My monthly TIPS update for those interested

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

My monthly TIPS update for those interested

Post by larryswedroe »

http://www.cbsnews.com/8301-505123_162- ... lds-down/?

I hope you find it helpful, not much has happened in last few months.

Best wishes
Larry
Saphomd
Posts: 165
Joined: Tue Apr 03, 2012 6:11 pm
Location: SF, CA

Re: My monthly TIPS update for those interested

Post by Saphomd »

Thanks for the update :happy
User avatar
Lbill
Posts: 4997
Joined: Thu Mar 13, 2008 11:25 pm
Location: Somewhere between Up and Down

Re: My monthly TIPS update for those interested

Post by Lbill »

Larry - I know that recently you have counseled investors that by staying in very short term bonds and MM from fear of an inflation shock, they've been giving up yield, and would have been better off to extend. That has turned out to be pretty good advice so far, as yields have dropped even more and price gains have been the result from either TIPs or nominals. Now, with real rates so miserably low way out to 20 years is this the time to withdraw to the sidelines in short term and cash? I'm among the multitude who are worrying that interest rate risk is off the charts right now.
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs
User avatar
baw703916
Posts: 6681
Joined: Sun Apr 01, 2007 1:10 pm
Location: Seattle

Re: My monthly TIPS update for those interested

Post by baw703916 »

Lbill wrote: Now, with real rates so miserably low way out to 20 years is this the time to withdraw to the sidelines in short term and cash? I'm among the multitude who are worrying that interest rate risk is off the charts right now.
Why risk a loss with long TIPS when you can guarantee one with short TIPS?
Most of my posts assume no behavioral errors.
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: My monthly TIPS update for those interested

Post by larryswedroe »

Lbill
Personally I am staying with the DFA ST Extended Credit Fund for now. Goes out to three years, picks up bit of credit premium in the one area it has been rewarded (short end and taking no call risk at all). Having said that I do account for 10% of it as equity like risks in my AA as it holds 30% each A and BBB (low end of investment grade) and 20% each of AAA and AA.
The curve is still very steep---the market anticipates rates will rise (or has big risk premiums for the risks) --so rates not only have to rise but have to rise more than already expected plus the risk premium.
Still expected returns are negative, but options not great at any point on the curve. With that said, the evidence historically is that when curve is steep is when you have been best rewarded for taking risk.
I hope you find that helpful

One last point I always like to make:
Note that just as there are no clear crystal balls in stocks there are none in bonds either. Just ask Bill Gross whose last call will go down with the death of equities and Meredith Whitney's as among the worst ever.

Best wishes
Larry
User avatar
Lbill
Posts: 4997
Joined: Thu Mar 13, 2008 11:25 pm
Location: Somewhere between Up and Down

Re: My monthly TIPS update for those interested

Post by Lbill »

Thanks very much for your comments, Larry. As far as extending out to long maturities, you're incurring interest rate risk with both nominals and TIPS. But no inflation risk with TIPs and chances are that rising rates would occur with rising inflation so this would offset - although not for sure. On balance, seems to me that TIPs would be the only way to go here unless one is worried a lot about deflation. Does this seem like correct logic?
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: My monthly TIPS update for those interested

Post by larryswedroe »

Logic is fine Lbill
Especially since you go out further and earn the term premium
My idea is based on the idea that real rates have a very strong tendency to revert to the mean (if they don't we are really in trouble as we will look like Japan). Of course there is no guarantee this will happen. And rates have stayed very low for far longer than I expected. So the shifting strategy worked really well until rates crashed below say 1.5% and have stayed down since then. Time will tell if a simple buy and hold would have turned out better.
Best wishes
Larry
User avatar
Lbill
Posts: 4997
Joined: Thu Mar 13, 2008 11:25 pm
Location: Somewhere between Up and Down

Re: My monthly TIPS update for those interested

Post by Lbill »

Thanks again, Larry. Your comments are appreciated. I just wish we weren't living in such a crazy environment with rates this low. Unprecedented??
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: My monthly TIPS update for those interested

Post by larryswedroe »

Lbill
AS to unprecdented? Ask the Japanese
Larry
DickBenson
Posts: 809
Joined: Sun Apr 08, 2007 7:27 pm

Re: My monthly TIPS update for those interested

Post by DickBenson »

Larry

For those in retirement (say mid 70's), who have no need to take risk, it is becoming more difficult to avoid taking some risk, even if there is no need to do so. Would you recommend moving some of the present bond risk into more equity risk, or should one simply go into short term bonds. (The possibility of a 10% drop in 10-12 year TIPS with a 1% rise in interest rates is not very appealing).

The present 0% real I bonds, with no risk of loss of principal, would be a natural alternative to the 10 year TIPS. But the government has anticipated this with a $10K limit on investments.

Does the present investing environment make annuities more attractive for older investors? As one ages the negative impact of low interest rates on payouts decreases.

Dick
User avatar
Random Musings
Posts: 5799
Joined: Thu Feb 22, 2007 4:24 pm
Location: Pennsylvania

Re: My monthly TIPS update for those interested

Post by Random Musings »

Lbill wrote:Thanks again, Larry. Your comments are appreciated. I just wish we weren't living in such a crazy environment with rates this low. Unprecedented??
Nominal 10-yr U.S. Treasuries were in the 3% and less camp from about the mid-30's to the mid-50's (about 20 years). They did touch around 2% around 1940 or so.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: My monthly TIPS update for those interested

Post by larryswedroe »

Dick
First, if have no need to take risk, don't. Rule number one of investing. Also Rule 2 and 3.
If needed more income than IMO the right answer is often a payout annuity, at least you earn the mortality credits, and you are about the right age for thinking about that, not before.
Sorry wish had more alternatives to offer but the typical ones IMO are wrong, like preferred stocks, dividend paying stocks, high yield, etc
They all have equity like risks
Best wishes
Larry
dbr
Posts: 33842
Joined: Sun Mar 04, 2007 9:50 am

Re: My monthly TIPS update for those interested

Post by dbr »

DickBenson wrote:Larry

For those in retirement (say mid 70's), who have no need to take risk, it is becoming more difficult to avoid taking some risk, even if there is no need to do so. Would you recommend moving some of the present bond risk into more equity risk, or should one simply go into short term bonds. (The possibility of a 10% drop in 10-12 year TIPS with a 1% rise in interest rates is not very appealing).

The present 0% real I bonds, with no risk of loss of principal, would be a natural alternative to the 10 year TIPS. But the government has anticipated this with a $10K limit on investments.

Does the present investing environment make annuities more attractive for older investors? As one ages the negative impact of low interest rates on payouts decreases.

Dick
These investors already had taken risk and didn't know it. The risk was reinvestment risk and also risk of inadequate return also known as "interest rates are cr*p right now." Volatility is not the only risk and bonds are not an absolutely safe investment for retirees.
User avatar
Lbill
Posts: 4997
Joined: Thu Mar 13, 2008 11:25 pm
Location: Somewhere between Up and Down

Re: My monthly TIPS update for those interested

Post by Lbill »

larryswedroe wrote:Lbill
AS to unprecdented? Ask the Japanese
Larry
Here's what the Japanese had to say, as of last July. Looks like only another decade to go...

Image
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs
AndroAsc
Posts: 1240
Joined: Sat Nov 21, 2009 7:39 am

Re: My monthly TIPS update for those interested

Post by AndroAsc »

So, what would a Japanese investor do (bond wise) if he had the benefit of hindsight?
User avatar
#Cruncher
Posts: 3057
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: My monthly TIPS update for those interested

Post by #Cruncher »

Larry in article wrote:An alternative to buying the current 10-year TIPS would be to extend another three years to the 13-year TIPS. It has a 2.375 percent coupon and captures an additional 0.30 percent of real yield. The maturity extension will add to the price risk, but the bigger coupon will help to dampen this volatility ...
Here's a comparison of the change in price corresponding to a 1% point rise in interest rates for the two TIPS Larry refers to along with an even bigger coupon issue and with the recently issued 5-year and 30-year maturities:

Code: Select all

                                     Instant   One Yr
                   --- Yield ---     Price     Value
Maturity  Coupon     Now     +1%     Change    Change
--------  ------   ------  ------    ------    ------
Apr 2017  0.125%   -1.177  -0.177    -4.9%     -5.0%
Jan 2022  0.125%   -0.305   0.695    -9.2%     -8.6%  <-- 10 Year
Jan 2025  2.375%   -0.023   0.977   -10.6%     -9.8%  <-- 13 Year
Apr 2028  3.625%    0.281   1.281   -12.1%    -11.0%
Feb 2042  0.750%    0.709   1.709   -23.2%    -21.9%
The column labeled "Instant Price Change" assumes an instantaneous 1% point increase in yields. The column labeled "One Yr Value Change" assumes yields are 1% higher one year from now and also reflects the interest earned during the year.

Sources:
WSJ TIPS Quotes 4/24/2012
FICALC - The Web's Fixed Income Calculator

Edit: Corrected 13-year Price Change from 10.8% to 10.6%. Also added column showing effect if interest rates increase after one year instead of instantly.
Last edited by #Cruncher on Tue Apr 24, 2012 11:50 pm, edited 1 time in total.
User avatar
Lbill
Posts: 4997
Joined: Thu Mar 13, 2008 11:25 pm
Location: Somewhere between Up and Down

Re: My monthly TIPS update for those interested

Post by Lbill »

Thanks #cruncher. Quite helpful information. :thumbsup

Here's the $64 question. Looking at the 30-year TIP your table shows a 23% price loss for a 1% increase in interest rate. What sort of an adjustment to the principal would be needed to offset that loss? Is that even within the realm of the possible in terms of what sort of CPI increase would be needed to accompany a 1% rate increase to soften the blow?
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs
User avatar
Noobvestor
Posts: 5644
Joined: Mon Aug 23, 2010 1:09 am

Re: My monthly TIPS update for those interested

Post by Noobvestor »

Lbill wrote:
larryswedroe wrote:Lbill
AS to unprecdented? Ask the Japanese
Larry
Here's what the Japanese had to say, as of last July. Looks like only another decade to go...

Image
Wait a sec, in another thread I'm pretty sure you implied we couldn't go down a Japan-like path in equities ... but we can in bonds? :confused
Lbill wrote:Even the "Pascal's Wager" argument seems flawed to me, because I think that if the U.S. stock market dropped more than 50% like the Japanese market, there would be no place to hide in equities and, even if there were, you wouldn't know beforehand where that was.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
User avatar
Lbill
Posts: 4997
Joined: Thu Mar 13, 2008 11:25 pm
Location: Somewhere between Up and Down

Re: My monthly TIPS update for those interested

Post by Lbill »

Wait a sec, in another thread I'm pretty sure you implied we couldn't go down a Japan-like path in equities ... but we can in bonds?
I have no idea, Noob. But you begin to wonder if it's possible, don't you? The Japanese 10-year gained 30% after the rate crossed below 2% there and it now stands at 2% here. If I knew that was going to happen here, I'd put everything I own into U.S. Treasuries. Wish my crystal ball was working, or my time machine so I could go back and invest after I see what happens.

"It's not so much that I'm a buy-and-hold investor, as much as I'm a deer paralyzed in the headlights."
Last edited by Lbill on Wed Apr 25, 2012 12:20 am, edited 1 time in total.
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs
User avatar
#Cruncher
Posts: 3057
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: My monthly TIPS update for those interested

Post by #Cruncher »

Lbill wrote:Looking at the 30-year TIP your table shows a 23% price loss for a 1% increase in interest rate. What sort of an adjustment to the principal would be needed to offset that loss? Is that even within the realm of the possible in terms of what sort of CPI increase would be needed to accompany a 1% rate increase to soften the blow?
Lbill, the way I look at it, no inflation adjustment can offset a real loss or even "soften the blow." If the real value of my TIPS falls 20% in a year, I'm not made whole if the CPI rises 25% and makes the nominal value the same. I've still lost 20% in real value.

By the way, your question caused me to add a column to my table. I realized that an investor might want to see the effect of higher interest rates over a period of time as well as the effect of a hypothetical instantaneous rise.
User avatar
Lbill
Posts: 4997
Joined: Thu Mar 13, 2008 11:25 pm
Location: Somewhere between Up and Down

Re: My monthly TIPS update for those interested

Post by Lbill »

#Cruncher wrote:
Lbill wrote:Looking at the 30-year TIP your table shows a 23% price loss for a 1% increase in interest rate. What sort of an adjustment to the principal would be needed to offset that loss? Is that even within the realm of the possible in terms of what sort of CPI increase would be needed to accompany a 1% rate increase to soften the blow?
Lbill, the way I look at it, no inflation adjustment can offset a real loss or even "soften the blow." If the real value of my TIPS falls 20% in a year, I'm not made whole if the CPI rises 25% and makes the nominal value the same. I've still lost 20% in real value.

By the way, your question caused me to add a column to my table. I realized that an investor might want to see the effect of higher interest rates over a period of time as well as the effect of a hypothetical instantaneous rise.
Wow, I'm trying to get my head around that. Here I've been thinking that if rates go up because of inflation, then my TIPS will protect me from the rate increase because the principal gets adjusted. But as I mull this over, I think you might be right. Nominals are exposed to a double-whammy: rate increase and unexpected inflation. The rate increase knocks down the nominal market value and inflation knocks down the actual purchasing power of the nominal value. TIPS are only protected from Whammy #2, but are just as exposed to Whammy #1 as nominals, correct? You still lose the same amount of real value due to a rate increase, but are spared from having that knocked down even further by unexpected inflation. If a 1% rate increase would cause a 23% market price loss, that's what I'll lose no matter what the inflation rate is. Hope I've got this straight. Takeaway: There's no difference between TIPS and Nominals regarding the impact of a rate increase on market price.
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs
Bongleur
Posts: 2276
Joined: Fri Dec 03, 2010 10:36 am

Re: My monthly TIPS update for those interested

Post by Bongleur »

> If a 1% rate increase would cause a 23% market price loss, that's what I'll lose no matter what the inflation rate is.

Not if you hold to maturity. Then you will get exactly the Real Return you expected.

Of course, someone who bought a Nominal the day after you, after the Real Rates went up, will get a LARGER real return than you. But that is not any kind of monetary loss for you, just a timing error.
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.
fmbnyc
Posts: 5
Joined: Sun May 20, 2007 10:32 am

Re: My monthly TIPS update for those interested

Post by fmbnyc »

I think, though, that Cruncher's numbers are based on REAL interest rates not nominal rates. Aren't the chances of a 1% move in real rates much less? Part of the prospect of rising nominal rates is the effect of expected inflation, isn't it?
User avatar
#Cruncher
Posts: 3057
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: My monthly TIPS update for those interested

Post by #Cruncher »

Lbill wrote:TIPS are ... just as exposed to Whammy #1 [rate increase] as nominals, correct?
Not quite. As fmbnyc points out, what you say is only the case if real interest rates rise. This would affect both TIPS and nominal bonds. But if rates on nominals rise only because of increased inflation expectations, then real rates and the price (before inflation adjustment) of TIPS would remain the same.
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: My monthly TIPS update for those interested

Post by larryswedroe »

If one owns TIPS one should pray for real rates to rise so that you get higher rates when you reinvest the proceeds, get a chance to buy at higher yields as you rebalance as well
If you just hold to maturity remember that you will have no loss on the original purchase.
Best wishes
Larry
User avatar
Lbill
Posts: 4997
Joined: Thu Mar 13, 2008 11:25 pm
Location: Somewhere between Up and Down

Re: My monthly TIPS update for those interested

Post by Lbill »

larryswedroe wrote:If one owns TIPS one should pray for real rates to rise so that you get higher rates when you reinvest the proceeds, get a chance to buy at higher yields as you rebalance as well
If you just hold to maturity remember that you will have no loss on the original purchase.
Best wishes
Larry
However, not everyone can/wants to hold TIPS to maturity, any more than they can/want to buy and hold other kinds of bonds in their portfolio to maturity. In this case, they're exposed to the same interest rate risk as nominals - if rates go up, their asset value goes down. The basic difference I see between TIPS and nominals in this regard is that any increase in rates that is attributable to an increase in inflation expectations (rather than some other source) would be reflected in the price of nominals but not in the price of TIPs. In other words, TIPS losses would reflect only the hypothetical change in real rates, which should be lower than the change in nominal rates if there is any inflation. The bottom line is that the TIPS holding should be somewhat less volatile than the nominal holding over time, but that's about it correct?
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: My monthly TIPS update for those interested

Post by larryswedroe »

Lbill
Disagree. If you cannot hold to maturity you bought the wrong maturity in the first place. One should not buy a bond whose maturity exceeds your expected holding period.
Best wishes
Larry
User avatar
Lbill
Posts: 4997
Joined: Thu Mar 13, 2008 11:25 pm
Location: Somewhere between Up and Down

Re: My monthly TIPS update for those interested

Post by Lbill »

larryswedroe wrote:Lbill
Disagree. If you cannot hold to maturity you bought the wrong maturity in the first place. One should not buy a bond whose maturity exceeds your expected holding period.
Best wishes
Larry
Larry - Thanks for your comment. I'm aware of this view, but should this always be the case? What about holding long term bonds because of their greater diversification benefit relative to stocks (lower correlation and "risk parity" considerations)? Of course, this exposes the port to greater interest rate/inflation risk, which requires adding something like commodities.
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: My monthly TIPS update for those interested

Post by larryswedroe »

Lbill
IMO that should always be the case. If your bigger risk is deflation and/or you have high equity allocation than longer bonds more appropriate, but that is relative, not absolute. So don't go longer than your investment horizon is my recommendation. And reason is exactly the one you offered---you may be forced to sell early and the strategy never gets to fully play out.
Larry
User avatar
Lbill
Posts: 4997
Joined: Thu Mar 13, 2008 11:25 pm
Location: Somewhere between Up and Down

Re: My monthly TIPS update for those interested

Post by Lbill »

larryswedroe wrote:Lbill
IMO that should always be the case. If your bigger risk is deflation and/or you have high equity allocation than longer bonds more appropriate, but that is relative, not absolute. So don't go longer than your investment horizon is my recommendation. And reason is exactly the one you offered---you may be forced to sell early and the strategy never gets to fully play out.
Larry
Thanks Larry. The part of your comment I underlined is really critical and exactly right, IMO. It is a long term strategy that you have to be able to ride out. That makes it clear for me.
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs
User avatar
Jerilynn
Posts: 1929
Joined: Tue Sep 06, 2011 12:49 pm
Location: USA, Earth

Re: My monthly TIPS update for those interested

Post by Jerilynn »

larryswedroe wrote:Lbill
Disagree. If you cannot hold to maturity you bought the wrong maturity in the first place. One should not buy a bond whose maturity exceeds your expected holding period.
Best wishes
Larry
What if it's Vanguard Inflation-Protected Securities Fund (VAIPX). You can't really hold that to maturity.
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)
dbr
Posts: 33842
Joined: Sun Mar 04, 2007 9:50 am

Re: My monthly TIPS update for those interested

Post by dbr »

Jerilynn wrote:
larryswedroe wrote:Lbill
Disagree. If you cannot hold to maturity you bought the wrong maturity in the first place. One should not buy a bond whose maturity exceeds your expected holding period.
Best wishes
Larry
What if it's Vanguard Inflation-Protected Securities Fund (VAIPX). You can't really hold that to maturity.
No, you hold a fund indefinitely, or, forever, if you take it that way.

There is a fundamental difference in framing of the discussion between those who invest in bonds as an asset in isolation and those who invest in bonds as components of a portfolio. People who are building portfolios operate as if the portfolio is forever. Buying and selling is in accord with staying balanced to target while adding contributions or taking withdrawals. I would say 99% of the discussion about investment horizon, time line, holding period, and so-on for bonds is irrelevant to the portfolio investor. What is relevant is the risk/return property of the fund, which is determined by duration (which is desirably constant) and by credit quality.

See also this discussion about rolling ladders and bond funds:

http://www.bogleheads.org/wiki/Rolling_ ... Bond_Funds

Larry might comment, but I suggest his view about buying individual bonds to build a portfolio is about structuring the right duration and credit quality and avoiding management costs and not about some magic "holding to maturity" at its essence.
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: My monthly TIPS update for those interested

Post by larryswedroe »

Jerilyn
Same thing applies. That fund has average maturity of say 9 years last I looked.
So if your horizon is longer than that, it's fine, if shorter it's inappropriate IMO
At that point should switch to PIMCO ST TIPS fund or buy individual ones with shorter maturity, or nominal bonds with shorter maturity as appropriate
Larry
User avatar
Lbill
Posts: 4997
Joined: Thu Mar 13, 2008 11:25 pm
Location: Somewhere between Up and Down

Re: My monthly TIPS update for those interested

Post by Lbill »

larryswedroe wrote:Jerilyn
Same thing applies. That fund has average maturity of say 9 years last I looked.
So if your horizon is longer than that, it's fine, if shorter it's inappropriate IMO
At that point should switch to PIMCO ST TIPS fund or buy individual ones with shorter maturity, or nominal bonds with shorter maturity as appropriate
Larry
Larry - This is a bond fund question, rather than a bond ladder question. What exactly does "horizon" mean if we're not thinking about a lump sum claim at some specific point in time? For example, what about retirement? What is the "horizon" in this case? Does that refer to the time until I begin taking withdrawals or the entire retirement period? if it is 10 years until I retire and start taking portfolio withdrawals, does that mean I should now be holding bonds with 10 years or less maturity, and then shorten that maturity as retirement approaches and finally hold only short maturities at retirement? That doesn't sound right. What bond fund maturity is appropriate in this case?
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: My monthly TIPS update for those interested

Post by larryswedroe »

Lbill
Say your 65 and you plan on taking out funds from your account that would come out before 9 years have expired. Those funds should not be in the TIPS fund because the maturity is longer than the need for cash.
In other words you should simply match maturity with cash flows at that point. Your maturity can be shorter than your cash need but should not be longer
Larry
Bongleur
Posts: 2276
Joined: Fri Dec 03, 2010 10:36 am

Re: My monthly TIPS update for those interested

Post by Bongleur »

How many ways might one regard a bond fund during retirement? You could plan only on using it to rebalance into equities, or plan on spending the dividends... how do you determine the correct duration?

I suppose the general answer is that Intermediate best correlates with equities (at least when equities are most of the portfolio).
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.
User avatar
Jerilynn
Posts: 1929
Joined: Tue Sep 06, 2011 12:49 pm
Location: USA, Earth

Re: My monthly TIPS update for those interested

Post by Jerilynn »

larryswedroe wrote:Jerilyn
Same thing applies. That fund has average maturity of say 9 years last I looked.
So if your horizon is longer than that, it's fine, if shorter it's inappropriate IMO
At that point should switch to PIMCO ST TIPS fund or buy individual ones with shorter maturity, or nominal bonds with shorter maturity as appropriate
Larry
I don't understand. If you have a fund with a 9 year ave maturity, you hold it for 9 years, sell it, and interest rates go up to say 7% during that time, don't you lose money?
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)
User avatar
Lbill
Posts: 4997
Joined: Thu Mar 13, 2008 11:25 pm
Location: Somewhere between Up and Down

Re: My monthly TIPS update for those interested

Post by Lbill »

larryswedroe wrote:Lbill
Say your 65 and you plan on taking out funds from your account that would come out before 9 years have expired. Those funds should not be in the TIPS fund because the maturity is longer than the need for cash.
In other words you should simply match maturity with cash flows at that point. Your maturity can be shorter than your cash need but should not be longer
Larry
Of course, I could just have everything in a short term bond fund, since it's maturity will be lower at all points in time during retirement. But I'm giving up the higher interest rates going out on the curve. I could just have everything in an intermediate bond fund, but then the maturities are longer than the withdrawals. The most efficient way, the only way, to actually match maturities with spending is to use a bond ladder. If I can't/don't want to do that, then I guess I could divide up between a short term fund, an intermediate fund, and a long fund. I could take withdrawals from the short fund and periodically roll money back into the short fund from the intermediate fund, and from the long fund into the intermediate fund to sort of keep things in line. This sounds like the "bucket" theory, and I'm sure it really makes any sense. Is there another way to manage bond funds in retirement, or do you need to go to a bond ladder?
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs
User avatar
#Cruncher
Posts: 3057
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: My monthly TIPS update for those interested

Post by #Cruncher »

Jerilynn wrote:If you have a fund with a 9 year ave maturity, you hold it for 9 years ... and interest rates go up ... during that time, don't you lose money? (underline added)
It depends on when they go up. Best would be if they went up at the beginning. Then after a period of time equal to the duration of the fund, you'd still earn the initial yield. Worst would be if they went up at the end.

For example, take a TIPS fund with a 0% real yield and a 9 year duration. If real interest rates rise at the beginning, you'll still get a 0% real yield after 9 years and end up with the same real value (before inflation adjustment) as when you started. But if real interest rates rose 2% points at the very end of 9 years, you'd end up losing about 18% of the real value that you started with.
User avatar
Lbill
Posts: 4997
Joined: Thu Mar 13, 2008 11:25 pm
Location: Somewhere between Up and Down

Re: My monthly TIPS update for those interested

Post by Lbill »

#Cruncher wrote:
Jerilynn wrote:If you have a fund with a 9 year ave maturity, you hold it for 9 years ... and interest rates go up ... during that time, don't you lose money? (underline added)
It depends on when they go up. Best would be if they went up at the beginning. Then after a period of time equal to the duration of the fund, you'd still earn the initial yield. Worst would be if they went up at the end.

For example, take a TIPS fund with a 0% real yield and a 9 year duration. If real interest rates rise at the beginning, you'll still get a 0% real yield after 9 years and end up with the same real value (before inflation adjustment) as when you started. But if real interest rates rose 2% points at the very end of 9 years, you'd end up losing about 18% of the real value that you started with.
Which I guess explains Larry's position that you should match bond maturity to cash flow needs insofar as that's possible. If get an interest rate hit on your 10-year bond fund right about the time you want to take a withdrawal - not good.
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: My monthly TIPS update for those interested

Post by larryswedroe »

Jerilynn
You should only be holding a fund with 9 year maturity when your cash flow need is 9 years or longer. So if your cash flow need is 10 years in two years you should no longer be in that fund because now your maturity is still 9 and your horizon is 8. Would switch to say PIMCO ST TIPS fund and eventually to shorter term bond fund or lindividual securities.
Hope that helps
Larry
kikie
Posts: 339
Joined: Sat Apr 09, 2011 4:37 pm

Re: My monthly TIPS update for those interested

Post by kikie »

larry, when you say this "Personally I am staying with the DFA ST Extended Credit Fund for now"

are you saying that is the majority of your entire portfolio, or what portion of your entire portfolio, and what's it's general make-up if you don't mind me asking ........

cheers
larryswedroe wrote:Lbill
Personally I am staying with the DFA ST Extended Credit Fund for now. Goes out to three years, picks up bit of credit premium in the one area it has been rewarded (short end and taking no call risk at all). Having said that I do account for 10% of it as equity like risks in my AA as it holds 30% each A and BBB (low end of investment grade) and 20% each of AAA and AA.
The curve is still very steep---the market anticipates rates will rise (or has big risk premiums for the risks) --so rates not only have to rise but have to rise more than already expected plus the risk premium.
Still expected returns are negative, but options not great at any point on the curve. With that said, the evidence historically is that when curve is steep is when you have been best rewarded for taking risk.
I hope you find that helpful

One last point I always like to make:
Note that just as there are no clear crystal balls in stocks there are none in bonds either. Just ask Bill Gross whose last call will go down with the death of equities and Meredith Whitney's as among the worst ever.

Best wishes
Larry
Those who know do not speak; those who speak do not know.
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: My monthly TIPS update for those interested

Post by larryswedroe »

paix
For the tax advantaged account. In taxable I own muni ladder of about 5 years average maturity
Best wishes
Larry
kikie
Posts: 339
Joined: Sat Apr 09, 2011 4:37 pm

Re: My monthly TIPS update for those interested

Post by kikie »

so, what would be the duration of your entire portfolio ?

about what % equity ?
larryswedroe wrote:paix
For the tax advantaged account. In taxable I own muni ladder of about 5 years average maturity
Best wishes
Larry
Those who know do not speak; those who speak do not know.
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: My monthly TIPS update for those interested

Post by larryswedroe »

Paix
About 10% is public equity
About 20% is non public equity
Rest is very high quality FI, about 10% of the FI is tax advantaged and rest Muni, with maturity average of about 5 years, so duration probably in area of 4
Larry
Post Reply