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

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BogleBuddy12
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“Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by BogleBuddy12 »

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

Image

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:)

Image

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.
Last edited by BogleBuddy12 on Tue Apr 06, 2021 2:56 pm, edited 2 times in total.
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Re: Bogleheads’ Guide To Investing - Sample Portfolios

Post by BogleBuddy12 »

It’s my understanding that TIPS are not as popular as they once were.
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Re: Bogleheads’ Guide To Investing - Sample Portfolios

Post by Mel Lindauer »

BogleBuddy12 wrote: Tue Apr 06, 2021 1:52 pm 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.
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Re: Bogleheads’ Guide To Investing - Sample Portfolios

Post by BogleBuddy12 »

Mel Lindauer wrote: Tue Apr 06, 2021 2:23 pm
BogleBuddy12 wrote: Tue Apr 06, 2021 1:52 pm 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?
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by 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.
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Re: Bogleheads’ Guide To Investing - Sample Portfolios

Post by Robot Monster »

BogleBuddy12 wrote: Tue Apr 06, 2021 2:57 pm
Mel Lindauer wrote: Tue Apr 06, 2021 2:23 pm
BogleBuddy12 wrote: Tue Apr 06, 2021 1:52 pm 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.
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by 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.
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by retiredjg »

BogleBuddy12 wrote: Tue Apr 06, 2021 8:03 am 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.
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by vineviz »

BogleBuddy12 wrote: Tue Apr 06, 2021 8:03 am 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").
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Re: Bogleheads’ Guide To Investing - Sample Portfolios

Post by 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.
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Re: Bogleheads’ Guide To Investing - Sample Portfolios

Post by BogleBuddy12 »

Elysium wrote: Tue Apr 06, 2021 4:43 pm 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?
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by BogleBuddy12 »

arcticpineapplecorp. wrote: Tue Apr 06, 2021 3:23 pm 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.
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by 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).
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by 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.
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by stimulacra »

Of my bond allocation, I do 1/3 Total Bonds, 1/3 TIPS, 1/3 Corporate Bonds.
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by watchnerd »

BogleBuddy12 wrote: Tue Apr 06, 2021 8:03 am

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.
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Re: Bogleheads’ Guide To Investing - Sample Portfolios

Post by Elysium »

BogleBuddy12 wrote: Tue Apr 06, 2021 7:24 pm 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.
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Re: Bogleheads’ Guide To Investing - Sample Portfolios

Post by watchnerd »

BogleBuddy12 wrote: Tue Apr 06, 2021 2:57 pm
Mel Lindauer wrote: Tue Apr 06, 2021 2:23 pm
BogleBuddy12 wrote: Tue Apr 06, 2021 1:52 pm 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
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by watchnerd »

Beensabu wrote: Tue Apr 06, 2021 8:32 pm 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?

;)
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by Beensabu »

watchnerd wrote: Tue Apr 06, 2021 10:54 pm
Beensabu wrote: Tue Apr 06, 2021 8:32 pm 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 :)
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by Valuethinker »

BogleBuddy12 wrote: Tue Apr 06, 2021 8:03 am

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).
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by 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.
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by 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.
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by stufunds »

BogleBuddy12 wrote: Tue Apr 06, 2021 8:03 am 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.
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by 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.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: Bogleheads’ Guide To Investing - Sample Portfolios

Post by FIREchief »

BogleBuddy12 wrote: Tue Apr 06, 2021 1:52 pm 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! 8-)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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Re: Bogleheads’ Guide To Investing - Sample Portfolios

Post by BogleBuddy12 »

FIREchief wrote: Thu Apr 08, 2021 12:10 am
BogleBuddy12 wrote: Tue Apr 06, 2021 1:52 pm 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! 8-)
I wouldn’t understand the logic of this. Wouldn’t the diversification of holding some nominal bonds be a benefit?
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Re: Bogleheads’ Guide To Investing - Sample Portfolios

Post by FIREchief »

BogleBuddy12 wrote: Tue Apr 27, 2021 10:43 pm
FIREchief wrote: Thu Apr 08, 2021 12:10 am
BogleBuddy12 wrote: Tue Apr 06, 2021 1:52 pm 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! 8-)
I wouldn’t understand the logic of this. Wouldn’t the diversification of holding some nominal bonds be a benefit?
What part don't you understand? Why do you think that "diversification" into nominal bonds would provide any type of benefit? Are you expecting significantly lower inflation than the markets are expecting?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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Re: Bogleheads’ Guide To Investing - Sample Portfolios

Post by vineviz »

FIREchief wrote: Wed Apr 28, 2021 1:14 am
BogleBuddy12 wrote: Tue Apr 27, 2021 10:43 pm
FIREchief wrote: Thu Apr 08, 2021 12:10 am
BogleBuddy12 wrote: Tue Apr 06, 2021 1:52 pm 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! 8-)
I wouldn’t understand the logic of this. Wouldn’t the diversification of holding some nominal bonds be a benefit?
What part don't you understand? Why do you think that "diversification" into nominal bonds would provide any type of benefit? Are you expecting significantly lower inflation than the markets are expecting?
I agree about the diversification question.

TIPS are (pretty much) the closest thing the individual invest has to a risk-free asset if the duration of the bonds is matched to the investor's time horizon. The concept of "diversification" within a risk-free asset.

However, if the investor expected that SOME of their future cash flow needs are best expressed in nominal (rather than inflation-adjusted) terms then it might be optimal to put SOME of the bond allocation in nominal bonds.

For the most part, though, TIPS (or Series I savings bonds) can be treated as a risk-free asset by most investors in most circumstances.
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by Astones »

In preparation to increase the stock allocation, at the moment I happen to have 41% in VTIP and 8% in SCHP right now. Then 20% split in long, short, international and corporate, and only 30% stocks.

My reasoning was that if I need money next year it's better to have them investend in the lowest risk asset while I wait.

My portfolio YTD is below 2%, not surprisingly.
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by HappyJack »

Age 68. Retired. Pension.
50/50 allocation 100% TIPS for bonds
TIPS LMP using VTIP and LTPZ matches anticipated expenses for 20 years. Two years of expenses are rotated into a stable value fund each year for immediate needs.

Concerns
1. Liquidity - A very small concern but it’s there.
2. Paying Expense Ratios - I’m paying ERs but I value the flexibility versus an individual bond ladder.
3. Gain vs Nominals - possibly good, poor, equal.
4. Volatility of LTPZ - I am having to get used to the wild swings of LTPZ over the last 18 months. I recognize that as long as it’s duration matched it doesn’t matter but it doesn’t make it any easier.

Assurances
1. No inflation risk
2. No interest rate risk
3. No default risk

Everything today in fixed income has drawbacks. I tremendously value the discussions on the forum about this topic. While I am paying a lot more in expense ratios and inflation insurance than others, I value the flexibility to make adjustments in withdrawals if necessary. I can easily add to the LMP from my risk portfolio or take a little more out if I need it.
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Re: Bogleheads’ Guide To Investing - Sample Portfolios

Post by abuss368 »

BogleBuddy12 wrote: Tue Apr 06, 2021 1:52 pm It’s my understanding that TIPS are not as popular as they once were.
That is correct. Many years ago I would say both TIPS and REITs were the RAGE for sure!

Times have changed.

TIPS have negative real rates and REITs have not held up during market drops, but rather dropped even more than the total market funds.

Tony
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Re: Bogleheads’ Guide To Investing - Sample Portfolios

Post by watchnerd »

abuss368 wrote: Wed Apr 28, 2021 9:38 pm
BogleBuddy12 wrote: Tue Apr 06, 2021 1:52 pm It’s my understanding that TIPS are not as popular as they once were.
That is correct. Many years ago I would say both TIPS and REITs were the RAGE for sure!

Times have changed.

TIPS have negative real rates and REITs have not held up during market drops, but rather dropped even more than the total market funds.

Tony
Well, to be fair to TIPS, all Treasuries, including the 30R (just barely), at the moment have negative real rates.

It's not a TIPS-specific problem.
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Re: Bogleheads’ Guide To Investing - Sample Portfolios

Post by abuss368 »

watchnerd wrote: Wed Apr 28, 2021 10:52 pm
abuss368 wrote: Wed Apr 28, 2021 9:38 pm
BogleBuddy12 wrote: Tue Apr 06, 2021 1:52 pm It’s my understanding that TIPS are not as popular as they once were.
That is correct. Many years ago I would say both TIPS and REITs were the RAGE for sure!

Times have changed.

TIPS have negative real rates and REITs have not held up during market drops, but rather dropped even more than the total market funds.

Tony
Well, to be fair to TIPS, all Treasuries, including the 30R (just barely), at the moment have negative real rates.

It's not a TIPS-specific problem.
Exactly.
Tony
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by Dude2 »

HappyJack wrote: Wed Apr 28, 2021 7:33 am Age 68. Retired. Pension.
50/50 allocation 100% TIPS for bonds
TIPS LMP using VTIP and LTPZ matches anticipated expenses for 20 years. Two years of expenses are rotated into a stable value fund each year for immediate needs.

Concerns
1. Liquidity - A very small concern but it’s there.
2. Paying Expense Ratios - I’m paying ERs but I value the flexibility versus an individual bond ladder.
3. Gain vs Nominals - possibly good, poor, equal.
4. Volatility of LTPZ - I am having to get used to the wild swings of LTPZ over the last 18 months. I recognize that as long as it’s duration matched it doesn’t matter but it doesn’t make it any easier.

Assurances
1. No inflation risk
2. No interest rate risk
3. No default risk

Everything today in fixed income has drawbacks. I tremendously value the discussions on the forum about this topic. While I am paying a lot more in expense ratios and inflation insurance than others, I value the flexibility to make adjustments in withdrawals if necessary. I can easily add to the LMP from my risk portfolio or take a little more out if I need it.
Kudos to you for working out an LMP plan using those two funds. I'm just chiming in to say that I feel your pain. I tried to hang in there with LTPZ, but I gave up in favor of all VAIPX/FIPDX (intermediate term). Sometimes it's more about picking a plan you can actually stick to. It might be psychologically easier to stick to a "true" LMP made up of individual bonds than to use funds where the "market value" (and it's irrationality) is constantly in your face, worrying about expense ratios, fund losses due to liquidity effects or deflation. Of course, it is possible there is an equal and opposite force too.
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by HappyJack »

Dude2
I had FIPDX (with VTIP and LTPZ) but simplified to a barbell which is duration matched. Easier with two funds than three. The swings in LTPZ are gut wrenching (24k up to 17k down) but I have 20 years to ride it out and my income is guaranteed to match my needs over the term which is what I was after. As you know, its not your number at the moment in FI with an LMP since you don’t rebalance. If things are really bad at withdrawal dates I can use my risk portfolio. I suppose that is rebalancing in a sense. But anyway the flexibility of funds allows a lot of options. Of course at an expense.
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Re: Bogleheads’ Guide To Investing - Sample Portfolios

Post by DesertInvestor »

Elysium wrote: Tue Apr 06, 2021 4:43 pm 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.
Is there not an adjustment yearly with TIPS to account for inflation component, such that the real yield will not be zero at year end? I believe I heard that, but I have never owned them so still confused about exactly how TIPS work relative to inflation. If inflation stays flat, is the real yield of TIPS also a flat -1.68 %?
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by dodecahedron »

TIPS are only 8% of the total value of market Treasury securities outstanding right now.

Source:
https://www.treasury.gov/resource-cente ... /tips.aspx

So it would not be possible for *everyone* to hold a 50-50 mix of TIPS and nominal Treasuries. Bill Bernstein has a very thought-provoking short piece highlighting this issue, which I consider an example of fallacy of composition.

http://www.efficientfrontier.com/ef/903/bodie.htm

I found his argument persuasive and until late 2018, I was content hold my fixed income in liquid TIAA Trad (with minimum 3%) and opportunistic CDs. However, when real yields on TIPS reached a ten-year historic high in late 2018, I decided to pull the trigger and put about 50% of my fixed income into an intermediate TIPS fund with a real yield of over 1% at the time. I am reasonably content to have done that, especially as prospect of inflation looms larger now than it did when I bought them.

But I am not buying more TIPS at the moment. I am continuing to buy I bonds.

This article (from Jan 2021) makes some interesting observations: Treasury has recently *cut back* the percentage of TIPS in new issues and the Federal Reserve has been "voraciously" buying up TIPS. The result is that the proportion of TIPS available for the public to hold has been shrinking.

https://www.nationalreview.com/2021/01/ ... ectations/

Edited to add accidentally omitted link
Last edited by dodecahedron on Wed Jun 09, 2021 2:51 pm, edited 1 time in total.
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by tonyclifton »

dodecahedron wrote: Wed Jun 09, 2021 2:21 pm This article (from Jan 2021)
Please provide the link to the article. Thank you!
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by dodecahedron »

tonyclifton wrote: Wed Jun 09, 2021 2:34 pm
dodecahedron wrote: Wed Jun 09, 2021 2:21 pm This article (from Jan 2021)
Please provide the link to the article. Thank you!
Oops, sorry! Here it is:

https://www.nationalreview.com/2021/01/ ... ectations/

(I will re-edit my post above to include it there.)
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by seajay »

Comparing 33% 2x S&P500 (ULPIX), 67% TIP to 67% SPY, 33% VBMFX ...

Image

PV

strikes me that rebalancing between TIP and Bonds might be just a expense event.
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by tonyclifton »

seajay wrote: Wed Jun 09, 2021 2:56 pm Comparing 33% 2x S&P500 (ULPIX), 67% TIP to 67% SPY, 33% VBMFX ...
...

strikes me that rebalancing between TIP and Bonds might be just a expense event.
This seems like an odd comparison. The first one is 33% equities (with leverage and TIPS) and the second is 67% equities (and bonds).

Kind of like saying lets compare a fruit salad of apples and orange to one of watermelon and grapes that happen to taste the same.
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by tonyclifton »

dodecahedron wrote: Wed Jun 09, 2021 2:49 pm (I will re-edit my post above to include it there.)
Thanks!
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by retiredjg »

tonyclifton wrote: Wed Jun 09, 2021 4:34 pm
seajay wrote: Wed Jun 09, 2021 2:56 pm Comparing 33% 2x S&P500 (ULPIX), 67% TIP to 67% SPY, 33% VBMFX ...
...

strikes me that rebalancing between TIP and Bonds might be just a expense event.
This seems like an odd comparison. The first one is 33% equities (with leverage and TIPS) and the second is 67% equities (and bonds).

Kind of like saying lets compare a fruit salad of apples and orange to one of watermelon and grapes that happen to taste the same.
Isn't that because leverage increases risk dramatically? In other words 33% equites leveraged 2 times may carry the same risk as 67% equities with no leverage?

That's what I thought when I saw the comparison.
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Re: “Bogleheads’ Guide To Investing” Portfolios - 50% in TIPS?

Post by countmein »

If one were 50/50 TIPS/nominals...

What is the argument for doing short duration tips / long nominals? (Guess: explicit deflation vs inflation hedges in balanced proportion? Least correlated to stocks?)

What is the argument for going long duration tips / short nominals? (Guess: each asset is both an inflation and deflation hedge?)

What is the argument for going intermediate in both? (Guess: Best Sharpe)
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Re: Bogleheads’ Guide To Investing - Sample Portfolios

Post by Mel Lindauer »

abuss368 wrote: Wed Apr 28, 2021 11:01 pm
watchnerd wrote: Wed Apr 28, 2021 10:52 pm
abuss368 wrote: Wed Apr 28, 2021 9:38 pm
BogleBuddy12 wrote: Tue Apr 06, 2021 1:52 pm It’s my understanding that TIPS are not as popular as they once were.
That is correct. Many years ago I would say both TIPS and REITs were the RAGE for sure!

Times have changed.

TIPS have negative real rates and REITs have not held up during market drops, but rather dropped even more than the total market funds.

Tony
Well, to be fair to TIPS, all Treasuries, including the 30R (just barely), at the moment have negative real rates.

It's not a TIPS-specific problem.
Exactly.
Tony
Just saw this old post that's been revived and wanted to correct an incorrect statement previously posted and then repeated in this thread.

ALL Treasuries do not and never did have negative real rates, since Treasury I Bonds can never provide a negative real rate. And, even at 0% real, they still provide a greater REAL return than anything that has negative rates.
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Re: Bogleheads’ Guide To Investing - Sample Portfolios

Post by watchnerd »

Mel Lindauer wrote: Wed Jun 09, 2021 6:11 pm

Just saw this old post that's been revived and wanted to correct an incorrect statement previously posted and then repeated in this thread.

ALL Treasuries do not and never did have negative real rates, since Treasury I Bonds can never provide a negative real rate. And, even at 0% real, they still provide a greater REAL return than anything that has negative rates.
C'mon Mel.

You're being pedantic.

You know when you buy a Treasury index fund or similar that has nothing to do with I Bonds.

If we were to talk about Treasuries as including I-bonds then everybody's vocabulary would have to change and everything we say about "Treasury returns" would have to have a footnote added to say:

*not inclusive of Treasury I-bonds

And that would be silly.
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Re: Bogleheads’ Guide To Investing - Sample Portfolios

Post by Mel Lindauer »

watchnerd wrote: Wed Jun 09, 2021 10:19 pm
Mel Lindauer wrote: Wed Jun 09, 2021 6:11 pm

Just saw this old post that's been revived and wanted to correct an incorrect statement previously posted and then repeated in this thread.

ALL Treasuries do not and never did have negative real rates, since Treasury I Bonds can never provide a negative real rate. And, even at 0% real, they still provide a greater REAL return than anything that has negative rates.
C'mon Mel.

You're being pedantic.

You know when you buy a Treasury index fund or similar that has nothing to do with I Bonds.

If we were to talk about Treasuries as including I-bonds then everybody's vocabulary would have to change and everything we say about "Treasury returns" would have to have a footnote added to say:

*not inclusive of Treasury I-bonds

And that would be silly.
I'm just being factual on a forum that prides itself on providing correct information. The statements that were made were factually incorrect and needed clarification. "Silly" is providing incorrect information if you know better.

Nothing silly about saying that all Treasuries except I Bonds are providing a negative real return at this time, if that's the case. Folks need to be informed when there's something from the Treasury that doesn't have, and can't have, a negative real return. Simple as that.
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Re: Bogleheads’ Guide To Investing - Sample Portfolios

Post by vineviz »

Mel Lindauer wrote: Thu Jun 10, 2021 12:03 am I'm just being factual on a forum that prides itself on providing correct information. The statements that were made were factually incorrect and needed clarification. "Silly" is providing incorrect information if you know better.

Nothing silly about saying that all Treasuries except I Bonds are providing a negative real return at this time, if that's the case. Folks need to be informed when there's something from the Treasury that doesn't have, and can't have, a negative real return. Simple as that.
It's possible to be both factual AND pedantic.

"Treasuries" means "marketable Treasury securities" to pretty much everyone in the financial services industry. The Treasury department issues many types of securities that aren't marketable, any informed reader will know that the simple phrase "Treasuries" refers only to the marketable securities.
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Re: Bogleheads’ Guide To Investing - Sample Portfolios

Post by Mel Lindauer »

vineviz wrote: Thu Jun 10, 2021 6:57 am
Mel Lindauer wrote: Thu Jun 10, 2021 12:03 am I'm just being factual on a forum that prides itself on providing correct information. The statements that were made were factually incorrect and needed clarification. "Silly" is providing incorrect information if you know better.

Nothing silly about saying that all Treasuries except I Bonds are providing a negative real return at this time, if that's the case. Folks need to be informed when there's something from the Treasury that doesn't have, and can't have, a negative real return. Simple as that.
It's possible to be both factual AND pedantic.

"Treasuries" means "marketable Treasury securities" to pretty much everyone in the financial services industry. The Treasury department issues many types of securities that aren't marketable, any informed reader will know that the simple phrase "Treasuries" refers only to the marketable securities.
Lots of folks who come here for factual guidance are actually novices, rather than "informed readers", and we need to remember that and post accordingly. Facts are facts. Informed posters shouldn't automatically assume (there's that word) that everyone can understand what they really mean.

How hard is it to say "All Treasury issues, except I Bonds, currently have negative real rates"?
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