“Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

[BogleBuddy12]

Hi all. In the Bogleheads’ Guide to Investing book (which I love,) they provide some sample portfolios (photo below:)



An observation in particular is how they suggest splitting one’s bond allocation as follows:

50% Total Bond Market
50% TIPS Fund

They discuss the diversification benefits by comparing Total Bond Market to a TIPS fund (chart below:)



I would guess that most Bogleheads do not hold 50% of their bond allocations in TIPS. (I would also question if a 5% allocation to REITs is necessary.)

I personally use the Vanguard Target Retirement funds, which do not have an allocation to TIPS (except as you near and enter retirement.)

I am looking for thoughts on the importance of balancing the Total Bond Market fund with a TIPS fund, perhaps 50/50.

I also understand there are concerns with TIPS funds, such as: 1. They haven’t been tested in a hyperinflationary environment
2. They don’t accurately reflect inflation?
3. What if the govt does not honor them if they skyrocket
4. A TIPS fund is not as well diversified as Total Bond Market
5. TIPS only make up about 15-20% of the bond market, so allocating half of your bonds to them would be out of line.
Etc.

[BogleBuddy12]

It’s my understanding that TIPS are not as popular as they once were.

[Mel Lindauer]

It’s my understanding that TIPS are not as popular as they once were.

TIPS aren't as popular now because they've been providing negative real rates. I Bonds are probably a better choice for inflation protection at the present time.

[BogleBuddy12]

It’s my understanding that TIPS are not as popular as they once were.

TIPS aren't as popular now because they've been providing negative real rates. I Bonds are probably a better choice for inflation protection at the present time.

Thanks! Would that make the recommendation of 50% TIPS outdated? Or perhaps still good advice for the long-term?

[000]

IMO 50% of bond allocation to TIPS is a fine allocation (the superiority of Series I bonds for most applications noted above). In fact I would prefer such an allocation to 100% nominals.

The fact that TIPS (well, most issues) are providing an explicit negative real yield is not relevant because nominal treasuries are providing an expected negative real yield as well, i.e. the stated nominal yield is not enough to overcome expected inflation.

[Robot Monster]

It’s my understanding that TIPS are not as popular as they once were.

TIPS aren't as popular now because they've been providing negative real rates. I Bonds are probably a better choice for inflation protection at the present time.

Thanks! Would that make the recommendation of 50% TIPS outdated? Or perhaps still good advice for the long-term?

Just want to point out two things:

1. You can buy up to $10,000 per year of I Bonds, so you should max out I Bonds before investing in TIPS. Both TIPS and nominal bonds offer negative real rates, so please don't let the negative yield on TIPS scare you.

2. On a short-term basis, BlackRock is currently overweight TIPS, underweight nominal Treasuries. You can read their reasoning here.

[arcticpineapplecorp.]

here's an article by Rick Ferri that suggests 20% (of overall fixed income portion) in TIPS:

I believe 20% in a low-cost TIPS fund is a good policy. They provide a hedge against unanticipated inflation and help diversify a fixed income portfolio.

source: https://www.forbes.com/sites/rickferri/ ... c8bce592ea

the article is from 2013 if that matters.

[retiredjg]

I am looking for thoughts on the importance of balancing the Total Bond Market fund with a TIPS fund, perhaps 50/50.

Several years ago, suggesting half TIPs was common around here. Then there were some discussions about whether TIPS are needed while working (because your salary should keep up with inflation). And the bond market started on the downhill and TIPS started producing almost nothing before some of the other things did.

Somewhere along the line, TIPS fell out of favor, at least for working people who have built in inflation protection in their income (at least that was the hope). Add to that falling interest rates...Suffice it to say that TIPS are not getting a lot of love these days.

My opinion - Having some TIPS is not going to hurt an otherwise decent portfolio. Not having TIPS is not going to hurt an otherwise decent portfolio. I suspect that having all your bonds in TIPS is probably not a good choice these days.

[vineviz]

I am looking for thoughts on the importance of balancing the Total Bond Market fund with a TIPS fund, perhaps 50/50.

I also understand there are concerns with TIPS funds, such as: 1. They haven’t been tested in a hyperinflationary environment
2. They don’t accurately reflect inflation?
3. What if the govt does not honor them if they skyrocket
4. A TIPS fund is not as well diversified as Total Bond Market
5. TIPS only make up about 15-20% of the bond market, so allocating half of your bonds to them would be out of line.

Sometimes people voice concerns like these five, but essentially they are all baseless.

That said, the underlying question about "the importance of balancing the Total Bond Market fund with a TIPS fund" can really only be answered on a case-by-case basis. Ultimately it depends on things like:

How much of your retirement spending will be covered by Social Security and how much will be withdrawn from your investment portfolio?
How much of your investment portfolio do you expect to withdraw each year?
How much flexibility in the amount of those withdrawals can you tolerate?
How much of your investment portfolio will be allocated to stocks and how much to bonds?

Depending on the mix of answers to those questions, you could literally find that the ideal TIPS allocation for YOU is anywhere from 0% of bonds to 100% of bonds.

If you're more than 10 years from retirement, you probably don't need any TIPS yet (then again you probably shouldn't have much in Total Bond Market either). However, as others have pointed out, it certainly might be prudent to start a process of purchasing Series I savings bonds every year starting at age 40 (possibly earlier if you want to use them as part of your "emergency fund").

[Elysium]

OP,

As of now Vanguard intermediate TIPS fund is yielding -1.68% real, but that doesn't count income adjustment for change in inflation if that were to happen. Total Bond Index is yielding 1.38% before adjusting for inflation. Assuming inflation running around 2.2% in 2021 (slightly lower than 2.3% in 2019 and higher than the 1.4% in 2020, it is on the rise slightly), then the real yield on TBM will be -0.82%.

So, take -1.68% from TIPS or -0.82% from TBM, depends on whether you wish to hedge against future change in inflation if it comes higher than expected. But, it isn't apples to apples since TBM contains corporate bonds and mortgage backed bonds, while TIPS are 100% treasury. To compare with nominal treasuries then, Interm-Term Treasury Index is yielding 0.87%, or a -1.33%. Almost no difference between nominal and inflation linked treasuries.

If inflation were to go up more than expected, then you will earn extra from adjusted income for that change with TIPS, but nothing with nominal bonds. You may breakeven with either one, or you may earn more with TIPS depending on how much inflation will rise. If we get a lot of inflation like the 70's then you will most definitely be happy to be owning TIPS and not nominal bonds. If we end up staying lower level as expected then you may be better off with nominals.

No right answer, but investing is all about coming up with protection against different scenarios, and looking forward there is no scenario under which TIPS are a terrible idea, at worst you give up a little and consider that insurance premium against rising inflation. At best you will be happy you owned them.

[BogleBuddy12]

OP,

As of now Vanguard intermediate TIPS fund is yielding -1.68% real, but that doesn't count income adjustment for change in inflation if that were to happen. Total Bond Index is yielding 1.38% before adjusting for inflation. Assuming inflation running around 2.2% in 2021 (slightly lower than 2.3% in 2019 and higher than the 1.4% in 2020, it is on the rise slightly), then the real yield on TBM will be -0.82%.

So, take -1.68% from TIPS or -0.82% from TBM, depends on whether you wish to hedge against future change in inflation if it comes higher than expected. But, it isn't apples to apples since TBM contains corporate bonds and mortgage backed bonds, while TIPS are 100% treasury. To compare with nominal treasuries then, Interm-Term Treasury Index is yielding 0.87%, or a -1.33%. Almost no difference between nominal and inflation linked treasuries.

If inflation were to go up more than expected, then you will earn extra from adjusted income for that change with TIPS, but nothing with nominal bonds. You may breakeven with either one, or you may earn more with TIPS depending on how much inflation will rise. If we get a lot of inflation like the 70's then you will most definitely be happy to be owning TIPS and not nominal bonds. If we end up staying lower level as expected then you may be better off with nominals.

No right answer, but investing is all about coming up with protection against different scenarios, and looking forward there is no scenario under which TIPS are a terrible idea, at worst you give up a little and consider that insurance premium against rising inflation. At best you will be happy you owned them.

Thanks! And you don’t share any of the few concerns with TIPS that I often hear, noted in my original post?

[BogleBuddy12]

here's an article by Rick Ferri that suggests 20% (of overall fixed income portion) in TIPS:

I believe 20% in a low-cost TIPS fund is a good policy. They provide a hedge against unanticipated inflation and help diversify a fixed income portfolio.

source: https://www.forbes.com/sites/rickferri/ ... c8bce592ea

the article is from 2013 if that matters.

Yes thanks, I am familiar with this article and Rick Ferri’s approach. I wonder if he still has the same approach in 2021.

[J295]

Early retired
50% equity
30% fixed split equally between TIP and BND
20% CD, I bond, s-t bond, MMF

Within the last year or two I posted about the BND and TIP allocations and as I recall splitting between the two for the fixed portion seemed reasonable and not uncommon.

In our particular situation, the fixed and cash are a ballast so we don’t get granular on our analysis. They represent approximately 20 years of expenses.

I realize this is just one data point and not substantive in analysis, primarily because for us the split is “good enough” and our crystal ball is broken. YMMV.

(Was 100% equity until 2013 retirement).

[Beensabu]

If you're going to go 50/50 nominal and TIPS, you might as well go LTT for nominal and short/mid-term for TIPS. There's a person here who does that and is vocal about it. It's not a bad idea. At least as an accumulator.

I also understand there are concerns with TIPS funds, such as: 1. They haven’t been tested in a hyperinflationary environment
2. They don’t accurately reflect inflation?
3. What if the govt does not honor them if they skyrocket
4. A TIPS fund is not as well diversified as Total Bond Market
5. TIPS only make up about 15-20% of the bond market, so allocating half of your bonds to them would be out of line.
Etc.

Don't forget illiquidity in a crisis. Seen that twice now.

You're referencing a publication from 2014, that was likely written/updated around a year prior to publication. The REIT recommendation is from a by-gone era. That's the problem with sample portfolios -- out of time = out of context. What was once almost considered a separate asset class is now simply a sub asset class.

TIPS have been around for 24 years. There hasn't even been any "high inflation" (i.e. >4%) since then. They haven't been purpose tested yet at all. They have been crisis tested though, so you'd best have another drawdown source for that eventuality.

[stimulacra]

Of my bond allocation, I do 1/3 Total Bonds, 1/3 TIPS, 1/3 Corporate Bonds.

[watchnerd]

I would guess that most Bogleheads do not hold 50% of their bond allocations in TIPS.

If counting actual 'bonds' (ignoring our cash), we're at exactly 50% TIPS.

Including both the Short TIPS (see sig) and individual 10 YR TIPS in our LMP ladder.

[Elysium]

Thanks! And you don’t share any of the few concerns with TIPS that I often hear, noted in my original post?

No, I don't . Most of those are not real concerns, but more like excuses.

[watchnerd]

It’s my understanding that TIPS are not as popular as they once were.

TIPS aren't as popular now because they've been providing negative real rates. I Bonds are probably a better choice for inflation protection at the present time.

Thanks! Would that make the recommendation of 50% TIPS outdated? Or perhaps still good advice for the long-term?

Negative real rates isn't a TIPS-specific problem.

All Treasuries right now with a maturity <30 Years have negative real rates.

https://www.treasury.gov/resource-cente ... =realyield

[watchnerd]

If you're going to go 50/50 nominal and TIPS, you might as well go LTT for nominal and short/mid-term for TIPS. There's a person here who does that and is vocal about it. It's not a bad idea. At least as an accumulator.

Who, me?

[Beensabu]

If you're going to go 50/50 nominal and TIPS, you might as well go LTT for nominal and short/mid-term for TIPS. There's a person here who does that and is vocal about it. It's not a bad idea. At least as an accumulator.

Who, me?

Of course

[Valuethinker]

I am looking for thoughts on the importance of balancing the Total Bond Market fund with a TIPS fund, perhaps 50/50.

I also understand there are concerns with TIPS funds, such as: 1. They haven’t been tested in a hyperinflationary environment

Nothing has. Not in the USA since the Confederate States of America collapsed.

*High inflation*. The 1970s. Still was less than 10 per cent pa (over the whole decade). They were constructed to meet that challenge -- however the tax drag gets significant.

2. They don’t accurately reflect inflation?

You will be interested to know that it was *conservative* economists (the Boskin Commission) who, in the 1990s, concluded that CPI-U was overstating inflation (understating quality improvements).

This, in other words, is "motivated cognition" or "motivated reasoning". Believing that the US govt systematically understates CPI-U is largely motivated by a political point of view (unconscious, perhaps).

What is true is that retirees' inflation may not be fully measured by CIP-U, in particular due to the importance of healthcare costs to retirees (that are not covered by US Medicare).

3. What if the govt does not honor them if they skyrocket

Then the US govt would be in default of a debt obligation, and we would be in a very grim place indeed.

4. A TIPS fund is not as well diversified as Total Bond Market

"well diversified" in what sense? TIPS are designed to match inflation, very few corporate or other bonds do that.

5. TIPS only make up about 15-20% of the bond market, so allocating half of your bonds to them would be out of line.
Etc.

The US dollar bond market is global. Should you then also include Emerging Market (government and corporate) bonds in your portfolio just because they exist?

The way to think about this if the instrument meets a portfolio need. In this case, inflation protection.

BTW US Social Security functions, in effect, as a TIPS portfolio (or rather, an inflation indexed annuity).

[HicksSt]

We are roughly half TIPS, half munis for fixed income.

Note that there is this tax thing with TIPS where the inflation adjustment is done thru adjustment of principal. But it is taxable when accrued, as I understand it. So we do TIPS in tax deferred.

[Dude2]

If a person is even interested in bonds or TIPS, that person is probably interested in the notion of taking less risk with some of their retirement savings. (The majority believe that their risks in stocks will be compensated, and so they could care less about this.) For those of us that are risk-averse, 50/50 TIPS/nominal is an excellent strategy. Inflation is forward-looking. Nominal bonds are priced by the market with inflation expectations in mind, but they are not indexed to inflation. In some cases, the market pricing will have been wrong, and inflation comes in higher than expected. In that situation TIPS shine. In other cases, inflation comes in lower than expected, in that case nominals shine. Probably in most cases the market predictions were valid, and it just didn't matter. Why not place yourself right in the middle to maintain a neutrality on what you think is going to happen? That is the logic behind a suggestion of 50/50 when presented in that fashion.

However, the discussion can very quickly spin in other directions. We can start to sub-categorize bonds much more deeply than just TIPS and Nominals. We can bring in duration and government vs. non-government. We can talk about matching your duration to the need for the money, taking risk on the equity side and having the most riskless bonds that are practical (or bonds that are the most uncorrelated to equities). We can bring in Liability Matching Portfolios and TIPS ladders, discuss stable value, direct CDs, MYGAs, holding in taxable vs tax-deferred, munis. In this respect, deviations from the neutrality of 50/50 have more to do with custom tailoring the bond portfolio to the individual and the individual's unique situations. a) what is their stock/bond ratio; b) when will they plan to retire; c) what is their income; d) what are rates doing right now? You can also get really deep into what exact type of bond and duration actually tracked inflation the best for a given timeframe. There's also the idea, as stated, that your inflation isn't the same as my inflation, and CPI may be a bad measure for both of us.

On the other hand, you can let the market decide what proportion of TIPS to hold. I think the estimate is closer to 10% of TIPS in the total investment grade bond market than the OPs notion of 15-20%. The only downside to an all TIPS (as bond proportion) portfolio is simply that you can likely make more money doing anything else, i.e. take risk and reap reward.

[stufunds]

I am looking for thoughts on the importance of balancing the Total Bond Market fund with a TIPS fund, perhaps 50/50.

Hi BogleBuddy12,

Excluding short-term reserves, I started allocating 25% of bonds to a short-term TIPS fund in 2015. I increased that allocation to 50% of bonds in 2018, and I maintained it through the events of 2020.

I retired early in May 2012 at the age of 47. I’ve never been married and have no children. I have a modest, non-inflation-adjusted age 65 pension. I don’t plan to take Social Security until age 70.

My overall allocation (100% of net worth):

• 55% stock – 2/3 US, 1/3 total international

• 35% bond – 1/2 short-term TIPs, 1/2 intermediate-term tax-exempt

• 10% short-term reserves – checking, savings, money-market fund, EE savings bonds

Please note that I’m a recovering slice-and-dicer who’s still working his way out of tilts within US stock in taxable and tax-advantaged.

I currently don’t invest in a total bond market fund, but it’s something I’m open to doing as I continue to simplify my portfolio.

I plan keep short-term TIPs at 50% of bonds for the foreseeable future.

Hope this helps.

[Northern Flicker]

TIPS have had a high correlation with corporate bonds. I would prefer 50% nominal treasuries and 50% TIPS to 50% total bond and 50% TIPS.

[FIREchief]

It’s my understanding that TIPS are not as popular as they once were.

Well, it's my understanding that some Bogleheads hold 100% of their fixed income in TIPS and....sleep well at night!