TIPS vs. treasuries

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NiceUnparticularMan
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Re: TIPS vs. treasuries

Post by NiceUnparticularMan »

chrisdds98 wrote: Fri Jun 04, 2021 4:50 pm
Lee_WSP wrote: Tue Jun 01, 2021 2:54 pm
nisiprius wrote: Tue Jun 01, 2021 2:29 pm
...nominal Treasuries provide deflation insurance...
I still can't get my head wrapped around the idea of needing "deflation insurance." I think what we are seeing is the difference between investing as a means of achieving a goal and investing as a competitive sport.

If I have a holding in nominal dollars and there is inflation, I experience actual harm. I can buy less. I am less able to achieve my goals.
...
Now that you've pointed out the contradiction, I completely agree. Nominal treasuries don't provide deflation insurance, they would increase in value in a deflationary environment.
How is that not deflation insurance? Nominals are nice to have when the market takes a dive as that would be an ideal time to rebalance into equities. I plan to be an early retiree and will be around 70% equities so deflation would be a much greater risk than inflation since equities are supposed to do well in an inflationary environment, right?
So the problem with holding long nominal bonds as deflation insurance and planning to rebalance into equities is you have to hold enough of them to really make a difference. As an aside, in some respects the most important strategy for such events is to : (a) don't panic and sell stocks; and (b) don't lose your job and keep investing in stocks (if you aren't retired, of course). If you are a retiree, some sort of cushion where you don't have to sell stocks to live might be helpful, but you don't need long bonds for that (and keep in mind if this is a serious deflationary period, things are getting cheaper). Obviously having long bonds to sell so you can buy more stocks might help, but my point is it isn't obviously necessary.

Anyway, the shorter and/or less severe the deflation, the more long nominal bonds you will need to hold for rebalancing purposes to make a real difference.

And fine, you say, I'll just hold a lot.

But then what happens if there is no serious deflation? That can be a significant opportunity cost in that you could have held other assets for other purposes.

And what if there is unexpectedly high inflation? Now your nominal long bonds are actually costing you, and you will need some sort of unexpectedly high inflation insurance to offset . . . but then now if there is deflation, what happens to THOSE assets?

When I thought all this through, I realized in practice, you can't really insure your portfolio against both unexpectedly high and unexpectedly low inflation at the same time. You can be neutral, or you can insure some against one or the other, but not both.

And my personal feeling is I need to be more concerned about how my portfolio would do if there is unexpectedly high inflation versus unexpectedly low inflation, given present circumstances. And obviously I could be betting wrong on that, but I have a plan for those scenarios that doesn't require long bonds. And in the end, if you can't really bet both ways, you have to decide which way to go (if any).
chrisdds98
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Re: TIPS vs. treasuries

Post by chrisdds98 »

NiceUnparticularMan wrote: Wed Jun 09, 2021 11:12 am
chrisdds98 wrote: Fri Jun 04, 2021 4:50 pm
How is that not deflation insurance? Nominals are nice to have when the market takes a dive as that would be an ideal time to rebalance into equities. I plan to be an early retiree and will be around 70% equities so deflation would be a much greater risk than inflation since equities are supposed to do well in an inflationary environment, right?
So the problem with holding long nominal bonds as deflation insurance and planning to rebalance into equities is you have to hold enough of them to really make a difference. As an aside, in some respects the most important strategy for such events is to : (a) don't panic and sell stocks; and (b) don't lose your job and keep investing in stocks (if you aren't retired, of course). If you are a retiree, some sort of cushion where you don't have to sell stocks to live might be helpful, but you don't need long bonds for that (and keep in mind if this is a serious deflationary period, things are getting cheaper). Obviously having long bonds to sell so you can buy more stocks might help, but my point is it isn't obviously necessary.

Anyway, the shorter and/or less severe the deflation, the more long nominal bonds you will need to hold for rebalancing purposes to make a real difference.

And fine, you say, I'll just hold a lot.

But then what happens if there is no serious deflation? That can be a significant opportunity cost in that you could have held other assets for other purposes.

And what if there is unexpectedly high inflation? Now your nominal long bonds are actually costing you, and you will need some sort of unexpectedly high inflation insurance to offset . . . but then now if there is deflation, what happens to THOSE assets?

When I thought all this through, I realized in practice, you can't really insure your portfolio against both unexpectedly high and unexpectedly low inflation at the same time. You can be neutral, or you can insure some against one or the other, but not both.

And my personal feeling is I need to be more concerned about how my portfolio would do if there is unexpectedly high inflation versus unexpectedly low inflation, given present circumstances. And obviously I could be betting wrong on that, but I have a plan for those scenarios that doesn't require long bonds. And in the end, if you can't really bet both ways, you have to decide which way to go (if any).
My plan is to spend TIPS during stagflation, equities/TIPS during inflation, and pray we don't have deflation (when I will spend long treasuries). If we get high inflation/interest rates and the value of my LTT crash I plan to rebalance back into them from equities.

I don't know if that will be generate higher returns than the boglehead default of total bond but I imagine having at least part of my portfolio doing well during deflation would be helpful psychologically during those periods.
NiceUnparticularMan
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Re: TIPS vs. treasuries

Post by NiceUnparticularMan »

chrisdds98 wrote: Wed Jun 09, 2021 3:41 pm
NiceUnparticularMan wrote: Wed Jun 09, 2021 11:12 am
chrisdds98 wrote: Fri Jun 04, 2021 4:50 pm
How is that not deflation insurance? Nominals are nice to have when the market takes a dive as that would be an ideal time to rebalance into equities. I plan to be an early retiree and will be around 70% equities so deflation would be a much greater risk than inflation since equities are supposed to do well in an inflationary environment, right?
So the problem with holding long nominal bonds as deflation insurance and planning to rebalance into equities is you have to hold enough of them to really make a difference. As an aside, in some respects the most important strategy for such events is to : (a) don't panic and sell stocks; and (b) don't lose your job and keep investing in stocks (if you aren't retired, of course). If you are a retiree, some sort of cushion where you don't have to sell stocks to live might be helpful, but you don't need long bonds for that (and keep in mind if this is a serious deflationary period, things are getting cheaper). Obviously having long bonds to sell so you can buy more stocks might help, but my point is it isn't obviously necessary.

Anyway, the shorter and/or less severe the deflation, the more long nominal bonds you will need to hold for rebalancing purposes to make a real difference.

And fine, you say, I'll just hold a lot.

But then what happens if there is no serious deflation? That can be a significant opportunity cost in that you could have held other assets for other purposes.

And what if there is unexpectedly high inflation? Now your nominal long bonds are actually costing you, and you will need some sort of unexpectedly high inflation insurance to offset . . . but then now if there is deflation, what happens to THOSE assets?

When I thought all this through, I realized in practice, you can't really insure your portfolio against both unexpectedly high and unexpectedly low inflation at the same time. You can be neutral, or you can insure some against one or the other, but not both.

And my personal feeling is I need to be more concerned about how my portfolio would do if there is unexpectedly high inflation versus unexpectedly low inflation, given present circumstances. And obviously I could be betting wrong on that, but I have a plan for those scenarios that doesn't require long bonds. And in the end, if you can't really bet both ways, you have to decide which way to go (if any).
My plan is to spend TIPS during stagflation, equities/TIPS during inflation, and pray we don't have deflation (when I will spend long treasuries). If we get high inflation/interest rates and the value of my LTT crash I plan to rebalance back into them from equities.

I don't know if that will be generate higher returns than the boglehead default of total bond but I imagine having at least part of my portfolio doing well during deflation would be helpful psychologically during those periods.
I actually do that too, mental accounting I am not sure makes sense but seems to work behaviorally.
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SimpleGift
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Re: TIPS vs. treasuries

Post by SimpleGift »

S_Track wrote: Wed Jun 09, 2021 10:21 am Ok that makes sense using the breakeven rates, but does that mean the SEC yields are completely useless when comparing funds of TIPS vs nominals? Or will they provide a ball park estimate?
The “SEC yield” has a specific definition. It reflects the dividends and interest earned during the past 30 days, after the deduction of a fund's expenses. But a major source of a TIPS fund's return is the future inflation adjustment. And since the future inflation adjustment is unknown for a TIPS fund, the SEC yield can’t make any accurate assumption about this portion of the return.

For a fuller explanation of why the SEC yields of TIPS funds are often misleading (and often useless), see this short article.
S_Track wrote: Wed Jun 09, 2021 10:21 am A second question, when I read folks stating TIPS are expensive right now, how do they know?
One way is to look up a price-only chart of a TIPS fund, and compare today's fund price with its long-term history.
  • Vanguard Inflation-Protected Securities Fund - Investor Shares (VIPSX)
    Image
    Source: Morningstar
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