Why (or at what YTM) does it make sense to buy a 20+ year TIPS...? "Draft" Conclusion page 5

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abc132
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by abc132 »

BirdFood wrote: Mon Jun 10, 2024 4:54 pm
abc132 wrote: Mon Jun 10, 2024 4:52 pm Sure but I have seen zero useful analysis that would help the OP like 1) and 2) above.
OP's purpose seems to be to persuade everyone to stop buying bonds with maturities more than 20 years.
abc132 wrote: Mon Jun 10, 2024 4:52 pmMy argument would be that risk analysis is done at such a low level here that building the portfolio with a stock/bond AA that balances risk is almost always going to be the best answer.
And has anyone at all disagreed with that?

Would you, too, oppose ever buying a bond with a maturity more than 20 years in the future?
The title doesn't use the word 'never' so I think you may be misstating the OP's intentions.
The title implies that there is a rate at which it does make sense even if 2% is not enough for them.

I think when we try to state other people's purposes we are likely introducing our own biases and that we should try to avoid this. I think it is tough to separate what we choose from what others might choose so I have no problem interpreting the OP as what the OP is considering for themselves. We can state why we might choose 20 year TIPS at 2% and someone reading might learn something.

I would not purchase 20-year TIPS @2% but I have previously suggested that 3% would be enough in other threads. I want my bonds to purchase shorter term expenses before social security and I-Bonds are the ideal instrument given the unknown duration. I like long bonds for an aggressive portfolio like 90/10 that is still a decade from retirement AA but it has nothing to do with the reason people buy TIPS. I would avoid TIPS for this purpose and stick to nominals.
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by BirdFood »

abc132 wrote: Mon Jun 10, 2024 5:06 pm I think it is tough to separate what we choose from what others might choose so I have no problem interpreting the OP as what the OP is considering for themselves. We can state why we might choose 20 year TIPS at 2% and someone reading might learn something.
That would be a lot easier if OP would stop telling people that their reasons are wrong or that they are based on the person not having the right data.

OP doesn't have to agree with a priority system where

-- minimizing the odds of return falling below a certain level

is a higher priority than

-- maximizing the odds of maximum return

My issue is with his determined refusal to believe that that difference in priorities can exist.
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by abc132 »

BirdFood wrote: Mon Jun 10, 2024 5:13 pm
abc132 wrote: Mon Jun 10, 2024 5:06 pm I think it is tough to separate what we choose from what others might choose so I have no problem interpreting the OP as what the OP is considering for themselves. We can state why we might choose 20 year TIPS at 2% and someone reading might learn something.
That would be a lot easier if OP would stop telling people that their reasons are wrong or that they are based on the person not having the right data.

OP doesn't have to agree with a priority system where

-- minimizing the odds of return falling below a certain level

is a higher priority than

-- maximizing the odds of maximum return

My issue is with his determined refusal to believe that that difference in priorities can exist.
My take was that we should never do either of these things for a low probability risk.

The reasons are explained earlier.
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by BirdFood »

abc132 wrote: Mon Jun 10, 2024 5:30 pm My take was that we should never do either of these things for a low probability risk.

The reasons are explained earlier.
I'm not sure which low probability risk you're thinking of. This is not about inflation, which is the one you mentioned earlier. If the low probability risk is the risk of the stock market losing money or having a low return over twentyish years, then that would tend to argue against any bonds of long duration.
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watchnerd
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by watchnerd »

Why are we cross-shopping a deterministic asset class vs a probabilistic asset class?

They're not fungible goods.

If your goal is to maximize returns, don't buy TIPS.

If your goal is to set an inflation-adjusted income floor, maybe buy some TIPS.

Aside from freakish short-lived one-off events, if TIPS ever get to the point where the real yield is competitive with the past performance of stocks (~6% real), that means the market is pricing US Treasuries / TIPS as pretty risky.
Last edited by watchnerd on Mon Jun 10, 2024 6:40 pm, edited 1 time in total.
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by watchnerd »

marcopolo wrote: Thu Jun 06, 2024 5:02 pm
My point was why are you using historical US equity returns to make your argument for not investing in longer maturity TIPs if you believe forwards returns are going to be significantly lower due to high valuations?

Valuations are higher today then when you abandoned US equities in 2018, and they are even less justified with today's higher bond yields.
It's a real head-scratcher
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abc132
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by abc132 »

BirdFood wrote: Mon Jun 10, 2024 5:35 pm
abc132 wrote: Mon Jun 10, 2024 5:30 pm My take was that we should never do either of these things for a low probability risk.

The reasons are explained earlier.
I'm not sure which low probability risk you're thinking of. This is not about inflation, which is the one you mentioned earlier. If the low probability risk is the risk of the stock market losing money or having a low return over twentyish years, then that would tend to argue against any bonds of long duration.
The chance that bonds outperform stocks over 20 years.
1) low probability
2) typically not worth insuring against
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by abc132 »

watchnerd wrote: Mon Jun 10, 2024 6:25 pm
marcopolo wrote: Thu Jun 06, 2024 5:02 pm
My point was why are you using historical US equity returns to make your argument for not investing in longer maturity TIPs if you believe forwards returns are going to be significantly lower due to high valuations?

Valuations are higher today then when you abandoned US equities in 2018, and they are even less justified with today's higher bond yields.
It's a real head-scratcher
A different sized portfolio today would justify a different choice.

As an example I have more than 2x the bonds I did in 2018 and with the same AA. I have less concern today about a downturn.
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watchnerd
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by watchnerd »

abc132 wrote: Mon Jun 10, 2024 6:43 pm
watchnerd wrote: Mon Jun 10, 2024 6:25 pm
marcopolo wrote: Thu Jun 06, 2024 5:02 pm
My point was why are you using historical US equity returns to make your argument for not investing in longer maturity TIPs if you believe forwards returns are going to be significantly lower due to high valuations?

Valuations are higher today then when you abandoned US equities in 2018, and they are even less justified with today's higher bond yields.
It's a real head-scratcher
A different sized portfolio today would justify a different choice.

As an example I have more than 2x the bonds I did in 2018 and with the same AA. I have less concern today about a downturn.
But you're not CraigTester who abandoned US stocks in 2018
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by IDpilot »

CraigTester wrote: Mon Jun 10, 2024 2:13 pm
IDpilot wrote: Mon Jun 10, 2024 1:09 pm
CraigTester wrote: Mon Jun 10, 2024 10:06 am
From Aug 1929 to May 1932, the real value of US stocks declined by 79%. Shiller reports a Real Total Return Price (RTRP) of 11,332,19 for August 1929 a 3107.32 for May 1932 which is a 72.5% real decline in 21 months or a -52% CAGR.

Yet by May 1949, returns were break-even, and then boomed from there...Shiller reports a RTRP of 11,740.27 as of April 1948

However, imagine a scenario where instead of a quick crash, followed by an eventual recovery, we had the reverse:

No quick crash, but just a slow steady grind down over 20 years, until the product of 10's of millions of people's labor, was eventually worth 79% less than it was two long decades prior....

Sniff test: Do these two scenarios sound equally likely to you in "practical" terms ? (forgetting the statistics for a moment);

And if you're thinking "Japan", imagine this latter scenario playing out for the entire Globe (e.g. VT)

WW3 would do it, but then we get questions like, who's going to be around to reimburse your TIPS at maturity, etc...

Benjamin Graham:“Over the short term the market is a voting machine, but over the long term it’s a weighing machine”
Besides the fact I can't replicate your numbers you also seem to be totally missing the point and continue to insist on relying on an intuitive story based on a very limited set of data. In this case just the historical record. While creating a coherent story based on what data you see is emotional satisfying it often leads to bad conclusions. Kahneman and Tversky identified this issue among statistically sophisticated researchers and recommended that they "regard their statistical intuitions with proper suspicion and replace impression formation by computation whenever possible."

Since I can't get you to let go of your intuitions, perhaps you should read Kahneman's book Thinking, Fast and Slow.
I just reconciled my numbers with the following website https://www.officialdata.org/us/stocks/ ... dYear=1932

It shows results close to my earlier quick calculation...

Aug 1929, 128.71
May 1932, 23.54

(128.71-23.54)/128.71 = 81.7% real decline

Not sure where you got your numbers....? I used Shiller's online data....
That website is NOT Shiller's data. It is some Ian Webster's interpretation of Shiller's data. If you want to use Shiller's data go to https://shillerdata.com/ and download the excel spreadsheet. I tried, briefly to reverse engineer Webster's website's computations with no success.

As for relying on a limited set of data..., don't we both suffer this constraint.... ?

Yes, we do. But how we respond to the limited data set is polar opposites. You insist that nothing can happen in the future outside of what has happened in this limited data set. I have, repeatedly, pointed out that this limited data set is just one of many outcomes that could have happened and I am open to many more possible outcomes.

As you said earlier, the number of independent trials for 20 year returns is too limited to draw statistically significant conclusions....

When one says that that they cannot draw a statistically significant conclusion that means that they cannot reject the null hypothesis with a meaningful level of confidence. So, I can't reject the hypothesis that there is chance of losing 50% of the real value of your money in 20 years. Earlier I showed you that there could be a 3.3% chance of losing half your money and with the data available to us won't show it 79% of the time. There could also be a chance of losing 9% of your money and the data we have won't show it half the time.

So why do you assign such confidence to a predicted result that has "never" happened in 100+ years...?

I won't call 3.3% or even 50% chance much confidence.

Benjamin Graham's quote (often repeated by Warren Buffett) wasn't just "made up".... It's how markets actually work....

Emotions/Psychology are the drivers of short term manias/crashes as they manifest in wild Valuations at times.....

But independent of what Bogle called the "speculative" components, eventually boring things like Earnings and Dividends are what matter in the long-term....

And so far, its the boring things that have enabled stocks to always at least break-even at durations greater than 20 years....

So absent a WW3 type event, I believe you are "safe" to own stocks at 20+ year horizons....

And unless you just don't care about opportunity cost, stocks seem to be the more logical choice versus TIPS at today's 20+ year YTM's...
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by IDpilot »

Kevin M wrote: Mon Jun 10, 2024 3:56 pm
IDpilot wrote: Mon Jun 10, 2024 1:09 pm Besides the fact I can't replicate your numbers you also seem to be totally missing the point and continue to insist on relying on an intuitive story based on a very limited set of data. In this case just the historical record. While creating a coherent story based on what data you see is emotional satisfying it often leads to bad conclusions. Kahneman and Tversky identified this issue among statistically sophisticated researchers and recommended that they "regard their statistical intuitions with proper suspicion and replace impression formation by computation whenever possible."

Since I can't get you to let go of your intuitions, perhaps you should read Kahneman's book Thinking, Fast and Slow.
It's worth noting that Kahneman said that even with all of his research, he was no better than anyone else at overcoming his cognitive biases. I read this in a podcast interview he did with Sam Harris, which was in Sam's book of his favorite podcasts.
Here is one of my favorite Kahneman quotes;

Our comforting conviction that the world makes sense rests on a secure foundation: Our almost unlimited ability to ignore our ignorance.

Flawed stories of the past shape our views of the world and our expectations for the future. Narrative fallacies arise inevitably from our continuous attempt to make sense of the world. The explanatory stories that people find compelling are simple; are concrete rather than abstract; assign a larger role to talent, stupidity, and intentions than to luck; and focus on a few striking events that happened rather than on the countless events that failed to happen. Any recent salient event is a candidate to become the kernel of a causal narrative.
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CraigTester
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by CraigTester »

IDpilot wrote: Mon Jun 10, 2024 7:28 pm
CraigTester wrote: Mon Jun 10, 2024 2:13 pm
IDpilot wrote: Mon Jun 10, 2024 1:09 pm
CraigTester wrote: Mon Jun 10, 2024 10:06 am
From Aug 1929 to May 1932, the real value of US stocks declined by 79%. Shiller reports a Real Total Return Price (RTRP) of 11,332,19 for August 1929 a 3107.32 for May 1932 which is a 72.5% real decline in 21 months or a -52% CAGR.

Yet by May 1949, returns were break-even, and then boomed from there...Shiller reports a RTRP of 11,740.27 as of April 1948

However, imagine a scenario where instead of a quick crash, followed by an eventual recovery, we had the reverse:

No quick crash, but just a slow steady grind down over 20 years, until the product of 10's of millions of people's labor, was eventually worth 79% less than it was two long decades prior....

Sniff test: Do these two scenarios sound equally likely to you in "practical" terms ? (forgetting the statistics for a moment);

And if you're thinking "Japan", imagine this latter scenario playing out for the entire Globe (e.g. VT)

WW3 would do it, but then we get questions like, who's going to be around to reimburse your TIPS at maturity, etc...

Benjamin Graham:“Over the short term the market is a voting machine, but over the long term it’s a weighing machine”
Besides the fact I can't replicate your numbers you also seem to be totally missing the point and continue to insist on relying on an intuitive story based on a very limited set of data. In this case just the historical record. While creating a coherent story based on what data you see is emotional satisfying it often leads to bad conclusions. Kahneman and Tversky identified this issue among statistically sophisticated researchers and recommended that they "regard their statistical intuitions with proper suspicion and replace impression formation by computation whenever possible."

Since I can't get you to let go of your intuitions, perhaps you should read Kahneman's book Thinking, Fast and Slow.
I just reconciled my numbers with the following website https://www.officialdata.org/us/stocks/ ... dYear=1932

It shows results close to my earlier quick calculation...

Aug 1929, 128.71
May 1932, 23.54

(128.71-23.54)/128.71 = 81.7% real decline

Not sure where you got your numbers....? I used Shiller's online data....
That website is NOT Shiller's data. It is some Ian Webster's interpretation of Shiller's data. If you want to use Shiller's data go to https://shillerdata.com/ and download the excel spreadsheet. I tried, briefly to reverse engineer Webster's website's computations with no success.

I get very similar results whether using Shiller's online data or the above website...

Are you reinvesting dividends and inflation adjusting....?
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by CraigTester »

avalpert1 wrote: Mon Jun 10, 2024 4:03 pm
CraigTester wrote: Mon Jun 10, 2024 2:55 pm Maybe one very important point people are missing when considering populating a 20-30 year ladder with a stock index:

Each of those successive 10 years (20+ years from now) is going to have a different result....

So even if you're the unluckiest guy who populated his entire 20-30 year stock ladder in August, 1929, every year except 1949 had a positive result...

And in fact every year, except 1949, significantly out-performed a 2.2% TIPS....

If you want to confirm this for yourself, play with the SP500 returns calculator I posted just a little while ago...
Now do a Japanese investor in 1989 then explain why that can't happen in the US or even globally... And then explain why someone has to value the additional dollar above the 2.2% as worth more than any possibility of being below it - is there some law of economics that doesn't allow them that utility curve?
Would be quite a unique event for the entire global market to have a Japan experience simultaneously ....

As for the note you're replying to, if I get the energy for it, I might run some numbers for each rung of a stock populated ladder for years 21-30....

We already know that worst case for 20 years is to break-even, and from McQ's rolling returns chart it looks like worst case for 30 years since 1900 was close to 3%.....but would be interesting to quantify worst case for the other durations....

Has anyone already run these...?
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by CraigTester »

muffins14 wrote: Mon Jun 10, 2024 3:57 pm
CraigTester wrote: Mon Jun 10, 2024 12:49 pm
avalpert1 wrote: Mon Jun 10, 2024 12:45 pm
CraigTester wrote: Mon Jun 10, 2024 12:39 pm I appreciate the "have you thought about X and Y possibilities...." but I still don't know why someone would trade the historical distribution of stock returns for a 2.2% 20 year TIPS....

Now the very fact that people are buying 20+ year TIPS every day, tells me someone sees (or believes) the logic....

I just don't think it's yet been articulated on this thread....

Other than the Argument that "once I have enough to meet my needs, I don't care about opportunity cost..."
It has been articulated, repeatedly (heck, it can even be seen or your very formulation above if you were paying attention) - you just refuse to accept it.
I believe the rationale for buying a 1-20 year TIPs ladder has been articulated very well.

So well in fact I own one myself.

But in case I missed it, other than the Argument that "once I have enough to meet my needs, I don't care about opportunity cost..." what is the reason to buy a 20+ year TIPS at 2.2% versus holding say VT for 20+ years....?
Again: the 2% real yield is absolutely guaranteed. You get a 48% cumulative real gain in 20 years. That’s pretty good return for zero risk.

the reason to buy it is because you are happy with guaranteed 2% real return, and perhaps don’t want to see your stock fund drop by 50-70% in any specific year.

Surely you understand that some people do not enjoy unnecessary volatility.
Yes, it's the volatility along the way that I'd love to avoid.... But hard to quantify that against the opportunity cost of stock returns over 20+ year durations...

If only Mr. Market would offer us some higher TIPS yields, our decision would be easier....

And yes, I do understand that a guarantee can be very valuable for SWAN....
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by avalpert1 »

abc132 wrote: Mon Jun 10, 2024 6:41 pm
BirdFood wrote: Mon Jun 10, 2024 5:35 pm
abc132 wrote: Mon Jun 10, 2024 5:30 pm My take was that we should never do either of these things for a low probability risk.

The reasons are explained earlier.
I'm not sure which low probability risk you're thinking of. This is not about inflation, which is the one you mentioned earlier. If the low probability risk is the risk of the stock market losing money or having a low return over twentyish years, then that would tend to argue against any bonds of long duration.
The chance that bonds outperform stocks over 20 years.
1) low probability
2) typically not worth insuring against
We are not 20 years removed from a period where bonds outperformed stocks for over 20 years...
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by avalpert1 »

CraigTester wrote: Mon Jun 10, 2024 9:57 pm
avalpert1 wrote: Mon Jun 10, 2024 4:03 pm
CraigTester wrote: Mon Jun 10, 2024 2:55 pm Maybe one very important point people are missing when considering populating a 20-30 year ladder with a stock index:

Each of those successive 10 years (20+ years from now) is going to have a different result....

So even if you're the unluckiest guy who populated his entire 20-30 year stock ladder in August, 1929, every year except 1949 had a positive result...

And in fact every year, except 1949, significantly out-performed a 2.2% TIPS....

If you want to confirm this for yourself, play with the SP500 returns calculator I posted just a little while ago...
Now do a Japanese investor in 1989 then explain why that can't happen in the US or even globally... And then explain why someone has to value the additional dollar above the 2.2% as worth more than any possibility of being below it - is there some law of economics that doesn't allow them that utility curve?
Would be quite a unique event for the entire global market to have a Japan experience simultaneously ....

As for the note you're replying to, if I get the energy for it, I might run some numbers for each rung of a stock populated ladder for years 21-30....

We already know that worst case for 20 years is to break-even
No, we know that the worst realized case is less than that (see Japan above), you just choose to be very selective about which historical record you use while also continuously ignoring the fact that the historical records does not represent the actual probability distribution...
Running more 'scenarios' off of it is just digging your head deeper into the sand as you refuse to confront the answers presented to you.
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CraigTester
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by CraigTester »

avalpert1 wrote: Mon Jun 10, 2024 11:15 pm
CraigTester wrote: Mon Jun 10, 2024 9:57 pm
avalpert1 wrote: Mon Jun 10, 2024 4:03 pm
CraigTester wrote: Mon Jun 10, 2024 2:55 pm Maybe one very important point people are missing when considering populating a 20-30 year ladder with a stock index:

Each of those successive 10 years (20+ years from now) is going to have a different result....

So even if you're the unluckiest guy who populated his entire 20-30 year stock ladder in August, 1929, every year except 1949 had a positive result...

And in fact every year, except 1949, significantly out-performed a 2.2% TIPS....

If you want to confirm this for yourself, play with the SP500 returns calculator I posted just a little while ago...
Now do a Japanese investor in 1989 then explain why that can't happen in the US or even globally... And then explain why someone has to value the additional dollar above the 2.2% as worth more than any possibility of being below it - is there some law of economics that doesn't allow them that utility curve?
Would be quite a unique event for the entire global market to have a Japan experience simultaneously ....

As for the note you're replying to, if I get the energy for it, I might run some numbers for each rung of a stock populated ladder for years 21-30....

We already know that worst case for 20 years is to break-even
No, we know that the worst realized case is less than that (see Japan above), you just choose to be very selective about which historical record you use while also continuously ignoring the fact that the historical records does not represent the actual probability distribution...
Running more 'scenarios' off of it is just digging your head deeper into the sand as you refuse to confront the answers presented to you.
Japan is the poster child for not putting all your investments in one country, especially at PE =70...

If I had to choose between investing exclusively in one country's stock market (at PE=70) or a 30 yr TIPS at 2.2%, I would choose the TIPS...
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by IDpilot »

CraigTester wrote: Mon Jun 10, 2024 9:37 pm
IDpilot wrote: Mon Jun 10, 2024 7:28 pm
CraigTester wrote: Mon Jun 10, 2024 2:13 pm
IDpilot wrote: Mon Jun 10, 2024 1:09 pm
CraigTester wrote: Mon Jun 10, 2024 10:06 am
From Aug 1929 to May 1932, the real value of US stocks declined by 79%. Shiller reports a Real Total Return Price (RTRP) of 11,332,19 for August 1929 a 3107.32 for May 1932 which is a 72.5% real decline in 21 months or a -52% CAGR.

Yet by May 1949, returns were break-even, and then boomed from there...Shiller reports a RTRP of 11,740.27 as of April 1948

However, imagine a scenario where instead of a quick crash, followed by an eventual recovery, we had the reverse:

No quick crash, but just a slow steady grind down over 20 years, until the product of 10's of millions of people's labor, was eventually worth 79% less than it was two long decades prior....

Sniff test: Do these two scenarios sound equally likely to you in "practical" terms ? (forgetting the statistics for a moment);

And if you're thinking "Japan", imagine this latter scenario playing out for the entire Globe (e.g. VT)

WW3 would do it, but then we get questions like, who's going to be around to reimburse your TIPS at maturity, etc...

Benjamin Graham:“Over the short term the market is a voting machine, but over the long term it’s a weighing machine”
Besides the fact I can't replicate your numbers you also seem to be totally missing the point and continue to insist on relying on an intuitive story based on a very limited set of data. In this case just the historical record. While creating a coherent story based on what data you see is emotional satisfying it often leads to bad conclusions. Kahneman and Tversky identified this issue among statistically sophisticated researchers and recommended that they "regard their statistical intuitions with proper suspicion and replace impression formation by computation whenever possible."

Since I can't get you to let go of your intuitions, perhaps you should read Kahneman's book Thinking, Fast and Slow.
I just reconciled my numbers with the following website https://www.officialdata.org/us/stocks/ ... dYear=1932

It shows results close to my earlier quick calculation...

Aug 1929, 128.71
May 1932, 23.54

(128.71-23.54)/128.71 = 81.7% real decline

Not sure where you got your numbers....? I used Shiller's online data....
That website is NOT Shiller's data. It is some Ian Webster's interpretation of Shiller's data. If you want to use Shiller's data go to https://shillerdata.com/ and download the excel spreadsheet. I tried, briefly to reverse engineer Webster's website's computations with no success.

I get very similar results whether using Shiller's online data or the above website...

Are you reinvesting dividends and inflation adjusting....?
I'm not. Shiller is in his spreadsheet. Using the Real Total Return Price values in column J of Shiller's spreadsheet.

August 1929 in cell J712 you'll find 11640.64
May 1932 in cell J745 you'll find 3191.90

(11640.64-3191.90)/3191.90 = 72.6% decline

What values from Shiller's spreadsheet give you 81.7%?
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CraigTester
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by CraigTester »

watchnerd wrote: Mon Jun 10, 2024 6:14 pm Why are we cross-shopping a deterministic asset class vs a probabilistic asset class?

They're not fungible goods.

If your goal is to maximize returns, don't buy TIPS.

If your goal is to set an inflation-adjusted income floor, maybe buy some TIPS.

Aside from freakish short-lived one-off events, if TIPS ever get to the point where the real yield is competitive with the past performance of stocks (~6% real), that means the market is pricing US Treasuries / TIPS as pretty risky.
They are alternative approaches for meeting spending needs say 30 years into the future.

And when the worst case for US stocks is 3%, one has to really think about the trade-off of a 2.2% TIPS, no?
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by HootingSloth »

CraigTester wrote: Tue Jun 11, 2024 6:33 am
watchnerd wrote: Mon Jun 10, 2024 6:14 pm Why are we cross-shopping a deterministic asset class vs a probabilistic asset class?

They're not fungible goods.

If your goal is to maximize returns, don't buy TIPS.

If your goal is to set an inflation-adjusted income floor, maybe buy some TIPS.

Aside from freakish short-lived one-off events, if TIPS ever get to the point where the real yield is competitive with the past performance of stocks (~6% real), that means the market is pricing US Treasuries / TIPS as pretty risky.
They are alternative approaches for meeting spending needs say 30 years into the future.

And when the worst case for US stocks is 3%, one has to really think about the trade-off of a 2.2% TIPS, no?
Maybe we can try a slightly different question. I believe you have said that you currently own TIPS maturing in February 2043. The real yield to maturity this morning on those TIPS is 2.273%, so every dollar you hold today should return, in today's dollars, about $1.55 in February 2043 (ignoring, for this purpose, any reinvestment risk on coupon payments).

If you bought some TIPS maturing February 2044, then they would be worth about $1.59 one year later.

Why do you hold the 2043 TIPS? Why don't those same reasons motivate you to hold 2044 TIPS? How different are they qualitatively? Is $1.55 in 2043 so much better than $1.59 in 2044? Is the likely range of stock market returns over the next 19.5 years so different from the likely range over 20.5 years such that you can't even understand why anyone would go a single year farther out that you have decided to go?

Or is all just a matter of degree and different reasonable people might have small differences in the relative weights of the tradeoffs and so reach a modestly different conclusion?
Building TIPS ladder for all residual needs and some wants after SS, pension, and paid-off house. Other wants from 5% constant percentage from Risk Portfolio (80/20 AA w/ 80% global + 20% US-tilt)
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CraigTester
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by CraigTester »

IDpilot wrote: Tue Jun 11, 2024 6:31 am
CraigTester wrote: Mon Jun 10, 2024 9:37 pm
IDpilot wrote: Mon Jun 10, 2024 7:28 pm
CraigTester wrote: Mon Jun 10, 2024 2:13 pm
IDpilot wrote: Mon Jun 10, 2024 1:09 pm

Besides the fact I can't replicate your numbers you also seem to be totally missing the point and continue to insist on relying on an intuitive story based on a very limited set of data. In this case just the historical record. While creating a coherent story based on what data you see is emotional satisfying it often leads to bad conclusions. Kahneman and Tversky identified this issue among statistically sophisticated researchers and recommended that they "regard their statistical intuitions with proper suspicion and replace impression formation by computation whenever possible."

Since I can't get you to let go of your intuitions, perhaps you should read Kahneman's book Thinking, Fast and Slow.
I just reconciled my numbers with the following website https://www.officialdata.org/us/stocks/ ... dYear=1932

It shows results close to my earlier quick calculation...

Aug 1929, 128.71
May 1932, 23.54

(128.71-23.54)/128.71 = 81.7% real decline

Not sure where you got your numbers....? I used Shiller's online data....
That website is NOT Shiller's data. It is some Ian Webster's interpretation of Shiller's data. If you want to use Shiller's data go to https://shillerdata.com/ and download the excel spreadsheet. I tried, briefly to reverse engineer Webster's website's computations with no success.

I get very similar results whether using Shiller's online data or the above website...

Are you reinvesting dividends and inflation adjusting....?
I'm not. Shiller is in his spreadsheet. Using the Real Total Return Price values in column J of Shiller's spreadsheet.

August 1929 in cell J712 you'll find 11640.64
May 1932 in cell J745 you'll find 3191.90

(11640.64-3191.90)/3191.90 = 72.6% decline

What values from Shiller's spreadsheet give you 81.7%?
Shiller uses "monthly average" price data.

So your above calculation is showing the decline in average monthly prices.

Good enough for academic ball-parking, which is what we're doing in this thread...

But need to use end-of-month data if want a more accurate answer....(This is what I actually use for my own modeling purposes)

The attached link has a downloadable file with EOM data...

https://earlyretirementnow.com/2022/10/ ... ape-ratio/
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CraigTester
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by CraigTester »

HootingSloth wrote: Tue Jun 11, 2024 8:11 am
CraigTester wrote: Tue Jun 11, 2024 6:33 am
watchnerd wrote: Mon Jun 10, 2024 6:14 pm Why are we cross-shopping a deterministic asset class vs a probabilistic asset class?

They're not fungible goods.

If your goal is to maximize returns, don't buy TIPS.

If your goal is to set an inflation-adjusted income floor, maybe buy some TIPS.

Aside from freakish short-lived one-off events, if TIPS ever get to the point where the real yield is competitive with the past performance of stocks (~6% real), that means the market is pricing US Treasuries / TIPS as pretty risky.
They are alternative approaches for meeting spending needs say 30 years into the future.

And when the worst case for US stocks is 3%, one has to really think about the trade-off of a 2.2% TIPS, no?
Maybe we can try a slightly different question. I believe you have said that you currently own TIPS maturing in February 2043. The real yield to maturity this morning on those TIPS is 2.273%, so every dollar you hold today should return, in today's dollars, about $1.55 in February 2043 (ignoring, for this purpose, any reinvestment risk on coupon payments).

If you bought some TIPS maturing February 2044, then they would be worth about $1.59 one year later.

Why do you hold the 2043 TIPS? Why don't those same reasons motivate you to hold 2044 TIPS? How different are they qualitatively? Is $1.55 in 2043 so much better than $1.59 in 2044? Is the likely range of stock market returns over the next 19.5 years so different from the likely range over 20.5 years such that you can't even understand why anyone would go a single year farther out that you have decided to go?

Or is all just a matter of degree and different reasonable people might have small differences in the relative weights of the tradeoffs and so reach a modestly different conclusion?
Worst case stock returns improve with duration, so as you say, where do you draw the line...?

At 30 years, worst case is 3%; at 1 year worst case is a 50%-type crash.

So far I've limited my duration to 20 years, as this is the inflection point where worst case = break-even.

So what is the minimum TIPS YTM that would motivate us to extend to 21 years, 25, 30, 35.....?

This really is getting to the question of the thread...
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by HootingSloth »

CraigTester wrote: Tue Jun 11, 2024 8:27 am Worst case stock returns improve with duration, so as you say, where do you draw the line...?

At 30 years, worst case is 3%; at 1 year worst case is a 50%-type crash.

So far I've limited my duration to 20 years, as this is the inflection point where worst case = break-even.

So what is the minimum TIPS YTM that would motivate us to extend to 21 years, 25, 30, 35.....?

This really is getting to the question of the thread...
Are you familiar with the work of Pastor and Stambaugh in Are Stocks Really Less Volatile in the Long Run?

This paper looks very carefully at the question of whether the range of investment outcomes over long time horizons is more or less uncertain than the range over shorter horizons, based on existing data
It concludes that stocks are substantially more volatile over long horizons, from an investor's perspective. There is a reduction in uncertainty over long horizons that is attributable to "mean reversion" of returns. However, this reduction is more than offset by the growing uncertainty over long horizons that results from unknown basic parameters (e.g., uncertainty about future expected returns).

In sum, if you pay close attention to the data, you would see that the answer to your question (at what yield should I invest in TIPS at various time horizons?) should actually decline as the length of the horizon increases. Of course, the exact numbers for break even should differ from investor to investor because their circumstances and goals differ. But of 20 year TIPS are good for you now, than 30 year TIPS should be even better if you pay close enough attention.
Building TIPS ladder for all residual needs and some wants after SS, pension, and paid-off house. Other wants from 5% constant percentage from Risk Portfolio (80/20 AA w/ 80% global + 20% US-tilt)
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by watchnerd »

CraigTester wrote: Tue Jun 11, 2024 6:33 am
watchnerd wrote: Mon Jun 10, 2024 6:14 pm Why are we cross-shopping a deterministic asset class vs a probabilistic asset class?

They're not fungible goods.

If your goal is to maximize returns, don't buy TIPS.

If your goal is to set an inflation-adjusted income floor, maybe buy some TIPS.

Aside from freakish short-lived one-off events, if TIPS ever get to the point where the real yield is competitive with the past performance of stocks (~6% real), that means the market is pricing US Treasuries / TIPS as pretty risky.
They are alternative approaches for meeting spending needs say 30 years into the future.

And when the worst case for US stocks is 3%, one has to really think about the trade-off of a 2.2% TIPS, no?
That's the flaw in your logic.

There is no rule that says the worst case for future returns of US stocks is 3% real.

It could be worse.

For stocks to have the potential to return more than bonds, they have to be riskier -- and have the potential of doing worse than bonds.

Again, you're acting as if stock returns are deterministic.

They're not, they're probabilistic.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by Kevin M »

HootingSloth wrote: Tue Jun 11, 2024 8:42 am
CraigTester wrote: Tue Jun 11, 2024 8:27 am Worst case stock returns improve with duration, so as you say, where do you draw the line...?

At 30 years, worst case is 3%; at 1 year worst case is a 50%-type crash.

So far I've limited my duration to 20 years, as this is the inflection point where worst case = break-even.

So what is the minimum TIPS YTM that would motivate us to extend to 21 years, 25, 30, 35.....?

This really is getting to the question of the thread...
Are you familiar with the work of Pastor and Stambaugh in Are Stocks Really Less Volatile in the Long Run?

This paper looks very carefully at the question of whether the range of investment outcomes over long time horizons is more or less uncertain than the range over shorter horizons, based on existing data
It concludes that stocks are substantially more volatile over long horizons, from an investor's perspective. There is a reduction in uncertainty over long horizons that is attributable to "mean reversion" of returns. However, this reduction is more than offset by the growing uncertainty over long horizons that results from unknown basic parameters (e.g., uncertainty about future expected returns).

In sum, if you pay close attention to the data, you would see that the answer to your question (at what yield should I invest in TIPS at various time horizons?) should actually decline as the length of the horizon increases. Of course, the exact numbers for break even should differ from investor to investor because their circumstances and goals differ. But of 20 year TIPS are good for you now, than 30 year TIPS should be even better if you pay close enough attention.
Already linked to this paper earlier in the thread, and recommended that everyone who belives what Craig believes should read it.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by HootingSloth »

Kevin M wrote: Tue Jun 11, 2024 9:26 am
HootingSloth wrote: Tue Jun 11, 2024 8:42 am
CraigTester wrote: Tue Jun 11, 2024 8:27 am Worst case stock returns improve with duration, so as you say, where do you draw the line...?

At 30 years, worst case is 3%; at 1 year worst case is a 50%-type crash.

So far I've limited my duration to 20 years, as this is the inflection point where worst case = break-even.

So what is the minimum TIPS YTM that would motivate us to extend to 21 years, 25, 30, 35.....?

This really is getting to the question of the thread...
Are you familiar with the work of Pastor and Stambaugh in Are Stocks Really Less Volatile in the Long Run?

This paper looks very carefully at the question of whether the range of investment outcomes over long time horizons is more or less uncertain than the range over shorter horizons, based on existing data
It concludes that stocks are substantially more volatile over long horizons, from an investor's perspective. There is a reduction in uncertainty over long horizons that is attributable to "mean reversion" of returns. However, this reduction is more than offset by the growing uncertainty over long horizons that results from unknown basic parameters (e.g., uncertainty about future expected returns).

In sum, if you pay close attention to the data, you would see that the answer to your question (at what yield should I invest in TIPS at various time horizons?) should actually decline as the length of the horizon increases. Of course, the exact numbers for break even should differ from investor to investor because their circumstances and goals differ. But of 20 year TIPS are good for you now, than 30 year TIPS should be even better if you pay close enough attention.
Already linked to this paper earlier in the thread, and recommended that everyone who belives what Craig believes should read it.
Thanks, Kevin M, and that's on me for not reading the whole thread.

In any event, if anyone wants to selectively ignore the best evidence, thought through in the most careful fashion, and instead rely on some rough intuition as applied to spending a few minutes fooling around with online calculators, I suppose that is their prerogative.

While I don't really expect to persuade particular individuals who already seem commited to a given point of view, I do hope the information will be useful to others who may be reading and still deciding on what to do. So I think these kinds of threads are productive, and some repetition of different people making related points is not a bad thing.
Building TIPS ladder for all residual needs and some wants after SS, pension, and paid-off house. Other wants from 5% constant percentage from Risk Portfolio (80/20 AA w/ 80% global + 20% US-tilt)
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by avalpert1 »

CraigTester wrote: Mon Jun 10, 2024 11:58 pm
avalpert1 wrote: Mon Jun 10, 2024 11:15 pm
CraigTester wrote: Mon Jun 10, 2024 9:57 pm
avalpert1 wrote: Mon Jun 10, 2024 4:03 pm
CraigTester wrote: Mon Jun 10, 2024 2:55 pm Maybe one very important point people are missing when considering populating a 20-30 year ladder with a stock index:

Each of those successive 10 years (20+ years from now) is going to have a different result....

So even if you're the unluckiest guy who populated his entire 20-30 year stock ladder in August, 1929, every year except 1949 had a positive result...

And in fact every year, except 1949, significantly out-performed a 2.2% TIPS....

If you want to confirm this for yourself, play with the SP500 returns calculator I posted just a little while ago...
Now do a Japanese investor in 1989 then explain why that can't happen in the US or even globally... And then explain why someone has to value the additional dollar above the 2.2% as worth more than any possibility of being below it - is there some law of economics that doesn't allow them that utility curve?
Would be quite a unique event for the entire global market to have a Japan experience simultaneously ....

As for the note you're replying to, if I get the energy for it, I might run some numbers for each rung of a stock populated ladder for years 21-30....

We already know that worst case for 20 years is to break-even
No, we know that the worst realized case is less than that (see Japan above), you just choose to be very selective about which historical record you use while also continuously ignoring the fact that the historical records does not represent the actual probability distribution...
Running more 'scenarios' off of it is just digging your head deeper into the sand as you refuse to confront the answers presented to you.
Japan is the poster child for not putting all your investments in one country, especially at PE =70...

If I had to choose between investing exclusively in one country's stock market (at PE=70) or a 30 yr TIPS at 2.2%, I would choose the TIPS...
And here you are using a single country's limited historical record to cognitively block out the possibility of TIPS outperforming stocks over a 20 (but not 19) year period...
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by CraigTester »

Kevin M wrote: Tue Jun 11, 2024 9:26 am
HootingSloth wrote: Tue Jun 11, 2024 8:42 am
CraigTester wrote: Tue Jun 11, 2024 8:27 am Worst case stock returns improve with duration, so as you say, where do you draw the line...?

At 30 years, worst case is 3%; at 1 year worst case is a 50%-type crash.

So far I've limited my duration to 20 years, as this is the inflection point where worst case = break-even.

So what is the minimum TIPS YTM that would motivate us to extend to 21 years, 25, 30, 35.....?

This really is getting to the question of the thread...
Are you familiar with the work of Pastor and Stambaugh in Are Stocks Really Less Volatile in the Long Run?

This paper looks very carefully at the question of whether the range of investment outcomes over long time horizons is more or less uncertain than the range over shorter horizons, based on existing data
It concludes that stocks are substantially more volatile over long horizons, from an investor's perspective. There is a reduction in uncertainty over long horizons that is attributable to "mean reversion" of returns. However, this reduction is more than offset by the growing uncertainty over long horizons that results from unknown basic parameters (e.g., uncertainty about future expected returns).

In sum, if you pay close attention to the data, you would see that the answer to your question (at what yield should I invest in TIPS at various time horizons?) should actually decline as the length of the horizon increases. Of course, the exact numbers for break even should differ from investor to investor because their circumstances and goals differ. But of 20 year TIPS are good for you now, than 30 year TIPS should be even better if you pay close enough attention.
Already linked to this paper earlier in the thread, and recommended that everyone who belives what Craig believes should read it.

Let me lay out several premises, and see if we can find the point of disconnect, before we dive into all the greek letters.

Premises

1) Bogle's "Equation" is valid: Stock returns = Starting Dividend Yield + Earnings Growth rate + Percentage change (annualized) in the P/E multiple.

2) Per Shiller's online data, while certainly lumpy, on average, (Earnings + Dividends) have consistently grown over the last 100+ years.

3) P/E multiples have had wild swings over the last 100+ years, but "ultimately" net to a zero long-term contribution to returns.

Let me stop here, for a moment... Do you agree with everything so far...?
IDpilot
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by IDpilot »

CraigTester wrote: Tue Jun 11, 2024 11:24 am
Kevin M wrote: Tue Jun 11, 2024 9:26 am
HootingSloth wrote: Tue Jun 11, 2024 8:42 am
CraigTester wrote: Tue Jun 11, 2024 8:27 am Worst case stock returns improve with duration, so as you say, where do you draw the line...?

At 30 years, worst case is 3%; at 1 year worst case is a 50%-type crash.

So far I've limited my duration to 20 years, as this is the inflection point where worst case = break-even.

So what is the minimum TIPS YTM that would motivate us to extend to 21 years, 25, 30, 35.....?

This really is getting to the question of the thread...
Are you familiar with the work of Pastor and Stambaugh in Are Stocks Really Less Volatile in the Long Run?

This paper looks very carefully at the question of whether the range of investment outcomes over long time horizons is more or less uncertain than the range over shorter horizons, based on existing data
It concludes that stocks are substantially more volatile over long horizons, from an investor's perspective. There is a reduction in uncertainty over long horizons that is attributable to "mean reversion" of returns. However, this reduction is more than offset by the growing uncertainty over long horizons that results from unknown basic parameters (e.g., uncertainty about future expected returns).

In sum, if you pay close attention to the data, you would see that the answer to your question (at what yield should I invest in TIPS at various time horizons?) should actually decline as the length of the horizon increases. Of course, the exact numbers for break even should differ from investor to investor because their circumstances and goals differ. But of 20 year TIPS are good for you now, than 30 year TIPS should be even better if you pay close enough attention.
Already linked to this paper earlier in the thread, and recommended that everyone who belives what Craig believes should read it.

Let me lay out several premises, and see if we can find the point of disconnect, before we dive into all the greek letters.

Premises

1) Bogle's "Equation" is valid: Stock returns = Starting Dividend Yield + Earnings Growth rate + Percentage change (annualized) in the P/E multiple.

2) Per Shiller's online data, while certainly lumpy, on average, (Earnings + Dividends) have consistently grown over the last 100+ years.

3) P/E multiples have had wild swings over the last 100+ years, but "ultimately" net to a zero long-term contribution to returns.

Let me stop here, for a moment... Do you agree with everything so far...?
A couple of clarifications.

1) The equation is Predicted 10-Year Return (expressed as an annual percentage) = Initial dividend yield + Predicted 10-year annual earnings growth + Annual change in P/E to bring it back to a terminal P/E

2) The second term in the equation is Earnings Growth Rate which is certainly not Earnings + Dividends. It is (earnings at time two - earnings at time 1)/ earnings a time 1 where the earnings values are picked at the appropriate time.

Here's a quick look at the annual real earnings growth rates by year

Image

The growth rate of real earnings looks like it is 0.07%/year but that goes to zero if you remove the 333% for 2009.
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CraigTester
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by CraigTester »

IDpilot wrote: Tue Jun 11, 2024 1:13 pm
CraigTester wrote: Tue Jun 11, 2024 11:24 am
Kevin M wrote: Tue Jun 11, 2024 9:26 am
HootingSloth wrote: Tue Jun 11, 2024 8:42 am
CraigTester wrote: Tue Jun 11, 2024 8:27 am Worst case stock returns improve with duration, so as you say, where do you draw the line...?

At 30 years, worst case is 3%; at 1 year worst case is a 50%-type crash.

So far I've limited my duration to 20 years, as this is the inflection point where worst case = break-even.

So what is the minimum TIPS YTM that would motivate us to extend to 21 years, 25, 30, 35.....?

This really is getting to the question of the thread...
Are you familiar with the work of Pastor and Stambaugh in Are Stocks Really Less Volatile in the Long Run?

This paper looks very carefully at the question of whether the range of investment outcomes over long time horizons is more or less uncertain than the range over shorter horizons, based on existing data
It concludes that stocks are substantially more volatile over long horizons, from an investor's perspective. There is a reduction in uncertainty over long horizons that is attributable to "mean reversion" of returns. However, this reduction is more than offset by the growing uncertainty over long horizons that results from unknown basic parameters (e.g., uncertainty about future expected returns).

In sum, if you pay close attention to the data, you would see that the answer to your question (at what yield should I invest in TIPS at various time horizons?) should actually decline as the length of the horizon increases. Of course, the exact numbers for break even should differ from investor to investor because their circumstances and goals differ. But of 20 year TIPS are good for you now, than 30 year TIPS should be even better if you pay close enough attention.
Already linked to this paper earlier in the thread, and recommended that everyone who belives what Craig believes should read it.

Let me lay out several premises, and see if we can find the point of disconnect, before we dive into all the greek letters.

Premises

1) Bogle's "Equation" is valid: Stock returns = Starting Dividend Yield + Earnings Growth rate + Percentage change (annualized) in the P/E multiple.

2) Per Shiller's online data, while certainly lumpy, on average, (Earnings + Dividends) have consistently grown over the last 100+ years.

3) P/E multiples have had wild swings over the last 100+ years, but "ultimately" net to a zero long-term contribution to returns.

Let me stop here, for a moment... Do you agree with everything so far...?
A couple of clarifications.

1) The equation is Predicted 10-Year Return (expressed as an annual percentage) = Initial dividend yield + Predicted 10-year annual earnings growth + Annual change in P/E to bring it back to a terminal P/E

2) The second term in the equation is Earnings Growth Rate which is certainly not Earnings + Dividends. It is (earnings at time two - earnings at time 1)/ earnings a time 1 where the earnings values are picked at the appropriate time.

Here's a quick look at the annual real earnings growth rates by year

Image

The growth rate of real earnings looks like it is 0.07%/year but that goes to zero if you remove the 333% for 2009.

https://alphaarchitect.com/wp-content/u ... -Model.pdf
HootingSloth
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by HootingSloth »

CraigTester wrote: Tue Jun 11, 2024 11:24 am
Kevin M wrote: Tue Jun 11, 2024 9:26 am
HootingSloth wrote: Tue Jun 11, 2024 8:42 am
CraigTester wrote: Tue Jun 11, 2024 8:27 am Worst case stock returns improve with duration, so as you say, where do you draw the line...?

At 30 years, worst case is 3%; at 1 year worst case is a 50%-type crash.

So far I've limited my duration to 20 years, as this is the inflection point where worst case = break-even.

So what is the minimum TIPS YTM that would motivate us to extend to 21 years, 25, 30, 35.....?

This really is getting to the question of the thread...
Are you familiar with the work of Pastor and Stambaugh in Are Stocks Really Less Volatile in the Long Run?

This paper looks very carefully at the question of whether the range of investment outcomes over long time horizons is more or less uncertain than the range over shorter horizons, based on existing data
It concludes that stocks are substantially more volatile over long horizons, from an investor's perspective. There is a reduction in uncertainty over long horizons that is attributable to "mean reversion" of returns. However, this reduction is more than offset by the growing uncertainty over long horizons that results from unknown basic parameters (e.g., uncertainty about future expected returns).

In sum, if you pay close attention to the data, you would see that the answer to your question (at what yield should I invest in TIPS at various time horizons?) should actually decline as the length of the horizon increases. Of course, the exact numbers for break even should differ from investor to investor because their circumstances and goals differ. But of 20 year TIPS are good for you now, than 30 year TIPS should be even better if you pay close enough attention.
Already linked to this paper earlier in the thread, and recommended that everyone who belives what Craig believes should read it.

Let me lay out several premises, and see if we can find the point of disconnect, before we dive into all the greek letters.

Premises

1) Bogle's "Equation" is valid: Stock returns = Starting Dividend Yield + Earnings Growth rate + Percentage change (annualized) in the P/E multiple.

2) Per Shiller's online data, while certainly lumpy, on average, (Earnings + Dividends) have consistently grown over the last 100+ years.

3) P/E multiples have had wild swings over the last 100+ years, but "ultimately" net to a zero long-term contribution to returns.

Let me stop here, for a moment... Do you agree with everything so far...?
I don't really agree with premise (3) personally, but these kinds of premises, although intentionally vaguely stated, generally are consistent with the analysis in Pastor and Stambaugh (although their framework is both much more general and much more mathematically precise). I will try to translate what they are saying into this context, in case it is of interest to anyone.

One simple model of stock market returns would be to say that each year of stock market returns just pulls from an identical random distribution of returns with a fixed expected value and fixed variance. Under this kind of simple model, the variance over all time horizons is constant, and so you generally would expect an investor to demand the same TIPS yield for different durations when comparing TIPS to stocks over different horizons, all else equal.

When we say something like P/E multiples both have wild swings and yet "ultimately" net to a zero in the long run, we are talking about a kind of "mean reversion" in stock returns. (Note that over the last 153 years in the U.S., P/E multiple expansion has contributed about 3.5x to the value of the market, or about 0.8% per year annualized, so we haven't really reached the long run in this sense between 1871 and today). Instead of taking the view that the expected return at any time is a constant and that the distribution of future returns are identically distributed, as in the simpler model above, we believe that whenever returns in year t are higher than expected, expected returns in subsequent years are diminished in order to offset this positive "shock" and return to some sort of ultra long-term point of stability in valuations. Similarly, if there is a negative "shock" of below expected returns in year t, then expected returns in future years will increase to eventually offset the shock.

If you build a toy model of this kind and, crucially, assume that there are fixed and knowable parameters driving the mean reversion, e.g. assume there is a fixed and knowable "true" expected return for stocks in 2024, "true" value towards which valuations are supposed to revert, knowable time scale over which this reversion occurs, etc.), then you can show that the "true" long-term variance of stock returns does indeed decline over longer time horizons. In fact, you will predict (consistent with real world data), that this decline in variance over longer time horizons will show up in historical backwards-looking stock market data.

However, Pastor and Stambaugh point out that an investor making a decision in 2024 is not on the same footing as an investor who is looking backwards at whatever actually ends up happening by, say, 2054. The investor in 2024 only has the current data available in 2024 and not the true values of any of the parameters described above or any of the actual valuation ratios (and hence, in this kind of model, actual expected returns) in each of the years between 2024 and 2053. So, the question for the investor making a decision in 2024 is not what the "true" long-term variance is in 10-, 20-, or 30-year returns (based on the true values of all of the relevant statistical parameters), but what is the "predictive" variance based on the investor's knowledge in 2024 (based on the data available today to estimate those parameters).

In particular, the fact that expected returns are "mean reverting" means that there is a degree of uncertainty about what future expected returns will be for any given future year because the expected return of stocks in, say, 2050, depends on what valuations end up doing between now and 2050. Pastor and Stambaugh show that, under a relatively broad set of assumptions, the positive contributions to long-term "predictive" variance from this uncertainty about future expected returns (and uncertainty about other "true" values of parameters) more than offsets the negative contribution to long-term variance derived from mean reversion. So an investor sitting here, today in 2024, and only able to look at information that is observable in 2024, actually has a better idea of what the CAGR of the stock market between 2024 and, say, 2034 will be than what the CAGR between 2024 and 2054 will be. This is still true despite the fact that, under this mean-reverting model, when an investor in 2124 looks backwards they will observe higher actual variance in 10-year returns than in 30-year returns.

All of this means that, if you believe in this kind of mean reverting model, an investor today that is deciding whether to buy TIPS maturing 2/15/54 vs. 2/15/44 will eliminate more uncertainty by buying the 30-year TIPS than the 20-year TIPS and so should be willing to accept a greater opportunity cost (and a lower yield) for the 30-year TIPS than the 20-year TIPS, all else equal.
Building TIPS ladder for all residual needs and some wants after SS, pension, and paid-off house. Other wants from 5% constant percentage from Risk Portfolio (80/20 AA w/ 80% global + 20% US-tilt)
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by IDpilot »

CraigTester wrote: Tue Jun 11, 2024 2:10 pm
IDpilot wrote: Tue Jun 11, 2024 1:13 pm
CraigTester wrote: Tue Jun 11, 2024 11:24 am
Kevin M wrote: Tue Jun 11, 2024 9:26 am
HootingSloth wrote: Tue Jun 11, 2024 8:42 am

Are you familiar with the work of Pastor and Stambaugh in Are Stocks Really Less Volatile in the Long Run?

This paper looks very carefully at the question of whether the range of investment outcomes over long time horizons is more or less uncertain than the range over shorter horizons, based on existing data
It concludes that stocks are substantially more volatile over long horizons, from an investor's perspective. There is a reduction in uncertainty over long horizons that is attributable to "mean reversion" of returns. However, this reduction is more than offset by the growing uncertainty over long horizons that results from unknown basic parameters (e.g., uncertainty about future expected returns).

In sum, if you pay close attention to the data, you would see that the answer to your question (at what yield should I invest in TIPS at various time horizons?) should actually decline as the length of the horizon increases. Of course, the exact numbers for break even should differ from investor to investor because their circumstances and goals differ. But of 20 year TIPS are good for you now, than 30 year TIPS should be even better if you pay close enough attention.
Already linked to this paper earlier in the thread, and recommended that everyone who belives what Craig believes should read it.

Let me lay out several premises, and see if we can find the point of disconnect, before we dive into all the greek letters.

Premises

1) Bogle's "Equation" is valid: Stock returns = Starting Dividend Yield + Earnings Growth rate + Percentage change (annualized) in the P/E multiple.

2) Per Shiller's online data, while certainly lumpy, on average, (Earnings + Dividends) have consistently grown over the last 100+ years.

3) P/E multiples have had wild swings over the last 100+ years, but "ultimately" net to a zero long-term contribution to returns.

Let me stop here, for a moment... Do you agree with everything so far...?
A couple of clarifications.

1) The equation is Predicted 10-Year Return (expressed as an annual percentage) = Initial dividend yield + Predicted 10-year annual earnings growth + Annual change in P/E to bring it back to a terminal P/E

2) The second term in the equation is Earnings Growth Rate which is certainly not Earnings + Dividends. It is (earnings at time two - earnings at time 1)/ earnings a time 1 where the earnings values are picked at the appropriate time.

Here's a quick look at the annual real earnings growth rates by year

Image

The growth rate of real earnings looks like it is 0.07%/year but that goes to zero if you remove the 333% for 2009.

https://alphaarchitect.com/wp-content/u ... -Model.pdf
Not sure why you provided this link.

Your link does provide this;

Expected returns (nominal, annualized over the next 10 years) = Starting Dividend Yield + Earnings Growth rate + Percentage change (annualized) in
the P/E multiple.


Which does point out that this equation provides an expected return over ten years and that it is a nominal return, not a real return. Although it could be a real return if you used the real values for input.
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by CraigTester »

HootingSloth wrote: Tue Jun 11, 2024 3:19 pm
CraigTester wrote: Tue Jun 11, 2024 11:24 am
Kevin M wrote: Tue Jun 11, 2024 9:26 am
HootingSloth wrote: Tue Jun 11, 2024 8:42 am
CraigTester wrote: Tue Jun 11, 2024 8:27 am Worst case stock returns improve with duration, so as you say, where do you draw the line...?

At 30 years, worst case is 3%; at 1 year worst case is a 50%-type crash.

So far I've limited my duration to 20 years, as this is the inflection point where worst case = break-even.

So what is the minimum TIPS YTM that would motivate us to extend to 21 years, 25, 30, 35.....?

This really is getting to the question of the thread...
Are you familiar with the work of Pastor and Stambaugh in Are Stocks Really Less Volatile in the Long Run?

This paper looks very carefully at the question of whether the range of investment outcomes over long time horizons is more or less uncertain than the range over shorter horizons, based on existing data
It concludes that stocks are substantially more volatile over long horizons, from an investor's perspective. There is a reduction in uncertainty over long horizons that is attributable to "mean reversion" of returns. However, this reduction is more than offset by the growing uncertainty over long horizons that results from unknown basic parameters (e.g., uncertainty about future expected returns).

In sum, if you pay close attention to the data, you would see that the answer to your question (at what yield should I invest in TIPS at various time horizons?) should actually decline as the length of the horizon increases. Of course, the exact numbers for break even should differ from investor to investor because their circumstances and goals differ. But of 20 year TIPS are good for you now, than 30 year TIPS should be even better if you pay close enough attention.
Already linked to this paper earlier in the thread, and recommended that everyone who belives what Craig believes should read it.

Let me lay out several premises, and see if we can find the point of disconnect, before we dive into all the greek letters.

Premises

1) Bogle's "Equation" is valid: Stock returns = Starting Dividend Yield + Earnings Growth rate + Percentage change (annualized) in the P/E multiple.

2) Per Shiller's online data, while certainly lumpy, on average, (Earnings + Dividends) have consistently grown over the last 100+ years.

3) P/E multiples have had wild swings over the last 100+ years, but "ultimately" net to a zero long-term contribution to returns.

Let me stop here, for a moment... Do you agree with everything so far...?
I don't really agree with premise (3) personally, but these kinds of premises, although intentionally vaguely stated, generally are consistent with the analysis in Pastor and Stambaugh (although their framework is both much more general and much more mathematically precise). I will try to translate what they are saying into this context, in case it is of interest to anyone.

One simple model of stock market returns would be to say that each year of stock market returns just pulls from an identical random distribution of returns with a fixed expected value and fixed variance. Under this kind of simple model, the variance over all time horizons is constant, and so you generally would expect an investor to demand the same TIPS yield for different durations when comparing TIPS to stocks over different horizons, all else equal.

When we say something like P/E multiples both have wild swings and yet "ultimately" net to a zero in the long run, we are talking about a kind of "mean reversion" in stock returns. (Note that over the last 153 years in the U.S., P/E multiple expansion has contributed about 3.5x to the value of the market, or about 0.8% per year annualized, so we haven't really reached the long run in this sense between 1871 and today). Instead of taking the view that the expected return at any time is a constant and that the distribution of future returns are identically distributed, as in the simpler model above, we believe that whenever returns in year t are higher than expected, expected returns in subsequent years are diminished in order to offset this positive "shock" and return to some sort of ultra long-term point of stability in valuations. Similarly, if there is a negative "shock" of below expected returns in year t, then expected returns in future years will increase to eventually offset the shock.

If you build a toy model of this kind and, crucially, assume that there are fixed and knowable parameters driving the mean reversion, e.g. assume there is a fixed and knowable "true" expected return for stocks in 2024, "true" value towards which valuations are supposed to revert, knowable time scale over which this reversion occurs, etc.), then you can show that the "true" long-term variance of stock returns does indeed decline over longer time horizons. In fact, you will predict (consistent with real world data), that this decline in variance over longer time horizons will show up in historical backwards-looking stock market data.

However, Pastor and Stambaugh point out that an investor making a decision in 2024 is not on the same footing as an investor who is looking backwards at whatever actually ends up happening by, say, 2054. The investor in 2024 only has the current data available in 2024 and not the true values of any of the parameters described above or any of the actual valuation ratios (and hence, in this kind of model, actual expected returns) in each of the years between 2024 and 2053. So, the question for the investor making a decision in 2024 is not what the "true" long-term variance is in 10-, 20-, or 30-year returns (based on the true values of all of the relevant statistical parameters), but what is the "predictive" variance based on the investor's knowledge in 2024 (based on the data available today to estimate those parameters).

In particular, the fact that expected returns are "mean reverting" means that there is a degree of uncertainty about what future expected returns will be for any given future year because the expected return of stocks in, say, 2050, depends on what valuations end up doing between now and 2050. Pastor and Stambaugh show that, under a relatively broad set of assumptions, the positive contributions to long-term "predictive" variance from this uncertainty about future expected returns (and uncertainty about other "true" values of parameters) more than offsets the negative contribution to long-term variance derived from mean reversion. So an investor sitting here, today in 2024, and only able to look at information that is observable in 2024, actually has a better idea of what the CAGR of the stock market between 2024 and, say, 2034 will be than what the CAGR between 2024 and 2054 will be. This is still true despite the fact that, under this mean-reverting model, when an investor in 2124 looks backwards they will observe higher actual variance in 10-year returns than in 30-year returns.

All of this means that, if you believe in this kind of mean reverting model, an investor today that is deciding whether to buy TIPS maturing 2/15/54 vs. 2/15/44 will eliminate more uncertainty by buying the 30-year TIPS than the 20-year TIPS and so should be willing to accept a greater opportunity cost (and a lower yield) for the 30-year TIPS than the 20-year TIPS, all else equal.
I appreciate that detailed explanation.

Restating what you said, As you progress through time from say 2024 to 2054, more data is revealed to inform the "fate" of a 2054 stock investment.

And this new information along the way can in turn increase volatility in what Bogle referred to as the "speculative component" aka P/E.

And this is what your authors refer to as changing conditional variability.

But with all due respect, from the perspective of a 2024 buy-n-hold stock investor that, very importantly, will NOT be "rebalancing" based on this evolving change in speculative component...., so what?

The intended target of your paper is someone considering a product like a target data fund, which "does" rebalance along the way as a consequence of changing "P/E".

Your paper has no impact on my proposal which is to simply buy a stock index in 2024 and see what you get by 2054. No Rebalancing!

So over a 30 year span of time, Earnings growth will be the primary determinant of the 2054 value of my investment, Not P/E.

And unless you believe that Earnings will discontinue their 100+ year history of growth, the value of my 2054 investment will be (much) higher.

And BTW, at least so far anyway, the worst case CAGR over that 30 year period will very likely be about 3% real (per McQ's rolling returns chart) with an expected CAGR of about 6% real.

So full circle to the question of the thread, why would anyone buy a 30 year TIPS at 2.2%...?

Unless they simply can't stand volatility (which 30-year TIPS are prone to as well)
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by km91 »

CraigTester wrote: Tue Jun 11, 2024 10:29 pm
So full circle to the question of the thread, why would anyone buy a 30 year TIPS at 2.2%...?
This is a bit like yogi berra's "nobody goes there anymore, it's too crowded." If there's no reason to buy a 30yr TIPS, why is the market pricing them so highly / yields so low
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by CraigTester »

km91 wrote: Tue Jun 11, 2024 11:14 pm
CraigTester wrote: Tue Jun 11, 2024 10:29 pm
So full circle to the question of the thread, why would anyone buy a 30 year TIPS at 2.2%...?
This is a bit like yogi berra's "nobody goes there anymore, it's too crowded." If there's no reason to buy a 30yr TIPS, why is the market pricing them so highly / yields so low
4 pages into this thread, I still don't know the answer.

Maybe insurance companies, etc... required by their corporate charters...?

Or maybe retail investors for reasons stated herein....
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by watchnerd »

km91 wrote: Tue Jun 11, 2024 11:14 pm
CraigTester wrote: Tue Jun 11, 2024 10:29 pm
So full circle to the question of the thread, why would anyone buy a 30 year TIPS at 2.2%...?
This is a bit like yogi berra's "nobody goes there anymore, it's too crowded." If there's no reason to buy a 30yr TIPS, why is the market pricing them so highly / yields so low
Because some people want a guaranteed outcome that's "good enough".

Stocks don't given a guaranteed outcome.

It's a pretty simple concept.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by watchnerd »

CraigTester wrote: Tue Jun 11, 2024 11:24 pm
km91 wrote: Tue Jun 11, 2024 11:14 pm
CraigTester wrote: Tue Jun 11, 2024 10:29 pm
So full circle to the question of the thread, why would anyone buy a 30 year TIPS at 2.2%...?
This is a bit like yogi berra's "nobody goes there anymore, it's too crowded." If there's no reason to buy a 30yr TIPS, why is the market pricing them so highly / yields so low
4 pages into this thread, I still don't know the answer.

Maybe insurance companies, etc... required by their corporate charters...?

Or maybe retail investors for reasons stated herein....
You have retail BHers on this forum who have bought 30 year TIPS.

Bill Bernstein also did.

Their reasoning is pretty straight forward -- the want a guaranteed inflation-adjusted income stream.

Is that hard to understand?
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by CraigTester »

watchnerd wrote: Tue Jun 11, 2024 11:46 pm
CraigTester wrote: Tue Jun 11, 2024 11:24 pm
km91 wrote: Tue Jun 11, 2024 11:14 pm
CraigTester wrote: Tue Jun 11, 2024 10:29 pm
So full circle to the question of the thread, why would anyone buy a 30 year TIPS at 2.2%...?
This is a bit like yogi berra's "nobody goes there anymore, it's too crowded." If there's no reason to buy a 30yr TIPS, why is the market pricing them so highly / yields so low
4 pages into this thread, I still don't know the answer.

Maybe insurance companies, etc... required by their corporate charters...?

Or maybe retail investors for reasons stated herein....
You have retail BHers on this forum who have bought 30 year TIPS.

Bill Bernstein also did.

Their reasoning is pretty straight forward -- the want a guaranteed inflation-adjusted income stream.

Is that hard to understand?
What YTM did Bill Bernstein buy his 30 year Tips at…?

How do you know this …., did he provide his reasoning somewhere in this forum?
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by watchnerd »

CraigTester wrote: Tue Jun 11, 2024 11:58 pm
watchnerd wrote: Tue Jun 11, 2024 11:46 pm
CraigTester wrote: Tue Jun 11, 2024 11:24 pm
km91 wrote: Tue Jun 11, 2024 11:14 pm
CraigTester wrote: Tue Jun 11, 2024 10:29 pm
So full circle to the question of the thread, why would anyone buy a 30 year TIPS at 2.2%...?
This is a bit like yogi berra's "nobody goes there anymore, it's too crowded." If there's no reason to buy a 30yr TIPS, why is the market pricing them so highly / yields so low
4 pages into this thread, I still don't know the answer.

Maybe insurance companies, etc... required by their corporate charters...?

Or maybe retail investors for reasons stated herein....
You have retail BHers on this forum who have bought 30 year TIPS.

Bill Bernstein also did.

Their reasoning is pretty straight forward -- the want a guaranteed inflation-adjusted income stream.

Is that hard to understand?
What YTM did Bill Bernstein buy his 30 year Tips at…?

How do you know this …., did he provide his reasoning somewhere in this forum?
I know it because I read what he wrote about it:

https://www.advisorperspectives.com/art ... at-age-104

Based on the timing of the article, I'm going to guess he got about 1.4% real.
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by watchnerd »

As Bernstein notes, 30 YR Treasuries are pretty dang volatile.

So the idea that people are buying 30 YR Treasuries because they're afraid of short term volatility of stocks doesn't seem to match asset behavior.

From the perspective of short-term risk, this security is not for the faint of heart; several days during the past year saw daily price changes in the longest TIPS of 4%. Furthermore, in bad states of the world, TIPS are notoriously illiquid; had the 30-year bond been available in 2008, it would have suffered a peak-to-trough price fall of nearly a third, as the yield, as judged by the extant 20-year bond, would have peaked at about 3.3%. (And, while in retrospect, long TIPS were a mouth-watering opportunity, at that moment there were far better bargains in equities.)

It’s a near certainty that my brand spanking new bond will suffer similar gyrations on the way to its maturity, at which point it will have become riskless in terms of real consumption, which is all any rational investor should care about.

A TIPS is risky in the short term and riskless in the long run, which is precisely the opposite of, and complementary to, a T-bill, which is riskless in the short term but, because of reinvestment rate volatility, risky in the long run

If they were really afraid of short term volatility, they wouldn't buy long bonds, they'd buy T-bills.
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by CraigTester »

watchnerd wrote: Wed Jun 12, 2024 12:17 am As Bernstein notes, 30 YR Treasuries are pretty dang volatile.

So the idea that people are buying 30 YR Treasuries because they're afraid of short term volatility of stocks doesn't seem to match asset behavior.

From the perspective of short-term risk, this security is not for the faint of heart; several days during the past year saw daily price changes in the longest TIPS of 4%. Furthermore, in bad states of the world, TIPS are notoriously illiquid; had the 30-year bond been available in 2008, it would have suffered a peak-to-trough price fall of nearly a third, as the yield, as judged by the extant 20-year bond, would have peaked at about 3.3%. (And, while in retrospect, long TIPS were a mouth-watering opportunity, at that moment there were far better bargains in equities.)

It’s a near certainty that my brand spanking new bond will suffer similar gyrations on the way to its maturity, at which point it will have become riskless in terms of real consumption, which is all any rational investor should care about.

A TIPS is risky in the short term and riskless in the long run, which is precisely the opposite of, and complementary to, a T-bill, which is riskless in the short term but, because of reinvestment rate volatility, risky in the long run

If they were really afraid of short term volatility, they wouldn't buy long bonds, they'd buy T-bills.
Sounds like he might have bought the “small amount” of the 30 yr TIPS as kind of a “something to write about”

But interesting to see him recognizing how they compare to stocks at different times:

“…long TIPS were a mouth-watering opportunity, at that moment there were far better bargains in equities.)”
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by JBTX »

CraigTester wrote: Sun Jun 09, 2024 10:20 pm Nice framework JBTX..., and thanks for sharing that you have already filled up a 30 yr TIPS ladder at 2.2-2.5%, so very interesting to see how you arrived at that decision...

Several thoughts:

I carefully (e.g. didn't want to spark an Int'l debate :happy) mentioned earlier that I would "only" use a Global stock Index as my stock choice for a 20+ year ladder rung, for some of the reasons you eloquently explained.

Wish we could do a similar Return/CAPE analysis, for Global, but under the cloak of "valuations matter", it would arguably help level things up over a 20 year timeframe starting at today's historically low int'l Valuations and Currency.
Given your data was using US returns and CAPES I stuck with that. Ex US CAPES are probably more complicated as there are a lot more outlier events in them (wars, Japan, etc). But even now, I suspect a global CAPE10 is above average given the US is 60% market weight, so the answers won’t be dramatically different.
But swimming to the top, anyone strongly believing US stock returns will be 0-3% over the next 20 years, should think very hard about why they own "any" US stocks at this moment... which quickly gets beyond the scope of this thread...
I don’t have strongly held beliefs about what the future may hold. I generally hedge my bets. Note 0-3 or 0-4% is real, not nominal. In my last detailed planning I had stocks at 3% real scenario and 4% real scenario, and bonds at 1% real and 2% real.

So moving on to your 2nd way to look at this:

An important caveat to ear-marking say, VT for your 20+ year ladder rungs is that you need to commit to treat your stock rungs just as you would a 20+ yr TIPS rung... IOW, "no touching until 'maturity'! " .... (unless of course Mr. market smiles on you at some point along the way)


One question, would you have bought the 20+ year TIPS rungs if US CAPE was at say, 15 right now...?

To reframe your original question

Since 100% stocks in retirement will beat a target date fund allocation most of the time over a 30+ year retirement, then why doesn’t everybody have 100% stocks until the day they die?

That seems like an obviously ridiculous question, but it isn’t really different than “since stocks almost always beat TIPS over 20 years then why not keep all 20+ money in stocks, for all 20+ years?

To your last question - I bought the 17~30 year TIPS rungs as somewhat of a market timing - given higher real yields, I wanted to lock in those rates, and the lock in effect is larger for longer duration TIPS. Years before that currently I have some TIPS etfs that would fill some of the closer years. My TIPS ladder is an ongoing work in progress.

So would I have done the same thing if stocks were at CAPE10 15? Probably yes

1. I presented 2 different arguments, of which to me both have validity - so even if market timing is ignored, I’m still going to want longer term diversity of bonds as well as stocks. It’s one thing to be 100% stocks in the accumulation phase - it’s another to be 100% for far years out in decumulation.

2. I don’t have strong confidence that the past data sets will represent the future.

3. Realistically if cape10 is 15, that means that stocks went through a really rough patch. At that point the sentiment of US stocks would probably be similar to the sentiment of exUS now. While I try to avoid going in all in with the crowd, I’m not so contrarian I’m going to buck the trend and completely go against it (just like I’m not 100% ex US in stocks).


Having said all of this if real rates dropped a lot, and stocks dropped, there is a greater than zero percent chance I may effective rebalance out of the ladder and back into stocks. I’m not a good Boglehead in that respect. I don’t have a written IPS, and am a bit west of the pants, although in actuality I never make big moves one way or the other.
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by watchnerd »

CraigTester wrote: Wed Jun 12, 2024 12:29 am
watchnerd wrote: Wed Jun 12, 2024 12:17 am As Bernstein notes, 30 YR Treasuries are pretty dang volatile.

So the idea that people are buying 30 YR Treasuries because they're afraid of short term volatility of stocks doesn't seem to match asset behavior.

From the perspective of short-term risk, this security is not for the faint of heart; several days during the past year saw daily price changes in the longest TIPS of 4%. Furthermore, in bad states of the world, TIPS are notoriously illiquid; had the 30-year bond been available in 2008, it would have suffered a peak-to-trough price fall of nearly a third, as the yield, as judged by the extant 20-year bond, would have peaked at about 3.3%. (And, while in retrospect, long TIPS were a mouth-watering opportunity, at that moment there were far better bargains in equities.)

It’s a near certainty that my brand spanking new bond will suffer similar gyrations on the way to its maturity, at which point it will have become riskless in terms of real consumption, which is all any rational investor should care about.

A TIPS is risky in the short term and riskless in the long run, which is precisely the opposite of, and complementary to, a T-bill, which is riskless in the short term but, because of reinvestment rate volatility, risky in the long run

If they were really afraid of short term volatility, they wouldn't buy long bonds, they'd buy T-bills.
Sounds like he might have bought the “small amount” of the 30 yr TIPS as kind of a “something to write about”

But interesting to see him recognizing how they compare to stocks at different times:

“…long TIPS were a mouth-watering opportunity, at that moment there were far better bargains in equities.)”

Or maybe he bought it for the reasons he says in the article?
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Topic Author
CraigTester
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Joined: Wed Aug 08, 2018 6:34 am

Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by CraigTester »

JBTX wrote: Wed Jun 12, 2024 12:31 am
CraigTester wrote: Sun Jun 09, 2024 10:20 pm Nice framework JBTX..., and thanks for sharing that you have already filled up a 30 yr TIPS ladder at 2.2-2.5%, so very interesting to see how you arrived at that decision...

Several thoughts:

I carefully (e.g. didn't want to spark an Int'l debate :happy) mentioned earlier that I would "only" use a Global stock Index as my stock choice for a 20+ year ladder rung, for some of the reasons you eloquently explained.

Wish we could do a similar Return/CAPE analysis, for Global, but under the cloak of "valuations matter", it would arguably help level things up over a 20 year timeframe starting at today's historically low int'l Valuations and Currency.
Given your data was using US returns and CAPES I stuck with that. Ex US CAPES are probably more complicated as there are a lot more outlier events in them (wars, Japan, etc). But even now, I suspect a global CAPE10 is above average given the US is 60% market weight, so the answers won’t be dramatically different.
But swimming to the top, anyone strongly believing US stock returns will be 0-3% over the next 20 years, should think very hard about why they own "any" US stocks at this moment... which quickly gets beyond the scope of this thread...
I don’t have strongly held beliefs about what the future may hold. I generally hedge my bets. Note 0-3 or 0-4% is real, not nominal. In my last detailed planning I had stocks at 3% real scenario and 4% real scenario, and bonds at 1% real and 2% real.

So moving on to your 2nd way to look at this:

An important caveat to ear-marking say, VT for your 20+ year ladder rungs is that you need to commit to treat your stock rungs just as you would a 20+ yr TIPS rung... IOW, "no touching until 'maturity'! " .... (unless of course Mr. market smiles on you at some point along the way)


One question, would you have bought the 20+ year TIPS rungs if US CAPE was at say, 15 right now...?

To reframe your original question

Since 100% stocks in retirement will beat a target date fund allocation most of the time over a 30+ year retirement, then why doesn’t everybody have 100% stocks until the day they die?

That seems like an obviously ridiculous question, but it isn’t really different than “since stocks almost always beat TIPS over 20 years then why not keep all 20+ money in stocks, for all 20+ years?

To your last question - I bought the 17~30 year TIPS rungs as somewhat of a market timing - given higher real yields, I wanted to lock in those rates, and the lock in effect is larger for longer duration TIPS. Years before that currently I have some TIPS etfs that would fill some of the closer years. My TIPS ladder is an ongoing work in progress.

So would I have done the same thing if stocks were at CAPE10 15? Probably yes

1. I presented 2 different arguments, of which to me both have validity - so even if market timing is ignored, I’m still going to want longer term diversity of bonds as well as stocks. It’s one thing to be 100% stocks in the accumulation phase - it’s another to be 100% for far years out in decumulation.

2. I don’t have strong confidence that the past data sets will represent the future.

3. Realistically if cape10 is 15, that means that stocks went through a really rough patch. At that point the sentiment of US stocks would probably be similar to the sentiment of exUS now. While I try to avoid going in all in with the crowd, I’m not so contrarian I’m going to buck the trend and completely go against it (just like I’m not 100% ex US in stocks).


Having said all of this if real rates dropped a lot, and stocks dropped, there is a greater than zero percent chance I may effective rebalance out of the ladder and back into stocks. I’m not a good Boglehead in that respect. I don’t have a written IPS, and am a bit west of the pants, although in actuality I never make big moves one way or the other.
Since u mentioned rebalancing, to make sure you’re aware, a poster named Doc wrote fairly extensively about how illiquid TIPS can become at precisely the time you might want to try to sell them to rebalance (e.g. 2008). Because of this, as Bernstein says, keep a goodly amount of Tbills on hand.

You mentioned Int’l valuations, they are currently below historical norms. The OP of the US vs Intl thread has all the details.
JBTX
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by JBTX »

CraigTester wrote: Wed Jun 12, 2024 12:51 am
JBTX wrote: Wed Jun 12, 2024 12:31 am
CraigTester wrote: Sun Jun 09, 2024 10:20 pm Nice framework JBTX..., and thanks for sharing that you have already filled up a 30 yr TIPS ladder at 2.2-2.5%, so very interesting to see how you arrived at that decision...

Several thoughts:

I carefully (e.g. didn't want to spark an Int'l debate :happy) mentioned earlier that I would "only" use a Global stock Index as my stock choice for a 20+ year ladder rung, for some of the reasons you eloquently explained.

Wish we could do a similar Return/CAPE analysis, for Global, but under the cloak of "valuations matter", it would arguably help level things up over a 20 year timeframe starting at today's historically low int'l Valuations and Currency.
Given your data was using US returns and CAPES I stuck with that. Ex US CAPES are probably more complicated as there are a lot more outlier events in them (wars, Japan, etc). But even now, I suspect a global CAPE10 is above average given the US is 60% market weight, so the answers won’t be dramatically different.
But swimming to the top, anyone strongly believing US stock returns will be 0-3% over the next 20 years, should think very hard about why they own "any" US stocks at this moment... which quickly gets beyond the scope of this thread...
I don’t have strongly held beliefs about what the future may hold. I generally hedge my bets. Note 0-3 or 0-4% is real, not nominal. In my last detailed planning I had stocks at 3% real scenario and 4% real scenario, and bonds at 1% real and 2% real.

So moving on to your 2nd way to look at this:

An important caveat to ear-marking say, VT for your 20+ year ladder rungs is that you need to commit to treat your stock rungs just as you would a 20+ yr TIPS rung... IOW, "no touching until 'maturity'! " .... (unless of course Mr. market smiles on you at some point along the way)


One question, would you have bought the 20+ year TIPS rungs if US CAPE was at say, 15 right now...?

To reframe your original question

Since 100% stocks in retirement will beat a target date fund allocation most of the time over a 30+ year retirement, then why doesn’t everybody have 100% stocks until the day they die?

That seems like an obviously ridiculous question, but it isn’t really different than “since stocks almost always beat TIPS over 20 years then why not keep all 20+ money in stocks, for all 20+ years?

To your last question - I bought the 17~30 year TIPS rungs as somewhat of a market timing - given higher real yields, I wanted to lock in those rates, and the lock in effect is larger for longer duration TIPS. Years before that currently I have some TIPS etfs that would fill some of the closer years. My TIPS ladder is an ongoing work in progress.

So would I have done the same thing if stocks were at CAPE10 15? Probably yes

1. I presented 2 different arguments, of which to me both have validity - so even if market timing is ignored, I’m still going to want longer term diversity of bonds as well as stocks. It’s one thing to be 100% stocks in the accumulation phase - it’s another to be 100% for far years out in decumulation.

2. I don’t have strong confidence that the past data sets will represent the future.

3. Realistically if cape10 is 15, that means that stocks went through a really rough patch. At that point the sentiment of US stocks would probably be similar to the sentiment of exUS now. While I try to avoid going in all in with the crowd, I’m not so contrarian I’m going to buck the trend and completely go against it (just like I’m not 100% ex US in stocks).


Having said all of this if real rates dropped a lot, and stocks dropped, there is a greater than zero percent chance I may effective rebalance out of the ladder and back into stocks. I’m not a good Boglehead in that respect. I don’t have a written IPS, and am a bit west of the pants, although in actuality I never make big moves one way or the other.
Since u mentioned rebalancing, to make sure you’re aware, a poster named Doc wrote fairly extensively about how illiquid TIPS can become at precisely the time you might want to try to sell them to rebalance (e.g. 2008). Because of this, as Bernstein says, keep a goodly amount of Tbills on hand.

You mentioned Int’l valuations, they are currently below historical norms. The OP of the US vs Intl thread has all the details.
I am aware of the TIPS volatility. The purpose of a TIPS ladder is not to plan to rebalance. What I was saying however that if real rates dropped, meaning TIPS went up, and stocks were down a lot, I may consider some strategic rebalancing.

One risk in what I’ve constructed is if real rates rise, a lot, and that hurts TIPS and stocks.
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by HootingSloth »

The intended target of your paper is someone considering a product like a target data fund, which "does" rebalance along the way as a consequence of changing "P/E".

Your paper has no impact on my proposal which is to simply buy a stock index in 2024 and see what you get by 2054. No Rebalancing!
I know that there is no circumstance in which the poster will change their mind, so I will not continue arguing the point, but for the sake of anyone else reading this, I would just like to point out that it is nearly impossible to read this comment as someone in good faith searching for the right answer. It is simply factually incorrect as would be clear to anyone who spent a few minutes reading and trying to understand Pastor and Stambaugh. The paper is discussing the performance of buying and holding stocks and does not describe the performance of rebalancing a portfolio of stocks and bonds. Some ancillary applications to target date funds are discussed in Part VIII of the paper, but only after buy and hold investments in stocks are discussed in Parts I through VII.
Building TIPS ladder for all residual needs and some wants after SS, pension, and paid-off house. Other wants from 5% constant percentage from Risk Portfolio (80/20 AA w/ 80% global + 20% US-tilt)
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watchnerd
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by watchnerd »

CraigTester wrote: Wed Jun 12, 2024 12:51 am
JBTX wrote: Wed Jun 12, 2024 12:31 am
CraigTester wrote: Sun Jun 09, 2024 10:20 pm Nice framework JBTX..., and thanks for sharing that you have already filled up a 30 yr TIPS ladder at 2.2-2.5%, so very interesting to see how you arrived at that decision...

Several thoughts:

I carefully (e.g. didn't want to spark an Int'l debate :happy) mentioned earlier that I would "only" use a Global stock Index as my stock choice for a 20+ year ladder rung, for some of the reasons you eloquently explained.

Wish we could do a similar Return/CAPE analysis, for Global, but under the cloak of "valuations matter", it would arguably help level things up over a 20 year timeframe starting at today's historically low int'l Valuations and Currency.
Given your data was using US returns and CAPES I stuck with that. Ex US CAPES are probably more complicated as there are a lot more outlier events in them (wars, Japan, etc). But even now, I suspect a global CAPE10 is above average given the US is 60% market weight, so the answers won’t be dramatically different.
But swimming to the top, anyone strongly believing US stock returns will be 0-3% over the next 20 years, should think very hard about why they own "any" US stocks at this moment... which quickly gets beyond the scope of this thread...
I don’t have strongly held beliefs about what the future may hold. I generally hedge my bets. Note 0-3 or 0-4% is real, not nominal. In my last detailed planning I had stocks at 3% real scenario and 4% real scenario, and bonds at 1% real and 2% real.

So moving on to your 2nd way to look at this:

An important caveat to ear-marking say, VT for your 20+ year ladder rungs is that you need to commit to treat your stock rungs just as you would a 20+ yr TIPS rung... IOW, "no touching until 'maturity'! " .... (unless of course Mr. market smiles on you at some point along the way)


One question, would you have bought the 20+ year TIPS rungs if US CAPE was at say, 15 right now...?

To reframe your original question

Since 100% stocks in retirement will beat a target date fund allocation most of the time over a 30+ year retirement, then why doesn’t everybody have 100% stocks until the day they die?

That seems like an obviously ridiculous question, but it isn’t really different than “since stocks almost always beat TIPS over 20 years then why not keep all 20+ money in stocks, for all 20+ years?

To your last question - I bought the 17~30 year TIPS rungs as somewhat of a market timing - given higher real yields, I wanted to lock in those rates, and the lock in effect is larger for longer duration TIPS. Years before that currently I have some TIPS etfs that would fill some of the closer years. My TIPS ladder is an ongoing work in progress.

So would I have done the same thing if stocks were at CAPE10 15? Probably yes

1. I presented 2 different arguments, of which to me both have validity - so even if market timing is ignored, I’m still going to want longer term diversity of bonds as well as stocks. It’s one thing to be 100% stocks in the accumulation phase - it’s another to be 100% for far years out in decumulation.

2. I don’t have strong confidence that the past data sets will represent the future.

3. Realistically if cape10 is 15, that means that stocks went through a really rough patch. At that point the sentiment of US stocks would probably be similar to the sentiment of exUS now. While I try to avoid going in all in with the crowd, I’m not so contrarian I’m going to buck the trend and completely go against it (just like I’m not 100% ex US in stocks).


Having said all of this if real rates dropped a lot, and stocks dropped, there is a greater than zero percent chance I may effective rebalance out of the ladder and back into stocks. I’m not a good Boglehead in that respect. I don’t have a written IPS, and am a bit west of the pants, although in actuality I never make big moves one way or the other.
Since u mentioned rebalancing, to make sure you’re aware, a poster named Doc wrote fairly extensively about how illiquid TIPS can become at precisely the time you might want to try to sell them to rebalance (e.g. 2008). Because of this, as Bernstein says, keep a goodly amount of Tbills on hand.

You mentioned Int’l valuations, they are currently below historical norms. The OP of the US vs Intl thread has all the details.
Why are you using a TIPS ladder for rebalancing?
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
IDpilot
Posts: 416
Joined: Sat Dec 05, 2020 7:13 am

Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by IDpilot »

HootingSloth wrote: Wed Jun 12, 2024 5:50 am
The intended target of your paper is someone considering a product like a target data fund, which "does" rebalance along the way as a consequence of changing "P/E".

Your paper has no impact on my proposal which is to simply buy a stock index in 2024 and see what you get by 2054. No Rebalancing!
I know that there is no circumstance in which the poster will change their mind, so I will not continue arguing the point, but for the sake of anyone else reading this, I would just like to point out that it is nearly impossible to read this comment as someone in good faith searching for the right answer. It is simply factually incorrect as would be clear to anyone who spent a few minutes reading and trying to understand Pastor and Stambaugh. The paper is discussing the performance of buying and holding stocks and does not describe the performance of rebalancing a portfolio of stocks and bonds. Some ancillary applications to target date funds are discussed in Part VIII of the paper, but only after buy and hold investments in stocks are discussed in Parts I through VII.
+1
Topic Author
CraigTester
Posts: 1743
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by CraigTester »

HootingSloth wrote: Wed Jun 12, 2024 5:50 am
The intended target of your paper is someone considering a product like a target data fund, which "does" rebalance along the way as a consequence of changing "P/E".

Your paper has no impact on my proposal which is to simply buy a stock index in 2024 and see what you get by 2054. No Rebalancing!
I know that there is no circumstance in which the poster will change their mind, so I will not continue arguing the point, but for the sake of anyone else reading this, I would just like to point out that it is nearly impossible to read this comment as someone in good faith searching for the right answer. It is simply factually incorrect as would be clear to anyone who spent a few minutes reading and trying to understand Pastor and Stambaugh. The paper is discussing the performance of buying and holding stocks and does not describe the performance of rebalancing a portfolio of stocks and bonds. Some ancillary applications to target date funds are discussed in Part VIII of the paper, but only after buy and hold investments in stocks are discussed in Parts I through VII.
You sound genuine in your belief that stocks in the long term have lower lows, than in the short term.

Yet this is not what we see in the historical data.

Long term stock returns are determined by the increased capacity to generate Earnings. Not P/E.

This is what drives the result we see in McQs rolling returns chart. (E.g. 20 year rolling returns reach a lower bound than 50 year returns)

However, if someone is following a rebalancing protocol where they are making buy and sell decisions based on new info along the way, (like a TDF), I won’t argue with you that someone’s “response” to this new data could increase volatility longer term.

PS. If you have a different interpretation, please first explain it to me like I’m a six year old. If you need 54 pages of Greek letters, my antenna is up.
abc132
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Re: Why (or at what YTM) does it make sense to buy a 20+ year TIPS...?

Post by abc132 »

avalpert1 wrote: Mon Jun 10, 2024 11:10 pm
abc132 wrote: Mon Jun 10, 2024 6:41 pm
BirdFood wrote: Mon Jun 10, 2024 5:35 pm
abc132 wrote: Mon Jun 10, 2024 5:30 pm My take was that we should never do either of these things for a low probability risk.

The reasons are explained earlier.
I'm not sure which low probability risk you're thinking of. This is not about inflation, which is the one you mentioned earlier. If the low probability risk is the risk of the stock market losing money or having a low return over twentyish years, then that would tend to argue against any bonds of long duration.
The chance that bonds outperform stocks over 20 years.
1) low probability
2) typically not worth insuring against
We are not 20 years removed from a period where bonds outperformed stocks for over 20 years...
Sure if you ignore all the gains from stocks before that period. It is similar to trying to justify not working because you would then spend more if you had income coming in. In each case the way you are comparing is so unfair that the result is saying the wrong thing.

We should be fine spending more if we have more income coming in.
We should be fine with a 20 year period for stocks if this was the result of good stock returns prior to this period.

Most of us work or live more than 20 years in our careers.
Locked