TIPS vs Total Bond Market?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
anncatchingup
Posts: 87
Joined: Sat Dec 11, 2010 3:33 pm

TIPS vs Total Bond Market?

Post by anncatchingup » Sat Jan 01, 2011 4:12 pm

I've been trying to follow the previous posting on TIPS, but I'm still confused. For a couple in their 60s due to retire in 3 to 4 years, with a 50/50 asset allocation, should we put part of our bond portion (tax deferred) in Vanguard TIPS fund or stick with the Total Bond Market Index fund? And why?

Thanks for your help.

User avatar
Taylor Larimore
Advisory Board
Posts: 27320
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: TIPS vs Total Bond Market?

Post by Taylor Larimore » Sat Jan 01, 2011 4:29 pm

Hi Ann:
anncatchingup wrote:I've been trying to follow the previous posting on TIPS, but I'm still confused. For a couple in their 60s due to retire in 3 to 4 years, with a 50/50 asset allocation, should we put part of our bond portion (tax deferred) in Vanguard TIPS fund or stick with the Total Bond Market Index fund? And why?

Thanks for your help.
Total Bond Market, by itself, is an excellent fund for the bond portion of your portfolio. Mr. Bogle recommends it.

I personally like to match TIPS with Total Bond Market for two primary reasons:

1. TIPS provide additional bond diversification without overlap.

2. TIPS provide inflation protection.

Pat and I have held a 50/50 ratio of Vanguard's Total Bond Market and Inflation Protected Securities for 10 years with happy results. Adding 25%-75% TIPS to the bond portion of your portfolio could be a worthwhile improvement. The funds do not overlap.

Happy New Year!
"Simplicity is the master key to financial success." -- Jack Bogle

livesoft
Posts: 62305
Joined: Thu Mar 01, 2007 8:00 pm

Post by livesoft » Sat Jan 01, 2011 4:36 pm

Since March 18, 2009 the funds VIPSX and VBMFX have returned about the same results. Although that is short-term, I think it helps show that it really doesn't matter what you do. So an allocation to VIPSX from 0% to 100% would be fine. Many folks around here just split the difference and go 50:50.

anncatchingup
Posts: 87
Joined: Sat Dec 11, 2010 3:33 pm

Post by anncatchingup » Sat Jan 01, 2011 5:04 pm

Thanks Taylor and livesoft.

I hope this isn't a really dumb question, but -- in retirement when we do have to take money out of these funds to live on, is there a strategy to which fund (VIPSX or VBMFX) we'd take it out of at any given point in time?

Thanks again. And best wishes in the New Year to you both.

Ann

User avatar
simplesimon
Posts: 3135
Joined: Mon Feb 25, 2008 8:53 pm
Location: Boston, MA

Post by simplesimon » Sat Jan 01, 2011 5:20 pm

anncatchingup wrote:Thanks Taylor and livesoft.

I hope this isn't a really dumb question, but -- in retirement when we do have to take money out of these funds to live on, is there a strategy to which fund (VIPSX or VBMFX) we'd take it out of at any given point in time?

Thanks again. And best wishes in the New Year to you both.

Ann
Withdraw according to your asset allocation as well. So if you have a 50/50 total bond/TIPS allocation, just take out 50/50 on your withdrawal, assuming they're at the same level at that time.

User avatar
#Cruncher
Posts: 2652
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Post by #Cruncher » Sat Jan 01, 2011 5:21 pm

livesoft wrote:Since March 18, 2009 the funds VIPSX and VBMFX have returned about the same results. Although that is short-term, I think it helps show that it really doesn't matter what you do.
I disagree. All this means is that it hasn't mattered during this period of time. The interest coupons for all nominal bonds (i.e., ones that aren't adjusted for inflation) include a component to protect you from expected inflation. TIPS provide this same protection via their inflation adjustment feature. But in addition they protect you from unexpected increases in inflation.

Currently the market expects inflation in the range of 2% per year. If you buy the Total Bond Market, which includes only nominal bonds, you're "protected" against inflation running at that rate. But only TIPS would protect you should inflation be higher than that. If inflation should be less than 2% then TIPS would perform worse than TBM. But since prices had risen less than expected, presumably you'd need less return from your investments to live on.

integrity
Posts: 394
Joined: Fri Mar 12, 2010 12:57 am

Post by integrity » Sun Jan 02, 2011 3:41 am

#Cruncher wrote:
livesoft wrote:Since March 18, 2009 the funds VIPSX and VBMFX have returned about the same results. Although that is short-term, I think it helps show that it really doesn't matter what you do.
I disagree. All this means is that it hasn't mattered during this period of time. The interest coupons for all nominal bonds (i.e., ones that aren't adjusted for inflation) include a component to protect you from expected inflation. TIPS provide this same protection via their inflation adjustment feature. But in addition they protect you from unexpected increases in inflation.

Currently the market expects inflation in the range of 2% per year. If you buy the Total Bond Market, which includes only nominal bonds, you're "protected" against inflation running at that rate. But only TIPS would protect you should inflation be higher than that. If inflation should be less than 2% then TIPS would perform worse than TBM. But since prices had risen less than expected, presumably you'd need less return from your investments to live on.
I guess that settles it. TIPS are the holy grail. Thanks!

BHChinook
Posts: 200
Joined: Mon Nov 26, 2007 12:44 pm
Location: East Texas

Post by BHChinook » Mon Jan 03, 2011 1:38 am

Oh my, the Holy Grail...

Larry Swedroe has (in the past) recommended a variable amount of TIPS, depending on their real yield. With real yields below 1.5%, he used to recommend zero TIPS.

There has been much discussion about this. In a sense, allowing a TIPS-% to vary is akin to varying AA based on market conditions; something Bogleheaders are loath to do.

But the question remains: Is 50% still reasonable at today's yields?
It's always easier to do nothing than to do something.

User avatar
Taylor Larimore
Advisory Board
Posts: 27320
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Stay-the-course is hard to do

Post by Taylor Larimore » Mon Jan 03, 2011 7:13 am

Hi BHChinook
"It's always easier to do nothing than to do something."
Consider changing your signature line. Many investors find it very difficult "to do nothing." :wink:
"Simplicity is the master key to financial success." -- Jack Bogle

BHChinook
Posts: 200
Joined: Mon Nov 26, 2007 12:44 pm
Location: East Texas

Newton's Law and Investors

Post by BHChinook » Mon Jan 03, 2011 9:46 am

Hi Taylor,

Sorry but I can't revoke Newton's 1st Law which goes something like "every body remains in a state of rest or uniform motion unless it is acted upon by an external unbalanced force."

For investors, the external forces include the words (both of tongue and pen) of pundits who make money by convincing others to "do this or do that" (especially today, the gold promoters on TV).

Although I've not heard it promoted as such, I believe N1L is also the basis for Scott Burns' well known "Couch Potato" method of investing and it's clearly the law that aids Bogleheaders in "staying the course."

It's what keeps me from "tweaking" my TIPS ratio every time word of a "Treasury bubble" fills the headlines.

And it's why I'm glad I heeded your advise some time ago to consider VTINX for the bulk of my IRA assets (OK, it only has a 30/70 TIPS to TBM ratio); I can do other things in my retirement besides constantly bumping my head against N1L.

I only asked the question about whether it is time to have a lower TIPS holding now (with low real yields) because I occasionally feel the need to challenge N1L.

I feel better now and I'm off to other things. In this case, the Christmas decorations have to come down...

Have a blessed New Year!
James
It's always easier to do nothing than to do something.

paulsiu
Posts: 1457
Joined: Sun Nov 16, 2008 7:46 pm

Post by paulsiu » Mon Jan 03, 2011 1:51 pm

Well, I am thinking of this in terms of scenarios. If there's deflation, intermediate provide better protection than TIPS or short term bonds.

If inflation increases though, which would be better TIPS or short term bonds?

Paul

P&C actuary
Posts: 113
Joined: Fri Jul 19, 2013 12:27 pm

Re: TIPS vs Total Bond Market?

Post by P&C actuary » Fri Jul 19, 2013 12:42 pm

The duration of VIPSX is 8 years. The duration of Total bond market VBMFX is 5.5 years. The yield to maturity of each is similiar at 2.2 and 2.3%.

With interest rates low and more likely to go up than down, does it make more sense to put money in VBMFX with the shorter duration? What else would you consider in a comparison?

The shorter term TIPS fund has duration of 2.4 years, but a yield to maturity of only 0.7%. VFSUX, the short term investment grade bond fund, has duration of 2.4 years and yield to maturity of 1.6%. For a shorter duration choice, VFSUX looks like the better choice to me.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: TIPS vs Total Bond Market?

Post by dbr » Sat Jul 20, 2013 8:43 am

You choose between TIPS and nominals depending on whether or not you want the property of inflation indexing. Having made that choice you choose duration to determine how much sensitivity to interest rate changes you want relative to available return. Shorter term TIPS ETFs are available.

User avatar
nedsaid
Posts: 10220
Joined: Fri Nov 23, 2012 12:33 pm

Re: TIPS vs Total Bond Market?

Post by nedsaid » Sat Jul 20, 2013 10:44 am

I have a healthy helping of TIPs in my portfolio but I am not sure about 50% of a bond portfolio. These darned things were really volatile during the last correction in the Bond Market down as much as 8-9%. I did some mild rebalancing and purchased more intermediate term bonds, TIPs, and Foreign Bonds. I want them for Inflation Protection, but am unsure about the appropriate percentage.
A fool and his money are good for business.

Investing is boring
Posts: 237
Joined: Tue Apr 09, 2013 11:55 am

Re: TIPS vs Total Bond Market?

Post by Investing is boring » Sat Jul 20, 2013 10:51 am

P&C actuary wrote:The duration of VIPSX is 8 years. The duration of Total bond market VBMFX is 5.5 years. The yield to maturity of each is similiar at 2.2 and 2.3%.

With interest rates low and more likely to go up than down, does it make more sense to put money in VBMFX with the shorter duration? What else would you consider in a comparison?

The shorter term TIPS fund has duration of 2.4 years, but a yield to maturity of only 0.7%. VFSUX, the short term investment grade bond fund, has duration of 2.4 years and yield to maturity of 1.6%. For a shorter duration choice, VFSUX looks like the better choice to me.
All of my bond holdings are short duration and iBonds. You could opt in for a short term TIPS bond fund.

Post Reply