach to target-date funds that shows their stance on TIPS.

https://www.vanguard.com/pdf/s167.pdf
Thanks very much for this. Interesting read!
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Re: TIPS as part of fixed income allocation

Post by Explorer »

My view is as long as one maintains at least 30% allocation to equities, no need to include TIPS - you can just use the Agg Bond funds (US & Intl) which do not include TIPS.
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Re: TIPS as part of fixed income allocation

Post by Elysium »

Explorer wrote: Tue Jan 28, 2020 9:32 am My view is as long as one maintains at least 30% allocation to equities, no need to include TIPS - you can just use the Agg Bond funds (US & Intl) which do not include TIPS.
Okay, so what do you do when equities are having a -50% drawdown, inflation is running above nominal bond rates, and you need to draw from your retirement assets. Sell equities that are declining, or sell nominal bonds that are trailing inflation?
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Re: TIPS as part of fixed income allocation

Post by SlowMovingInvestor »

Elysium wrote: Tue Jan 28, 2020 9:37 am
Okay, so what do you do when equities are having a -50% drawdown, inflation is running above nominal bond rates, and you need to draw from your retirement assets. Sell equities that are declining, or sell nominal bonds that are trailing inflation?
TIPS are typically held in a tax sheltered account.

So you would move from TIPS to regular bonds in a tax sheltered account, and sell regular bonds in a taxable account ? [ wondering about the mechanics of using TIPS here only]. That way you would reduce your TIPS portfolio, but not take a withdrawal ?
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Re: TIPS as part of fixed income allocation

Post by Elysium »

SlowMovingInvestor wrote: Tue Jan 28, 2020 9:47 am
Elysium wrote: Tue Jan 28, 2020 9:37 am
Okay, so what do you do when equities are having a -50% drawdown, inflation is running above nominal bond rates, and you need to draw from your retirement assets. Sell equities that are declining, or sell nominal bonds that are trailing inflation?
TIPS are typically held in a tax sheltered account.

So you would move from TIPS to regular bonds in a tax sheltered account, and sell regular bonds in a taxable account ? [ wondering about the mechanics of using TIPS here only]. That way you would reduce your TIPS portfolio, but not take a withdrawal ?
Yes, but the previous poster is saying there is not need for TIPS in a portfolio. If you don't own TIPS at all then you can't sell them anywhere, and you are stuck with selling either declining equities or nominal bonds trailing inflation. This why TIPS are an important tool in a retirement portfolio.
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Re: TIPS as part of fixed income allocation

Post by SlowMovingInvestor »

Elysium wrote: Tue Jan 28, 2020 9:54 am
SlowMovingInvestor wrote: Tue Jan 28, 2020 9:47 am
Elysium wrote: Tue Jan 28, 2020 9:37 am
Okay, so what do you do when equities are having a -50% drawdown, inflation is running above nominal bond rates, and you need to draw from your retirement assets. Sell equities that are declining, or sell nominal bonds that are trailing inflation?
TIPS are typically held in a tax sheltered account.

So you would move from TIPS to regular bonds in a tax sheltered account, and sell regular bonds in a taxable account ? [ wondering about the mechanics of using TIPS here only]. That way you would reduce your TIPS portfolio, but not take a withdrawal ?
Yes, but the previous poster is saying there is not need for TIPS in a portfolio. If you don't own TIPS at all then you can't sell them anywhere, and you are stuck with selling either declining equities or nominal bonds trailing inflation. This why TIPS are an important tool in a retirement portfolio.
I wasn't disputing that. I'm merely trying to figure out how one would drawdown TIPS if they're in a tax sheltered account without a tax hit.

Evaluating TIPS and also considering I-Bonds vs TIPs, but only 10-20K/per year is a serious drawback.
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Re: TIPS as part of fixed income allocation

Post by Explorer »

Elysium wrote: Tue Jan 28, 2020 9:37 am
Explorer wrote: Tue Jan 28, 2020 9:32 am My view is as long as one maintains at least 30% allocation to equities, no need to include TIPS - you can just use the Agg Bond funds (US & Intl) which do not include TIPS.
Okay, so what do you do when equities are having a -50% drawdown, inflation is running above nominal bond rates, and you need to draw from your retirement assets. Sell equities that are declining, or sell nominal bonds that are trailing inflation?
Hypothetical scenario... I will leave it at that. I see no need to add TIPS to my portfolio.
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Re: TIPS as part of fixed income allocation

Post by watchnerd »

Explorer wrote: Tue Jan 28, 2020 10:50 am
Elysium wrote: Tue Jan 28, 2020 9:37 am
Explorer wrote: Tue Jan 28, 2020 9:32 am My view is as long as one maintains at least 30% allocation to equities, no need to include TIPS - you can just use the Agg Bond funds (US & Intl) which do not include TIPS.
Okay, so what do you do when equities are having a -50% drawdown, inflation is running above nominal bond rates, and you need to draw from your retirement assets. Sell equities that are declining, or sell nominal bonds that are trailing inflation?
Hypothetical scenario... I will leave it at that. I see no need to add TIPS to my portfolio.
All scenarios are hypothetical, aren't they?

It sounds like you think anything above "nuisance level" inflation is highly unlikely.

I hope you're right, but I'm still holding some short TIPS just in case.
Last edited by watchnerd on Tue Jan 28, 2020 11:33 am, edited 1 time in total.
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Re: TIPS as part of fixed income allocation

Post by Explorer »

watchnerd wrote: Tue Jan 28, 2020 10:55 am
Explorer wrote: Tue Jan 28, 2020 10:50 am
Elysium wrote: Tue Jan 28, 2020 9:37 am
Explorer wrote: Tue Jan 28, 2020 9:32 am My view is as long as one maintains at least 30% allocation to equities, no need to include TIPS - you can just use the Agg Bond funds (US & Intl) which do not include TIPS.
Okay, so what do you do when equities are having a -50% drawdown, inflation is running above nominal bond rates, and you need to draw from your retirement assets. Sell equities that are declining, or sell nominal bonds that are trailing inflation?
Hypothetical scenario... I will leave it at that. I see no need to add TIPS to my portfolio.
All scenarios are hypothetical, aren't they?

It sounds like you think anything about "nuisance level" inflation is highly unlikely.

I hope you're right, but I'm still holding some short TIPS just in case.
I don't have any predictions on inflation.. all I am saying is with at least 30% alloc to stocks I feel comfortable that I can cover inflation concerns.

Could I be totally wrong? Absolutely. Could I be just fine in the future? Absolutely. Stock indexes and agg bond indexes that is all I need in the portfolio.
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Re: TIPS as part of fixed income allocation

Post by Elysium »

Explorer wrote: Tue Jan 28, 2020 10:50 am
Elysium wrote: Tue Jan 28, 2020 9:37 am
Explorer wrote: Tue Jan 28, 2020 9:32 am My view is as long as one maintains at least 30% allocation to equities, no need to include TIPS - you can just use the Agg Bond funds (US & Intl) which do not include TIPS.
Okay, so what do you do when equities are having a -50% drawdown, inflation is running above nominal bond rates, and you need to draw from your retirement assets. Sell equities that are declining, or sell nominal bonds that are trailing inflation?
Hypothetical scenario... I will leave it at that. I see no need to add TIPS to my portfolio.
Hypothetical because you haven't experienced it :shock:

I say recency bias, looking at past decade or two where inflation was tame and nominal bonds were starting from high rates in a declining rate scenario.

Just study the history before that and the high inflationary periods of 70's and early 80's. Both stocks and bonds did poorly. This is the kind of situation TIPS will protect a retiree portfolio.

Inflation spikes are real and very much possible, no one knows when why and how much until after the fact. It is normal to get complacent after period of low inflation combined with decent returns for nominal bonds.

If you do not see need to add TIPS to your portfolio that doesn't mean others don't. Every individual situation is different. Someone with a guaranteed pension, enough SS income to meet lifestyle, other sources of income such as rentals and royalties, etc may not need.
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Re: TIPS as part of fixed income allocation

Post by Elysium »

Explorer wrote: Tue Jan 28, 2020 10:59 am I don't have any predictions on inflation.. all I am saying is with at least 30% alloc to stocks I feel comfortable that I can cover inflation concerns.
Consider this.

A recent 10 year period from 2000 to 2009, US Total Stock Index returned a negative 0.27%. Inflation averaged above 3% in half of those ten years, and 2% for the rest half. Average inflation ran at 2.5% for this ten year period. Nominal Agg US Bonds were starting at 6% yield, and with rate cuts they did well, returning close to 6% during this 10 years, thus saving a bond heavy portfolio from total disaster. Best predictor of bond returns are current rates.

Given today US Agg Bonds are at 2%, it is very likely they could return anywhere from 1.5% to 2.5% in the next decade, and very likely inflation could run 2.5% to 3%. This will make US Agg Bonds to just about breakeven or trail inflation. You don't even need a spike in inflation, or the hyperinflation of 70's. Combine this with the fact stocks are coming off a ten year bull market with higher than average returns with current valuations peaking, the possibility of lower returns, and/or large drawdowns very much likely.

This is not a far fetched situation at all. This are very likely scenarios using modest estimates.
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Re: TIPS as part of fixed income allocation

Post by Explorer »

Elysium wrote: Tue Jan 28, 2020 11:20 am
Explorer wrote: Tue Jan 28, 2020 10:59 am I don't have any predictions on inflation.. all I am saying is with at least 30% alloc to stocks I feel comfortable that I can cover inflation concerns.
Consider this.

A recent 10 year period from 2000 to 2009, US Total Stock Index returned a negative 0.27%. Inflation averaged above 3% in half of those ten years, and 2% for the rest half. Average inflation ran at 2.5% for this ten year period. Nominal Agg US Bonds were starting at 6% yield, and with rate cuts they did well, returning close to 6% during this 10 years, thus saving a bond heavy portfolio from total disaster. Best predictor of bond returns are current rates.

Given today US Agg Bonds are at 2%, it is very likely they could return anywhere from 1.5% to 2.5% in the next decade, and very likely inflation could run 2.5% to 3%. This will make US Agg Bonds to just about breakeven or trail inflation. You don't even need a spike in inflation, or the hyperinflation of 70's. Combine this with the fact stocks are coming off a ten year bull market with higher than average returns with current valuations peaking, the possibility of lower returns, and/or large drawdowns very much likely.

This is not a far fetched situation at all. This are very likely scenarios using modest estimates.
Fair enough. To each his/her own.
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Re: TIPS as part of fixed income allocation

Post by watchnerd »

Elysium wrote: Tue Jan 28, 2020 11:20 am

Given today US Agg Bonds are at 2%, it is very likely they could return anywhere from 1.5% to 2.5% in the next decade, and very likely inflation could run 2.5% to 3%. This will make US Agg Bonds to just about breakeven or trail inflation. You don't even need a spike in inflation, or the hyperinflation of 70's. Combine this with the fact stocks are coming off a ten year bull market with higher than average returns with current valuations peaking, the possibility of lower returns, and/or large drawdowns very much likely.

This is not a far fetched situation at all. This are very likely scenarios using modest estimates.
This scenario is actually my working default for planning purposes over the next 10 years.

It's also in line with the 2020 forecast papers from Vanguard, BlackRock, JP Morgan, etc.
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Re: TIPS as part of fixed income allocation

Post by Elysium »

watchnerd wrote: Tue Jan 28, 2020 11:31 am
Elysium wrote: Tue Jan 28, 2020 11:20 am

Given today US Agg Bonds are at 2%, it is very likely they could return anywhere from 1.5% to 2.5% in the next decade, and very likely inflation could run 2.5% to 3%. This will make US Agg Bonds to just about breakeven or trail inflation. You don't even need a spike in inflation, or the hyperinflation of 70's. Combine this with the fact stocks are coming off a ten year bull market with higher than average returns with current valuations peaking, the possibility of lower returns, and/or large drawdowns very much likely.

This is not a far fetched situation at all. This are very likely scenarios using modest estimates.
This scenario is actually my working default for planning purposes over the next 10 years.

It's also in line with the 2020 forecast papers from Vanguard, BlackRock, JP Morgan, etc.
Indeed. Bonds possibly 0.5% real returns given current rates. Stocks possibly 4% to 5% given last decade S&P 500 returned 13.5%.

That said, I haven't done anything myself regarding TIPS because I still have another 10 years at least of earnings potential, so could fight inflation with current income. If I were planning to retire now or already retired, then I would not feel safe just having equities and nominal bonds, unless there is also another source.
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Re: TIPS as part of fixed income allocation

Post by gmaynardkrebs »

Explorer wrote: Tue Jan 28, 2020 10:50 am
Elysium wrote: Tue Jan 28, 2020 9:37 am
Explorer wrote: Tue Jan 28, 2020 9:32 am My view is as long as one maintains at least 30% allocation to equities, no need to include TIPS - you can just use the Agg Bond funds (US & Intl) which do not include TIPS.
Okay, so what do you do when equities are having a -50% drawdown, inflation is running above nominal bond rates, and you need to draw from your retirement assets. Sell equities that are declining, or sell nominal bonds that are trailing inflation?
Hypothetical scenario... I will leave it at that. I see no need to add TIPS to my portfolio.
Depends on your situation of course, but even 2% inflation takes a big toll over many years.
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Re: TIPS as part of fixed income allocation

Post by Nightowl99 »

This is just the thing I was pondering today, so I appreciate the discussion. This time may really be different, and to me it seems like more inflation is inevitable sometime in the future, so I made a little exchange from Total Bond to Short-term inflation protected today. Without doing the math, it seems like a lateral exchange, more or less, since the price per share is up YTD for both funds. Thanks, Elysium!
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