Should everyone have TIPS?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Northern Flicker
Posts: 7091
Joined: Fri Apr 10, 2015 12:29 am

Re: Should everyone have TIPS?

Post by Northern Flicker »

vineviz wrote: Fri Jul 17, 2020 2:52 pm
Northern Flicker wrote: Fri Jul 17, 2020 2:00 pm There's nothing like an 11 year bull market for making investors feel invincible and risk-tolerant.
I see this rationalization a lot but not a lot of evidence to support it.

The flip side of this argument, of course, is that a 40 year "bull market" for bonds has undoubtedly clouded the judgement of many investors. There's a core group of Bogleheads who are still investing as if they expect to continue getting real returns on bonds of 4% or more. That kind of belief can definitely warp the perception of the risk/reward tradeoff between stocks and fixed income.

Anyway, target date funds have been around long enough that we can observe investor behavior over the course of multiple 20%+ drawdowns. In doing so, we can see that the vast majority of younger investors in TDFs just shrug it off and carry on.

I'm much less worried about the typical 90/10 40-year old investor than I am about a 40/60 retiree.
I agree that having 60% of one's assets in, say, a total bond market index fund at today's rates is also risky.
Risk is not a guarantor of return.
hudson
Posts: 3709
Joined: Fri Apr 06, 2007 9:15 am

Re: Should everyone have TIPS?

Post by hudson »

I'm familiar with Vanguard's TIPS products.
I know about buying individual TIPS and Ibonds.
I recently learned about PIMCO 15+ Year U.S. TIPS Index Exchange-Traded Fund (LTPZ).
What other inflation protect products are worth looking at?
Angst
Posts: 2579
Joined: Sat Jun 09, 2007 11:31 am

Re: Should everyone have TIPS?

Post by Angst »

hudson wrote: Fri Jul 17, 2020 4:19 pm I'm familiar with Vanguard's TIPS products.
I know about buying individual TIPS and Ibonds.
I recently learned about PIMCO 15+ Year U.S. TIPS Index Exchange-Traded Fund (LTPZ).
What other inflation protect products are worth looking at?
It sounds to me like you have things covered. Presumably you're aware of the inflation protection advantages of delaying claiming one's SS until age 70. I'm not a proponent of commodities, gold, guns and ammo, etc. and I don't consider them "inflation protection products".

There's also another ETF out there, WIP - the SPDR® FTSE International Government Inflation-Protected Bond ETF - but I don't recall it being advocated here, probably b/c no one's made a good argument that it's worthwhile to protect oneself from inflation beyond the currency of their home country.
User avatar
jason2459
Posts: 760
Joined: Wed May 06, 2020 7:59 pm

Re: Should everyone have TIPS?

Post by jason2459 »

There's also Corporate inflation-linked securities CIPS ETFs.

LQDI is one.
"In the short run, the stock market is a voting machine; in the long run, it is a weighing machine" ~Benjamin Graham
hudson
Posts: 3709
Joined: Fri Apr 06, 2007 9:15 am

Re: Should everyone have TIPS?

Post by hudson »

Angst wrote: Sat Jul 18, 2020 8:18 am
hudson wrote: Fri Jul 17, 2020 4:19 pm I'm familiar with Vanguard's TIPS products.
I know about buying individual TIPS and Ibonds.
I recently learned about PIMCO 15+ Year U.S. TIPS Index Exchange-Traded Fund (LTPZ).
What other inflation protect products are worth looking at?
It sounds to me like you have things covered. Presumably you're aware of the inflation protection advantages of delaying claiming one's SS until age 70. I'm not a proponent of commodities, gold, guns and ammo, etc. and I don't consider them "inflation protection products".

There's also another ETF out there, WIP - the SPDR® FTSE International Government Inflation-Protected Bond ETF - but I don't recall it being advocated here, probably b/c no one's made a good argument that it's worthwhile to protect oneself from inflation beyond the currency of their home country.
Thanks Angst!

I knew about waiting until 70, but I decided to start drawing at 66; I just didn't want to draw down my holdings. That may be the optimal answer for many....but not all. Many of my (serious planning/calculating) co-workers in a manufacturing plant were trying to stretch it out to age 65 for social security, medicare, part time work,and medicaid. When 65 arrived, they were gone.

Commodities, guns, gold as inflation protection....I agree with you. Those don't work for me as investments. I know that they do work for many.

The ETF WIP is as you said non-US and has a .5 expense ratio. It was worth a look. Thanks!
Last edited by hudson on Sat Jul 18, 2020 9:03 am, edited 3 times in total.
hudson
Posts: 3709
Joined: Fri Apr 06, 2007 9:15 am

Re: Should everyone have TIPS?

Post by hudson »

jason2459 wrote: Sat Jul 18, 2020 8:23 am There's also Corporate inflation-linked securities CIPS ETFs.

LQDI is one.
Thanks jason2459,

I took a look. That one looked like it held a lot of derivatives and corporates. That wouldn't work for me, but it was worth a look.
I guess I was looking for pure US TIPS holdings with a very low expense ratio.....funds or ETFs that are Vanguard like. Ones that have a longer duration than Vanguard's Intermediate TIPs fund.
User avatar
abuss368
Posts: 23787
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Should everyone have TIPS?

Post by abuss368 »

Robot Monster wrote: Thu Jul 16, 2020 11:02 am David Swensen's lazy portfolio allocates equally to TIPS and nominal bonds.
https://www.bogleheads.org/wiki/Lazy_portfolios

I'm 46 and have 12% TIPS.
I would be curious if David Swensen would provide the same guidance today. Would love to see Unconventional Success updated.
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
vineviz
Posts: 9296
Joined: Tue May 15, 2018 1:55 pm

Re: Should everyone have TIPS?

Post by vineviz »

hudson wrote: Sat Jul 18, 2020 8:57 am
jason2459 wrote: Sat Jul 18, 2020 8:23 am There's also Corporate inflation-linked securities CIPS ETFs.

LQDI is one.
Thanks jason2459,

I took a look. That one looked like it held a lot of derivatives and corporates. That wouldn't work for me, but it was worth a look.
I guess I was looking for pure US TIPS holdings with a very low expense ratio.....funds or ETFs that are Vanguard like. Ones that have a longer duration than Vanguard's Intermediate TIPs fund.
The derivatives in LQDI are merely inflation swaps. They are extremely simple as far as derivatives go, and not fundamentally different from the futures contracts used by most index fund managers (including Vanguard). If that’s not your cup of tea, just know that they aren’t dangerous, unpredictable, or hard to understand.

The only long duration TIPS fund that is broadly available is the PIMCO 15+ years fund LTPZ. It’s also a good fund, though honestly I’d suggest looking into individual TIPS in tax-advantaged accounts or Series I savings bonds with post-tax dollars.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Robot Monster
Posts: 1971
Joined: Sun May 05, 2019 11:23 am
Location: New York

Re: Should everyone have TIPS?

Post by Robot Monster »

abuss368 wrote: Sat Jul 18, 2020 9:19 am
Robot Monster wrote: Thu Jul 16, 2020 11:02 am David Swensen's lazy portfolio allocates equally to TIPS and nominal bonds.
https://www.bogleheads.org/wiki/Lazy_portfolios

I'm 46 and have 12% TIPS.
I would be curious if David Swensen would provide the same guidance today. Would love to see Unconventional Success updated.
Seems neglectful if he didn't say something given his portfolio recommendation is very much out there in the public. Has anyone else modified their recommended portfolio to better suit the current environment? I would like to think portfolio recommendations are in fact all-weather and don't need any changes depending, but perhaps this is too idealistic.
User avatar
abuss368
Posts: 23787
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Should everyone have TIPS?

Post by abuss368 »

Robot Monster wrote: Sat Jul 18, 2020 9:37 am
abuss368 wrote: Sat Jul 18, 2020 9:19 am
Robot Monster wrote: Thu Jul 16, 2020 11:02 am David Swensen's lazy portfolio allocates equally to TIPS and nominal bonds.
https://www.bogleheads.org/wiki/Lazy_portfolios

I'm 46 and have 12% TIPS.
I would be curious if David Swensen would provide the same guidance today. Would love to see Unconventional Success updated.
Seems neglectful if he didn't say something given his portfolio recommendation is very much out there in the public. Has anyone else modified their recommended portfolio to better suit the current environment? I would like to think portfolio recommendations are in fact all-weather and don't need any changes depending, but perhaps this is too idealistic.
He updated his endowment books years back but not Unconventional Success.
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
TomatoTomahto
Posts: 11932
Joined: Mon Apr 11, 2011 1:48 pm

Re: Should everyone have TIPS?

Post by TomatoTomahto »

dbr wrote: Fri Jul 17, 2020 9:06 am A difference between stocks and TIPS as inflation "protection" is that TIPS are perfectly protected themselves but by that very fact offer nothing to the rest of the portfolio. Stocks, on the other hand, have no inflation protection as such but have enough return to be able to eventually outrun inflation and to outrun inflation by enough that the portfolio as a whole does not lose real value. If you look at real returns the difference is that the expected real return from stocks is always(?) positive while the expected real return from TIPS can be negative even while they are protected from inflation.
Bingo.
I get the FI part but not the RE part of FIRE.
Robot Monster
Posts: 1971
Joined: Sun May 05, 2019 11:23 am
Location: New York

Re: Should everyone have TIPS?

Post by Robot Monster »

abuss368 wrote: Sat Jul 18, 2020 9:45 am
Robot Monster wrote: Sat Jul 18, 2020 9:37 am
abuss368 wrote: Sat Jul 18, 2020 9:19 am
Robot Monster wrote: Thu Jul 16, 2020 11:02 am David Swensen's lazy portfolio allocates equally to TIPS and nominal bonds.
https://www.bogleheads.org/wiki/Lazy_portfolios

I'm 46 and have 12% TIPS.
I would be curious if David Swensen would provide the same guidance today. Would love to see Unconventional Success updated.
Seems neglectful if he didn't say something given his portfolio recommendation is very much out there in the public. Has anyone else modified their recommended portfolio to better suit the current environment? I would like to think portfolio recommendations are in fact all-weather and don't need any changes depending, but perhaps this is too idealistic.
He updated his endowment books years back but not Unconventional Success.
How many years back? As of 2015 he was still hawking the same tips/bond split,
https://www.npr.org/2015/10/17/43699364 ... portfolios
petulant
Posts: 1901
Joined: Thu Sep 22, 2016 1:09 pm

Re: Should everyone have TIPS?

Post by petulant »

One interesting aspect of TIPS and nominal bonds is their role in a tax-deferred account when recognizing that tax brackets move with CPI, too. That means a given balance of TIPS can be perfectly matched to tax brackets, and the tax implications of future withdrawals can be more precisely predicted. Not so for nominal bonds: if inflation unexpectedly outpaces the bond returns, the tax brackets will also go up, mitigating some of the loss for the nominal bonds. On the other hand, if inflation is lower than expected, some of the extra real gain on the nominal bonds may be taxed at a higher rate.
User avatar
NewMoneyMustBeSmart
Posts: 492
Joined: Sat Jun 01, 2019 10:28 pm
Location: Midwest

Re: Should everyone have TIPS?

Post by NewMoneyMustBeSmart »

vineviz wrote: Fri Jul 17, 2020 11:52 am
aj76er wrote: Fri Jul 17, 2020 9:53 am
What this fails to take into account is the average size of the 2045 portfolio. I’m guessing it’s a small amount relative to one’s retirement needs. On the other hand, if someone saves diligently and/or gets lucky on an early career windfall, has 25x their living expenses by age 40, then I can’t fault them for being more conservative than average.
I think you hit the nail on the head: investors with significantly greater-than-average wealth probably can afford to choose an allocation with less-than-average market exposure. I wouldn’t fault them for making a conservative choice either.

But the average 40-year old American has less than $70,000 in retiremenT savings, and I’m confident the average Boglehead is well below 25x expenses by age 40.

We aren’t helping “typical” investors by codifying the experience and preferences of a tiny minority of atypical investors as if they are “moderate” rules of thumb.
I want to compliment you on your insight and the way you put this.

Someone with $50k net work has different tolerances than someone with $500k, $5M or $50M.

Thank you for pointing this out.

So much of the world is expressed as mean/average when in fact we have a gaussian distribution of almost everything.

One of the issues I'm reminded of is how to handle an emergency fund. I still don't have a good feeling/answer/belief on this, but if you have a portfolio of $10M and you need $200k ; one can simply borrow on margin instead of using a line of credit or keeping cash. But is this wise, I'm not sure.

Regardless of righteousness, it's very true that the decision pattern is different based on wealth magnitude.

I think it's great Bogleheads puts out great rules of thumb for most people, but the "it depends" sometimes gets lost.
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein
BrooklynInvest
Posts: 347
Joined: Sun Jul 28, 2013 9:23 am

Re: Should everyone have TIPS?

Post by BrooklynInvest »

I will readily admit to not understanding TIPs.

TIPs principal is adjusted to compensate for inflation BUT expected inflation has to be embedded into the price of the bond, no? Inflation insurance can't be free.

So what I'm getting is compensation for UNexpected inflation but doing it in a vehicle that can (and has) suffered losses when rates have risen or demand/supply gets outta whack. And rising rates tend to occur when economies heat up/inflationary pressure builds.

So while the par price of the bond is increased if inflation peaks the market price of the bond still fluctuates...unless held to maturity which it won't be in a fund?

Why wouldn't exposure to real estate do this same thing? When inflation's a problem the price of buildings goes up too?
User avatar
Ice-9
Posts: 1526
Joined: Wed Oct 15, 2008 12:40 pm
Location: Rockville, MD

Re: Should everyone have TIPS?

Post by Ice-9 »

I am now 47. I designed a portfolio at I think age 32 that was largely influenced from reading David Swenson and Larry Swedroe and includes half nominal bonds and half inflation-protected bonds in the bond portion. It started as an 86/14 portfolio, but as I became familiar with my risk tolerance while rebalancing multiple times during the 2008-9 crash, I revised it to 70/30, where it remains today.

The half TIPS / half nominal split of my fixed income allocation appealed to me at the time, because I felt that way I wasn't making a bet on inflation. If inflation turned out higher than expected, the TIPS half would perform better, and if inflation came in lower than expected the nominal half would perform better.

What advice would I give my younger self after a decade and a half of experience regarding the fixed income allocation and TIPS?

First, I think I would carefully advise myself not to over-allocate to bonds as a result of the stress experienced rebalancing during the crash. If at all possible, I would have instead focused my smaller bond allocation on a long term treasury fund to get more zig when stocks zag. Of course, back then, I was more limited to the few index funds available in my workplace plan, so total bond market was the best choice. (Today, I have a self-directed brokerage option available in the plan and can pick whatever funds I want.)

I do think TIPS have the value I saw in them to avoid making a bet on inflation with the bond portion of the portfolio. However, as others have stated in this thread, human capital is the best inflation hedge. I think I would advise my younger self to delay implementing the half TIPS / half nominal bond allocation until, well, about my age now. So, no reason for me to change now, but I'd suggest a younger person to consider maintaining a smaller bond allocation that's mostly or all long term treasury index if you can manage that with available choices in your plan. Then add TIPS later when your fixed income allocation may be increasing anyway.
Angst
Posts: 2579
Joined: Sat Jun 09, 2007 11:31 am

Re: Should everyone have TIPS?

Post by Angst »

vineviz wrote: Sat Jul 18, 2020 9:27 amThe only long duration TIPS fund that is broadly available is the PIMCO 15+ years fund LTPZ. It’s also a good fund, though honestly I’d suggest looking into individual TIPS in tax-advantaged accounts or Series I savings bonds with post-tax dollars.
hudson, I agree with and encourage the idea of buying individual TIPS, in a tax preferred acct, especially at auction which guarantees you the highest accepted yield and there is no purchase fee and no ETF expense ratio to consider. I've been buying 30-yr TIPS at auction in my Roth acct at Vanguard for years now with the intention to hold to maturity as part of a small LMP/retirement income supplement. If you're interested, here are three important links:

1) Tentative Auction Schedule of US Treasury Securities - This pdf calendar is periodically updated at Treasury.gov, and for TIPS, just look for the light blue color-coded lines for the new issue and re-opening auctions for TIPS.

2) Daily Treasury Real Yield Curve Rates - Also provided by Treasury.gov, the real yield curve data gives you a good idea of where rates are presently, as well as recently, and will give you some insight into what yield an upcoming auction might come in at.

3) Treasury Direct - Today's Auction Results - This webpage from treasurydirect.gov gives both past and present results. Opening up the TIPS tab and the appropriate 5, 10 or 30-yr term-tab, will take you to pdf links. The "competitive results" pdf is what's most useful.
User avatar
dodecahedron
Posts: 5444
Joined: Tue Nov 12, 2013 12:28 pm

Re: Should everyone have TIPS?

Post by dodecahedron »

Chiming in to answer the thread title question: ¨Should everyone have TIPS?¨ [Emphasis added by me.]

Definitely agree with those above that there is no one-size-fits-all answer. TIPS are an affordable luxury for me. After much thought and consideration, I decided that in my particular circumstances I could easily afford to devote about 25% of my portfolio to TIPS. For me, at my stage of life, it is a long term simple SWAN decision. It is all inside my Roth IRA (so no tax consequences.) I made this decision back in Dec 2018 (when real interest rates were much higher) and I have seen considerable appreciation since then. For simplicity and ease of management, I use Schwab´s SWRSX fund as my TIPS vehicle (ER is 5 basis points.) By happy coincidence, the fund has appreciated almost 15% during the 19 months I have held it, and I have rebalanced that appreciation into equities to keep my TIPS around 25%.

But if *everyone* did this, as Bill Bernstein astutely pointed out years ago, there would not be enough supply of TIPS to go around. Though I suppose, the US Treasury and other issuers of debt might respond by issuing more TIPS. That itself could create some interesting fiscal issues I will not discuss here.

I have read and reflected and thought a lot about this issue before making my decision. I have had the pleasure of personally meeting both Bill Bernstein and Zvi Bodie and respect both of their perspectives, and ultimately decided on an asset allocation that made sense for *me.*

I certainly would not encourage my daughters (in their 30s) to explicitly include TIPS in their portfolios. The Vanguard Target age-based retirement plans, which are default options for them and which they are quite content with, seem quite reasonable for now. Very little allocation to fixed income in the early years and zero to TIPS until a very gradual glide path allocates a small but growing portion to short term TIPS starting at age 60. By the time they hit their 60s, they will likely have inherited my Roth IRA with its big TIPS component. Hopefully that is a while away, but they can figure out what to do with that inherited asset allocation in the light of their circumstances at the time. Meanwhile, their time is better spent developing their human capital than worrying about fine-tuning their asset allocation to include TIPS.
Last edited by dodecahedron on Sat Jul 18, 2020 2:23 pm, edited 1 time in total.
User avatar
FIREchief
Posts: 6326
Joined: Fri Aug 19, 2016 6:40 pm

Re: Should everyone have TIPS?

Post by FIREchief »

Angst wrote: Sat Jul 18, 2020 11:00 am there is no purchase fee and no ETF expense ratio to consider.
Just to clarify, there is no purchase fee or expense ratio when buying individual TIPS in the secondary market either (at most major brokerages). 8-)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
User avatar
nedsaid
Posts: 14383
Joined: Fri Nov 23, 2012 12:33 pm

Re: Should everyone have TIPS?

Post by nedsaid »

dodecahedron wrote: Sat Jul 18, 2020 11:29 am Chiming in to answer the thread title question: ¨Should everyone have TIPS?¨ [Emphasis added by me.]

Definitely agree with those above that there is no one-size-fits-all answer. TIPS are an affordable luxury. After much thought and consideration, I decided that in my particular circumstances I could easily afford to devote about 25% of my portfolio to. For me, at my stage of life, it is a long term simple SWAN decision. It is all inside my Roth IRA (so no tax consequences.) I made this decision back in Dec 2018 (when real interest rates were much higher) and I have seen considerable appreciation since then. For simplicity and ease of management, I use Schwab´s SWRSX fund as my TIPS vehicle (ER is 5 basis points.) By happy coincidence, the fund has appreciated almost 15% during the 19 months I have held it, and I have rebalanced that appreciation into equities to keep my TIPS around 25%.

But if *everyone* did this, as Bill Bernstein astutely pointed out years ago, there would not be enough supply of TIPS to go around. Though I suppose, the US Treasury and other issuers of debt might respond by issuing more TIPS. That itself could create some interesting fiscal issues I will not discuss here.

I have read and reflected and thought a lot about this issue before making my decision. I have had the pleasure of personally meeting both Bill Bernstein and Zvi Bodie and respect both of their perspectives, and ultimately decided on an asset allocation that made sense for *me.*

I certainly would not encourage my daughters (in their 30s) to explicitly include TIPS in their portfolios. The Vanguard Target age-based retirement plans, which are default options for them and which they are quite content with, seem quite reasonable for now. Very little allocation to fixed income in the early years and zero to TIPS until a very gradual glide path allocates a small but growing portion to short term TIPS starting at age 60. By the time they hit their 60s, they will likely have inherited my Roth IRA with its big TIPS component. Hopefully that is a while a way, but they can figure out what to do with that inherited asset allocation in the light of their circumstances at the time. Meanwhile, their time is better spent developing their human capital than worrying about fine-tuning their asset allocation to include TIPS.
I am a fan of TIPS, I just thought it would make sense to have inflation protection on the bond side of the portfolio as well as on the equity side. Despite my many favorable posts regarding these instruments, only about 12% of my bonds are in TIPS, like with many other things my bark is worse than my bite. Seeing that most of my bonds are nominal bonds, I am still okay because inflation is still very low and I am still reinvesting my dividends. Also, I own a lot of Federal Agency Mortgage backed securities like GNMAs, which have principal and interest guarantees very similar to US Treasuries but with a higher yield. I have considered upping my allocation to TIPS but haven't done anything yet.
A fool and his money are good for business.
megabad
Posts: 3625
Joined: Fri Jun 01, 2018 4:00 pm

Re: Should everyone have TIPS?

Post by megabad »

By definition, it would be unsustainable for it to make sense to invest in TIPS over the long run. Equity would cease to exist if anticipated real return was less than TIPS over the long run. Over short periods of time, it might though.
User avatar
FIREchief
Posts: 6326
Joined: Fri Aug 19, 2016 6:40 pm

Re: Should everyone have TIPS?

Post by FIREchief »

megabad wrote: Sat Jul 18, 2020 12:17 pm Equity would cease to exist if anticipated real return was less than TIPS over the long run.
:confused Please explain. Thanks.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
User avatar
dodecahedron
Posts: 5444
Joined: Tue Nov 12, 2013 12:28 pm

Re: Should everyone have TIPS?

Post by dodecahedron »

megabad wrote: Sat Jul 18, 2020 12:17 pm By definition, it would be unsustainable for it to make sense to invest in TIPS over the long run. Equity would cease to exist if anticipated real return was less than TIPS over the long run. Over short periods of time, it might though.
I did not invest in TIPS because I expected real return to be higher than stocks in the long run. I invested in TIPS for insurance. Happy to accept lower expected real returns in exchange for lower volatility over my remaining lifetime. Sleeping well at night (SWAN) is a much higher priority at this stage of life than a larger but more volatile portfolio, given an already very comfortable lifestyle.
User avatar
FIREchief
Posts: 6326
Joined: Fri Aug 19, 2016 6:40 pm

Re: Should everyone have TIPS?

Post by FIREchief »

dodecahedron wrote: Sat Jul 18, 2020 2:28 pm
megabad wrote: Sat Jul 18, 2020 12:17 pm By definition, it would be unsustainable for it to make sense to invest in TIPS over the long run. Equity would cease to exist if anticipated real return was less than TIPS over the long run. Over short periods of time, it might though.
I did not invest in TIPS because I expected real return to be higher than stocks in the long run. I invested in TIPS for insurance. Happy to accept lower expected real returns in exchange for lower volatility over my remaining lifetime. Sleeping well at night (SWAN) is a much higher priority at this stage of life than a larger but more volatile portfolio, given an already very comfortable lifestyle.
:sharebeer
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
hudson
Posts: 3709
Joined: Fri Apr 06, 2007 9:15 am

Re: Should everyone have TIPS?

Post by hudson »

vineviz wrote: Sat Jul 18, 2020 9:27 am
hudson wrote: Sat Jul 18, 2020 8:57 am
jason2459 wrote: Sat Jul 18, 2020 8:23 am There's also Corporate inflation-linked securities CIPS ETFs.

LQDI is one.
Thanks jason2459,

I took a look. That one looked like it held a lot of derivatives and corporates. That wouldn't work for me, but it was worth a look.
I guess I was looking for pure US TIPS holdings with a very low expense ratio.....funds or ETFs that are Vanguard like. Ones that have a longer duration than Vanguard's Intermediate TIPs fund.
The derivatives in LQDI are merely inflation swaps. They are extremely simple as far as derivatives go, and not fundamentally different from the futures contracts used by most index fund managers (including Vanguard). If that’s not your cup of tea, just know that they aren’t dangerous, unpredictable, or hard to understand.

The only long duration TIPS fund that is broadly available is the PIMCO 15+ years fund LTPZ. It’s also a good fund, though honestly I’d suggest looking into individual TIPS in tax-advantaged accounts or Series I savings bonds with post-tax dollars.
LQDI is probably not my cup of tea because I have zero understanding. That could change.
I'm several years away from being able to make a move. I plan to learn what I need to know in the meantime.
Right now, it appears as if this is where I should look in priority order:

Individual TIPs from auction and Ibonds.
Individual TIPs not from auction
Vanguard Mutual Funds/ETFs in combination with PIMCO's LTPZ.... 15+ Year US TIPS Index ETF

LQDI...maybe...more research
also Schwab´s SWRSX
Read: Explore TIPs by the Finance Buff
megabad
Posts: 3625
Joined: Fri Jun 01, 2018 4:00 pm

Re: Should everyone have TIPS?

Post by megabad »

FIREchief wrote: Sat Jul 18, 2020 12:34 pm
megabad wrote: Sat Jul 18, 2020 12:17 pm Equity would cease to exist if anticipated real return was less than TIPS over the long run.
:confused Please explain. Thanks.
Don’t know what to explain? Seems pretty intuitive to me that if inflation protected US government debt provided higher returns over infinite timeline that no one would invest in equity. In reality this will never happen because it doesn’t make sense. Which is why it doesn’t make logical sense to own TIPS with an extremely long time horizon. You are betting against fundamentals. This is ok in the short run if your goal is a hedge, but doesn’t make sense long term where you don’t care about short term Unexpected inflation.
User avatar
FIREchief
Posts: 6326
Joined: Fri Aug 19, 2016 6:40 pm

Re: Should everyone have TIPS?

Post by FIREchief »

megabad wrote: Sat Jul 18, 2020 7:12 pm
FIREchief wrote: Sat Jul 18, 2020 12:34 pm
megabad wrote: Sat Jul 18, 2020 12:17 pm Equity would cease to exist if anticipated real return was less than TIPS over the long run.
:confused Please explain. Thanks.
Don’t know what to explain? Seems pretty intuitive to me that if inflation protected US government debt provided higher returns over infinite timeline that no one would invest in equity. In reality this will never happen because it doesn’t make sense. Which is why it doesn’t make logical sense to own TIPS with an extremely long time horizon. You are betting against fundamentals. This is ok in the short run if your goal is a hedge, but doesn’t make sense long term where you don’t care about short term Unexpected inflation.
Thanks. Now I understand what you meant. Do you think equities would cease to exist? Or, would they simply drop in price to the point that they provided an expected return higher than TIPS?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
megabad
Posts: 3625
Joined: Fri Jun 01, 2018 4:00 pm

Re: Should everyone have TIPS?

Post by megabad »

FIREchief wrote: Sat Jul 18, 2020 7:22 pm
Thanks. Now I understand what you meant. Do you think equities would cease to exist? Or, would they simply drop in price to the point that they provided an expected return higher than TIPS?
What I said was they would cease to exist if the indicated valuation impossibility were to hold true for the long term. It was a hypothetical scenario that will never happen. What you are describing is of course what happens in reality and is exactly why TIPs do not make sense in the long run (infinitely long run). This of course doesn’t mean that they won’t outperform lots of asset classes in the short run.
User avatar
vineviz
Posts: 9296
Joined: Tue May 15, 2018 1:55 pm

Re: Should everyone have TIPS?

Post by vineviz »

megabad wrote: Sat Jul 18, 2020 7:34 pm
FIREchief wrote: Sat Jul 18, 2020 7:22 pm
Thanks. Now I understand what you meant. Do you think equities would cease to exist? Or, would they simply drop in price to the point that they provided an expected return higher than TIPS?
What I said was they would cease to exist if the indicated valuation impossibility were to hold true for the long term. It was a hypothetical scenario that will never happen. What you are describing is of course what happens in reality and is exactly why TIPs do not make sense in the long run (infinitely long run). This of course doesn’t mean that they won’t outperform lots of asset classes in the short run.
I’d like to point out, for the benefit of readers who are less interested in impossible hypothetical scenarios than in the real-life aspects of retirement planning, that the role of long-term TIPS is that they are pretty close to the risk-free asset for long-term investors. Zero-coupon nominal Treasuries are also close to risk-free.

Since most investors do NOT have an infinite investment time horizon and are NOT infinitely risk tolerant, it’s likely that a risk-free asset plays an important role in their retirement planning.

That doesn’t mean everyone should own TIPS, but most people should consider them at some point.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
FIREchief
Posts: 6326
Joined: Fri Aug 19, 2016 6:40 pm

Re: Should everyone have TIPS?

Post by FIREchief »

megabad wrote: Sat Jul 18, 2020 7:34 pm What you are describing is of course what happens in reality and is exactly why TIPs do not make sense in the long run (infinitely long run).
This is certainly true if the future behaves like the past. Can you guarantee that?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
megabad
Posts: 3625
Joined: Fri Jun 01, 2018 4:00 pm

Re: Should everyone have TIPS?

Post by megabad »

FIREchief wrote: Sat Jul 18, 2020 8:04 pm
megabad wrote: Sat Jul 18, 2020 7:34 pm What you are describing is of course what happens in reality and is exactly why TIPs do not make sense in the long run (infinitely long run).
This is certainly true if the future behaves like the past. Can you guarantee that?
Over the long run, yes I can assuming economic fundamentals hold up. That is why I gave the theoretical example. Risk must be rewarded. TIPS don’t make sense long term since you have abandoned most credit and inflation risk. The only question is how “long” is long term. If it is less than an adult life, than the answer to OP’s question is no, everyone should not own TIPS.
User avatar
FIREchief
Posts: 6326
Joined: Fri Aug 19, 2016 6:40 pm

Re: Should everyone have TIPS?

Post by FIREchief »

megabad wrote: Sat Jul 18, 2020 8:32 pm
FIREchief wrote: Sat Jul 18, 2020 8:04 pm
megabad wrote: Sat Jul 18, 2020 7:34 pm What you are describing is of course what happens in reality and is exactly why TIPs do not make sense in the long run (infinitely long run).
This is certainly true if the future behaves like the past. Can you guarantee that?
Over the long run, yes I can assuming economic fundamentals hold up.
It's the "assuming" part that scares those who have exhausted their human capital and are solely dependent upon SS and their savings.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
megabad
Posts: 3625
Joined: Fri Jun 01, 2018 4:00 pm

Re: Should everyone have TIPS?

Post by megabad »

FIREchief wrote: Sat Jul 18, 2020 8:39 pm
It's the "assuming" part that scares those who have exhausted their human capital and are solely dependent upon SS and their savings.
By investing, you are assuming it will be productive. This is not a radical idea. I have no idea why that would scare you. I agree that a small subset of late stage investors could benefit by owning TIPS but this was not OPs question.
Always passive
Posts: 808
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Should everyone have TIPS?

Post by Always passive »

Ice-9 wrote: Sat Jul 18, 2020 10:43 am I am now 47. I designed a portfolio at I think age 32 that was largely influenced from reading David Swenson and Larry Swedroe and includes half nominal bonds and half inflation-protected bonds in the bond portion. It started as an 86/14 portfolio, but as I became familiar with my risk tolerance while rebalancing multiple times during the 2008-9 crash, I revised it to 70/30, where it remains today.

The half TIPS / half nominal split of my fixed income allocation appealed to me at the time, because I felt that way I wasn't making a bet on inflation. If inflation turned out higher than expected, the TIPS half would perform better, and if inflation came in lower than expected the nominal half would perform better.

What advice would I give my younger self after a decade and a half of experience regarding the fixed income allocation and TIPS?

First, I think I would carefully advise myself not to over-allocate to bonds as a result of the stress experienced rebalancing during the crash. If at all possible, I would have instead focused my smaller bond allocation on a long term treasury fund to get more zig when stocks zag. Of course, back then, I was more limited to the few index funds available in my workplace plan, so total bond market was the best choice. (Today, I have a self-directed brokerage option available in the plan and can pick whatever funds I want.)

I do think TIPS have the value I saw in them to avoid making a bet on inflation with the bond portion of the portfolio. However, as others have stated in this thread, human capital is the best inflation hedge. I think I would advise my younger self to delay implementing the half TIPS / half nominal bond allocation until, well, about my age now. So, no reason for me to change now, but I'd suggest a younger person to consider maintaining a smaller bond allocation that's mostly or all long term treasury index if you can manage that with available choices in your plan. Then add TIPS later when your fixed income allocation may be increasing anyway.
I know that I am already too late to comment. July 2020 is an eternity ago. But your comments are as valid then, a few years ago, today or in the future. I am 72, and my bond allocation is understandably large (50%), and it is all in TIPS. Years ago I held less bonds and were long term. This strategy has served me well.
User avatar
dmcmahon
Posts: 2684
Joined: Fri Mar 21, 2008 10:29 pm

Re: Should everyone have TIPS?

Post by dmcmahon »

I love the idea of TIPS bonds and they are the only long-duration bonds I’ve been willing to hold. I backed up the truck during the 2008 crisis and filled my 401k with them. I bought and continued to buy individual bonds. The problem now is that I’d have to buy them at explicit negative real yields. In other words you must pay a very explicit annual yield price for that inflation insurance. Another, lesser, issue is that the type of inflation they insure against is not the type we are now experiencing (asset inflation). This latter issue isn’t relevant if your main goal is to protect consumption in future years.

Versus other inflation hedges, TIPS have a big advantage and a big disadvantage. The big advantage is they explicitly track an inflation index so what you see is what you get. Other hedges track market forces so if you overpay at the front end you might not get back what you expect, absent a bigger fool. The big disadvantage is that the inflation adjustments are taxed as income. This is one place where the tax system is brutally honest about what’s really going on. With a capital gain, it’s less obvious because it’s hard to know how much of the gain is due to inflation. So versus a hard asset, TIPS are disadvantaged, there is no ability to defer taxation, and no favorable tax rate to soften the blow of tax-on-inflation. This disadvantage disappears if you use a tax-advantaged account, which is what I did.
User avatar
galeno
Posts: 2164
Joined: Fri Dec 21, 2007 12:06 pm

Re: Should everyone have TIPS?

Post by galeno »

Are TIPS as good ballast as US treasuries?

Our port right now looks like this: 45% equities + 15% TIPS + 15% US treas + 15% USD corp bonds + 10% CASH.

This is the first time in 35 years that we hold so much cash.

For some reason I feel we are going toward a 1970s stagflation type of economy.
KISS & STC.
User avatar
FIREchief
Posts: 6326
Joined: Fri Aug 19, 2016 6:40 pm

Re: Should everyone have TIPS?

Post by FIREchief »

galeno wrote: Sun Jan 10, 2021 2:29 pm Are TIPS as good ballast as US treasuries?
Aren't TIPS US treasuries??? :confused
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
User avatar
abuss368
Posts: 23787
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Should everyone have TIPS?

Post by abuss368 »

No unless everyone is also exposed to unexpected inflation. Wages, Social Security, and Fixed Rate debt are inflation fighters.

Unless you feel as if you have a higher risk to unexpected inflation, I would pass and keep investing simple.

Tony
John C. Bogle: “Simplicity is the master key to financial success."
17outs
Posts: 165
Joined: Thu Feb 13, 2020 4:03 pm

Re: Should everyone have TIPS?

Post by 17outs »

FIREchief wrote: Sun Jan 10, 2021 9:58 pm
galeno wrote: Sun Jan 10, 2021 2:29 pm Are TIPS as good ballast as US treasuries?
Aren't TIPS US treasuries??? :confused
They don't seem to be negatively correlated with stocks like LTT. Today equities and LTT and TIPS are all down. Also, doesn't the value of TIPS rise if interest rates are up? Today 10 years are over 1%.
User avatar
FIREchief
Posts: 6326
Joined: Fri Aug 19, 2016 6:40 pm

Re: Should everyone have TIPS?

Post by FIREchief »

17outs wrote: Mon Jan 11, 2021 12:39 pm
FIREchief wrote: Sun Jan 10, 2021 9:58 pm
galeno wrote: Sun Jan 10, 2021 2:29 pm Are TIPS as good ballast as US treasuries?
Aren't TIPS US treasuries??? :confused
Also, doesn't the value of TIPS rise if interest rates are up? Today 10 years are over 1%.
No. As with all bonds, a rise in rates will lower the value of the bond. In the case of TIPS, it's changes to real rates.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
User avatar
galeno
Posts: 2164
Joined: Fri Dec 21, 2007 12:06 pm

Re: Should everyone have TIPS?

Post by galeno »

I know TIPS are US treasuries. But there is a HUGE difference in volume and liquidity.

When the equity markets crashed in March we owned equal parts of intermediate term TIPS, US treasuries, and USD corporate bonds.

The US treasuries went up a lot. The TIPS went up a moderate amount. The USD corp bonds went down.

I like the ballast component of nominal US Treasuries. I also like the USD inflation insurance of TIPS. And I like the yield of the USD corporates.

I simplified our equities from 3 UCITS ETFs to 1. I'd like to do the same for our bonds. But I can't decide between the nominal US treasuries and the TIPS.

I have no problem eliminating the USD corp bonds however. That UCITS ETF is the next victim on our simplification crusade.
KISS & STC.
17outs
Posts: 165
Joined: Thu Feb 13, 2020 4:03 pm

Re: Should everyone have TIPS?

Post by 17outs »

FIREchief wrote: Mon Jan 11, 2021 1:10 pm
17outs wrote: Mon Jan 11, 2021 12:39 pm
FIREchief wrote: Sun Jan 10, 2021 9:58 pm
galeno wrote: Sun Jan 10, 2021 2:29 pm Are TIPS as good ballast as US treasuries?
Aren't TIPS US treasuries??? :confused
Also, doesn't the value of TIPS rise if interest rates are up? Today 10 years are over 1%.
No. As with all bonds, a rise in rates will lower the value of the bond. In the case of TIPS, it's changes to real rates.
Thanks I thought about this and went back to correct but alas you were too quick for me:-). Thanks. Looking at the correlations on PV it appears that TIPS don't react like LTT. I like having a mix because psychologically its tough to see LTT plummet when stocks are doing well. I think the TIPS keep the overall portfolio less volatile. I'm still learning how they react different from each other and equities. Also, i'm okay buying more and more if long term they are similar to Total Bond or ITT or something, but after holding for a while I get why peeps just go with total bond and wait for the paint to dry.
dh
Posts: 530
Joined: Sun Mar 13, 2011 8:01 pm

Re: Should everyone have TIPS?

Post by dh »

I am glad this thread was resurrected in January (I missed the initial discussion). As I am getting older, I am increasing my TIPS holdings. Specifically, I am increasing them in my 401. I have access to Vanguard's Intermediate TIPS Fund (VAIPX; Expense Ratio: 0.10%). Do most of you use a fund, or do you purchase individual bonds? If you do use a fund, would you make any recommendations? While I do not have other TIPS options in my 401, I do have an IRA that I could use. I thank all who have shared their thoughts so far.
dbr
Posts: 34868
Joined: Sun Mar 04, 2007 9:50 am

Re: Should everyone have TIPS?

Post by dbr »

dh wrote: Sat Feb 13, 2021 9:36 am I am glad this thread was resurrected in January (I missed the initial discussion). As I am getting older, I am increasing my TIPS holdings. Specifically, I am increasing them in my 401. I have access to Vanguard's Intermediate TIPS Fund (VAIPX; Expense Ratio: 0.10%). Do most of you use a fund, or do you purchase individual bonds? If you do use a fund, would you make any recommendations? While I do not have other TIPS options in my 401, I do have an IRA that I could use. I thank all who have shared their thoughts so far.
VAIPX works fine for me. People may also use an ETF for TIPS. iShares has several at different durtions.

I don't think anyone here knows what most people on this forum do because in recent years they stopped letting people start surveys to find out that kind of information.

Holding individual bonds is a question of how a person likes to manage bond investments whether TIPS or not and may be affected by whether or not a person likes to go to Treasury Direct for bonds. Individual bonds can be bought and held at brokers. TD bonds have to be transferred to a broker to sell them on the secondary market, but they will redeem at TD when mature.

Here is the wiki on bonds vs funds of bonds: https://www.bogleheads.org/wiki/Individ ... _bond_fund
hudson
Posts: 3709
Joined: Fri Apr 06, 2007 9:15 am

Re: Should everyone have TIPS?

Post by hudson »

dh wrote: Sat Feb 13, 2021 9:36 am I am glad this thread was resurrected in January (I missed the initial discussion). As I am getting older, I am increasing my TIPS holdings. Specifically, I am increasing them in my 401. I have access to Vanguard's Intermediate TIPS Fund (VAIPX; Expense Ratio: 0.10%). Do most of you use a fund, or do you purchase individual bonds? If you do use a fund, would you make any recommendations? While I do not have other TIPS options in my 401, I do have an IRA that I could use. I thank all who have shared their thoughts so far.
I own no TIPS, but am considering the following. Thanks Vineviz and others in this discussion and others. I'm considering putting this in an IRA if possible.

At age 76: Non Rolling TIPS ladder...24 years (I'm 73.)
OR
At age 76: Long TIPS ETF LTPZ and Intermediate TIPS ETF SWRSX...duration matched

I like Angst's post from above: viewtopic.php?p=5378783#p5378783
There's another contribution that I plan to use as a reference if I go with individual TIPS. I'll edit and add later if I can find it.

Vineviz once said that if your portfolio is a certain size, that you could skip TIPS. If I can find the discussion, I'll edit and add it later.

VAIPX would be a good choice, but Schwab's SWRSX has a longer average duration and has a lower expense ratio.
HappyJack
Posts: 253
Joined: Thu Jan 10, 2019 7:45 am

Re: Should everyone have TIPS?

Post by HappyJack »

With the help of Bobk, Vineviz, grok, bigskyguy, and others I have established an LMP with LTPZ (long term TIPS), FIPDX (intermediate term TIPS) and a stable value fund that is duration matched to meet my expenses out to age 91. About 50% of total portfolio. The rest is in stock index funds.

Its more expensive and takes some attention to adjust durations from time to time. But the flexibility of being in funds works for me better than buying individual bonds.
hudson
Posts: 3709
Joined: Fri Apr 06, 2007 9:15 am

Re: Should everyone have TIPS?

Post by hudson »

Thanks HappyJack!
Is your LMP in an IRA?
HappyJack
Posts: 253
Joined: Thu Jan 10, 2019 7:45 am

Re: Should everyone have TIPS?

Post by HappyJack »

This should control interest rate risk, default risk, and inflation risk. Expensive though. And of course, past performance....
HappyJack
Posts: 253
Joined: Thu Jan 10, 2019 7:45 am

Re: Should everyone have TIPS?

Post by HappyJack »

Yes. Almost all in tax deferred. Left some LTPZ in taxable.
grok87
Posts: 9304
Joined: Tue Feb 27, 2007 9:00 pm

Re: Should everyone have TIPS?

Post by grok87 »

HappyJack wrote: Sat Feb 13, 2021 10:34 am With the help of Bobk, Vineviz, grok, bigskyguy, and others I have established an LMP with LTPZ (long term TIPS), FIPDX (intermediate term TIPS) and a stable value fund that is duration matched to meet my expenses out to age 91. About 50% of total portfolio. The rest is in stock index funds.

Its more expensive and takes some attention to adjust durations from time to time. But the flexibility of being in funds works for me better than buying individual bonds.
Sounds like an interesting approach.

If you are willing to share, I'd be curious about how you determined on age 91. I'm currently struggling with how far out to go mysef.

cheers,
grok
RIP Mr. Bogle.
Post Reply