Why or why not TIPS

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Soonerintn
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Why or why not TIPS

Post by Soonerintn »

I am fairly new to bogleheads. About a year ago, I had talked to a fee only advisor about helping me with asset allocation.

As per my handle, I am from the US and 43.

Currently my taxable and tax deferred accounts are about equal and 80/20 stock/bond.

As I was rebalancing, I asked the advisor about TIPS. At the time, he said I should avoid TIPS. I don't recall his reasoning. Other than the tax consequences in my taxable account, what would be reasons for or against having TIPS as part of my asset allocation?

Thanks
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steve roy
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Re: Why or why not TIPS

Post by steve roy »

Nothing wrong with TIPS, although the Vanguard TIPs fund has negative yield. (In other words, TIPS aren't the "deal" they were a few years ago, but what is?)

As for myself, I don't have a 70% bond allocation to make a killing, but because I am on the cusp of geezerhood (age 63) and I'm protecting the stash of money I've accumulated over four decades of employment. (Don't have time -- or energy -- to recreate the stash if I lose it, so I'm 45% TIPS, 55% nominal bonds with a 3.5-4 year duration.)
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Kevin M
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Re: Why or why not TIPS

Post by Kevin M »

I like I Bonds better, but the annual purchase limits limit their usefulness in portfolios worth more than a certain amount. Do you own any I Bonds?

Many Bogleheads own TIPS; some simply hold 50% of fixed income in total bond market and 50% in TIPS. Personally, I think the interest-rate risk currently is too high for TIPS, but many will disagree with me.

Kevin
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Spades
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Re: Why or why not TIPS

Post by Spades »

Steve Roy,

Could you please provide the ticker symbol of the index you use for TIPS? I tried to see if my Fidelity Total Bond market had any TIPS; it doesn't. I checked the monthly holdings report. I was surprised. I'm interested in learning about how tips could help my asset allocation.

:sharebeer
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steve roy
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Re: Why or why not TIPS

Post by steve roy »

I use the Vanguard TIPS fund (VIPSX). Duration is 8.4 years with assets of $40.9 billion. I bought the Admiral share class almost two years ago and have watched its value climb, and climb some more. (Understand, this is because interest rates declined and the values of VIPSX holdings went UP.)

I'm aware that the fund could -- at some point -- take a hit, but I'm not concerned about it. I'm after a viable plan for maintaining wealth, and the TIPS are a large cornerstone of the scheme. I also have Admiral shares of the Vanguard Intermediate bond fund and Vanguard Short Term federal, also Vanguard Total International and Vanguard Total Stock, along with positions in REITS, Precious Metals, and Energy. (Used to have Vanguard Health Care but I sold it because I thought I was getting too slicey and dicey.)

I have my doubts about the Precious Metals and Energy, but am standing pat for now. For the next four years, I'm in an accumulation phase, ending with 55% TIPS and 45% nominal bonds with a 3-4 year duration, and a 70/30 bond/stock split. My plan is to let the cash flow supplement Social Security and a Defined Benefit pension.

So far, so good.
Jerry_lee
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Re: Why or why not TIPS

Post by Jerry_lee »

Why not? One purpose for fixed income is to lower portfolio risk and provide liquidity in an event equities are sagging. ST nominal bonds of high quality are more reliable in this regard.

By looking past an extreme period of falling rates and writing off 2008 as an outlier never to repeat, TIPS investors have convinced themselves they own an investment other than what they have: a CPI hedge if bought and held to maturity designed for immunizing specific and highly certain future liabilities whose cost is expected to rise perfectly in lockstep with the ever changing CPI benchmark. I don't know a single investor who can boil their future needs down to that formula.
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Rob't
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Re: Why or why not TIPS

Post by Rob't »

To extend this question to "Why not TIPS now?" , I would add the following:

L. Swedroe "Shifting TIPS Allocation:"
Real Yield.............% of bonds in TIPS
< 1.5%........................ 0%
1.5% – 2%..................... 0 – 25%
2.0% – 2.5%................. 25 – 50%
2.5% – 3.0%................. 50 – 75%
> 3.0% .......................75 – 100%

Modification of same by TFB:
I modified Mr. Swedroe’s strategy table and came up with my own. Basically I’m shifting more slowly towards TIPS than what Mr. Swedroe suggested because I “require” or “demand” higher yields. Here’s my plan:
Real Yield.................... % of bonds in TIPS
< 2.0%.............................. 0% N/A Not interested in TIPS
2.0% – 2.5%..... ..................25%
2.5% – 3.0%........................50%
3.0% – 3.5%........................75%
3.5% – 4.0%.......................100%
> 4.0%.............................100%

So even if an investor was committed to holding TIPS, some experts would recommend that now was not the time to make that commitment. If you look at returns for the past one, five and ten years, you might be a tad disappointed that you sold your TIPS when real yields dropped under 2%, but that would be confusing strategy with outcome, and we don't do that around here. Besides, if you used as the substitute fixed income for the sold TIPS an Intermediate bond index fund such as VBIIX, you really had no shortfall in returns over 1, 5 and 10 years.
On the other hand, if you fell for the Pascal's wager argument ..............
How short is short?
by wbern » Fri May 20, 2011 2:09 pm

As always in finance, there's no right answer. If we do get a bond debacle, no matter how short you were you'd have wished you'd been in 30-day bills.

But certainly a Vanguard Fund containing the words "short-term" will fill the bill better than one containing the words "intermediate-term," or better than VBMFX.

Are TIPS overvalued? Don't know about at the long end, but at the short end, I cannot imagine that negative rates are the, ahem, new normal.

Bill
and shifted to short term as the substitute, you screwed yourself (so far).
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tfb
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Re: Why or why not TIPS

Post by tfb »

Rob't wrote:L. Swedroe "Shifting TIPS Allocation:"
Real Yield.............% of bonds in TIPS
< 1.5%........................ 0%
1.5% – 2%..................... 0 – 25%
2.0% – 2.5%................. 25 – 50%
2.5% – 3.0%................. 50 – 75%
> 3.0% .......................75 – 100%

Modification of same by TFB:
I modified Mr. Swedroe’s strategy table and came up with my own. Basically I’m shifting more slowly towards TIPS than what Mr. Swedroe suggested because I “require” or “demand” higher yields. Here’s my plan:
Real Yield.................... % of bonds in TIPS
< 2.0%.............................. 0% N/A Not interested in TIPS
2.0% – 2.5%..... ..................25%
2.5% – 3.0%........................50%
3.0% – 3.5%........................75%
3.5% – 4.0%.......................100%
> 4.0%.............................100%
Larry has since come up with a new strategy based on inflation protection premium rather than hard coded real yields. See recent updates published by Larry. I also changed my modification accordingly. The old strategy was flawed because it implicitly assumed short-term nominals would provide a decent real yield. It turned out when TIPS have a low real yield, the real yield on short term nominals is even lower. Although it isn't as clear cut to estimate the inflation protection premium, I think that's a better metric for deciding between nominals and TIPS.
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tipswatcher
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Re: Why or why not TIPS

Post by tipswatcher »

Even though I have 25% of my portfolio in TIPS, I don't think this is a great time to buy them, especially in a mutual fund.

Yes, I Bonds are clearly better, up to your annual purchase limit.

There is a 10-year TIPS being auctioned Thursday, a reissue, and it will probably go with a yield to maturity of about -0.32%, meaning buyers are accepting less than the rate of inflation for 10 years.

http://tipswatch.com/2012/05/13/next-ti ... y-17-2012/

Buying that and holding to maturity would not be a 'disaster,' but it will be a mediocre investment, in my opinion. I still might do it, only because I've had TIPS mature this year and I am sitting on that money in near-zero-yield money market account, and I have bought I Bonds this year.

Yeah, there are some taxable-account consequences, but if inflation stays in the 2-3% range, you won't be making enough to pay serious taxes. If inflation soars, you will be very, very happy to pay that tax.

My view is ... buy and hold TIPS to maturity. Period.
TIPS: Perfect investment for imperfect times?
kikie
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Re: Why or why not TIPS

Post by kikie »

hmm, i did a search and don't see larry's new strategy in his postings nor searching for inflation protection premium


---------
Larry has since come up with a new strategy based on inflation protection premium rather than hard coded real yields. See recent updates published by Larry. I also changed my modification accordingly. The old strategy was flawed because it implicitly assumed short-term nominals would provide a decent real yield. It turned out when TIPS have a low real yield, the real yield on short term nominals is even lower. Although it isn't as clear cut to estimate the inflation protection premium, I think that's a better metric for deciding between nominals and TIPS.[/quote]
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hazlitt777
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Re: Why or why not TIPS

Post by hazlitt777 »

Soonerintn wrote:I am fairly new to bogleheads. About a year ago, I had talked to a fee only advisor about helping me with asset allocation.

As per my handle, I am from the US and 43.

Currently my taxable and tax deferred accounts are about equal and 80/20 stock/bond.

As I was rebalancing, I asked the advisor about TIPS. At the time, he said I should avoid TIPS. I don't recall his reasoning. Other than the tax consequences in my taxable account, what would be reasons for or against having TIPS as part of my asset allocation?

Thanks
If you can avoid using TIPs, I would. Maybe your advisor can tell you of a way to change your bond stock allocation to achieve the same protection against inflation. I would imagine this would mean a little higher allocation to stocks...maybe 25%.
Call_Me_Op
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Re: Why or why not TIPS

Post by Call_Me_Op »

A case can perhaps be made for TIPS, but they are not a good inflation hedge for a portfolio (as is often claimed) unless most or all of the portfolio are invested in them. 25% in TIPS ain't gonna do diddly to protect a portfolio from high inflation.
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