TIPS -- "When the Numbers Lie"

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Taylor Larimore
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TIPS -- "When the Numbers Lie"

Post by Taylor Larimore »

Bogleheads:

When Vanguard introduced its first TIPS fund in June, 2000, we invested. Several years later I dumped the fund for two reasons: (1) Simplification. (2) I could not understand TIPS.

Now, thanks to this article by John Rekenthaler at Morningstar, I know why TIPS are so difficult to understand:

https://www.morningstar.com/articles/10 ... umbers-lie

Thank you Mr. Rekenthaler.

Taylor
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Re: TIPS -- "When the Numbers Lie"

Post by willthrill81 »

While the article makes the case that it's difficult to interpret and/or utilize the SEC yield, inflation-adjusted bonds will return what they will return. Taylor and many others have long advocated that current prices for bonds, stocks, etc., shouldn't matter to a long-term investor who will be buying an holding. Inflation-adjusted bonds protect against unexpected inflation, and funds that hold them don't change that.

If calculating the yields on TIPS is too confusing, investors should consider buying TIPS directly from the Treasury. Those yields are comparatively very easy to understand.
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Re: TIPS -- "When the Numbers Lie"

Post by nisiprius »

I invested in my first individual TIPS bond in 1998. Eventually I shifted to funds for convenience.

At one point, I wanted to hold a) a TIPS index fund b) at Fidelity. I didn't want to pay a $75 transaction fee for the Vanguard TIPS fund, VIPSX/VAIPX, so I was looking at various alternatives. Comparing growth charts, I judged that the growth chart for VIPSX was essentially identical to that for FIdelity's TIPS fund, the iShares TIPS index ETF the American Century TIPS fund, and a couple of others--probably TIPZ. The lines virtually overlaid each other. (Not sure that's still true). Anyway I concluded they were all virtually interchangeable and I went wth TIP because it actually was an index ETF.

I never compared SEC yields and it never even occurred to me to do so. I'm prepared to believe that the SEC yield is the mess that Rekenthaler says, and I am certainly prepared to believe that it's tricky to make a proper comparison between TIPS and nominal bonds due to the rising value of the principal.

But obviously I don't agree fully with Taylor on this, and frankly I think a lot of the talk about complexity of TIPS is FUD and obfuscation. TIPS are certainly no harder to understand than any international bond. Ordinary bonds are denominated in dollars. International bonds are denominated in non-dollar currencies. Well, TIPS are just Treasury securities that happen to be denominated in constant dollars.

People think that a TIPS has some mysterious inflation bet in it. But if you think in real dollars, which is what I think we should be doing, it is just the opposite. In real dollars, it is TIPS that are simple, and nominal bonds that have the peculiar extra inflation bet in them.

So far all my TIPS have just been very slightly quirky, off-center choices that have done me no particular good or harm.
Last edited by nisiprius on Fri Sep 17, 2021 11:52 am, edited 2 times in total.
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Re: TIPS -- "When the Numbers Lie"

Post by grok87 »

i agree, long term tips are terrible. But an inflation protected annuity is great. /s

LOL!

(they are basically the same thing....)

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Re: TIPS -- "When the Numbers Lie"

Post by Ramjet »

Cannot say I agree with the simplification argument. Something like VT + TIPS fund + nominal Treasury fund is still only 3 funds. Plus, If you have less than say 50% stocks, then owning an intermediate TIPS fund may be the most simple thing you can do to your asset allocation in order to protect yourself against inflation and make certain your purchasing power doesn't erode. Curious as to what others think
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Re: TIPS -- "When the Numbers Lie"

Post by dodecahedron »

nisiprius wrote: Fri Sep 17, 2021 11:05 am I invested in my first individual TIPS bond in 1998. Eventually I shifted to funds for convenience.

At one point, I wanted to hold a) a TIPS index fund b) at Fidelity. I didn't want to pay a $75 transaction fee for the Vanguard TIPS fund, VIPSX/VAIPX, so I was looking at various alternatives. Comparing growth charts, I judged that the growth chart for VIPSX was essentially identical to that for FIdelity's TIPS fund, the iShares TIPS index ETF the American Century TIPS fund, and a couple of others--probably TIPZ. The lines virtually overlaid each other. (Not sure that's still true). Anyway I concluded they were all virtually interchangeable and I went wth TIP because it actually was an index ETF.

I never compared SEC yields and it never even occurred to me to do so

Obviously I don't agree with Taylor on this, and frankly I think a lot of the talk about complexity of TIPS is FUD and obfuscation. They are no harder to understand than any international bond. Ordinary bonds are denominated in dollars. International bonds are denominated in other currencies. And TIPS are denominated in constant dollars.

People think that a TIPS has some mysterious inflation bet in it. But if you think in real dollars, which is what I think we should be doing, it is just the opposite. In real dollars, it is TIPS that are simple, and nominal bonds that have the peculiar extra inflation bet in them.

So far all my TIPS have just been very slightly quirky, off-center choices that have done me no particular good or harm.
I agree with the above.

Frequent discussions on this Bogleheads Forum have convinced me that the SEC yield figures can be misleading in general (i.e., not just for inflation-adjusted bonds), though obviously the issue is more pronounced for inflation adjusted securities given the apparent lack of guidance by SEC on whether real or nominal yields should be used in the computation.

Personally, I prefer the greater transparency of Vanguard's approach, which reports real yields only. That said, when I have examined, for example, growth of income charts on VAIPX and SWSRX (Vanguard & Schwab intermediate inflation product funds), I have seen no discernible differences, so I use Vanguard's reported SEC figures as a general guideline to what intermediate inflation protected bond funds are generally yielding.

For folks in their 90s (like Taylor and my mother), I think staying with plain vanilla nominal fixed income products has served them well in recent low-inflation decades and there is probably little harm for them in staying the course. For those of us still in our 60s (and with modest equity allocations, currently around 33% for me), I think it would be a mistake to ignore inflation-protected fixed income products simply because the SEC yield numbers can be misleading.
Last edited by dodecahedron on Fri Sep 17, 2021 11:25 am, edited 1 time in total.
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Re: TIPS -- "When the Numbers Lie"

Post by Taylor Larimore »

Bogleheads:

Another reason I discontinued our TIPS fund is that the three funds in The Three-Fund Portfolio worked quite well together during the high-inflation of the late 70s:

YEAR--INFLATION--BOND INDEX--S&P 500 T.R. INDEX--MSCI EAFE T.R.INDEX
1976-------4.9%--------15.6%------------23.8%--------------------3.6%
1977-------6.7-----------3.0-------------(-7.2)-------------------17.5
1978-------9.0-----------1.4---------------6.6--------------------33.1
1979------13.3-----------1.9--------------18.4-------------------10.9 (Highest Annual Inflation Rate)
1980------12.5-----------2.7--------------32.4-------------------25.4
1981-------8.9-----------6.3-------------(-4.9)------------------(-2.5)
1982-------3.8----------32.6--------------21.6------------------(-0.3) (Highest Bond Index Return)
1983-------3.8-----------8.4--------------22.6-------------------24.8
1984-------3.9----------15.2---------------6.3--------------------3.5
1985-------3.8----------22.1--------------31.7-------------------51.4
1986-------1.1----------15.2--------------18.7-------------------65.8 (Vanguard Total Bond Market Inception )
1987-------4.4-----------2.8----------------5.2-------------------24.6
1988-------4.4-----------7.9---------------16.6-------------------27.8
1989-------4.6----------14.5---------------31.7------------------11.4
1990-------6.1-----------8.9---------------(-3.1)---------------(-22.8)
1991-------3.1----------16.0---------------30.5------------------12.4
1992-------2.9-----------7.4-----------------7.6----------------(-11.9) (Vanguard Total Stock Market Inception)
1993-------2.7-----------9.7----------------10.1------------------32.6
1994-------2.7---------(-2.9)----------------1.3--------------------7.6 (Lowest Bond Index Return)
1995-------2.5----------18.5---------------37.6-------------------11.8 (Highest S&P Index Return)
1996-------3.3-----------3.6----------------23.0--------------------7.2 (Vanguard Total International Stock Market Inception
1997-------1.7-----------9.7----------------33.4--------------------2.6
1998-------1.6-----------8.7----------------28.6-------------------19.1
1999-------2.7---------(-0.8)---------------21.0-------------------28.3
2000-------3.4----------11.6---------------(-9.1)----------------(-15.8)
2001-------1.6-----------8.4--------------(-11.9)----------------(-19.8)
2002-------2.4----------10.3-------------(-22.1)----------------(-15.3)
2003-------1.9-----------4.1----------------28.7-------------------40.4
2004-------3.3-----------4.3----------------10.9-------------------20.9
2005-------3.4-----------2.4-----------------4.9-------------------15.8
2006-------2.5-----------4.3----------------15.8------------------26.8
2007-------4.1-----------7.0-----------------5.5------------------11.6
2008-------0.1-----------5.2--------------(-37.0)---------------(-43.1) (Lowest U.S. and International Stock Returns)
2009-------2.7-----------5.9----------------26.5------------------32.5
2010-------1.5-----------6.5----------------15.1-------------------8.2
2011-------3.0-----------7.7-----------------2.1----------------(-11.7)
2012-------1.7-----------4.3----------------16.0------------------17.9
2013-------1.5---------(-2.0)---------------32.4------------------23.3
2014-------1.6-----------6.0----------------13.7-----------------(-4.5)
2015-------0.7-----------0.5-----------------1.4-----------------(-0.4)
2016-------2.1-----------2.6----------------12.0-------------------1.5
2017-------2.1-----------3.5----------------21.8------------------25.6
2018-------2.5---------(-0.1)--------------(-4.4)---------------(-13.4)
2019-------2.3-----------8.7----------------31.5------------------22.7
2020-------1.4-----------7.7----------------18.4------------------11.3

Best wishes
Taylor
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Re: TIPS -- "When the Numbers Lie"

Post by dodecahedron »

Ramjet wrote: Fri Sep 17, 2021 11:08 am Cannot say I agree with the simplification argument. Something like VT + TIPS fund + nominal Treasury fund is still only 3 funds. Plus, If you have less than say 50% stocks, then owning an intermediate TIPS fund may be the most simple thing you can do to your asset allocation in order to protect yourself against inflation and make certain your purchasing power doesn't erode. Curious as to what others think
I agree. At this point, if further simplification is needed in my portfolio, I would drop my nominal fixed income before dropping my TIPS-based fund.
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Re: TIPS -- "When the Numbers Lie"

Post by nisiprius »

I admit I feel very slightly uneasy about the fact that the (regular) Vanguard TIPS fund, VAIPX, is not an index fund. But I guess I have enough trust in Vanguard to stick with VAIPX instead of, say, switching to the TIP ETF.

The (now discontinued) Schwab Total Bond Market (not-index) Fund tracked virtually perfectly with the Aggregate index for over a decade, then suddenly took a fairly-shocking dive around 2007-2009. They fell for something faddish that shouldn't have been in a totall bond fund.

But one thing about Vanguard TIPS fund, is that the whole schedule of investments in the annual report fits on less than two screens, and it is 99.4% TIPS. And some money market. The weird little options and derivative crumbs that seem to be in every fund from every provider are virtually zero. So I should be able to keep an eye on it to see if Vanguard starts playing any games with it.

(Vanguard's short-term TIPS fund is an index fund. Go figure.)
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Re: TIPS -- "When the Numbers Lie"

Post by dodecahedron »

nisiprius wrote: Fri Sep 17, 2021 12:02 pm I admit I feel very slightly uneasy about the fact that the (regular) Vanguard TIPS fund, VAIPX, is not an index fund. But I guess I have enough trust in Vanguard to stick with VAIPX instead of, say, switching to the TIP ETF.
Hmm, out of curiosity I just did a five year comparison between VAIPX, SWSRX, and TIPZ (which is as far back as I can go and still capture all three.)

My impression is that all three have roughly similar duration of around 8 years (though there are some methodological issues involved in computing duration on TIPS), but VAIPX seems to have systematically underperformed the two others (which are both index funds) during that period. (Cumulative return of 11.36% for SWSRX, 11.83% for TIPZ, and 8.14% for VAIPX.)

Edited to add: I just added Fidelity's intermediate TIPS index fund (FIPDX) to the comparison. FIPDX performed even better during the past five years, with cumulative return of 14.94%.


Edited to correct: Thanks to buckeye7983 for pointing out my silly error. All the funds described above do in fact track very closely.
Last edited by dodecahedron on Fri Sep 17, 2021 7:16 pm, edited 2 times in total.
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Re: TIPS -- "When the Numbers Lie"

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nisiprius wrote: Fri Sep 17, 2021 12:02 pm I admit I feel very slightly uneasy about the fact that the (regular) Vanguard TIPS fund, VAIPX, is not an index fund. But I guess I have enough trust in Vanguard to stick with VAIPX instead of, say, switching to the TIP ETF.

The (now discontinued) Schwab Total Bond Market (not-index) Fund tracked virtually perfectly with the Aggregate index for over a decade, then suddenly took a fairly-shocking dive around 2007-2009. They fell for something faddish that shouldn't have been in a totall bond fund.

But one thing about Vanguard TIPS fund, is that the whole schedule of investments in the annual report fits on less than two screens, and it is 99.4% TIPS. And some money market. The weird little options and derivative crumbs that seem to be in every fund from every provider are virtually zero. So I should be able to keep an eye on it to see if Vanguard starts playing any games with it.

(Vanguard's short-term TIPS fund is an index fund. Go figure.)
It is easy to assemble TIPS at this duration, I think. The fact it is not actively managed is easy to understand when the investment space is small (all 19 or 20 TIPS). How would anyone actively manage this?
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Re: TIPS -- "When the Numbers Lie"

Post by dodecahedron »

secondopinion wrote: Fri Sep 17, 2021 12:26 pm
nisiprius wrote: Fri Sep 17, 2021 12:02 pm I admit I feel very slightly uneasy about the fact that the (regular) Vanguard TIPS fund, VAIPX, is not an index fund. But I guess I have enough trust in Vanguard to stick with VAIPX instead of, say, switching to the TIP ETF.

The (now discontinued) Schwab Total Bond Market (not-index) Fund tracked virtually perfectly with the Aggregate index for over a decade, then suddenly took a fairly-shocking dive around 2007-2009. They fell for something faddish that shouldn't have been in a totall bond fund.

But one thing about Vanguard TIPS fund, is that the whole schedule of investments in the annual report fits on less than two screens, and it is 99.4% TIPS. And some money market. The weird little options and derivative crumbs that seem to be in every fund from every provider are virtually zero. So I should be able to keep an eye on it to see if Vanguard starts playing any games with it.

(Vanguard's short-term TIPS fund is an index fund. Go figure.)
It is easy to assemble TIPS at this duration, I think. The fact it is not actively managed is easy to understand when the investment space is small (all 19 or 20 TIPS). How would anyone actively manage this?
Well, even with a small number of holdings, and even if you keep the overall portfolio duration constant, there can be multiple ways to achieve the same overall duration (e.g., barbell approach vs. all intermediates, for example) and I guess if you try to market-time a changing yield curve, it could turn out differently.
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Re: TIPS -- "When the Numbers Lie"

Post by secondopinion »

dodecahedron wrote: Fri Sep 17, 2021 12:33 pm
secondopinion wrote: Fri Sep 17, 2021 12:26 pm
nisiprius wrote: Fri Sep 17, 2021 12:02 pm I admit I feel very slightly uneasy about the fact that the (regular) Vanguard TIPS fund, VAIPX, is not an index fund. But I guess I have enough trust in Vanguard to stick with VAIPX instead of, say, switching to the TIP ETF.

The (now discontinued) Schwab Total Bond Market (not-index) Fund tracked virtually perfectly with the Aggregate index for over a decade, then suddenly took a fairly-shocking dive around 2007-2009. They fell for something faddish that shouldn't have been in a totall bond fund.

But one thing about Vanguard TIPS fund, is that the whole schedule of investments in the annual report fits on less than two screens, and it is 99.4% TIPS. And some money market. The weird little options and derivative crumbs that seem to be in every fund from every provider are virtually zero. So I should be able to keep an eye on it to see if Vanguard starts playing any games with it.

(Vanguard's short-term TIPS fund is an index fund. Go figure.)
It is easy to assemble TIPS at this duration, I think. The fact it is not actively managed is easy to understand when the investment space is small (all 19 or 20 TIPS). How would anyone actively manage this?
Well, even with a small number of holdings, and even if you keep the overall portfolio duration constant, there can be multiple ways to achieve the same overall duration (e.g., barbell approach vs. all intermediates, for example) and I guess if you try to market-time a changing yield curve, it could turn out differently.
The actively managed fund has about 50 TIPS, but it has a longer duration limit. I was talking the passive short-term TIPS ETF having about 20.

But yes, a lot can happen when the holdings are actively managed.
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Re: TIPS -- "When the Numbers Lie"

Post by Northern Flicker »

Taylor Larimore wrote: Fri Sep 17, 2021 10:19 am Bogleheads:

When Vanguard introduced its first TIPS fund in June, 2000, we invested. Several years later I dumped the fund for two reasons: (1) Simplification. (2) I could not understand TIPS.

Now, thanks to this article by John Rekenthaler at Morningstar, I know why TIPS are so difficult to understand:

https://www.morningstar.com/articles/10 ... umbers-lie
Taylor, you could have just read the footnote Vanguard has always used when they quote a yield for either of their TIPS funds on their web site:

G — DOES NOT INCLUDE ANY INCOME ADJUSTMENT RESULTING FROM CHANGE IN INFLATION RATE

TIPS are not appropriate for all investors, but they are an important asset class that should not just be dismissed because you decided not to hold them.
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Re: TIPS -- "When the Numbers Lie"

Post by arcticpineapplecorp. »

sounds like this is an easy problem to solve provided the SEC makes a consistent requirement for mutual fund families because:
The SEC’s rules for calculating its yield, however, don’t say whether to include the inflation adjustment or leave it out. And that gives funds a lot of leeway.”
sounds like an easy problem to solve provided the will is there.

i don't think saying the mutual fund companies should somehow work together for consistent reporting. If this is a known problem that can be solved with a regulation you don't need to "hope" that compteting companies play well together (quote below). Seems like an odd suggestion on John's part.
The SEC is not the only guilty party. The fund industry could have eliminated the confusion, but it has not. Frequently, the fund industry evolves and improves in response to customer demand. But such actions tend to be individual; one firm sees an opportunity and reacts accordingly. That is a different mechanism for creating change than is required to solve this problem, which involves working together to reach a common goal.
Last edited by arcticpineapplecorp. on Fri Sep 17, 2021 1:01 pm, edited 1 time in total.
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Re: TIPS -- "When the Numbers Lie"

Post by Svensk Anga »

nisiprius wrote: Fri Sep 17, 2021 12:02 pm I admit I feel very slightly uneasy about the fact that the (regular) Vanguard TIPS fund, VAIPX, is not an index fund. But I guess I have enough trust in Vanguard to stick with VAIPX instead of, say, switching to the TIP ETF.
My guess is that Vanguard wanted to offer a consistent average maturity or duration. If it were an index fund, those values would be set by the Treasury Department when they decide what quantity of which maturity they will offer in the periodic auctions. If Treasury decided to lock in long term negative real yield with a series of outsize 30-year TIPS auctions, investors in a TIPS index fund could find themselves taking on more risk than they bargained for.
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Re: TIPS -- "When the Numbers Lie"

Post by Taylor Larimore »

Northern Flicker wrote: Fri Sep 17, 2021 12:50 pm
Taylor, you could have just read the footnote Vanguard has always used when they quote a yield for either of their TIPS funds on their web site:

G — DOES NOT INCLUDE ANY INCOME ADJUSTMENT RESULTING FROM CHANGE IN INFLATION RATE
Northern Flicker:

"G — DOES NOT INCLUDE ANY INCOME ADJUSTMENT RESULTING FROM CHANGE IN INFLATION RATE"

I thought this it what TIPS are for.

Taylor
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Re: TIPS -- "When the Numbers Lie"

Post by chem6022 »

Ramjet wrote: Fri Sep 17, 2021 11:08 am Cannot say I agree with the simplification argument. Something like VT + TIPS fund + nominal Treasury fund is still only 3 funds. Plus, If you have less than say 50% stocks, then owning an intermediate TIPS fund may be the most simple thing you can do to your asset allocation in order to protect yourself against inflation and make certain your purchasing power doesn't erode. Curious as to what others think
I have taken Taylor's message on simplification and its benefits to heart, but my ideal 3 fund for decumulation is total worldwide VT + short-term TIPS VTIP + long-term nominal treasuries VGLT. VTIP provides the spending buffer, and VGLT is the bond yin to the equity yang of VT. Still simple and diverse, but more matched to my own needs. One the other hand it is probably better for me long-term if you all well and avoid treasuries and TIPS, so please.go ahead and do that instead!
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Re: TIPS -- "When the Numbers Lie"

Post by willthrill81 »

Taylor Larimore wrote: Fri Sep 17, 2021 11:25 am Another reason I discontinued our TIPS fund is that the three funds in The Three-Fund Portfolio worked quite well together during the high-inflation of the late 70s:
From 1977-1981, U.S. stocks had a real return of .57%, and intermediate-term Treasuries, roughly akin to the total bond market, had a real return of -5.58%. That's not good performance. EAFE did well during that period, but as I recall, your own ex-U.S. allocation is very low now.
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Re: TIPS -- "When the Numbers Lie"

Post by FactualFran »

After Morningstar nudges the SEC to have the reported yield of TIPS funds exclude the inflation adjustment to the principal, maybe they will nudge the IRS about the income tax treatment mentioned in the "When the Numbers Lies" article: "(Regrettably for investors, the IRS treats the adjustment as immediate income, when it is in fact a deferred capital gain. Pay taxes today, receive the profit tomorrow.)"
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Re: TIPS -- "When the Numbers Lie"

Post by Ramjet »

willthrill81 wrote: Fri Sep 17, 2021 1:43 pm
Taylor Larimore wrote: Fri Sep 17, 2021 11:25 am Another reason I discontinued our TIPS fund is that the three funds in The Three-Fund Portfolio worked quite well together during the high-inflation of the late 70s:
From 1977-1981, U.S. stocks had a real return of .57%, and intermediate-term Treasuries, roughly akin to the total bond market, had a real return of -5.58%. That's not good performance. EAFE did well during that period, but as I recall, your own ex-U.S. allocation is very low now.
For the same time period inflation averaged 9.9%, yikes
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Re: TIPS -- "When the Numbers Lie"

Post by nedsaid »

Taylor Larimore wrote: Fri Sep 17, 2021 11:25 am Bogleheads:

Another reason I discontinued our TIPS fund is that the three funds in The Three-Fund Portfolio worked quite well together during the high-inflation of the late 70s:

YEAR--INFLATION--BOND INDEX--S&P 500 T.R. INDEX--MSCI EAFE T.R.INDEX
1976-------4.9%--------15.6%------------23.8%--------------------3.6%
1977-------6.7-----------3.0-------------(-7.2)-------------------17.5
1978-------9.0-----------1.4---------------6.6--------------------33.1
1979------13.3-----------1.9--------------18.4-------------------10.9 (Highest Annual Inflation Rate)
1980------12.5-----------2.7--------------32.4-------------------25.4
1981-------8.9-----------6.3-------------(-4.9)------------------(-2.5)
1982-------3.8----------32.6--------------21.6------------------(-0.3) (Highest Bond Index Return)
1983-------3.8-----------8.4--------------22.6-------------------24.8
1984-------3.9----------15.2---------------6.3--------------------3.5
1985-------3.8----------22.1--------------31.7-------------------51.4
1986-------1.1----------15.2--------------18.7-------------------65.8 (Vanguard Total Bond Market Inception )
1987-------4.4-----------2.8----------------5.2-------------------24.6
1988-------4.4-----------7.9---------------16.6-------------------27.8
1989-------4.6----------14.5---------------31.7------------------11.4
1990-------6.1-----------8.9---------------(-3.1)---------------(-22.8)
1991-------3.1----------16.0---------------30.5------------------12.4
1992-------2.9-----------7.4-----------------7.6----------------(-11.9) (Vanguard Total Stock Market Inception)
1993-------2.7-----------9.7----------------10.1------------------32.6
1994-------2.7---------(-2.9)----------------1.3--------------------7.6 (Lowest Bond Index Return)
1995-------2.5----------18.5---------------37.6-------------------11.8 (Highest S&P Index Return)
1996-------3.3-----------3.6----------------23.0--------------------7.2 (Vanguard Total International Stock Market Inception
1997-------1.7-----------9.7----------------33.4--------------------2.6
1998-------1.6-----------8.7----------------28.6-------------------19.1
1999-------2.7---------(-0.8)---------------21.0-------------------28.3
2000-------3.4----------11.6---------------(-9.1)----------------(-15.8)
2001-------1.6-----------8.4--------------(-11.9)----------------(-19.8)
2002-------2.4----------10.3-------------(-22.1)----------------(-15.3)
2003-------1.9-----------4.1----------------28.7-------------------40.4
2004-------3.3-----------4.3----------------10.9-------------------20.9
2005-------3.4-----------2.4-----------------4.9-------------------15.8
2006-------2.5-----------4.3----------------15.8------------------26.8
2007-------4.1-----------7.0-----------------5.5------------------11.6
2008-------0.1-----------5.2--------------(-37.0)---------------(-43.1) (Lowest U.S. and International Stock Returns)
2009-------2.7-----------5.9----------------26.5------------------32.5
2010-------1.5-----------6.5----------------15.1-------------------8.2
2011-------3.0-----------7.7-----------------2.1----------------(-11.7)
2012-------1.7-----------4.3----------------16.0------------------17.9
2013-------1.5---------(-2.0)---------------32.4------------------23.3
2014-------1.6-----------6.0----------------13.7-----------------(-4.5)
2015-------0.7-----------0.5-----------------1.4-----------------(-0.4)
2016-------2.1-----------2.6----------------12.0-------------------1.5
2017-------2.1-----------3.5----------------21.8------------------25.6
2018-------2.5---------(-0.1)--------------(-4.4)---------------(-13.4)
2019-------2.3-----------8.7----------------31.5------------------22.7
2020-------1.4-----------7.7----------------18.4------------------11.3

Best wishes
Taylor
Jack Bogle's Words of Wisdom: "There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."
You have posted this several times and it is reassuring to those of us with substantial investments in U.S. Bond Index Funds. This post should be in the Wiki - it is that good. Thank you for taking the time to put this together.

That all being said, I do own TIPS funds and may buy more if it looks like we are headed for a higher sustained rate of inflation. So far Total Bond Market Index has been plenty well good enough but I like my TIPS funds. I want the protection from unexpected inflation.
A fool and his money are good for business.
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Re: TIPS -- "When the Numbers Lie"

Post by alex_686 »

arcticpineapplecorp. wrote: Fri Sep 17, 2021 12:58 pm sounds like an easy problem to solve provided the will is there.

i don't think saying the mutual fund companies should somehow work together for consistent reporting. If this is a known problem that can be solved with a regulation you don't need to "hope" that compteting companies play well together (quote below). Seems like an odd suggestion on John's part.
I have worked on this issue. It is not a easy one. I would love to hear your suggestion.

You could report what the coupon yield is. That is dead easy. Of course, reporting that assumes no inflation. There are multiple issues here.

Or you could report what the current yield is plus the expected inflation. You can derive how the market is pricing in expected inflation. Expect it is a indirect measurement and requires some subjective judgment calls. The SEC does not like that.

And here is the rub. And if they were to endorse such a method they would want everybody to be working form the same playbook.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: TIPS -- "When the Numbers Lie"

Post by buckeye7983 »

dodecahedron wrote: Fri Sep 17, 2021 12:17 pm
nisiprius wrote: Fri Sep 17, 2021 12:02 pm I admit I feel very slightly uneasy about the fact that the (regular) Vanguard TIPS fund, VAIPX, is not an index fund. But I guess I have enough trust in Vanguard to stick with VAIPX instead of, say, switching to the TIP ETF.
Hmm, out of curiosity I just did a five year comparison between VAIPX, SWSRX, and TIPZ (which is as far back as I can go and still capture all three.)

My impression is that all three have roughly similar duration of around 8 years (though there are some methodological issues involved in computing duration on TIPS), but VAIPX seems to have systematically underperformed the two others (which are both index funds) during that period. (Cumulative return of 11.36% for SWSRX, 11.83% for TIPZ, and 8.14% for VAIPX.)

Edited to add: I just added Fidelity's intermediate TIPS index fund (FIPDX) to the comparison. FIPDX performed even better during the past five years, with cumulative return of 14.94%.
Hi dodecahedron-

I think you may have been looking at change in share price. VAIPX, SWRSX, FIPDX, and TIPZ all have 5 year total return tightly grouped between 25.64% and 26.26%

Cheers!
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Re: TIPS -- "When the Numbers Lie"

Post by dodecahedron »

buckeye7983 wrote: Fri Sep 17, 2021 5:38 pm
dodecahedron wrote: Fri Sep 17, 2021 12:17 pm
nisiprius wrote: Fri Sep 17, 2021 12:02 pm I admit I feel very slightly uneasy about the fact that the (regular) Vanguard TIPS fund, VAIPX, is not an index fund. But I guess I have enough trust in Vanguard to stick with VAIPX instead of, say, switching to the TIP ETF.
Hmm, out of curiosity I just did a five year comparison between VAIPX, SWSRX, and TIPZ (which is as far back as I can go and still capture all three.)

My impression is that all three have roughly similar duration of around 8 years (though there are some methodological issues involved in computing duration on TIPS), but VAIPX seems to have systematically underperformed the two others (which are both index funds) during that period. (Cumulative return of 11.36% for SWSRX, 11.83% for TIPZ, and 8.14% for VAIPX.)

Edited to add: I just added Fidelity's intermediate TIPS index fund (FIPDX) to the comparison. FIPDX performed even better during the past five years, with cumulative return of 14.94%.
Hi dodecahedron-

I think you may have been looking at change in share price. VAIPX, SWRSX, FIPDX, and TIPZ all have 5 year total return tightly grouped between 25.64% and 26.26%

Cheers!
Oops, yes, I believe you are right! I was using Google Finance, and should have been using another tool. Thanks for pointing this out. I am feeling much reassured--I should have been more suspicious of such a large discrepancy. I have gone back and edited my erroneous post above to explicitly acknowledge my mistake.
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Re: TIPS -- "When the Numbers Lie"

Post by Northern Flicker »

Taylor Larimore wrote: Fri Sep 17, 2021 1:08 pm
Northern Flicker wrote: Fri Sep 17, 2021 12:50 pm
Taylor, you could have just read the footnote Vanguard has always used when they quote a yield for either of their TIPS funds on their web site:

G — DOES NOT INCLUDE ANY INCOME ADJUSTMENT RESULTING FROM CHANGE IN INFLATION RATE
Northern Flicker:

"G — DOES NOT INCLUDE ANY INCOME ADJUSTMENT RESULTING FROM CHANGE IN INFLATION RATE"

I thought this it what TIPS are for.

Taylor
Yes. The point of investing in TIPS is that you don't have to care what the future inflation rate turns out to be. You know what the real yield is. Vanguard appropriately publishes the 30-day real yield and has a footnote to articulate that is what it is. This is quite transparent.

There are some fund companies that play games with their published SEC yield for TIPS funds, potentially misleading investors. Vanguard is not one of them. The behavior of some fund companies does not diminish the relevance of TIPS as an asset class. Neither does the fact that you chose to stop investing in them.
Last edited by Northern Flicker on Fri Sep 17, 2021 7:49 pm, edited 3 times in total.
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Re: TIPS -- "When the Numbers Lie"

Post by willthrill81 »

Northern Flicker wrote: Fri Sep 17, 2021 7:29 pm Yes. The point of investing in TIPS is that you don't have to care what the future inflation rate turns out to be. You know what the real yield is.
Precisely. While I know that some argue that not all fixed income should be inflation-adjusted (an argument which I do not find compelling), I don't understand why an investor would choose an uncertain real yield from nominal bonds over a certain real yield from TIPS or I bonds if there isn't a significant expense for buying the latter.

Maybe some just don't like what the bond market has been saying for a while now: intermediate Treasuries at least are likely to lose out to inflation over the next decade.
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Re: TIPS -- "When the Numbers Lie"

Post by grok87 »

Northern Flicker wrote: Fri Sep 17, 2021 7:29 pm
Taylor Larimore wrote: Fri Sep 17, 2021 1:08 pm
Northern Flicker wrote: Fri Sep 17, 2021 12:50 pm
Taylor, you could have just read the footnote Vanguard has always used when they quote a yield for either of their TIPS funds on their web site:

G — DOES NOT INCLUDE ANY INCOME ADJUSTMENT RESULTING FROM CHANGE IN INFLATION RATE
Northern Flicker:

"G — DOES NOT INCLUDE ANY INCOME ADJUSTMENT RESULTING FROM CHANGE IN INFLATION RATE"

I thought this it what TIPS are for.

Taylor
Yes. The point of investing in TIPS is that you don't have to care what the future inflation rate turns out to be. You know what the real yield is. Vanguard appropriately publishes the 30-day real yield and has a footnote to articulate that is what it is. This is quite transparent.

There are some fund companies that play games with their published SEC yield for TIPS funds, potentially misleading investors. Vanguard is not one of them. The behavior of some fund companies does not diminish the relevance of TIPS as an asset class. Neither does the fact that you chose to stop investing in them.
yep
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Re: TIPS -- "When the Numbers Lie"

Post by Northern Flicker »

nedsaid wrote: Fri Sep 17, 2021 5:06 pm
Taylor Larimore wrote: Fri Sep 17, 2021 11:25 am Bogleheads:

Another reason I discontinued our TIPS fund is that the three funds in The Three-Fund Portfolio worked quite well together during the high-inflation of the late 70s:

YEAR--INFLATION--BOND INDEX--S&P 500 T.R. INDEX--MSCI EAFE T.R.INDEX
1976-------4.9%--------15.6%------------23.8%--------------------3.6%
1977-------6.7-----------3.0-------------(-7.2)-------------------17.5
1978-------9.0-----------1.4---------------6.6--------------------33.1
1979------13.3-----------1.9--------------18.4-------------------10.9 (Highest Annual Inflation Rate)
1980------12.5-----------2.7--------------32.4-------------------25.4
1981-------8.9-----------6.3-------------(-4.9)------------------(-2.5)
1982-------3.8----------32.6--------------21.6------------------(-0.3) (Highest Bond Index Return)
1983-------3.8-----------8.4--------------22.6-------------------24.8
1984-------3.9----------15.2---------------6.3--------------------3.5
1985-------3.8----------22.1--------------31.7-------------------51.4
1986-------1.1----------15.2--------------18.7-------------------65.8 (Vanguard Total Bond Market Inception )
1987-------4.4-----------2.8----------------5.2-------------------24.6
1988-------4.4-----------7.9---------------16.6-------------------27.8
1989-------4.6----------14.5---------------31.7------------------11.4
1990-------6.1-----------8.9---------------(-3.1)---------------(-22.8)
1991-------3.1----------16.0---------------30.5------------------12.4
1992-------2.9-----------7.4-----------------7.6----------------(-11.9) (Vanguard Total Stock Market Inception)
1993-------2.7-----------9.7----------------10.1------------------32.6
1994-------2.7---------(-2.9)----------------1.3--------------------7.6 (Lowest Bond Index Return)
1995-------2.5----------18.5---------------37.6-------------------11.8 (Highest S&P Index Return)
1996-------3.3-----------3.6----------------23.0--------------------7.2 (Vanguard Total International Stock Market Inception
1997-------1.7-----------9.7----------------33.4--------------------2.6
1998-------1.6-----------8.7----------------28.6-------------------19.1
1999-------2.7---------(-0.8)---------------21.0-------------------28.3
2000-------3.4----------11.6---------------(-9.1)----------------(-15.8)
2001-------1.6-----------8.4--------------(-11.9)----------------(-19.8)
2002-------2.4----------10.3-------------(-22.1)----------------(-15.3)
2003-------1.9-----------4.1----------------28.7-------------------40.4
2004-------3.3-----------4.3----------------10.9-------------------20.9
2005-------3.4-----------2.4-----------------4.9-------------------15.8
2006-------2.5-----------4.3----------------15.8------------------26.8
2007-------4.1-----------7.0-----------------5.5------------------11.6
2008-------0.1-----------5.2--------------(-37.0)---------------(-43.1) (Lowest U.S. and International Stock Returns)
2009-------2.7-----------5.9----------------26.5------------------32.5
2010-------1.5-----------6.5----------------15.1-------------------8.2
2011-------3.0-----------7.7-----------------2.1----------------(-11.7)
2012-------1.7-----------4.3----------------16.0------------------17.9
2013-------1.5---------(-2.0)---------------32.4------------------23.3
2014-------1.6-----------6.0----------------13.7-----------------(-4.5)
2015-------0.7-----------0.5-----------------1.4-----------------(-0.4)
2016-------2.1-----------2.6----------------12.0-------------------1.5
2017-------2.1-----------3.5----------------21.8------------------25.6
2018-------2.5---------(-0.1)--------------(-4.4)---------------(-13.4)
2019-------2.3-----------8.7----------------31.5------------------22.7
2020-------1.4-----------7.7----------------18.4------------------11.3

Best wishes
Taylor
Jack Bogle's Words of Wisdom: "There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."
You have posted this several times and it is reassuring to those of us with substantial investments in U.S. Bond Index Funds. This post should be in the Wiki - it is that good. Thank you for taking the time to put this together.

That all being said, I do own TIPS funds and may buy more if it looks like we are headed for a higher sustained rate of inflation. So far Total Bond Market Index has been plenty well good enough but I like my TIPS funds. I want the protection from unexpected inflation.
It looks a bit better by starting in 1976. That was the only year from 1967-1981 (the inflationary period under discussion) when intermediate bonds had a positive real return for the year.

From 1967-1981 the real return of:

1. S&P500 was zero
2. Intermediate bonds was negative
3. Developed markets EAFE stocks was positive.

As long as you held a decent allocation to international stocks, you had a positive real return.
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Re: TIPS -- "When the Numbers Lie"

Post by grabiner »

Oicuryy wrote: Fri Sep 17, 2021 10:26 pm
John Rekenthaler wrote:That conflicts with the purpose of the yield calculation, which exists not to estimate a fund’s future total returns but instead to provide investors with a sense of what the fund is currently distributing.
That is completely backwards. Rekenthaler has no clue how SEC yield is calculated. It has nothing to do with current distributions. See paragraph (b)(4) of Item 26 on page 58 of Form N1-A.

https://www.sec.gov/files/formn-1a.pdf
For an example, see SEC Yield on the wiki. There are two example bonds, with the same SEC yield, because both are 10-year bonds which will yield 2% if held to maturity. One bond is at par, and makes distributions equal to its SEC yield. The other is at a premium, and makes distributions higher than its SEC yield, but the premium declines over time; it will return only the par value at maturity.

And given that meaning of the SEC yield, it makes more sense for TIPS funds to have a consistent rule for incorporating the inflation adjustment. A TIPS which will yield 1% above inflation if held to maturity should report a 1% yield, and the yield should stay nearly constant if bond prices are not volatile. If the inflation adjustment is included, the bond price might not change much but its yield will change as short-term inflation changes.
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Re: TIPS -- "When the Numbers Lie"

Post by Thesaints »

There is nothing complicated in the 30-day yield calculation and the article is not really correct: the inflation adjustment is a "phantom" yield if one holds individual bonds, but it is cash in the pocket if one holds them via a fund.
As the CPI adjustment being volatile, well , inflation is volatile and so is the purchasing power of a fixed yield. On the other hand, the purchasing power of the inflation adjusted yield is constant. I would argue that it is the fixed yield that is volatile in real terms !
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Re: TIPS -- "When the Numbers Lie"

Post by dcabler »

This is why I follow #cruncher's thread where he regularly calculates real yield and duration of the major TIPs indexes that funds track. Nice spreadsheet that, if you're into spreadsheets, is easy to modify to allow you to dump the actual current holdings of your favorite fund into it.

viewtopic.php?f=10&t=104845&start=100

cheers.
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Re: TIPS -- "When the Numbers Lie"

Post by dbr »

Thesaints wrote: Sat Sep 18, 2021 12:48 am There is nothing complicated in the 30-day yield calculation and the article is not really correct: the inflation adjustment is a "phantom" yield if one holds individual bonds, but it is cash in the pocket if one holds them via a fund.
As the CPI adjustment being volatile, well , inflation is volatile and so is the purchasing power of a fixed yield. On the other hand, the purchasing power of the inflation adjusted yield is constant. I would argue that it is the fixed yield that is volatile in real terms !
I know it is conventional but I wish that whole terminology would go away.

But, don't forget that if that cash in the pocket is spent then the investment will not index for inflation. The fixed yield is not indexed for inflation. Rather the yield payment increases because the adjusted principle increases, which it won't if one takes the money and spends it.

Note none of this is any different from nominal bonds. One can own a nominal bond with reinvestment and then add or remove the difference to inflation as a contribution or withdrawal and inflation index one's own fund. Sometimes inflation will develop in such a way that one would be ahead with the nominals and sometimes with TIPS. One buys TIPS not to be ahead but to have certainty.
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Re: TIPS -- "When the Numbers Lie"

Post by David Althaus »

It is reassuring to note other people seem just as baffled by TIPS as me. Bogleheads (I think) are big believers in simplicity, mean reversion, and that popularity too often results in less than stellar outcomes. TIPS are discussed about every day. Who doesn't know they are purchasing inflation protection (often at a high premium), are we really sure there's going to be a lot of it, and are we willing to make such a big bet to have meaningful impact (we hope positive) on the portfolio? Is it possible they are just another sector bet?

All the best
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Re: TIPS -- "When the Numbers Lie"

Post by willthrill81 »

David Althaus wrote: Sat Sep 18, 2021 10:32 am It is reassuring to note other people seem just as baffled by TIPS as me. Bogleheads (I think) are big believers in simplicity, mean reversion, and that popularity too often results in less than stellar outcomes. TIPS are discussed about every day. Who doesn't know they are purchasing inflation protection (often at a high premium), are we really sure there's going to be a lot of it, and are we willing to make such a big bet to have meaningful impact (we hope positive) on the portfolio? Is it possible they are just another sector bet?
Why do you think that TIPS' inflation protection is 'often at a high premium'? Right now at least, the breakeven inflation rate on 10 year TIPS is only 2.33% (i.e., inflation at that level would produce identical real returns for both TIPS and nominal Treasuries).
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Re: TIPS -- "When the Numbers Lie"

Post by nisiprius »

If you think in real dollars it is nominal bonds that are the "bet," not TIPS.
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Re: TIPS -- "When the Numbers Lie"

Post by willthrill81 »

nisiprius wrote: Sat Sep 18, 2021 10:40 am If you think in real dollars it is nominal bonds that are the "bet," not TIPS.
Correct! :thumbsup
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Re: TIPS -- "When the Numbers Lie"

Post by Angst »

dcabler wrote: Sat Sep 18, 2021 4:56 am This is why I follow #cruncher's thread where he regularly calculates real yield and duration of the major TIPs indexes that funds track. Nice spreadsheet that, if you're into spreadsheets, is easy to modify to allow you to dump the actual current holdings of your favorite fund into it.

viewtopic.php?f=10&t=104845&start=100

cheers.
Yes, really anyone comparing TIPS funds, or comparing them to nominal bond funds in terms of YTM, is almost obligated to consider #Cruncher's thread, and you don't need to actually use his spreadsheets. From its first post, note the following funds associations with their respective indexes:
#Cruncher wrote: Fri Oct 26, 2012 8:53 pm[Snip]...
The three main statistics to help in making this decision are, in my opinion, average Real Yield-to-Maturity (YTM), average Real Duration, and Expense Ratio. Unfortunately TIPS funds don't always calculate the first two or do so inconsistently.

[Snip]...
Here are the TIPS ETFs I'm aware of that fit into these four maturity categories. Since they are index funds all of the ones in the same category will have pretty much the same average real YTM and duration as shown in the table above.
0 - 5 Years: iShares STIP, Vanguard VTIP (2)
1 - 5 Years: PIMCO STPZ
1+ Years: SPDR IPE, Schwab SCHP, iShares TIP, PIMCO TIPZ
15+ Years: PIMCO LTPZ
Also Note: Although Vanguard's VAIPX TIPS fund is not technically an index fund, it's reasonable to use the "1+ Years" index for comparison purposes.

To find #Cruncher's latest YTM and Duration calculations for these different indexes (for their associated funds), you need to navigate to the latest page and latest post within the thread. The most recent post I see that #Cruncher has done is dated June 30, 2021, including a few edits within it as recently as yesterday, 9/17: https://www.bogleheads.org/forum/viewtopic.php?p=6094640#p6094640

Within that post you'll find the all-important YTM and Duration numbers, which I believe are current thru 6-30-2021:

Code: Select all

  #     Real       Avg  - Real Duration -   - Fall if Rates Rise -
TIPS     YTM      Life  Macaulay Modified     1%       2%       3%       Index
----    -----     ----  -------- --------   -----    -----    -----   ------------
  19   (2.40%)    2.83     2.81    2.84%    2.78%    5.45%    8.02%   0 - 5 Years
  16   (2.23%)    3.13     3.10    3.13%    3.07%    6.01%    8.84%   1 - 5 Years
  31   (1.77%)    5.01     4.89    4.93%    4.77%    9.24%   13.43%   1 - 10 Years
  44   (1.47%)    8.70     8.18    8.21%    7.62%   14.22%   19.97%   1+ Years
  12   (0.28%)   23.30    21.18   21.20%   18.90%   33.89%   45.80%   15+ Years
Last edited by Angst on Sat Sep 18, 2021 1:12 pm, edited 1 time in total.
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Re: TIPS -- "When the Numbers Lie"

Post by Zardoz »

I don't see any mysteries about TIPS. They are widely considered to be an investment that delivers as close as we can get to guaranteed real returns (especially when duration matched and held to maturity), and they have been routinely recommended by investing luminaries such as David Swensen and William Sharpe.

I definitely value the advice of Taylor and Bogle to keep things simple. But there are also many roads to Simplicity, e.g.

A) US Stocks + US Bonds + International Stocks (3 fund portfolio)
B) US Stocks + US Bonds (2 fund portfolio)
C) TIPS + World Stock + World Bonds (Sharpe's recommendation for many retirees)
D) All in one fund (e.g. Vanguard Balanced or a Vanguard Target fund)
Taylor Larimore wrote: Fri Sep 17, 2021 11:25 am Bogleheads:

Another reason I discontinued our TIPS fund is that the three funds in The Three-Fund Portfolio worked quite well together during the high-inflation of the late 70s
Northern Flicker wrote: Fri Sep 17, 2021 8:15 pm From 1967-1981 the real return of:

1. S&P500 was zero
2. Intermediate bonds was negative
3. Developed markets EAFE stocks was positive.

As long as you held a decent allocation to international stocks, you had a positive real return.
Now you have my attention. Personally, I'm never sure whether to think of International Stocks as an asset class that adds valuable diversification or just another "factor" that can create tracking error regret. If there's data that shows that holding International helps hedge against inflation, then it becomes much more appealing to me. My next question would be: was it merely a coincidence that ex-US did well during this period of high US inflation, or was it due to underlying economic principles?
Withdrawal Phase Plan: Equities <= 50% | TIPS, I Bonds | VPW Worksheet | TPAW | Social Security @70
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Re: TIPS -- "When the Numbers Lie"

Post by nedsaid »

Northern Flicker wrote: Fri Sep 17, 2021 8:15 pm
It looks a bit better by starting in 1976. That was the only year from 1967-1981 (the inflationary period under discussion) when intermediate bonds had a positive real return for the year.

From 1967-1981 the real return of:

1. S&P500 was zero
2. Intermediate bonds was negative
3. Developed markets EAFE stocks was positive.

As long as you held a decent allocation to international stocks, you had a positive real return.
Yep, that is why I diversify Internationally, with Stocks and with Bonds.
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Re: TIPS -- "When the Numbers Lie"

Post by FreddieFIRE »

willthrill81 wrote: Sat Sep 18, 2021 10:40 am
David Althaus wrote: Sat Sep 18, 2021 10:32 am It is reassuring to note other people seem just as baffled by TIPS as me. Bogleheads (I think) are big believers in simplicity, mean reversion, and that popularity too often results in less than stellar outcomes. TIPS are discussed about every day. Who doesn't know they are purchasing inflation protection (often at a high premium), are we really sure there's going to be a lot of it, and are we willing to make such a big bet to have meaningful impact (we hope positive) on the portfolio? Is it possible they are just another sector bet?
Why do you think that TIPS' inflation protection is 'often at a high premium'? Right now at least, the breakeven inflation rate on 10 year TIPS is only 2.33% (i.e., inflation at that level would produce identical real returns for both TIPS and nominal Treasuries).
Thanks. This is arguably the most misunderstood aspect of TIPS. The inflation premium has been essentially zero for years.
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Re: TIPS -- "When the Numbers Lie"

Post by FreddieFIRE »

nisiprius wrote: Sat Sep 18, 2021 10:40 am If you think in real dollars it is nominal bonds that are the "bet," not TIPS.
Bingo!!!
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Re: TIPS -- "When the Numbers Lie"

Post by Northern Flicker »

Zardoz wrote: Now you have my attention. Personally, I'm never sure whether to think of International Stocks as an asset class that adds valuable diversification or just another "factor" that can create tracking error regret. If there's data that shows that holding International helps hedge against inflation, then it becomes much more appealing to me. My next question would be: was it merely a coincidence that ex-US did well during this period of high US inflation, or was it due to underlying economic principles?
Who knows? There always is lots of uncertainty, making your question more an argument for diversification than an argument against it.

Few Americans held non-US stocks in the 1970's. It was not easy or inexpensive to do so. Templeton Funds were probably the best opportunity to do so for those not uber-wealthy. Expense ratios were high, and there likely were sales loads.
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Re: TIPS -- "When the Numbers Lie"

Post by Whiggish Boffin »

grok87 wrote:i agree, long term tips are terrible. But an inflation protected annuity is great. /s

LOL!

(they are basically the same thing....)
They are different in one important way:
You can still buy long term TIPS.
You can no longer buy an inflation protected annuity.
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Re: TIPS -- "When the Numbers Lie"

Post by chw »

I tend to agree with Taylor, and have loaded up with Ibonds over the years as an inflation protection alternative instead with a 20% allocation of our bonds to them. We started these purchases in 2001 when they seemed to be a good deal, and have been adding them in most years since then. They are easy to understand, and the main drawback is the 10k/year purchase limit per taxpayer.
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Re: TIPS -- "When the Numbers Lie"

Post by grok87 »

Whiggish Boffin wrote: Sat Sep 18, 2021 1:44 pm
grok87 wrote:i agree, long term tips are terrible. But an inflation protected annuity is great. /s

LOL!

(they are basically the same thing....)
They are different in one important way:
You can still buy long term TIPS.
You can no longer buy an inflation protected annuity.
Agree
RIP Mr. Bogle.
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FreddieFIRE
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Re: TIPS -- "When the Numbers Lie"

Post by FreddieFIRE »

chw wrote: Sat Sep 18, 2021 2:18 pm the main drawback is the 10k/year purchase limit per taxpayer.
For many, the main drawback is that they can't be used for a fixed income component of a qualified retirement account.
A house and a job. Once the American dream. Two things I'll never again have. Life is simple (and good).
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Re: TIPS -- "When the Numbers Lie"

Post by #Cruncher »

nisiprius wrote: Fri Sep 17, 2021 11:05 amTIPS are certainly no harder to understand than any international bond. Ordinary bonds are denominated in dollars. International bonds are denominated in non-dollar currencies. Well, TIPS are just Treasury securities that happen to be denominated in constant dollars. People think that a TIPS has some mysterious inflation bet in it. But if you think in real dollars, which is what I think we should be doing, it is just the opposite. In real dollars, it is TIPS that are simple, and nominal bonds that have the peculiar extra inflation bet in them.
Well said, Nisi! TIPS are not complicated if you just think of them as a bond denominated in constant dollars. The inflation indexing is just the means to bring that about.

This view leads to favoring an SEC yield (subject of the Morningstar article referenced in the original post) based on the intrinsic yield-to-maturity (YTM) of a fund's TIPS holdings without any past change in the CPI tacked on. Such a YTM is calculated the same for an individual TIPS as for any other bond. E.g., a TIPS with a 1% coupon selling at par has a 1% YTM just as a German bund with a 1% coupon selling at par has a 1% YTM.

We don't feel the need to add in a past change in the USD:EUR currency conversion to get a USD yield for the bund. Why should we feel the need to add in a nominal$:constant$ conversion to get a nominal$ yield for the TIPS? If we want to compare today's TIPS yields to those of nominal Treasuries, we can do that in a separate step. And that step needs to reflect our estimate of future inflation, not some irrelevant past inflation.

While I'm at it, another problem with the SEC yield is seldom mentioned: that it is prescribed to reflect the average over the past 30 days. This is absurd. [*] What an investor really needs to know is the yield now, not what it averaged in the past. The FTC would be all over a gas station that posted the past month's average price, but calculated the charge using today's price.

* This absurdity is illustrated by the VAIPX's price history page. Its two columns show the fund's price each day but the yield is an average for the past 30 days. An example of the inconsistency: VAIPX's price climbed from $29.17 to $29.33 on September 9th. We know that a bond's price and yield are inversely correlated, but the listing shows the yield rising from -1.66% to -1.64% that day.
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Re: TIPS -- "When the Numbers Lie"

Post by JBTX »

Northern Flicker wrote: Fri Sep 17, 2021 8:15 pm
nedsaid wrote: Fri Sep 17, 2021 5:06 pm
Taylor Larimore wrote: Fri Sep 17, 2021 11:25 am Bogleheads:

Another reason I discontinued our TIPS fund is that the three funds in The Three-Fund Portfolio worked quite well together during the high-inflation of the late 70s:

YEAR--INFLATION--BOND INDEX--S&P 500 T.R. INDEX--MSCI EAFE T.R.INDEX
1976-------4.9%--------15.6%------------23.8%--------------------3.6%
1977-------6.7-----------3.0-------------(-7.2)-------------------17.5
1978-------9.0-----------1.4---------------6.6--------------------33.1
1979------13.3-----------1.9--------------18.4-------------------10.9 (Highest Annual Inflation Rate)
1980------12.5-----------2.7--------------32.4-------------------25.4
1981-------8.9-----------6.3-------------(-4.9)------------------(-2.5)
1982-------3.8----------32.6--------------21.6------------------(-0.3) (Highest Bond Index Return)
1983-------3.8-----------8.4--------------22.6-------------------24.8
1984-------3.9----------15.2---------------6.3--------------------3.5
1985-------3.8----------22.1--------------31.7-------------------51.4
1986-------1.1----------15.2--------------18.7-------------------65.8 (Vanguard Total Bond Market Inception )
1987-------4.4-----------2.8----------------5.2-------------------24.6
1988-------4.4-----------7.9---------------16.6-------------------27.8
1989-------4.6----------14.5---------------31.7------------------11.4
1990-------6.1-----------8.9---------------(-3.1)---------------(-22.8)
1991-------3.1----------16.0---------------30.5------------------12.4
1992-------2.9-----------7.4-----------------7.6----------------(-11.9) (Vanguard Total Stock Market Inception)
1993-------2.7-----------9.7----------------10.1------------------32.6
1994-------2.7---------(-2.9)----------------1.3--------------------7.6 (Lowest Bond Index Return)
1995-------2.5----------18.5---------------37.6-------------------11.8 (Highest S&P Index Return)
1996-------3.3-----------3.6----------------23.0--------------------7.2 (Vanguard Total International Stock Market Inception
1997-------1.7-----------9.7----------------33.4--------------------2.6
1998-------1.6-----------8.7----------------28.6-------------------19.1
1999-------2.7---------(-0.8)---------------21.0-------------------28.3
2000-------3.4----------11.6---------------(-9.1)----------------(-15.8)
2001-------1.6-----------8.4--------------(-11.9)----------------(-19.8)
2002-------2.4----------10.3-------------(-22.1)----------------(-15.3)
2003-------1.9-----------4.1----------------28.7-------------------40.4
2004-------3.3-----------4.3----------------10.9-------------------20.9
2005-------3.4-----------2.4-----------------4.9-------------------15.8
2006-------2.5-----------4.3----------------15.8------------------26.8
2007-------4.1-----------7.0-----------------5.5------------------11.6
2008-------0.1-----------5.2--------------(-37.0)---------------(-43.1) (Lowest U.S. and International Stock Returns)
2009-------2.7-----------5.9----------------26.5------------------32.5
2010-------1.5-----------6.5----------------15.1-------------------8.2
2011-------3.0-----------7.7-----------------2.1----------------(-11.7)
2012-------1.7-----------4.3----------------16.0------------------17.9
2013-------1.5---------(-2.0)---------------32.4------------------23.3
2014-------1.6-----------6.0----------------13.7-----------------(-4.5)
2015-------0.7-----------0.5-----------------1.4-----------------(-0.4)
2016-------2.1-----------2.6----------------12.0-------------------1.5
2017-------2.1-----------3.5----------------21.8------------------25.6
2018-------2.5---------(-0.1)--------------(-4.4)---------------(-13.4)
2019-------2.3-----------8.7----------------31.5------------------22.7
2020-------1.4-----------7.7----------------18.4------------------11.3

Best wishes
Taylor
Jack Bogle's Words of Wisdom: "There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."
You have posted this several times and it is reassuring to those of us with substantial investments in U.S. Bond Index Funds. This post should be in the Wiki - it is that good. Thank you for taking the time to put this together.

That all being said, I do own TIPS funds and may buy more if it looks like we are headed for a higher sustained rate of inflation. So far Total Bond Market Index has been plenty well good enough but I like my TIPS funds. I want the protection from unexpected inflation.
It looks a bit better by starting in 1976. That was the only year from 1967-1981 (the inflationary period under discussion) when intermediate bonds had a positive real return for the year.

From 1967-1981 the real return of:

1. S&P500 was zero
2. Intermediate bonds was negative
3. Developed markets EAFE stocks was positive.

As long as you held a decent allocation to international stocks, you had a positive real return.

I always find that graphic Taylor posts very informative and somewhat reassuring. However the bigger message in there is a healthy allocation to international is a good inflation defense, and I would argue more than the 20% some advocate.

Of course the next inflationary period could be completely different.
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Re: TIPS -- "When the Numbers Lie"

Post by JBTX »

The OP was very informative. I didn't realize some of that and it is good to know.

Practically I keep them all in tax deferred, and I know that they will return inflation, and currently a little bit less due to the negative real rate. I just don't think about it.
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