Replace entire bond allocation with TIPS?

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barnaby444
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Replace entire bond allocation with TIPS?

Post by barnaby444 »

My portfolio is about 85% stocks / 15% bonds & cash. I've obviously taken a major hit in 2022. I am not about to panic sell, but I admit I'm pretty discouraged by the double-whammy of the bear market and relentless inflation. I feel extra exposed because I don't own a house, so I haven't had the last 2+ years of home value appreciation to offset some of this year's market declines. Further, I am in the market for a house (for the last 2 years), so now facing sharply higher rates and no price relief. All of this together is making me feel a whole lot less financially secure than ever before.

I want to "stay the course." But I'm also worried about the downside risk of inflation persisting longer than the market is pricing in right now, since I have nothing in my portfolio whatsoever to hedge against that.

Right now my bond allocation is mostly a mix of BND, VCSH, VTEB, and BSV (I know that's a mess, I went through phases where I thought each of those were advantageous at the time). I've also already maxed out I-Bonds.

I'm thinking of selling all bonds except the I-bonds and replacing with VTIP. My rationale is:
1. This doesn't change my AA of 15% in bonds,
2. Protects against inflation being worse than expected,
3. The bond ETFs I'd be selling are in a loss position (so I can recognize losses in taxes),
4. I didn't have that strong of a rationale for the specific bond funds I own in the first place.

Does this make sense, or is it being too reactive to the current market situation?

For background, I'm late 30s in a VHCOL and have a pretty secure but variable income between 250k and 500k. I have cash set aside for a house down payment that's not included in the AA I mentioned. Thanks.
dbr
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Re: Replace entire bond allocation with TIPS?

Post by dbr »

1. It makes perfect sense.

2. At 85/15 it makes no difference.
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retired@50
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Re: Replace entire bond allocation with TIPS?

Post by retired@50 »

barnaby444 wrote: Wed Jun 22, 2022 9:36 am ...My portfolio is about 85% stocks / 15% bonds & cash.
... But I'm also worried about the downside risk of inflation persisting longer than the market is pricing in right now, since I have nothing in my portfolio whatsoever to hedge against that.
...For background, I'm late 30s in a VHCOL and have a pretty secure but variable income between 250k and 500k.
Huh? what do you think the 85% in stocks is for? That's your inflation hedge. Over a long term horizon (like you're looking at), stocks have kept up with inflation and then some. Plus, your wages will keep up with inflation too, unless you never get a raise. Tweaking the 15% in bonds is going to do almost nothing to help you.
Does this make sense, or is it being too reactive to the current market situation?
Too reactive to current market.

Regards,
This is one person's opinion. Nothing more.
CC1E
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Re: Replace entire bond allocation with TIPS?

Post by CC1E »

Buy actual TIPS, not an TIPS fund. They’re easy to buy on Vanguard or Fidelity via Treasury auction or on the secondary market.
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Re: Replace entire bond allocation with TIPS?

Post by DIYtrixie »

CC1E wrote: Wed Jun 22, 2022 9:49 am Buy actual TIPS, not an TIPS fund.
Why?
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Re: Replace entire bond allocation with TIPS?

Post by Trance »

CC1E wrote: Wed Jun 22, 2022 9:49 am Buy actual TIPS, not an TIPS fund. They’re easy to buy on Vanguard or Fidelity via Treasury auction or on the secondary market.
Could you elaborate on why you would buy tips directly instead of a tips fund?
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barnaby444
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Re: Replace entire bond allocation with TIPS?

Post by barnaby444 »

retired@50 wrote: Wed Jun 22, 2022 9:48 am
Huh? what do you think the 85% in stocks is for? That's your inflation hedge. Over a long term horizon (like you're looking at), stocks have kept up with inflation and then some. Plus, your wages will keep up with inflation too, unless you never get a raise.
Thank you for the feedback. My thought was: I hope--and expect--that stocks will beat inflation, hence the 85% allocation. But I don't want to bet 100% on that, again hence the 85%. As for my wages, a raise does nothing to help me preserve the value of past wages.
Tweaking the 15% in bonds is going to do almost nothing to help you.
What if I'm thinking of it as protection against a pretty extreme tail outcome on inflation? The tweak most likely won't make much of a difference, but inflation is 10-15% for the next 5 years, that story changes right?
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dual
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Re: Replace entire bond allocation with TIPS?

Post by dual »

CC1E wrote: Wed Jun 22, 2022 9:49 am Buy actual TIPS, not an TIPS fund. They’re easy to buy on Vanguard or Fidelity via Treasury auction or on the secondary market.
if you have to hold the tips in a taxable account, the taxation can get pretty complex. See my post

https://www.bogleheads.org/forum/viewt ... ?t=379911
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Re: Replace entire bond allocation with TIPS?

Post by aristotelian »

Your expected return is the same as with nominal Treasuries. You will come out ahead if inflation is higher than expected, and behind if inflation is lower than expected. Expected correlation with the market and overall portfolio volatility would be higher. I don't see a compelling case to go all in on TIPS but a certain amount for inflation protection seems fine. This also seems like a reaction to market conditions which is always a bad habit to get into.
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barnaby444
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Re: Replace entire bond allocation with TIPS?

Post by barnaby444 »

aristotelian wrote: Wed Jun 22, 2022 10:17 am Expected correlation with the market and overall portfolio volatility would be higher.
Thanks -- would you mind explaining this point further? Much appreciated.
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Re: Replace entire bond allocation with TIPS?

Post by Mike Scott »

If you have bond losses in a taxable account, I would take the opportunity to tax loss harvest and consolidate all of them into one fund in a tax deferred account. Pick one of the best from what is available in that account or go half TIPS. It probably does not matter very much which one.
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Re: Replace entire bond allocation with TIPS?

Post by retired@50 »

barnaby444 wrote: Wed Jun 22, 2022 10:13 am
retired@50 wrote: Wed Jun 22, 2022 9:48 am
Huh? what do you think the 85% in stocks is for? That's your inflation hedge. Over a long term horizon (like you're looking at), stocks have kept up with inflation and then some. Plus, your wages will keep up with inflation too, unless you never get a raise.
Thank you for the feedback. My thought was: I hope--and expect--that stocks will beat inflation, hence the 85% allocation. But I don't want to bet 100% on that, again hence the 85%. As for my wages, a raise does nothing to help me preserve the value of past wages.
Tweaking the 15% in bonds is going to do almost nothing to help you.
What if I'm thinking of it as protection against a pretty extreme tail outcome on inflation? The tweak most likely won't make much of a difference, but inflation is 10-15% for the next 5 years, that story changes right?
If buying TIPS will help you sleep, and get you to stop messing around with your bonds, then do it. My fear is that in 2 or 3 years, you'll be bored with TIPS and want something else, because the TIPS fund will be sitting there like a stone, doing nothing. You may want to avoid TIPS in a taxable account, or at least learn about the tax consequences of holding them in a taxable account.

With your income I can't imagine not feeling secure. I'd suggest you consider buying a less expensive house, or save more, or review your spending to look for unintended leaks. If you don't have a high enough savings rate, there is no magic portfolio mixture that will make up for it.

Regards,
This is one person's opinion. Nothing more.
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Re: Replace entire bond allocation with TIPS?

Post by invest4 »

retired@50 wrote: Wed Jun 22, 2022 9:48 am
barnaby444 wrote: Wed Jun 22, 2022 9:36 am Does this make sense, or is it being too reactive to the current market situation?
Too reactive to current market.

Regards,
+1
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Re: Replace entire bond allocation with TIPS?

Post by LilyFleur »

1. Don't watch TV news or listen to the news on the radio. Those are shallow and sensationalistic news sources that thrive on fanning up emotion. If you must, read the Wall Street Journal. Even with its responsible journalism, the economic news is not good, though.

2. You have a very good job and will weather inflation much better than most folks. Many on this forum are now living out of savings. Inflation is much more of a worry when not earning and saving anymore.

I lived through lines at gas pumps in the 1970s and the big slump in 2008. Really, you're going to be just fine. If you're worried, just save more.
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Re: Replace entire bond allocation with TIPS?

Post by aristotelian »

barnaby444 wrote: Wed Jun 22, 2022 10:21 am
aristotelian wrote: Wed Jun 22, 2022 10:17 am Expected correlation with the market and overall portfolio volatility would be higher.
Thanks -- would you mind explaining this point further? Much appreciated.
Sure, TIPS are slightly more correlated with the market. For example, with a deflationary market crash your TIPS would go down (unlike I Bonds, TIPS can have negative return), whereas nominal bonds might go up as the central bank lowers interest rates to stimulate the economy. In 2008, TIPS went down -2.85%, while 10 Year Treasury went up 20.5%. In that case, nominal Treasuries would have been the much better diversifier. Since the expected return is the same, I would prefer the majority of my bond allocation to have the lowest market correlation.
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Re: Replace entire bond allocation with TIPS?

Post by exodusNH »

barnaby444 wrote: Wed Jun 22, 2022 10:13 am
retired@50 wrote: Wed Jun 22, 2022 9:48 am
Huh? what do you think the 85% in stocks is for? That's your inflation hedge. Over a long term horizon (like you're looking at), stocks have kept up with inflation and then some. Plus, your wages will keep up with inflation too, unless you never get a raise.
Thank you for the feedback. My thought was: I hope--and expect--that stocks will beat inflation, hence the 85% allocation. But I don't want to bet 100% on that, again hence the 85%. As for my wages, a raise does nothing to help me preserve the value of past wages.
Tweaking the 15% in bonds is going to do almost nothing to help you.
What if I'm thinking of it as protection against a pretty extreme tail outcome on inflation? The tweak most likely won't make much of a difference, but inflation is 10-15% for the next 5 years, that story changes right?
Too reactionary.

Inflation of 10%-15% for 5 years will not happen. The economy would crash well before then as that would be a price increase -- from here -- of 61%-101% over 5 years.
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Re: Replace entire bond allocation with TIPS?

Post by framus »

CC1E wrote: Wed Jun 22, 2022 9:49 am Buy actual TIPS, not an TIPS fund. They’re easy to buy on Vanguard or Fidelity via Treasury auction or on the secondary market.
Please elaborate.
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Re: Replace entire bond allocation with TIPS?

Post by dbr »

barnaby444 wrote: Wed Jun 22, 2022 10:13 am
retired@50 wrote: Wed Jun 22, 2022 9:48 am
Huh? what do you think the 85% in stocks is for? That's your inflation hedge. Over a long term horizon (like you're looking at), stocks have kept up with inflation and then some. Plus, your wages will keep up with inflation too, unless you never get a raise.
Thank you for the feedback. My thought was: I hope--and expect--that stocks will beat inflation, hence the 85% allocation. But I don't want to bet 100% on that, again hence the 85%. As for my wages, a raise does nothing to help me preserve the value of past wages.
Tweaking the 15% in bonds is going to do almost nothing to help you.
What if I'm thinking of it as protection against a pretty extreme tail outcome on inflation? The tweak most likely won't make much of a difference, but inflation is 10-15% for the next 5 years, that story changes right?
No, of course not. Having 15% of your assets simply tracking inflation "protects" 15% of your assets and has no effect on the other 85% which may or may not outrun inflation. In that scenario financial disruption would likely be very bad for stocks though after many years later you could be ok.

If you want an investment that tracks inflation it has to be all TIPS and then you also have to contend with whether or not you can buy those TIPS at zero premium or a discount and how you want to structure the holdings to not be affected by term risk. I suppose you could put everything into a five year TIPS now. Also, unfortunately higher nominal returns also impose higher taxes sooner or later except in a tax exempt account.
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Re: Replace entire bond allocation with TIPS?

Post by 2b2 »

CC1E
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Re: Replace entire bond allocation with TIPS?

Post by CC1E »

Trance wrote: Wed Jun 22, 2022 10:12 am
CC1E wrote: Wed Jun 22, 2022 9:49 am Buy actual TIPS, not an TIPS fund. They’re easy to buy on Vanguard or Fidelity via Treasury auction or on the secondary market.
Could you elaborate on why you would buy tips directly instead of a tips fund?
Bond funds have to sell their bonds to cover redemptions, sometimes taking a loss. Just take a look at the performance of bond funds over the past year. Essentially the level-headed people who stay invested get shafted by the hotheads who sell out of the fund at the first sign of trouble.

If you hold an actual bond you will get your principal back at maturity even it’s worth less on paper today. No one forces its sale at a loss. TIPS are a bit trickier because deflation could technically reduce the principal, but it’s unlikely over the life of the bond since the FED fears deflation above all else.

I do suggest holding TIPS in tax deferred accounts because each principal adjustment is taxable in the year it’s made, even though you don’t receive it until the bond matures. Really all bonds should be held in tax deferred accounts because interest is taxed at your marginal tax rate, unlike capital gains on stocks. Better to pay it at retirement when you should have more control of your income and resultant marginal tax rate.

I’ll never buy another treasury/muni bond fund again. Too many downsides and it’s easy enough to buy individual bonds myself. Also lets me avoid management fees. Corporate bonds are a different story since a bond fund does allow easy diversification. Hard to buy/manage hundreds of corporate bonds myself.
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Re: Replace entire bond allocation with TIPS?

Post by Robot Monster »

Your stock allocation is high and, going by what Vineviz says, it might not make sense to replace your bond allocation with TIPS.
Speaking very generally, it usually makes sense to hold some TIPS when your portfolio is is less than 70% stocks.

If your portfolio is less than 50% stocks it could make sense to have most of your bonds as TIPS.

A very rough rule of thumb, in table form:

Code: Select all

Stocks	LTT	TIPS	STIG
100%	0%	0%	0%
90%	10%	0%	0%
80%	20%	0%	0%
70%	20%	10%	0%
60%	20%	20%	0%
50%	20%	30%	0%
40%	10%	40%	10%
30%	0%	50%	20%
LTT = Long-term Treasuries
TIPS = Broad TIPS fund (or Series I Savings Bonds or individual TIPS ladder)
STIG = Short-term investment grade corporate bond fund
link to original post
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barnaby444
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Re: Replace entire bond allocation with TIPS?

Post by barnaby444 »

dbr wrote: Wed Jun 22, 2022 11:26 am Having 15% of your assets simply tracking inflation "protects" 15% of your assets and has no effect on the other 85% which may or may not outrun inflation. In that scenario financial disruption would likely be very bad for stocks though after many years later you could be ok.

If you want an investment that tracks inflation it has to be all TIPS
I did not at all mean to suggest that 15% TIPS is going to have any effect on the other 85% of the portfolio's performance (I hope that's obvious). I would just expect it to partially offset the downside risk to stocks if inflation gets out of control over a multiyear period.
retired@50 wrote: Wed Jun 22, 2022 10:28 am My fear is that in 2 or 3 years, you'll be bored with TIPS and want something else, because the TIPS fund will be sitting there like a stone, doing nothing.
Probably true. But given that I already don't have much conviction about the existing bond funds I own, and I'd like to simplify down from 4 funds to one (and tax loss harvest in the process), do you have an alternative suggestion besides VTIP?
Mike Scott wrote: Wed Jun 22, 2022 10:24 am If you have bond losses in a taxable account, I would take the opportunity to tax loss harvest and consolidate all of them into one fund in a tax deferred account. Pick one of the best from what is available in that account or go half TIPS. It probably does not matter very much which one.
I like this idea but all of my tax-deferred accounts are in target date funds, which I preferred to leave as is for simplicity. I suppose I could consider swapping out a portion of those for a bond fund then making my taxable account all stocks.
aristotelian wrote: Wed Jun 22, 2022 10:57 am Sure, TIPS are slightly more correlated with the market. For example, with a deflationary market crash your TIPS would go down (unlike I Bonds, TIPS can have negative return), whereas nominal bonds might go up as the central bank lowers interest rates to stimulate the economy. In 2008, TIPS went down -2.85%, while 10 Year Treasury went up 20.5%. In that case, nominal Treasuries would have been the much better diversifier. Since the expected return is the same, I would prefer the majority of my bond allocation to have the lowest market correlation.
Thanks for the explanation.
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Re: Replace entire bond allocation with TIPS?

Post by exodusNH »

CC1E wrote: Wed Jun 22, 2022 11:46 am
Trance wrote: Wed Jun 22, 2022 10:12 am
CC1E wrote: Wed Jun 22, 2022 9:49 am Buy actual TIPS, not an TIPS fund. They’re easy to buy on Vanguard or Fidelity via Treasury auction or on the secondary market.
Could you elaborate on why you would buy tips directly instead of a tips fund?
Bond funds have to sell their bonds to cover redemptions, sometimes taking a loss. Just take a look at the performance of bond funds over the past year. Essentially the level-headed people who stay invested get shafted by the hotheads who sell out of the fund at the first sign of trouble.

If you hold an actual bond you will get your principal back at maturity even it’s worth less on paper today. No one forces its sale at a loss. TIPS are a bit trickier because deflation could technically reduce the principal, but it’s unlikely over the life of the bond since the FED fears deflation above all else.

I do suggest holding TIPS in tax deferred accounts because each principal adjustment is taxable in the year it’s made, even though you don’t receive it until the bond matures. Really all bonds should be held in tax deferred accounts because interest is taxed at your marginal tax rate, unlike capital gains on stocks. Better to pay it at retirement when you should have more control of your income and resultant marginal tax rate.

I’ll never buy another treasury/muni bond fund again. Too many downsides and it’s easy enough to buy individual bonds myself. Also lets me avoid management fees. Corporate bonds are a different story since a bond fund does allow easy diversification. Hard to buy/manage hundreds of corporate bonds myself.
If the bond fund is an ETF, the people selling incur the losses when the APs redeem the creation units.

Bond funds that are purely mutual funds can definitely cause those who hold to suffer since the fund may need to sell off the most liquid bonds to cover redemptions.

I'm not sure how well something like Vanguard's Total Bond handles the situation. Since they're able to flush capital gains via the ETF class, it might not be as big of a deal.
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Re: Replace entire bond allocation with TIPS?

Post by FreddieFIRE »

CC1E wrote: Wed Jun 22, 2022 11:46 am If you hold an actual bond you will get your principal back at maturity even it’s worth less on paper today. No one forces its sale at a loss. TIPS are a bit trickier because deflation could technically reduce the principal, but it’s unlikely over the life of the bond since the FED fears deflation above all else.
If you buy a TIPS at auction, and hold it until maturity, you will get your principal back as well.
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Re: Replace entire bond allocation with TIPS?

Post by retired@50 »

barnaby444 wrote: Wed Jun 22, 2022 12:19 pm
retired@50 wrote: Wed Jun 22, 2022 10:28 am My fear is that in 2 or 3 years, you'll be bored with TIPS and want something else, because the TIPS fund will be sitting there like a stone, doing nothing.
Probably true. But given that I already don't have much conviction about the existing bond funds I own, and I'd like to simplify down from 4 funds to one (and tax loss harvest in the process), do you have an alternative suggestion besides VTIP?
Personally, I'd lean toward how Vanguard handles bond funds in their target date funds or LifeStrategy funds.

They hold a mix of total bond (VBTLX) and total international bond (VTABX) and then as your age increases, they add a short term TIPS fund like VTAPX.

For a longer time horizon (like you have, since you're younger) you might consider an intermediate term TIPS fund like VAIPX.

In my case, I'm only using VBTLX and VTABX. No TIPS yet, but maybe in a five or ten years.

Regards,
This is one person's opinion. Nothing more.
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Re: Replace entire bond allocation with TIPS?

Post by aristotelian »

FreddieFIRE wrote: Wed Jun 22, 2022 12:36 pm
CC1E wrote: Wed Jun 22, 2022 11:46 am If you hold an actual bond you will get your principal back at maturity even it’s worth less on paper today. No one forces its sale at a loss. TIPS are a bit trickier because deflation could technically reduce the principal, but it’s unlikely over the life of the bond since the FED fears deflation above all else.
If you buy a TIPS at auction, and hold it until maturity, you will get your principal back as well.
How so? Isn't the point (and risk) of TIPS that the principal rises and falls with inflation? I suppose it is true that you get your principal back on a real basis but not nominal.
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Re: Replace entire bond allocation with TIPS?

Post by framus »

2b2 wrote: Wed Jun 22, 2022 11:32 am framus,

https://www.bogleheads.org/wiki/Individ ... _bond_fund

2b2
Thanks for the link to the refreshing, objective information outlining individual bonds and bond funds. :sharebeer
The wiki is much better than the polemics that sometimes occur in discussions about these topics.
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Re: Replace entire bond allocation with TIPS?

Post by Triple digit golfer »

This sounds like a classic case of closing the barn door after the horse runs out. This seems very reactive.

You hold 85% in stocks. Long-term, they are almost certain to greatly beat inflation. Why are you concerned about the 15%? It's less than 15% actually, because you said you have some I-Bonds.

In a diversified portfolio, you should expect that sometimes parts of it won't perform. Value, growth, large, small, bonds, cash, whatever it may be. This is why you hold a diversified portfolio.

Why are you not upset about your stock allocation losing 20%+ this year (probably 18% or so of portfolio loss at 85%) but you are upset about bonds being down 10-12% (probably 1.5% of portfolio loss)?

In a $1 million portfolio, your bonds probably lost around $16k. Is a component of a diversified portfolio that is down $16k out of a $1 million portfolio really anything worth fretting over?

Aside from all that, there is absolutely no guarantee that TIPS will outperform nominal bonds or have less severe losses. Inflation expectations are pretty high. If they come in lower, TIPS will underperform nominal bonds.
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barnaby444
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Re: Replace entire bond allocation with TIPS?

Post by barnaby444 »

Triple digit golfer wrote: Wed Jun 22, 2022 1:29 pm Why are you not upset about your stock allocation losing 20%+ this year (probably 18% or so of portfolio loss at 85%) but you are upset about bonds being down 10-12% (probably 1.5% of portfolio loss)?
...
Aside from all that, there is absolutely no guarantee that TIPS will outperform nominal bonds or have less severe losses. Inflation expectations are pretty high. If they come in lower, TIPS will underperform nominal bonds.
Thanks for the perspective. To answer your question, I am not more upset about bonds losing 10-12% than I am about stocks losing 20%+. YTD performance has little to do with my rationale here. I'm reasonably comfortable with my 85% stock allocation because I expect stocks to recover and outrun inflation in the long run, so I see no move to make there. However, I'm also thinking about downside risks, and I'm more scared of inflation being above expectations than below, because if it's below, then stocks will probably recover even faster.

All that said, I am certainly reconsidering in light of the responses (which indeed was the point of asking the question!). Even the "prolonged" inflation scenario I'm afraid of is short-term compared to my investment horizon. Thanks all for helping me take a step back and look at the big picture.
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Re: Replace entire bond allocation with TIPS?

Post by FreddieFIRE »

aristotelian wrote: Wed Jun 22, 2022 1:09 pm
FreddieFIRE wrote: Wed Jun 22, 2022 12:36 pm
CC1E wrote: Wed Jun 22, 2022 11:46 am If you hold an actual bond you will get your principal back at maturity even it’s worth less on paper today. No one forces its sale at a loss. TIPS are a bit trickier because deflation could technically reduce the principal, but it’s unlikely over the life of the bond since the FED fears deflation above all else.
If you buy a TIPS at auction, and hold it until maturity, you will get your principal back as well.
How so? Isn't the point (and risk) of TIPS that the principal rises and falls with inflation? I suppose it is true that you get your principal back on a real basis but not nominal.
It's because when a TIPS matures the treasury pays out the inflation adjusted principal or the original principal, whichever is more.
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Re: Replace entire bond allocation with TIPS?

Post by Call_Me_Op »

barnaby444 wrote: Wed Jun 22, 2022 9:36 am I want to "stay the course." But I'm also worried about the downside risk of inflation persisting longer than the market is pricing in right now, since I have nothing in my portfolio whatsoever to hedge against that.
Nothing except for a big slug of stocks - the best long-term inflation hedge that exists.
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Re: Replace entire bond allocation with TIPS?

Post by DS03 »

Based on past analyses I've read on BH, TIPS don't really add much until your stock allocation drops below 55-60%. Plus, the horse is probably already out of the barn by now anyway.
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Re: Replace entire bond allocation with TIPS?

Post by ivgrivchuck »

TIPS provides the ultimate stability as long as your consumption is correlated with CPI (which is true for most people).
If I-bonds and EE-bonds didn't exist, I might fully well hold most of my cash/bond money in SCHP (mid-term TIPS etf).

TIPS have downsides (not performing as well as nominal treasuries in deflationary recession).

But are you market timing? Why didn't you worry about this 2 years ago?
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Re: Replace entire bond allocation with TIPS?

Post by FreddieFIRE »

DS03 wrote: Wed Jun 22, 2022 3:49 pm Based on past analyses I've read on BH, TIPS don't really add much until your stock allocation drops below 55-60%. Plus, the horse is probably already out of the barn by now anyway.
Except for those who saddled up the TIPS horse five or six years ago. Giddy up! 8-)
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Re: Replace entire bond allocation with TIPS?

Post by bridge2benefits »

barnaby444 wrote: Wed Jun 22, 2022 2:08 pm All that said, I am certainly reconsidering in light of the responses (which indeed was the point of asking the question!). Even the "prolonged" inflation scenario I'm afraid of is short-term compared to my investment horizon. Thanks all for helping me take a step back and look at the big picture.
I would encourage you to not give up so quickly. In particular, take the criticism that you are being reactive with a grain of salt. There's nothing inherently wrong with someone investing in asset class A and subsequently observing that asset class B behaves differently, and wondering if it might be a better fit for their goals.

And it does come down to what your goals are for that 15% of your portfolio which is not stocks. If you want to guarantee that you won't have negative real returns (before taxes) for that portion of your portfolio, then TIPS can give you a way to do that, because they eliminate one of the two major risks of nominal bond funds: inflation risk.

And if you know that you will spend that 15% of your portfolio on a somewhat predictable schedule, e.g. 1% per year for 15 years after you retire, then you can duration match your TIPS, e.g. by buying individual TIPS and holding them until maturity. This enables you to eliminate the second major risk of nominal bond funds: interest rate risk. Buying duration matched individual TIPS can be thought of as buying insurance for a portion of your portfolio - it guarantees that portion of your portfolio will not unexpectedly lose purchasing power.

If instead you are hoping your bonds contribute significant real returns, you can take your chances on inflation risk and interest rate risk, and roll the dice with a nominal bond fund. Many here did exactly that over recent decades and were rewarded handsomely, due to low inflation and falling interest rates. That is, until 2022, when the story changed and nominal bond funds experienced significant real losses. Will today's bets on nominal bond funds pay off handsomely, or will the trend from 2022 continue? Nobody knows - it's more like placing a bet than buying insurance.
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Beensabu
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Re: Replace entire bond allocation with TIPS?

Post by Beensabu »

barnaby444 wrote: Wed Jun 22, 2022 9:36 am Right now my bond allocation is mostly a mix of BND, VCSH, VTEB, and BSV (I know that's a mess, I went through phases where I thought each of those were advantageous at the time).
Sounds like you're going through another one of those phases.
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Re: Replace entire bond allocation with TIPS?

Post by barnaby444 »

bridge2benefits wrote: Wed Jun 22, 2022 10:12 pm I would encourage you to not give up so quickly. In particular, take the criticism that you are being reactive with a grain of salt. There's nothing inherently wrong with someone investing in asset class A and subsequently observing that asset class B behaves differently, and wondering if it might be a better fit for their goals.

And it does come down to what your goals are for that 15% of your portfolio which is not stocks. If you want to guarantee that you won't have negative real returns (before taxes) for that portion of your portfolio, then TIPS can give you a way to do that, because they eliminate one of the two major risks of nominal bond funds: inflation risk.

And if you know that you will spend that 15% of your portfolio on a somewhat predictable schedule, e.g. 1% per year for 15 years after you retire, then you can duration match your TIPS, e.g. by buying individual TIPS and holding them until maturity. This enables you to eliminate the second major risk of nominal bond funds: interest rate risk. Buying duration matched individual TIPS can be thought of as buying insurance for a portion of your portfolio - it guarantees that portion of your portfolio will not unexpectedly lose purchasing power.

If instead you are hoping your bonds contribute significant real returns, you can take your chances on inflation risk and interest rate risk, and roll the dice with a nominal bond fund. Many here did exactly that over recent decades and were rewarded handsomely, due to low inflation and falling interest rates. That is, until 2022, when the story changed and nominal bond funds experienced significant real losses. Will today's bets on nominal bond funds pay off handsomely, or will the trend from 2022 continue? Nobody knows - it's more like placing a bet than buying insurance.
Thanks, helpful perspective.
Beensabu wrote: Wed Jun 22, 2022 10:19 pm Sounds like you're going through another one of those phases.
Ha... was wondering how long it would take for someone to say that.
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Re: Replace entire bond allocation with TIPS?

Post by willthrill81 »

I've long advocated for 100% of one's fixed income to be in TIPS/I bonds unless there is a compelling reason not to do so.
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Re: Replace entire bond allocation with TIPS?

Post by bertilak »

willthrill81 wrote: Thu Jun 23, 2022 8:12 am I've long advocated for 100% of one's fixed income to be in TIPS/I bonds unless there is a compelling reason not to do so.
I don't know if my reasoning is compelling, but it goes like this:
  1. Regular bonds' pricing already accounts for expected inflation.
  2. My 65% stock allocation is a hedge against unexpected inflation.
  3. Regular bonds have a higher return than TIPS. This diversifies my sources of return.
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Re: Replace entire bond allocation with TIPS?

Post by willthrill81 »

bertilak wrote: Thu Jun 23, 2022 8:24 am
willthrill81 wrote: Thu Jun 23, 2022 8:12 am I've long advocated for 100% of one's fixed income to be in TIPS/I bonds unless there is a compelling reason not to do so.
I don't know if my reasoning is compelling, but it goes like this:
  1. Regular bonds' pricing already accounts for expected inflation.
  2. My 65% stock allocation is a hedge against unexpected inflation.
  3. Regular bonds have a higher return than TIPS. This diversifies my sources of return.
Unexpectedly high inflation is a big risk to nominals but not a risk at all to inflation-linked bonds, so #1 is not at all compelling.

A 65% stock allocation helps but still leaves 35% of the portfolio exposed to unexpected inflation.

Nominal bonds have not had a higher return than TIPS. Rather, the opposite has been true.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: Replace entire bond allocation with TIPS?

Post by bertilak »

willthrill81 wrote: Thu Jun 23, 2022 8:27 am Nominal bonds have not had a higher return than TIPS. Rather, the opposite has been true.
A bad assumption on my part!
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Re: Replace entire bond allocation with TIPS?

Post by arcticpineapplecorp. »

barnaby444 wrote: Wed Jun 22, 2022 9:36 am My portfolio is about 85% stocks / 15% bonds & cash. I've obviously taken a major hit in 2022. I feel extra exposed because I don't own a house, so I haven't had the last 2+ years of home value appreciation to offset some of this year's market declines.
But hasn't your portfolio with 85% stocks/15% bonds and cash offset some of this year's market declines? Since 2020 (the arbitrary 2 last two years you cite) your stock and bond portfolio made 9.77% each of those years, and your portfolio is still up 25% even AFTER "this year's market declines":

Image

source:
https://www.portfoliovisualizer.com/bac ... tion2_1=15

of course we can keep looking back, like over the past 3 years, 4 years, etc. because "2+ years" is kinda nebulous in terms of researching, but I believe your portfolio would still show UP over any period from the past to now because markets have reached highs in 2021.

what do you think about that?
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Re: Replace entire bond allocation with TIPS?

Post by guanonics »

willthrill81 wrote: Thu Jun 23, 2022 8:12 am I've long advocated for 100% of one's fixed income to be in TIPS/I bonds unless there is a compelling reason not to do so.
I agree with this, and in my case I have a compelling reason to hold some nominals. The primary IPS purpose of my bonds is for unexpected expenses / job loss / other emergencies. I'd be 100% IBonds if I could. But in my view short term nominals are better than TIPS for this purpose, so I hold short term nominals instead of TIPS.
Last edited by guanonics on Thu Jun 23, 2022 2:07 pm, edited 2 times in total.
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Re: Replace entire bond allocation with TIPS?

Post by dbr »

My portfolio including withdrawals is still higher than at any time in the last fifty years except the last three, and the loss there is only in the last six months. This is presumably not yet even the second or third greatest relative loss in fifty years of investing and also not even close to the highest inflation. The biggest downturns list before the pandemic is here: https://moneymorning.com/2015/10/23/bea ... pullbacks/ I was there for six of them and now the additional maybe one as I am not sure 2020 even counts.

FWIW I finally changed from holding half TIPS and half Treasuries to holding all TIPS, but the "mistake," if there was one, is that it would have made sense to have been all TIPS from the start. But then I am not at 85% stocks where bond selection is pretty much irrelevant but rather at 50% stocks.
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Re: Replace entire bond allocation with TIPS?

Post by barnaby444 »

arcticpineapplecorp. wrote: Thu Jun 23, 2022 8:42 am But hasn't your portfolio with 85% stocks/15% bonds and cash offset some of this year's market declines? Since 2020 (the arbitrary 2 last two years you cite) your stock and bond portfolio made 9.77% each of those years, and your portfolio is still up 25% even AFTER "this year's market declines":

Image

source:
https://www.portfoliovisualizer.com/bac ... tion2_1=15

of course we can keep looking back, like over the past 3 years, 4 years, etc. because "2+ years" is kinda nebulous in terms of researching, but I believe your portfolio would still show UP over any period from the past to now because markets have reached highs in 2021.

what do you think about that?
My portfolio is up slightly over the last 2 and 3 years, less than your example. The reason it's not up more is because my income has increased, so my contributions have increased, so my purchases are disproportionately concentrated at a higher cost basis. But I take your point.
guanonics wrote: Thu Jun 23, 2022 8:54 am
willthrill81 wrote: Thu Jun 23, 2022 8:12 am I've long advocated for 100% of one's fixed income to be in TIPS/I bonds unless there is a compelling reason not to do so.
I agree with this. The primary IPS purpose of my bonds are for unexpected expenses / job loss / other emergencies. I'd be 100% IBonds if I could. But in my view short term nominals are better than TIPS for this purpose.
I'm not following... if you agree with 100% of fixed income in TIPS, what do you mean that short term nominals are better for this purpose?
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Re: Replace entire bond allocation with TIPS?

Post by guanonics »

barnaby444 wrote: Thu Jun 23, 2022 9:26 am
guanonics wrote: Thu Jun 23, 2022 8:54 am
willthrill81 wrote: Thu Jun 23, 2022 8:12 am I've long advocated for 100% of one's fixed income to be in TIPS/I bonds unless there is a compelling reason not to do so.
I agree with this. The primary IPS purpose of my bonds are for unexpected expenses / job loss / other emergencies. I'd be 100% IBonds if I could. But in my view short term nominals are better than TIPS for this purpose.
I'm not following... if you agree with 100% of fixed income in TIPS, what do you mean that short term nominals are better for this purpose?
No wonder you are not following, I phrased that very poorly :oops: . I edited my original post to clarify for others as well. It now reads:

I agree with this, and in my case I have a compelling reason to hold some nominals. The primary IPS purpose of my bonds is for unexpected expenses / job loss / other emergencies. I'd be 100% IBonds if I could. But in my view short term nominals are better than TIPS for this purpose, so I hold short term nominals instead of TIPS.

To explain further, emergencies being by definition unplanned, I might need to sell all my bonds on the secondary market on one week notice while the financial markets are absolutely melting down. I think nominals are better than TIPS in this scenario, due to higher liquidity, so I accept their inflation risk. I keep term short because the emergency might happen tomorrow (I hope not!). Ibonds do better than both, since they have no inflation risk and can also be redeemed at any time directly from the treasury without regard for market conditions.
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