What is your target allocation to TIPS? {Poll}

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

What is your target allocation to TIPS [as part of bond holdings]?

10%
52
16%
10%
52
16%
20%
56
17%
20%
56
17%
40%
18
5%
50%
76
23%
60%
5
2%
70%
1
0%
80%
6
2%
90%
4
1%
100%
4
1%
 
Total votes: 330

Beagler
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Post by Beagler » Sun May 23, 2010 1:03 pm

GammaPoint wrote:
Beagler wrote:
To paraphrase one of the other posters, I want my bonds to pay me a routine income. Share liquidation seems the only way to live off income from VIPSX during the months you've listed above.
Does the share price go up too, or are you really getting nothing out of it during those time periods? That seems like it might be dangerous for those in retirement, since doesn't inflation for the elderly behave differently than one for the younger consumer (extra health care vs food or whatever).

The 52-week high and low for TIPS has been $11.92-$13.05.

Edit: Here's a link to something Scott Burns wrote on the CPI http://tinyurl.com/242kgfd
Last edited by Beagler on Sun May 23, 2010 1:13 pm, edited 1 time in total.
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FrugalInvestor
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Post by FrugalInvestor » Sun May 23, 2010 1:12 pm

Apparently Chaz has 60%. :lol:

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Sheepdog
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Post by Sheepdog » Sun May 23, 2010 1:42 pm

ruralavalon wrote:
With all the TIPS talk around here, I am surprised that 24% of persons responding to the poll hold none and that only 22% hold the often recommended 1/2 of the bond allocation in TIPS.

All
of us don't talk about TIPS......especially if they are not high on our list of preferred investments. They aren't on mine.
Jim
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Quidnam
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Post by Quidnam » Sun May 23, 2010 2:01 pm

Alex Frakt wrote:The problem is that [nominal bonds] may take a few years to catch up to an inflation spike. This makes TIPS preferable when you need to live off the income, but doesn't really come into the picture if you are 10+ years away from retirement.
Alex, just out of curiosity, is there anything you don't find particularly persuasive about holding TIPS as a non-correlated asset in a portfolio? Just as you have indicated that investors who are in the accumulation phase need not be too concerned with the yield on nominal bonds (thus implying that their value comes not from their yield but from their non-correlation with equities in the portfolio), would it not be worthwhile to hold a real-return asset that is itself not fully correlated with nominal bonds, and which also happens to be less correlated with equities than nominal bonds are?

It would seem that this aspect of holding TIPS could be of even greater relative value for younger investors, as a real-return asset could boost portfolio returns over time (particularly in the event of shocks to expected inflation). I would think that the expected value derived from rebalancing between the nominal and real return bond allocations (as well as with the equity allocation) would exceed the predicted difference in the yields of the different types of treasuries (the "insurance premium" that folks keep alluding to).

Here is an academic paper that I recall having read on TIPS as an asset class. It was written about 10 years ago using simulated data, but I thought it was fairly convincing. If anyone can point me to more recent studies that draw different conclusions, that would be great...

http://corporate.morningstar.com/ib/htm ... tClass.pdf

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Post by natureexplorer » Sun May 23, 2010 2:17 pm

ruralavalon wrote:With all the TIPS talk around here, I am surprised that 24% of persons responding to the poll hold none and that only 22% hold the often recommended 1/2 of the bond allocation in TIPS.
The poll is a little strange. It talks about a target allocation but not an actual allocation. I don't have a "target" for TIPS, but I do hold them. I only have a target for bonds overall.

My target might be 50% TIPS of bonds but due to limited tax-advantaged space my TIPS allocation is than 5%. So what should I vote or should I not vote at all? My 401k doesn't even offer TIPS. So that leaves me with my Roth IRA, where I do hold some TIPS. And then I have munis. Instead of holding munis, would I much rather hold TIPS in a Roth IRA? You bet I would. But it is not realistic. So I don't even spend time thinking about how much I would want to hold if taxes wouldn't prevent me from doing so.

For what it's worth, I am a big fan of TIPS, they take inflation out of the equation. It's a guaranteed real return. The only risk in my book is a default by the US government. With nominal treasuries the government could just start printing money to pay me back in worthless currency.

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Post by ResNullius » Sun May 23, 2010 4:23 pm

I answered with a zero. I don't really understand TIPS. If I were to invest in TIPS, it would be in Vanguard's TIP fund, and I really can't get my arms around it. My fixed allocation is in short and intermediate investment grade (IRA) and limited and intermediate tax exempt, all with Vanguard. I understand those, at least I think I do. Comparable durations TIPS pay less yield than investment grade. I realize that the inflation adjustment is supposed to make up for this, plus some, but I really have my doubts. Bottom line: No TIPS for me, at least for now.

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Post by mickeyd » Sun May 23, 2010 7:26 pm

I have always tried to keep it close to 50/50. When I sell/buy FI I always sell/buy at a 50/50 clip.
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Post by Tyrobi » Mon May 24, 2010 12:22 am

Alex Frakt wrote:0%. I don't see the point of TIPS for those of us still several years away from retirement. My reasoning is simple, the point of TIPS is to reduce a certain risk relative to nominal bonds. If risk and expected returns are correlated, then the expected returns of lower-risk TIPS must be lower than nominal bonds with otherwise similar characteristics. Since fluctuations in the real income from bonds are immaterial while we are in the accumulation stage, it doesn't make sense to me to give up the (expected) returns advantage of nominal bonds.
I agree with Alex's reasoning completely, and I also have 0% in TIPS currently. Personally, I don’t think a young investor in the accumulation stage needs TIPS that much. Assuming a reasonably efficient market, the expected long term return on TIPS might be lower than nominal bonds because you are paying a premium to protect against inflation.

I expect to have some portion of my bond in TIPS in the future (hopefully, once the total bond reaches admiral status).
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Justin618
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Post by Justin618 » Mon May 24, 2010 12:19 pm

Personally, I don’t think a young investor in the accumulation stage needs TIPS that much. Assuming a reasonably efficient market, the expected long term return on TIPS might be lower than nominal bonds because you are paying a premium to protect against inflation.
0% TIPS, 100% Int. Treasuries for me ---- for same reason above and I feel that nominals are a better counterbalance to equity tilt to SV & EM for rebalancing purposes. Anecdotally, nominals worked great in the flight to safety in 4Q 2008 whereas TIPS didn't fare as well.

That said, I'm sure TIPS will be part of my retirement AA.

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Post by Alex Frakt » Mon May 24, 2010 1:42 pm

Quidnam wrote:
Alex Frakt wrote:The problem is that [nominal bonds] may take a few years to catch up to an inflation spike. This makes TIPS preferable when you need to live off the income, but doesn't really come into the picture if you are 10+ years away from retirement.
Alex, just out of curiosity, is there anything you don't find particularly persuasive about holding TIPS as a non-correlated asset in a portfolio? Just as you have indicated that investors who are in the accumulation phase need not be too concerned with the yield on nominal bonds (thus implying that their value comes not from their yield but from their non-correlation with equities in the portfolio), would it not be worthwhile to hold a real-return asset that is itself not fully correlated with nominal bonds, and which also happens to be less correlated with equities than nominal bonds are?

It would seem that this aspect of holding TIPS could be of even greater relative value for younger investors, as a real-return asset could boost portfolio returns over time (particularly in the event of shocks to expected inflation). I would think that the expected value derived from rebalancing between the nominal and real return bond allocations (as well as with the equity allocation) would exceed the predicted difference in the yields of the different types of treasuries (the "insurance premium" that folks keep alluding to).
First, I was not "implying that [nominal bonds] value comes not from their yield but from their non-correlation with equities in the portfolio" if by that you mean the value comes only from that non-correlation. I was actually answering a different question - whether nominals offer inflation protection - which I hope was clear from the sentence preceding the one you quoted:
Nominal bonds work fine for long-term inflation protection with real annual returns since 1926 of around 2 1/4% (which is around 50bp greater than the current TIPS real yield).
Obviously instruments with a 2 1/4% real return have a value over and above any derived from a rebalancing bonus due to its low correlation with another asset class. So while bonds do offer low correlations with equities, they also offer real growth. But the most important reason for holding bonds is risk reduction. And by risk reduction I don't just mean some academic measure of volatility, I mean protection against all the black and white swan weirdness that can and does occur in the equity markets.

Which brings us back to your question on the value of using TIPS to slice and dice your bond holdings. If I wanted to S&D bonds, I would be looking for asset classes with risk profiles that complemented each other. It seems to me that Intermediate investment grade corporates and short or limited term nominal Treasuries provides a better risk/return mix than TIPS + anything else in the majority of possible economic scenarios.

But once again, I'm not opposed to the use of TIPS. They are an extremely valuable tool for certain situations: in particular for wealth preservation. For example, for anyone who has enough assets to swing it, putting enough in TIPS that you can live off the real yield and investing the rest in equities makes perfect sense. And even in those cases where I think the use of TIPS is less than optimal, they are never really a bad choice.

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Leif
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Post by Leif » Mon May 24, 2010 7:52 pm

I put 50%. However, I don't really have a % allocation set for TIPS. Instead my AA divides bonds into % cash, short term, and intermediate term. However, I do favor TIPS if you can get a yield to maturity >= 2.5%.

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Post by Sidney » Mon May 24, 2010 8:05 pm

Present value of normal expenses to age 95 not covered by pension and SS.
I always wanted to be a procrastinator.

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Post by Sheepdog » Tue May 25, 2010 2:26 am

Commentary: US. inflation expectations have come undone
http://www.marketwatch.com/story/inflat ... =rss&rss=1
But there is one interest rate that has fallen even faster than the rest and this, ironically, is a sign of concern about inflation.

In seeking to protect themselves from inflation, bond buyers purchase more of this instrument than others, thereby driving up its price and pushing down its yield faster than the others. I am referring to Treasury Inflation Protected Securities, or "TIPS" as they are widely known.

The spread between the 10-year TIPS and their plain-vanilla counterpart is today about 2-1/4% -- the same level it has been running since the turn of this year.

Seventeen months ago, at the start of 2009, this spread was zero. That was when the markets were concerned that the tumbling economy could actually lead to deflation
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Post by Valuethinker » Tue May 25, 2010 9:19 am

Sheepdog wrote:Commentary: US. inflation expectations have come undone
http://www.marketwatch.com/story/inflat ... =rss&rss=1
But there is one interest rate that has fallen even faster than the rest and this, ironically, is a sign of concern about inflation.

In seeking to protect themselves from inflation, bond buyers purchase more of this instrument than others, thereby driving up its price and pushing down its yield faster than the others. I am referring to Treasury Inflation Protected Securities, or "TIPS" as they are widely known.

The spread between the 10-year TIPS and their plain-vanilla counterpart is today about 2-1/4% -- the same level it has been running since the turn of this year.

Seventeen months ago, at the start of 2009, this spread was zero. That was when the markets were concerned that the tumbling economy could actually lead to deflation
Liquidity was also a big factor at end of 2009. TIPS are quite illiquid compared to US T Bonds.

As a measure of expected inflation the TIPS breakeven rate doesn't have a great record, and that is as we should expect: commodity markets don't forecast future prices well, for example.

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Post by billjohnson » Sun Jul 17, 2011 2:40 pm

0% TIPS.

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BlueEars
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Post by BlueEars » Sun Jul 17, 2011 2:53 pm

Bill, your a bit late in responding to this over 1 year old poll :) .

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zaboomafoozarg
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Re: What is your target allocation to TIPS? {Poll}

Post by zaboomafoozarg » Wed Mar 28, 2012 10:23 pm

Transitioned to 20% I-Bonds in the past month (in my retirement account). The remaining I-Bonds I have are part of my emergency fund.

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Re: What is your target allocation to TIPS? {Poll}

Post by abuss368 » Wed Mar 28, 2012 10:32 pm

David Swensen recommends 50% of your bond portion in TIPS.

How can we argue with that and the results his recommended portfolio has achieved?
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Rob5TCP
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Re: What is your target allocation to TIPS? {Poll}

Post by Rob5TCP » Wed Mar 28, 2012 10:54 pm

65%; much of it in I Bonds bought years ago when the yields were +2 to +3.6% above inflation. I bought the max and keep building on those. If that 65%, about 15% are TIPS. It was almost 100%, but I sold off quite a number of TIPS over the past 6-10 months.

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jackpistachio
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Re: What is your target allocation to TIPS? {Poll}

Post by jackpistachio » Wed Mar 28, 2012 11:18 pm

30%, but I use I-bonds in place of TIPs right now.
Also, the poll doesn't have a 0% option, and a typo on what would be the 30% option.
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Re: What is your target allocation to TIPS? {Poll}

Post by 2beachcombers » Thu Mar 29, 2012 10:15 am

0%--we have very large SS income. I voted for the first 10% assuming it was really 0?

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Re: What is your target allocation to TIPS? {Poll}

Post by DVMResident » Thu Mar 29, 2012 10:26 am

0% (can't vote for it)

Currently 29. When I'm 35~40, I plan to move my long term emergency fund is iBonds, which will double as an inflation hedge. I'm not using them now because the max maturity would hit before I retire. I'll phase in TIPs near retirement.

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FlyHi
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Re: What is your target allocation to TIPS? {Poll}

Post by FlyHi » Thu Mar 29, 2012 12:36 pm

I hold 0%
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Re: What is your target allocation to TIPS? {Poll}

Post by TheEternalVortex » Thu Mar 29, 2012 1:04 pm

100% TIPS

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Re: What is your target allocation to TIPS? {Poll}

Post by 3504PIR » Thu Mar 29, 2012 1:08 pm

zaboomafoozarg wrote:Transitioned to 20% I-Bonds in the past month (in my retirement account). The remaining I-Bonds I have are part of my emergency fund.
How did you transition 20% to I bonds in a month (I'm assuming your portfolio is >$40,000)? Perhaps more importantly, how are they in a retirement account?

Thanks

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ruralavalon
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Re: What is your target allocation to TIPS? {Poll}

Post by ruralavalon » Thu Mar 29, 2012 4:51 pm

00%, so I did not vote.

Did not realize the poll is over a year old :oops:

I've wanted to use the :oops: ever since it was introduced.
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zaboomafoozarg
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Re: What is your target allocation to TIPS? {Poll}

Post by zaboomafoozarg » Thu Mar 29, 2012 8:00 pm

ruralavalon wrote:00%, so I did not vote.

Did not realize the poll is over a year old :oops:

I've wanted to use the :oops: ever since it was introduced.
It is timeless IMHO!

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zaboomafoozarg
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Re: What is your target allocation to TIPS? {Poll}

Post by zaboomafoozarg » Thu Mar 29, 2012 8:02 pm

3504PIR wrote:
zaboomafoozarg wrote:Transitioned to 20% I-Bonds in the past month (in my retirement account). The remaining I-Bonds I have are part of my emergency fund.
How did you transition 20% to I bonds in a month (I'm assuming your portfolio is >$40,000)? Perhaps more importantly, how are they in a retirement account?

Thanks
I've bought I-Bonds the last 2 years ($5K then $10K), but was just using them in the emergency fund. Decided to include a portion of them in my retirement asset allocation bonds percentage (20% of total bond allocation), and adjusted my 401k bonds and stocks accordingly to even everything out.

detifoss
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Re: What is your target allocation to TIPS? {Poll}

Post by detifoss » Thu Mar 29, 2012 11:13 pm

ugh I goofed
clicked 10%
it is 50% of my bonds 13% of my total portfolio
sorry for the oops

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Re:

Post by chipmonk » Fri Mar 30, 2012 2:42 pm

tfb wrote:
Alex Frakt wrote:0%. I don't see the point of TIPS for those of us still several years away from retirement. My reasoning is simple, the point of TIPS is to reduce a certain risk relative to nominal bonds. If risk and expected returns are correlated, then the expected returns of lower-risk TIPS must be lower than nominal bonds with otherwise similar characteristics. Since fluctuations in the real income from bonds are immaterial while we are in the accumulation stage, it doesn't make sense to me to give up the (expected) returns advantage of nominal bonds.
Inflation does not know if the nominal bond investor is young or old. It will knock down nominal bonds the same way. If you have nominal bonds at all, you are taking inflation risk. As Larry has shown many times, the excess expected return from nominal bonds is very small, sometimes negative. It makes taking inflation risk not so worth it.
I like that TIPS give inflation protection with very little loss of (expected) real returns.

Is there any fundamental explanation for this risk "anti-premium"? Is there any reason we should expect it to persist in the future? It seems that a lot of investors aren't familiar with TIPS, which are a relatively new product...

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Re: What is your target allocation to TIPS? {Poll}

Post by LH » Fri Mar 30, 2012 8:14 pm

8 percent TIPS
8 percent Aggregate bonds

old poll.

I assume first entry is <10 percent

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Re: What is your target allocation to TIPS? {Poll}

Post by AzRunner » Fri Mar 30, 2012 10:21 pm

My target allocation to TIPS is 50%, but I am at 25% since they have been bid up so high.

Norm

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Re:

Post by abuss368 » Fri Mar 30, 2012 10:39 pm

natureexplorer wrote:
ruralavalon wrote:So I don't even spend time thinking about how much I would want to hold if taxes wouldn't prevent me from doing so.

This is the one thing that bothers me on the forum, and you see it quite a bit. Taxes prevent you from investing? Seriously? Really? I have never let taxes prevent me from making money. Taxes are one consideration of an investment, not the only one.

Forget my two cents. How about Warren Buffett's comment on taxes during his interview on CNBC recently before the release of his annual shareholder letter..."If you are paying taxes, that means you made money".

If you need/want TIPS in a portfolio, and there is no room in tax advantaged, why would you not place them in taxable compared to not having any inflation protection? I have a client who has significant TIPS positions in both taxable and tax exempt, pays the tax (which is not bad and there is no state or local income tax), and has made a nice return from this investment.

I also had a relative who invested in nothing but treasury bonds and now lives off the interest, and yes pays the tax (he never invested in equities, but actually did well for himself).

Come on folks...
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Re: Re:

Post by ruralavalon » Sat Mar 31, 2012 11:06 am

abuss368 wrote:
natureexplorer wrote:
ruralavalon wrote:So I don't even spend time thinking about how much I would want to hold if taxes wouldn't prevent me from doing so. <= I never wrote this !!! This is natureexploreres comment, to the effect that, because TIPs were not offered in his 401k, he did not have enough tax advantaged space to hold the amount of TIPS he wanted along with other bonds.

This is the one thing that bothers me on the forum, and you see it quite a bit. Taxes prevent you from investing? Seriously? Really? I have never let taxes prevent me from making money. Taxes are one consideration of an investment, not the only one.

Forget my two cents. How about Warren Buffett's comment on taxes during his interview on CNBC recently before the release of his annual shareholder letter..."If you are paying taxes, that means you made money".

If you need/want TIPS in a portfolio, and there is no room in tax advantaged, why would you not place them in taxable compared to not having any inflation protection? I have a client who has significant TIPS positions in both taxable and tax exempt, pays the tax (which is not bad and there is no state or local income tax), and has made a nice return from this investment.

I also had a relative who invested in nothing but treasury bonds and now lives off the interest, and yes pays the tax (he never invested in equities, but actually did well for himself).

Come on folks...
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