5) TIPS are not tax efficient because you pay taxes on principal adjustment, not when you actually get the money.Ramjet wrote: ↑Wed Oct 13, 2021 10:11 am 100% FI in TIPS makes a lot more sense to me, some thoughts:
1) TIPS will cover actual inflation, Nominal Bond rates take into account estimated inflation. I thought Bogleheads "don't know nuthin"
2) But TIPS make up a small segment of overall bonds. Who cares? There is essentially no credit risk, they are backed by the full faith of the U.S. Government
3) Bogleheads hate bets, e.g., don't buy individual stocks, invest in the total market. How do Bogleheads reconcile that Nominal Bonds are a "bet" on inflation. We turn a blind eye when it is convenient
4) TIPS aren't as liquid as Nominal Bonds. Ok. They are close. Solution, have a year or two of expenses in cash or a CD
Why use anything but TIPS?
Re: Why use anything but TIPS?
Re: Why use anything but TIPS?
I modified nisiprius' chart upthread viewtopic.php?p=6272338#p6272338 to add intermediate Treasuries.
I haven't been reading this thread but nominal Treasures certainly outperformed TIPS in the 2008 conundrum. If you are not going to rebalance in a stock market crash it makes no difference to the subject of this thread.
(I rebalanced back then and since then have eliminated TIPs from my portfolio).
I haven't been reading this thread but nominal Treasures certainly outperformed TIPS in the 2008 conundrum. If you are not going to rebalance in a stock market crash it makes no difference to the subject of this thread.
(I rebalanced back then and since then have eliminated TIPs from my portfolio).
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
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Re: Why use anything but TIPS?
This is the most accurate direct comparison I could come up with. IEF has duration of 8 years, the same as VISPX. The total return since 2003 is nearly identical. And contrary to the idea the TIPS have more of a squiggle, the TIPS fund had the better sharpe ratio (less squiggle, same CAGR).
I would love to include TIPS in my leveraged bond strategy, but I haven't figured out how to efficiently leverage TIPS.
https://www.portfoliovisualizer.com/bac ... ion2_2=100
I would love to include TIPS in my leveraged bond strategy, but I haven't figured out how to efficiently leverage TIPS.
https://www.portfoliovisualizer.com/bac ... ion2_2=100
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Re: Why use anything but TIPS?
Am I missing something? This chart does not show what is stated above. The “winner” was not the blue line showing nominal Treasuries (it has the lowest final value) and the TIPS fund had a higher final value.Doc wrote: ↑Thu Oct 14, 2021 12:07 pm I modified nisiprius' chart upthread viewtopic.php?p=6272338#p6272338 to add intermediate Treasuries.
I haven't been reading this thread but nominal Treasures certainly outperformed TIPS in the 2008 conundrum. If you are not going to rebalance in a stock market crash it makes no difference to the subject of this thread.
(I rebalanced back then and since then have eliminated TIPs from my portfolio).
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Re: Why use anything but TIPS?
Agreed. I think investments that are stable with real returns are the truly stable ones. I am just saying that nominal bonds counteract fixed-rate debt and achieve that real return stability for at least companies that have such debt and have earnings that adjust quickly to inflation. I am not saying that stagflation cannot happen; it is bad for stocks and nominal bonds; but the portion of fixed-rate debt that companies carry saves them somewhat in that case (that is, if their earnings adjust). Likewise, unexpected low inflation or even deflation causes stock to drop; but the portion of fixed-rate debt that companies carry is now more of a burden if their earnings adjust (in this case, nominal bonds come to the rescue).JackoC wrote: ↑Thu Oct 14, 2021 11:18 amI think it illustrates the basic hang up where people end up saying 'buying TIPS is a bet' (which I don't think you are). A big reason US corporations have tended to fund themselves with fixed rate debt is simply convention. If you do what's conventional and it backfires, everyone else is doing it too so you don't look as stupid. And that's a more concentrated effect for corporate managers than individual investors.secondopinion wrote: ↑Thu Oct 14, 2021 10:34 am Hedging is the precise reason.
As another note, companies often borrow with fixed-rate debt; so they are doing the opposite of holding nominal bonds. The only hedge for that debt they carry is to buy nominal bonds. Otherwise, they and you lose to unexpected low inflation. It might not take much to hedge that portion, but something to think about. Again, part of the business cycle.
European companies have been much more likely than US to fund themselves with floating rate debt. While actually inflation adjusted corporate debt has been very rare, floating tends to somewhat accomplish the same goals. Debt burden is less in severe recession where nominal cash flow and debt service cost will both tend to go down, works out also in at least moderately high inflation in the other direction. It does introduce the risk of very high debt service cost when real short term rates are high and cashflow doesn't fully follow. But again the reason they've done that has a lot to do with convention, just a different convention in their sphere (also the convention of borrowing more from banks, usually floating...by convention, and less from the bond market).
Note though in either case in the last at least 30 yrs it's more difficult to know the actual net interest rate risk of corporate debt not seeing what interest rate swaps and other hedges the company has done. For example when I say 'European companies more likely to fund themselves floating' I'm partly referring to much more common case of them issuing fixed rate bonds but receiving fixed/paying floating on a swap tied to the issuance. They do so because it's perceived that buyers of fixed rate debt of that issuer will result in a lower cost of floating debt after the swap than would be the case issuing floating rate notes directly to a different clientele looking for floating bonds. But the issuer wants floating in the end.
Again my point is just that people have different frames of reference, but often based on convention. For example the people saying 'buying TIPS is a bet on inflation' (which I find a silly statement) seem to be driven in part by a logic which says if buying TIPS isn't a bet, then buying nominals must be, but that's what every bond investor always did before a few decades ago. That was the convention. However disregarding convention seems to me elementary to deduce that this convention simply *was* taking risk to fund future real liabilities which buying TIPS is reducing (though not true in relatively unusual case of an individual investor seeking to fund nominal liabilities with bonds).
Floating rate debt is hedged against inflation to be honest for both sides (assuming interest rate follow). Again, that is if earnings adjust well; otherwise, it is not well protected against inflation.
The entire discussion is based on whether company earnings adjust for inflation. Those that are sluggish behave like nominal bonds, winning on deflation but losing to inflation regardless of their fixed-rate debt; so, buying nominal bonds does not hedge them. If they are quick responding, then they benefit (or lose) depending on their fixed-rate debt; so, buying nominal bonds does hedge them. However, I am not aware of many companies that gain more real earnings on inflation independently of fixed-rate debt.
Hedging risk is not a bet. If TIPS follow stocks somewhat, then nominal bonds that reduce the risk could be a counter-bet. We have to look at the entire portfolio before we can conclude that some investment is a position on some factor. It is like saying investing in value is a bet; but if one has growth as well, then the discussion is rather pointless (despite having value stocks).
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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Re: Why use anything but TIPS?
We should use Vanguard funds for intermediate treasuries. But if I remember right, the duration risk on the TIPS fund is higher. Since the market-demanded real return decreased, we end up with a gain for TIPS against lesser duration risk bonds. If the market-demanded real return increased, the picture would probably be slightly different.tonyclifton wrote: ↑Thu Oct 14, 2021 12:35 pmAm I missing something? This chart does not show what is stated above. The “winner” was not the blue line showing nominal Treasuries (it has the lowest final value) and the TIPS fund had a higher final value.Doc wrote: ↑Thu Oct 14, 2021 12:07 pm I modified nisiprius' chart upthread viewtopic.php?p=6272338#p6272338 to add intermediate Treasuries.
I haven't been reading this thread but nominal Treasures certainly outperformed TIPS in the 2008 conundrum. If you are not going to rebalance in a stock market crash it makes no difference to the subject of this thread.
(I rebalanced back then and since then have eliminated TIPs from my portfolio).
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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Re: Why use anything but TIPS?
The VFICX that is used in the chart is 49% BBB corporate bonds. It isn't really valid to compare this type of bond fund to nominal Treasuries or TIPS. Vanguard Intermediate-Term Treasury ETF (VGIT) or Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX) are more appropriate.secondopinion wrote: ↑Thu Oct 14, 2021 12:41 pmWe should use Vanguard funds for intermediate treasuries. But if I remember right, the duration risk on the TIPS fund is higher. Since the market-demanded real return decreased, we end up with a gain for TIPS against lesser duration risk bonds. If the market-demanded real return increased, the picture would probably be slightly different.tonyclifton wrote: ↑Thu Oct 14, 2021 12:35 pmAm I missing something? This chart does not show what is stated above. The “winner” was not the blue line showing nominal Treasuries (it has the lowest final value) and the TIPS fund had a higher final value.Doc wrote: ↑Thu Oct 14, 2021 12:07 pm I modified nisiprius' chart upthread viewtopic.php?p=6272338#p6272338 to add intermediate Treasuries.
I haven't been reading this thread but nominal Treasures certainly outperformed TIPS in the 2008 conundrum. If you are not going to rebalance in a stock market crash it makes no difference to the subject of this thread.
(I rebalanced back then and since then have eliminated TIPs from my portfolio).
Re: Why use anything but TIPS?
You shouldn't evaluate an asset in the way you describe. Take a 90/10, 70/30, or 50/50 portfolio and rebalance it with each asset, and compare how the portfolio performed. Throw in some withdrawals as if you were retired. A lower performing asset can in fact perform better in a portfolio depending on its correlation.tonyclifton wrote: ↑Thu Oct 14, 2021 12:35 pmAm I missing something? This chart does not show what is stated above. The “winner” was not the blue line showing nominal Treasuries (it has the lowest final value) and the TIPS fund had a higher final value.Doc wrote: ↑Thu Oct 14, 2021 12:07 pm I modified nisiprius' chart upthread viewtopic.php?p=6272338#p6272338 to add intermediate Treasuries.
I haven't been reading this thread but nominal Treasures certainly outperformed TIPS in the 2008 conundrum. If you are not going to rebalance in a stock market crash it makes no difference to the subject of this thread.
(I rebalanced back then and since then have eliminated TIPs from my portfolio).
In response to the general thread,
Looking at past performance, the drop of TIPS in 2008 is at least an issue for consideration. I would like to be able to rebalance bonds into stocks, and use at least some of my fixed income to access money when I need it. I don't really want TIPS for this purpose. I-Bonds seem to do a good job of access+ inflation protection, and the 5 year penalty isn't a big deal if you want 5 years worth of deposits for this purpose. Nominal bonds are best for rebalancing.
I-Bonds: short term spending
Nominal Bonds: rebalancing when the market crashes
TIPS: long term storage of value
Looking at the various uses of fixed income, it seems like a mix of the above is only common sense for most situations.
One who holds no emergency fund and does not rebalance can reasonably consider all TIPS.
Re: Why use anything but TIPS?
Couple of random comments on the last few posts.
Looking at a long term growth chart to compare different types of bonds is valid if you are going to buy and hold forever and never rebalnce into stocks. Back in the beginning the Boglehead's mantra about TIPS was that they were exactly like nominal Treasuries except for the unexpected inflation protection. Then along came 2008 and TIPS tanked while nominal Treasuries soared. The mantra: "not so much".
Looking at a long term growth chart to compare different types of bonds is valid if you are going to buy and hold forever and never rebalnce into stocks. Back in the beginning the Boglehead's mantra about TIPS was that they were exactly like nominal Treasuries except for the unexpected inflation protection. Then along came 2008 and TIPS tanked while nominal Treasuries soared. The mantra: "not so much".
Right, Nisiprius used a total return chart which tends to hide the short term effects which are important for a total portfolio which includes stocks as well as bonds.
The data for the Vangaurd funds doesn't go back as far as the original chart does. The fund sponsor is not very relevant for this type of analysis. If one decides to use intermediate Treasuries based on this type of chart go ahead and buy the Vanguard fund/ETF even if it wasn't available in 2002. (I tend to use actual Treasury notes myself but that data is not easy to use in a chart.)tonyclifton wrote: ↑Thu Oct 14, 2021 12:53 pm Vanguard Intermediate-Term Treasury ETF (VGIT) or Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX) are more appropriate.
Ditto nominal T's.tonyclifton wrote: ↑Thu Oct 14, 2021 12:40 pm Interest income from individual TIPS are exempt from state and local tax.
Yes.abc132 wrote: ↑Thu Oct 14, 2021 1:07 pm Looking at past performance, the drop of TIPS in 2008 is at least an issue for consideration. I would like to be able to rebalance bonds into stocks, and use at least some of my fixed income to access money when I need it. I don't really want TIPS for this purpose. I-Bonds seem to do a good job of access+ inflation protection, and the 5 year penalty isn't a big deal if you want 5 years worth of deposits for this purpose. Nominal bonds are best for rebalancing.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
Re: Why use anything but TIPS?
OK, to recap: for fixed income, if no need to rebalance into stock when market crash and the 5 year breakeven inflation rate (currently at 2.68%) seems reasonable then use TIPs.
https://fred.stlouisfed.org/series/T5YIE
https://fred.stlouisfed.org/series/T5YIE
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Re: Why use anything but TIPS?
I don’t follow the need to rebalancing during a crash and TIPS. Maybe this is a secondary purpose of any fixed income (or any asset that is liquid and hasn’t crashed at the same time)? I didn’t own TIPS in 2008 (only equities) but felt they did fine in March 2020 (didn’t sell or rebalance).N.Y.Cab wrote: ↑Thu Oct 14, 2021 2:14 pm OK, to recap: for fixed income, if no need to rebalance into stock when market crash and the 5 year breakeven inflation rate (currently at 2.68%) seems reasonable then use TIPs.
https://fred.stlouisfed.org/series/T5YIE
If you want to sleep well at night knowing you will be able to buy $Z worth of stuff X years from now then buy $Z in TIPS today that mature in X years. The market will determine what will cost in today’s dollars. If there is a market crash in X years on the day you need to buy the $Z stuff you should be fine.
In my case, I don’t have a specific $Z or X, yet. So I take the easy route and buy intermediate TIPS funds and pay the expense ratio for the convenience. If I could do it over again I would have bought longer-term TIPS funds to better match my timeline.
Re: Why use anything but TIPS?
If you think the market is less safe after crashing, then keeping that higher percentage of bonds would be fine. People that rebalance back to their original AA keep the same level or risk but hope for higher potential gains.tonyclifton wrote: ↑Thu Oct 14, 2021 3:21 pm
I don’t follow the need to rebalancing during a crash and TIPS. Maybe this is a secondary purpose of any fixed income (or any asset that is liquid and hasn’t crashed at the same time)? I didn’t own TIPS in 2008 (only equities) but felt they did fine in March 2020 (didn’t sell or rebalance).
The performance gain has been around +0.5% annually for rebalancing in a typical stock/bond portfolio, which is an example of how a lower performing asset can contribute more than you would expect than by looking at it individually. It's tougher to capture as much of this +0.5% with an asset like TIPS that may experience bigger drops due to its lower market liquidity.
Specific numbers are in the thread below:
viewtopic.php?t=334433
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Re: Why use anything but TIPS?
One major snag in a 100% TIPS portfolio is assuming that you can keep them to maturity.
If you are forced to sell earlier for unforeseen reasons, you could potentially be screwed.
On the other hand, if you feel that you do not need real growth to maintain your lifestyle and thus do not have to take the associated risks involved in getting it, if one could purchase unlimited I-bonds I think that would be a great way to go. Sadly that is not an option. So anything you do involves risk.
If you are forced to sell earlier for unforeseen reasons, you could potentially be screwed.
On the other hand, if you feel that you do not need real growth to maintain your lifestyle and thus do not have to take the associated risks involved in getting it, if one could purchase unlimited I-bonds I think that would be a great way to go. Sadly that is not an option. So anything you do involves risk.
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Re: Why use anything but TIPS?
I saw a list of several Vanguard TIPS funds on this thread. Unless I missed it, there was only one reference to a Fidelity fund (FIPDX).
Any suggestions/thoughts on other Fidelity TIPS funds?
Any suggestions/thoughts on other Fidelity TIPS funds?
Re: Why use anything but TIPS?
On the breakeven inflation rate seeming reasonable people on this forum are generally well 'trained' to say they can't tell if stocks are overvalued or not, or at least a bunch of people will always pipe up saying you can't determine if eg. US stocks are overvalued. But the discipline isn't as strong once you get a little off that beaten path to something like whether the BE inflation rate looks 'reasonable'. I don't see much reason you could assess one of those things any better than the other, though I'm less hardcore than some in insisting you can *never* assess either one at all. But in general my reference for the 'reasonableness' of the TIPS BE would be that the market wouldn't likely say it was X if the real expectation was greatly different. There are exceptions though. In 2009 I just thought TIPS were undervalued at yields like 3% and BE indicating long term deflation. Whether by correct analysis or luck, in hindsight it seems they were undervalued.
On TIPS looking much better when not used to 'rebalance', sure. Although I'd add that even if you sell bonds to buy stocks when the stock market goes down (I adjust my futures position in stocks; I do keep my margin reserve in nominal treasuries, the mid term fund VGIT, but it's small and at the moment I'm short treasury futures against it), you are never going to 'rebalance' *all* of your bonds into stocks. The plausible % is fairly small*. So 'rebalancing' isn't a reason to entirely ignore the often big penalty you suffer in lower yield for liquidity in nominal treasuries you don't actually need. And total return is what matters, the fact that a 5 yr treasury (you aren't going to sell) gets marked up and a 5yr TIPS doesn't as much, and a 5 yr CD doesn't at all, is an illusory difference. It's not leaving anything out of a historical analysis to ignore that, because it wasn't worth anything, *on bonds held to maturity* (and holding eg. an 8yr total bond fund over a 30 yr investing horizon is effectively predominantly holding bonds to maturity).
*60/40 stock/bond, stock market drops 30%, assume bond prices don't change for simplicity, the stocks become 60*.7=42, bonds still 40, becomes only 51% stock, restoring to 60% stock only requires 7.2 or 18% of the bonds to be sold. Having the whole 40 in a super liquid instrument at a yield penalty isn't justified by 'rebalancing', which again anyway doesn't actually require selling anywhere near that much in bonds, with futures it would require liquidating perhaps 1.5% of your bonds. And 30% stock drops don't happen all the time, but you're taking extra risk (vs TIPS) or losing yield (vs CD's) with nominal treasuries all the time.
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Re: Why use anything but TIPS?
If you have a Fidelity account or can buy it with no fees then FIPDX based on the fund info seems similar to the other intermediate funds mentioned. I am using Vanguard because that is what is available in my 401k plan. I was also using Schwab's SCHP ETF (Schwab US TIPS ETF) in my Roth IRA before I moved TIPS from the Roth IRA into the 401k. I use Schwab for our Roth and taxable accounts and would not buy the Fidelity or any mutual fund if I had to pay a fee to purchase. There are too many no-cost similar funds out there.Copernicus9 wrote: ↑Thu Oct 14, 2021 3:59 pm I saw a list of several Vanguard TIPS funds on this thread. Unless I missed it, there was only one reference to a Fidelity fund (FIPDX).
Any suggestions/thoughts on other Fidelity TIPS funds?
The performance of an intermediate TIPS fund that is tracking correctly should be the same as shown here for FIPDX (Fidelity Inflation-Prot Bd Index), SWRSX (Schwab Treasury Infl Protected Secs Idx) and VAIPX (Vanguard Inflation-Protected Secs Adm). FIPDX actually had a slightly higher final balance.
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Re: Why use anything but TIPS?
At least as far as I'm concerned, the 'reasonableness' of the TIPS break-even point is the fact that that point aligns closely with other measures of expected inflation, not what I'm guessing inflation will be and comparing the BE rate to that guess.JackoC wrote: ↑Thu Oct 14, 2021 4:04 pmOn the breakeven inflation rate seeming reasonable people on this forum are generally well 'trained' to say they can't tell if stocks are overvalued or not, or at least a bunch of people will always pipe up saying you can't determine if eg. US stocks are overvalued. But the discipline isn't as strong once you get a little off that beaten path to something like whether the BE inflation rate looks 'reasonable'. I don't see much reason you could assess one of those things any better than the other, though I'm less hardcore than some in insisting you can *never* assess either one at all. But in general my reference for the 'reasonableness' of the TIPS BE would be that the market wouldn't likely say it was X if the real expectation was greatly different. There are exceptions though. In 2009 I just thought TIPS were undervalued at yields like 3% and BE indicating long term deflation. Whether by correct analysis or luck, in hindsight it seems they were undervalued.
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Re: Why use anything but TIPS?
I have noticed during bears that volatility does go up. Part of this is that there is a question of quality during a bear (quality is a factor that reduces volatility in the market, but it can be challenged and result in higher volatility as the downside risk is realized).abc132 wrote: ↑Thu Oct 14, 2021 3:41 pmIf you think the market is less safe after crashing, then keeping that higher percentage of bonds would be fine. People that rebalance back to their original AA keep the same level or risk but hope for higher potential gains.tonyclifton wrote: ↑Thu Oct 14, 2021 3:21 pm
I don’t follow the need to rebalancing during a crash and TIPS. Maybe this is a secondary purpose of any fixed income (or any asset that is liquid and hasn’t crashed at the same time)? I didn’t own TIPS in 2008 (only equities) but felt they did fine in March 2020 (didn’t sell or rebalance).
The performance gain has been around +0.5% annually for rebalancing in a typical stock/bond portfolio, which is an example of how a lower performing asset can contribute more than you would expect than by looking at it individually. It's tougher to capture as much of this +0.5% with an asset like TIPS that may experience bigger drops due to its lower market liquidity.
Specific numbers are in the thread below:
viewtopic.php?t=334433
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Re: Why use anything but TIPS?
TIPS will not fare well during unexpected deflation but if held to maturity will be worth par value, which would be less than the original investment if bought at a negative yield.
Although I wouldn't consider TIPS a bet more than other investment, it is true that one is paying for a kind of insurance, for which it is presumably possible to overpay, and that that insurance may not be as significant were the case for which it was purchased to occur.
I lean towards a portfolio consisting of TIPS, corporates, and gold on the non-stocks side though I don't currently hold this. The logic would be that if we don't see severe inflation or deflation (either of which could impact corporate viability) one may as well get the higher yields on the corporate bonds.
Although I wouldn't consider TIPS a bet more than other investment, it is true that one is paying for a kind of insurance, for which it is presumably possible to overpay, and that that insurance may not be as significant were the case for which it was purchased to occur.
I lean towards a portfolio consisting of TIPS, corporates, and gold on the non-stocks side though I don't currently hold this. The logic would be that if we don't see severe inflation or deflation (either of which could impact corporate viability) one may as well get the higher yields on the corporate bonds.
Re: Why use anything but TIPS?
Does this statement apply to all age groups and level of FI?willthrill81 wrote: ↑Wed Oct 13, 2021 11:29 am TIPS remove the impact of unexpected inflation from the funds used to buy them and do so for very little, potentially even zero, cost. As such, they seem like close to a no-brainer to me. I've heard very esoteric arguments against this (e.g., 'not all expenses track CPI and some are nominal, so some nominal bonds make sense'), but the reality is that inflation risk has likely been the single biggest risk historically to bonds, and TIPS (and I bonds) remove the risk of unexpected inflation as noted above.
So I agree that 100% TIPS for one's fixed income is certainly logical.
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Re: Why use anything but TIPS?
More or less, yes.Makaveli wrote: ↑Thu Oct 14, 2021 9:56 pmDoes this statement apply to all age groups and level of FI?willthrill81 wrote: ↑Wed Oct 13, 2021 11:29 am TIPS remove the impact of unexpected inflation from the funds used to buy them and do so for very little, potentially even zero, cost. As such, they seem like close to a no-brainer to me. I've heard very esoteric arguments against this (e.g., 'not all expenses track CPI and some are nominal, so some nominal bonds make sense'), but the reality is that inflation risk has likely been the single biggest risk historically to bonds, and TIPS (and I bonds) remove the risk of unexpected inflation as noted above.
So I agree that 100% TIPS for one's fixed income is certainly logical.
If you have two investment options available to you, both offer the same expected return, but one is much more exposed to a serious risk, which one should you logically choose? Does your age or level of assets have any impact on the decision?
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Re: Why use anything but TIPS?
I like the idea of TIPS, but there's a disconnect in what I think I'd like them to do, and the way they seem to actually perform.
If I had bought VTAPX - Vanguard Short-Term Inflation-Protected Securities Index Fund - back in 2012, my results would have been trailing inflation a fair bit in 2017
Is this a concern? Can someone explain this to me? It doesn't seem to be an issue with the fund in particular either, as it tracked it's index.
If I had bought VTAPX - Vanguard Short-Term Inflation-Protected Securities Index Fund - back in 2012, my results would have been trailing inflation a fair bit in 2017
Is this a concern? Can someone explain this to me? It doesn't seem to be an issue with the fund in particular either, as it tracked it's index.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Re: Why use anything but TIPS?
Are you sure you're including dividends?JoMoney wrote: ↑Thu Oct 14, 2021 11:34 pm I like the idea of TIPS, but there's a disconnect in what I think I'd like them to do, and the way they seem to actually perform.
If I had bought VTAPX - Vanguard Short-Term Inflation-Protected Securities Index Fund - back in 2012, my results would have been trailing inflation a fair bit in 2017
Is this a concern? Can someone explain this to me? It doesn't seem to be an issue with the fund in particular either, as it tracked it's index.
Re: Why use anything but TIPS?
Yes, the charts is a (old style) Morningstar growth chart of the fund, and also tracks the "Total Return" of the "Bloomberg US TIPS 0-5 Year" index.
Over the same time period, a nominal short-term bond fund seemed better with at least matching inflation
Growth chart of VBIRX v. Inflation
Growth chart of VTAPX v. inflation
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Re: Why use anything but TIPS?
This is interesting. That’s quite a few years.JoMoney wrote: ↑Thu Oct 14, 2021 11:34 pm I like the idea of TIPS, but there's a disconnect in what I think I'd like them to do, and the way they seem to actually perform.
If I had bought VTAPX - Vanguard Short-Term Inflation-Protected Securities Index Fund - back in 2012, my results would have been trailing inflation a fair bit in 2017
Is this a concern? Can someone explain this to me? It doesn't seem to be an issue with the fund in particular either, as it tracked it's index.
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Re: Why use anything but TIPS?
I know the amount of I Bonds one can buy per year is limited and they're locked up for a year but other than that, are I Bonds better than TIPS?
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Re: Why use anything but TIPS?
Absolutely. I-Bonds have a fixed rate of 0. Very clear winner. Max out your $10k.billthecat wrote: ↑Fri Oct 15, 2021 8:55 am I know the amount of I Bonds one can buy per year is limited and they're locked up for a year but other than that, are I Bonds better than TIPS?
Re: Why use anything but TIPS?
They are different, so that makes it difficult to have one definitive answer.billthecat wrote: ↑Fri Oct 15, 2021 8:55 am I know the amount of I Bonds one can buy per year is limited and they're locked up for a year but other than that, are I Bonds better than TIPS?
Check out the I-Bonds thread, and see which characteristics you prefer.
Having to open a special Treasury Direct account is probably the biggest detractor from I-Bonds besides the annual limits.
I plan to liquidate everything in my TD account before I take social security at 70. It's not something I want anyone else to have to deal with after my death.
Re: Why use anything but TIPS?
Have a look at this: https://tipswatch.com/2021/09/07/i-bond ... rotection/billthecat wrote: ↑Fri Oct 15, 2021 8:55 am I know the amount of I Bonds one can buy per year is limited and they're locked up for a year but other than that, are I Bonds better than TIPS?
tipswatch (who has a nice site and writes extensively on this) feels I-bonds are better as of now. If you don't want to read the whole thing, go to "I Bonds vs. TIPS: It’s not a contest".
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Re: Why use anything but TIPS?
abc132 wrote: ↑Fri Oct 15, 2021 9:25 amThey are different, so that makes it difficult to have one definitive answer.billthecat wrote: ↑Fri Oct 15, 2021 8:55 am I know the amount of I Bonds one can buy per year is limited and they're locked up for a year but other than that, are I Bonds better than TIPS?
Check out the I-Bonds thread, and see which characteristics you prefer.
Having to open a special Treasury Direct account is probably the biggest detractor from I-Bonds besides the annual limits.
I plan to liquidate everything in my TD account before I take social security at 70. It's not something I want anyone else to have to deal with after my death.
Orangutan wrote: ↑Fri Oct 15, 2021 9:21 amAbsolutely. I-Bonds have a fixed rate of 0. Very clear winner. Max out your $10k.billthecat wrote: ↑Fri Oct 15, 2021 8:55 am I know the amount of I Bonds one can buy per year is limited and they're locked up for a year but other than that, are I Bonds better than TIPS?
Thanks, and that also clarifies why according to this thread TIPS beat bonds: "Historically, TIPS pay a yield premium over I Bonds, which makes sense because I Bonds have a more flexible maturity, better deflation protection, and tax-deferred interest. But that’s not the case right now."Da5id wrote: ↑Fri Oct 15, 2021 9:29 amHave a look at this: https://tipswatch.com/2021/09/07/i-bond ... rotection/billthecat wrote: ↑Fri Oct 15, 2021 8:55 am I know the amount of I Bonds one can buy per year is limited and they're locked up for a year but other than that, are I Bonds better than TIPS?
tipswatch (who has a nice site and writes extensively on this) feels I-bonds are better as of now. If you don't want to read the whole thing, go to "I Bonds vs. TIPS: It’s not a contest".
So, I Bonds > TIPS fund > total bond fund. I have $1M in total bond (100% of tax deferred plus more in taxable). Shoot, now I have to figure out what to do about the total bond holdings. I could just leave it and just add I Bonds / TIPS. I hate to change things up yet again. Schwab's 2025 target date fund has about 3% (of total, not just FI) in TIPS (currently). I could follow that.
We cannot direct the winds but we can adjust our sails • It's later than you think • Ack! Thbbft!
Re: Why use anything but TIPS?
I personally would go with the additive method if it can get you to your desired allocation.billthecat wrote: ↑Fri Oct 15, 2021 10:28 am So, I Bonds > TIPS fund > total bond fund. I have $1M in total bond (100% of tax deferred plus more in taxable). Shoot, now I have to figure out what to do about the total bond holdings. I could just leave it and just add I Bonds / TIPS. I hate to change things up yet again. Schwab's 2025 target date fund has about 3% (of total, not just FI) in TIPS (currently). I could follow that.
At 3% TIPS I don't think it will matter much so make sure to weigh the additional value you perceive against the additional hassle. If you are headed to 10% TIPS in the future, then the decision to start transitioning now would be easier to make.
Re: Why use anything but TIPS?
To explore the "logical" aspect, I would think that just because 100% TIPS is logical doesn't exclude the possibility of other allocations also being logical. Example, in a taxable account TIPS inflation adjustments are treated as income each year even though (phantom income) so one might choose 100% TIPS for most of one's fixed income exposure in a tax-deferred account but nominal bonds in taxable for the rest.willthrill81 wrote: ↑Thu Oct 14, 2021 10:50 pmMore or less, yes.Makaveli wrote: ↑Thu Oct 14, 2021 9:56 pmDoes this statement apply to all age groups and level of FI?willthrill81 wrote: ↑Wed Oct 13, 2021 11:29 am TIPS remove the impact of unexpected inflation from the funds used to buy them and do so for very little, potentially even zero, cost. As such, they seem like close to a no-brainer to me. I've heard very esoteric arguments against this (e.g., 'not all expenses track CPI and some are nominal, so some nominal bonds make sense'), but the reality is that inflation risk has likely been the single biggest risk historically to bonds, and TIPS (and I bonds) remove the risk of unexpected inflation as noted above.
So I agree that 100% TIPS for one's fixed income is certainly logical.
If you have two investment options available to you, both offer the same expected return, but one is much more exposed to a serious risk, which one should you logically choose? Does your age or level of assets have any impact on the decision?
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Re: Why use anything but TIPS?
That is because people are commanding far below inflation for short term bonds. So will short-term TIPS not keep up with inflation (even with the inflation adjustment, the real yield is still negative). Also, if the demanded real yield increases, they will temporarily underperform inflation just because of interest rate risk.JoMoney wrote: ↑Thu Oct 14, 2021 11:34 pm I like the idea of TIPS, but there's a disconnect in what I think I'd like them to do, and the way they seem to actually perform.
If I had bought VTAPX - Vanguard Short-Term Inflation-Protected Securities Index Fund - back in 2012, my results would have been trailing inflation a fair bit in 2017
Is this a concern? Can someone explain this to me? It doesn't seem to be an issue with the fund in particular either, as it tracked it's index.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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Re: Why use anything but TIPS?
Fair enough, though any bonds in taxable may be sub-optimal.sycamore wrote: ↑Fri Oct 15, 2021 1:11 pmTo explore the "logical" aspect, I would think that just because 100% TIPS is logical doesn't exclude the possibility of other allocations also being logical. Example, in a taxable account TIPS inflation adjustments are treated as income each year even though (phantom income) so one might choose 100% TIPS for most of one's fixed income exposure in a tax-deferred account but nominal bonds in taxable for the rest.willthrill81 wrote: ↑Thu Oct 14, 2021 10:50 pmMore or less, yes.Makaveli wrote: ↑Thu Oct 14, 2021 9:56 pmDoes this statement apply to all age groups and level of FI?willthrill81 wrote: ↑Wed Oct 13, 2021 11:29 am TIPS remove the impact of unexpected inflation from the funds used to buy them and do so for very little, potentially even zero, cost. As such, they seem like close to a no-brainer to me. I've heard very esoteric arguments against this (e.g., 'not all expenses track CPI and some are nominal, so some nominal bonds make sense'), but the reality is that inflation risk has likely been the single biggest risk historically to bonds, and TIPS (and I bonds) remove the risk of unexpected inflation as noted above.
So I agree that 100% TIPS for one's fixed income is certainly logical.
If you have two investment options available to you, both offer the same expected return, but one is much more exposed to a serious risk, which one should you logically choose? Does your age or level of assets have any impact on the decision?
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Re: Why use anything but TIPS?
For "dry powder", to buy equities during a downturn. In other words, to use when you rebalance.
Let's say you rebalance once a year, on New Year's Eve. In 2008, equities were down 37%. The next year, they'd go up 29%. So, this is a great time to buy more equities. But what will you use to buy them? Plain Treasuries are much better than TIPS. Short term Treasuries rose 6.6% in 2008, while TIPS declined 2.8%.
Your bond portion has several jobs, not just one. One is to provide money to buy stocks when they're down; plain Treasuries do that better than TIPS. Another is to reduce volatility, so you can sleep at night. In that case, you want to diversity a lot: not just TIPS, but also plain Treasuries, and maybe Munis or corporate bonds.Yeah, I get that TIPS have historically made the line more squiggly and they temporarily sink a bit when stocks do - but they’re still doing their job as the bond portion of a portfolio.
Totally agree that everything should be looked at in terms of real dollars, not nominal dollars. The average price of a new car: $2,210 -- in 1950. 1950 dollars can't be compared directly to 2021 dollars, any more than Canadian dollars can be compared 1:1 to U.S. dollars. Plain Treasuries are thought of as safe, but they're actually very exposed to inflation risk. TIPS are actually safe.Whether inflation is transitory or not, it’s still made me reassess my fixed income strategy. Why am I exposing half of my fixed income to a huge risk? Why would I not want something in real terms?
Still, they're only safe if you buy a bunch of them today, keep them to maturity, then cash them in and use them for living expenses. If you have a mutual fund or ETF of TIPS, where they're continually buying new ones and selling old ones, the argument that TIPS are safe goes out the window. If you buy a 20 year TIPS today, and sell it in 10 years, half of the difference is inflation *expectations*, not actual inflation.
Yeah, but you can only get $25k / year (if you buy a second in a trust and a 3rd $5k with tax returns). And you can't really use them for rebalancing, e.g. sell a portion of one to buy stocks. So unless your expenses are $25k/year or less, you need something else on top of I-bonds.Also, I-Bonds are cool.
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Re: Why use anything but TIPS?
Thanks. Currently, 2.2% of NW (5.25% of FI) is in I Bonds, so I'm well on my way. I'm still contributing to total bond, though, in my traditional 401K. There's no TIPS option, but there is a stable value option. Not sure if I should switch to the stable value.abc132 wrote: ↑Fri Oct 15, 2021 11:03 amI personally would go with the additive method if it can get you to your desired allocation.billthecat wrote: ↑Fri Oct 15, 2021 10:28 am So, I Bonds > TIPS fund > total bond fund. I have $1M in total bond (100% of tax deferred plus more in taxable). Shoot, now I have to figure out what to do about the total bond holdings. I could just leave it and just add I Bonds / TIPS. I hate to change things up yet again. Schwab's 2025 target date fund has about 3% (of total, not just FI) in TIPS (currently). I could follow that.
At 3% TIPS I don't think it will matter much so make sure to weigh the additional value you perceive against the additional hassle. If you are headed to 10% TIPS in the future, then the decision to start transitioning now would be easier to make.
Last edited by billthecat on Mon Oct 18, 2021 11:25 pm, edited 2 times in total.
We cannot direct the winds but we can adjust our sails • It's later than you think • Ack! Thbbft!
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Re: Why use anything but TIPS?
Very conservative folks here suggesting 50/50 TIPS/Short term treasuries.
Why not something like:
20% TIPS
20% Short-term treasuries
20% Total Bond or VWIUX (if in taxable)
20% Corporate Bond
20% Long-term treasuries
You’ll never be happy with everything in there which would indicate diversification. It’s slightly riskier than pure TIPS and short-term treasuries but well-diversified and should boost returns a bit which is useful.
Why not something like:
20% TIPS
20% Short-term treasuries
20% Total Bond or VWIUX (if in taxable)
20% Corporate Bond
20% Long-term treasuries
You’ll never be happy with everything in there which would indicate diversification. It’s slightly riskier than pure TIPS and short-term treasuries but well-diversified and should boost returns a bit which is useful.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh
Re: Why use anything but TIPS?
I'm 100% fixed...about 90% CDs and 10% intermediate munis; so I qualify as conservative.finite_difference wrote: ↑Fri Oct 15, 2021 6:16 pm Very conservative folks here suggesting 50/50 TIPS/Short term treasuries.
Why not something like:
20% TIPS
20% Short-term treasuries
20% Total Bond or VWIUX (if in taxable)
20% Corporate Bond
20% Long-term treasuries
You’ll never be happy with everything in there which would indicate diversification. It’s slightly riskier than pure TIPS and short-term treasuries but well-diversified and should boost returns a bit which is useful.
When the CDs mature, I may just move to TIPS; I may not.
Corporate Bonds are too risky for me.
Short term treasuries are too short. FDIC savings beat them.
Total Bond...not bad but too many corporates.
Long Treasuries...maybe long TIPS treasuries; but probably a non-rolling TIPS ladder; or some combination of a TIPS ETFs....duration matched.
VWIUX (Intermediate Muni): I hold it; I like it. I probably won't go over 30% of my holdings because W. Bernstein said that munis are OK as long as you have plenty of treasuries and CDs.
Re: Why use anything but TIPS?
Probably not going to perform that differently from 20% TIPS, 80% total bond and perhaps with lower vol-adjusted return: linkfinite_difference wrote: ↑Fri Oct 15, 2021 6:16 pm Very conservative folks here suggesting 50/50 TIPS/Short term treasuries.
Why not something like:
20% TIPS
20% Short-term treasuries
20% Total Bond or VWIUX (if in taxable)
20% Corporate Bond
20% Long-term treasuries
You’ll never be happy with everything in there which would indicate diversification. It’s slightly riskier than pure TIPS and short-term treasuries but well-diversified and should boost returns a bit which is useful.
Now I would agree that 50/50 TIPS/Short term treasuries is very conservative. What about some mix of TIPS, nominal corporates, and gold? Covers mild inflation, mild disinflation, and severe currency shock with higher coupons of corporates during good times.
Re: Why use anything but TIPS?
Fidelity has only 1 TIPs fund, FIPDX. There are ETFs from others which, for most accounts at Fidelity, are available can be purchased commission free.Copernicus9 wrote: ↑Thu Oct 14, 2021 3:59 pm I saw a list of several Vanguard TIPS funds on this thread. Unless I missed it, there was only one reference to a Fidelity fund (FIPDX).
Any suggestions/thoughts on other Fidelity TIPS funds?
There are no ultrashort TIPs funds. ProShares had an ETF at one time but it was closed several years ago.
For short and intermediate duration, there are a number of them.
Some of the more popular Intermediate duration choices:
Yes, there's FIPDX from Fidelity which tracks an index that includes all TIPs with a duration of >1 year
Schwab's SCHP tracks the same index as FIPDX but is an ETF. Same e/r as FIPDX
TIP is an ETF from ishares from ishares also tracks the same index but with a higher e/r.
There are others.
For short duration
STIP from ishares tracks an index with duration 0-5 years and is relatively inexpensive
VTIP is an ETF from Vanguard tracks the same index as STIP
There are others
For long duration, currently there really is only one choice that's available to most investors
LTPZ from Pimco which is an index fund ETF that tracks TIPs with duration of >15 years
Today I hold LTPZ and SCHP. I'm doing duration matching where I update the proportion I hold between LTPZ and SCHP once per quarter. I've chosen these ETF's because they report their holdings daily (with at most 1-2 days lag) whereas mutual funds can have a lag of up to 3 months. I update the proportions between LTPZ and SCHP once per quarter. At some point the duration I need will be too short to include LTPZ. At that point, it will be SCHP and STIP. Again, at some point the duration I need will be too short to include SCHP. At that point it will be STIP and ???. ??? because there is no ultrashort TIPs fund. Perhaps by then, there will be something. Otherwise, it will be something nominal: ultrashort bond, CD's, etc. or maybe just stick with STIP.
Some use LTPZ and something like STIP for the entire range. That works too. I've chosen to do a multi-step mainly because it gets me out of LTPZ sooner since it has the highest e/r at 0.20%. Would be nice is this fund had a competitor to drive down the e/r.
Cheers.
Re: Why use anything but TIPS?
I like your plan in bold; I may copy it. Very simple and almost the equal to a non-rolling TIPS ladder. From memory, it's all in tax advantaged.dcabler wrote: ↑Sat Oct 16, 2021 7:24 amFidelity has only 1 TIPs fund, FIPDX. There are ETFs from others which, for most accounts at Fidelity, are available can be purchased commission free.Copernicus9 wrote: ↑Thu Oct 14, 2021 3:59 pm I saw a list of several Vanguard TIPS funds on this thread. Unless I missed it, there was only one reference to a Fidelity fund (FIPDX).
Any suggestions/thoughts on other Fidelity TIPS funds?
There are no ultrashort TIPs funds. ProShares had an ETF at one time but it was closed several years ago.
For short and intermediate duration, there are a number of them.
Some of the more popular Intermediate duration choices:
Yes, there's FIPDX from Fidelity which tracks an index that includes all TIPs with a duration of >1 year
Schwab's SCHP tracks the same index as FIPDX but is an ETF. Same e/r as FIPDX
TIP is an ETF from ishares from ishares also tracks the same index but with a higher e/r.
There are others.
For short duration
STIP from ishares tracks an index with duration 0-5 years and is relatively inexpensive
VTIP is an ETF from Vanguard tracks the same index as STIP
There are others
For long duration, currently there really is only one choice that's available to most investors
LTPZ from Pimco which is an index fund ETF that tracks TIPs with duration of >15 years
Today I hold LTPZ and SCHP. I'm doing duration matching where I update the proportion I hold between LTPZ and SCHP once per quarter. I've chosen these ETF's because they report their holdings daily (with at most 1-2 days lag) whereas mutual funds can have a lag of up to 3 months. I update the proportions between LTPZ and SCHP once per quarter. At some point the duration I need will be too short to include LTPZ. At that point, it will be SCHP and STIP. Again, at some point the duration I need will be too short to include SCHP. At that point it will be STIP and ???. ??? because there is no ultrashort TIPs fund. Perhaps by then, there will be something. Otherwise, it will be something nominal: ultrashort bond, CD's, etc. or maybe just stick with STIP.
Some use LTPZ and something like STIP for the entire range. That works too. I've chosen to do a multi-step mainly because it gets me out of LTPZ sooner since it has the highest e/r at 0.20%. Would be nice is this fund had a competitor to drive down the e/r.
Cheers.
The expenses on $100K of LTPZ are about $200 per year; $500K would be $1000 per year.
Bottom Line: In my opinion your plan is optimal or close for an after full-retirement-age investor.
Re: Why use anything but TIPS?
It's a reason to hold both - you use plain Treasuries to rebalance into stock, and to a lesser extent, TIPS.martincmartin wrote: ↑Fri Oct 15, 2021 3:10 pm For "dry powder", to buy equities during a downturn. In other words, to use when you rebalance.
Let's say you rebalance once a year, on New Year's Eve. In 2008, equities were down 37%. The next year, they'd go up 29%. So, this is a great time to buy more equities. But what will you use to buy them? Plain Treasuries are much better than TIPS. Short term Treasuries rose 6.6% in 2008, while TIPS declined 2.8%.
Even if you held only TIPS as your fixed income, rebalancing from TIPS with a 2.8% drop into the stock market with a 50% drop would still have been very profitable long-term.
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Re: Why use anything but TIPS?
It outperforms 20% TIPS:80% Total Bond by 0.5%/year. For fixed income, that’s significant!!000 wrote: ↑Sat Oct 16, 2021 12:02 amProbably not going to perform that differently from 20% TIPS, 80% total bond and perhaps with lower vol-adjusted return: linkfinite_difference wrote: ↑Fri Oct 15, 2021 6:16 pm Very conservative folks here suggesting 50/50 TIPS/Short term treasuries.
Why not something like:
20% TIPS
20% Short-term treasuries
20% Total Bond or VWIUX (if in taxable)
20% Corporate Bond
20% Long-term treasuries
You’ll never be happy with everything in there which would indicate diversification. It’s slightly riskier than pure TIPS and short-term treasuries but well-diversified and should boost returns a bit which is useful.
Now I would agree that 50/50 TIPS/Short term treasuries is very conservative. What about some mix of TIPS, nominal corporates, and gold? Covers mild inflation, mild disinflation, and severe currency shock with higher coupons of corporates during good times.
As you say, I was mainly pointing out that 50:50 TIPS:Total Bond is conservative. If you drop down to 20:80 that’s a better mix in my opinion.
In Portfolio Visualizer we can also only go back to 2001 when TIPS started (if you use High Yield Corporate Bonds instead of Corporate Bonds since the only goes back to 2004.)
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh
Re: Why use anything but TIPS?
I'd correct that to say "It outperformed 20% TIPS:80% Total Bond by 0.5%/year. For fixed income, that’s significant!!"finite_difference wrote: ↑Sun Oct 17, 2021 1:18 pmIt outperforms 20% TIPS:80% Total Bond by 0.5%/year. For fixed income, that’s significant!!000 wrote: ↑Sat Oct 16, 2021 12:02 amProbably not going to perform that differently from 20% TIPS, 80% total bond and perhaps with lower vol-adjusted return: linkfinite_difference wrote: ↑Fri Oct 15, 2021 6:16 pm Very conservative folks here suggesting 50/50 TIPS/Short term treasuries.
Why not something like:
20% TIPS
20% Short-term treasuries
20% Total Bond or VWIUX (if in taxable)
20% Corporate Bond
20% Long-term treasuries
You’ll never be happy with everything in there which would indicate diversification. It’s slightly riskier than pure TIPS and short-term treasuries but well-diversified and should boost returns a bit which is useful.
Now I would agree that 50/50 TIPS/Short term treasuries is very conservative. What about some mix of TIPS, nominal corporates, and gold? Covers mild inflation, mild disinflation, and severe currency shock with higher coupons of corporates during good times.
As you say, I was mainly pointing out that 50:50 TIPS:Total Bond is conservative. If you drop down to 20:80 that’s a better mix in my opinion.
In Portfolio Visualizer we can also only go back to 2001 when TIPS started (if you use High Yield Corporate Bonds instead of Corporate Bonds since the only goes back to 2004.)
Whether it will outperform over any future specified duration is unknown. As a riskier portfolio it probably will outperform in the long term, but I'm always a bit wary about assuming future returns myself.
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Re: Why use anything but TIPS?
Right now, I'm at 49% duration-matched TIPS (15% LT, 34% IT) and 51% Global Bond (32% BND, 19% BNDX).
My two investment portfolios are TIPS and WBS (World market allocations of VTI, VXUS, BND, BNDX). I initially set my TIPS at roughly 50% of Global Bond and have my rebalancing table (for redemptions and contributions) set to maintain the current (at time of rebalancing and determined by market dynamics) TIPS percentage of TIPS + WBS.
Any WBS internal rebalancing (to maintain world market proportions), of course, doesn't involve the TIPS. Ideally, any rebalancing between TIPS and WBS would use Sharpe's AAAP, but I haven't yet discovered a formula.
(I want to avoid conventional rebalancing as I consider it betting--on a particular market dynamic--and active investing.)
Note: My current ratio of BND:BNDX isn't actual world market due to account limitations, but I'll have the opportunity to improve this with future contributions from some legacy, factor-tilt stock funds.
My two investment portfolios are TIPS and WBS (World market allocations of VTI, VXUS, BND, BNDX). I initially set my TIPS at roughly 50% of Global Bond and have my rebalancing table (for redemptions and contributions) set to maintain the current (at time of rebalancing and determined by market dynamics) TIPS percentage of TIPS + WBS.
Any WBS internal rebalancing (to maintain world market proportions), of course, doesn't involve the TIPS. Ideally, any rebalancing between TIPS and WBS would use Sharpe's AAAP, but I haven't yet discovered a formula.
(I want to avoid conventional rebalancing as I consider it betting--on a particular market dynamic--and active investing.)
Note: My current ratio of BND:BNDX isn't actual world market due to account limitations, but I'll have the opportunity to improve this with future contributions from some legacy, factor-tilt stock funds.
VT 60% / VFSUX 20% / TIPS 20%
Re: Why use anything but TIPS?
This is another aspect I struggle with. Which may apply to many non-retiree's. I would assume that most 20-30-40's YO fixed income is held in 401(k) plans. I am interested in shifting a portion of my FI to TIPS yet would need to do so in my brokerage account since there are only stable value, active/passive Bond funds in 401(k). I am leveraging the wisdom of the forum as this part of my portfolio does not interest me as much.willthrill81 wrote: ↑Fri Oct 15, 2021 1:29 pmFair enough, though any bonds in taxable may be sub-optimal.sycamore wrote: ↑Fri Oct 15, 2021 1:11 pmTo explore the "logical" aspect, I would think that just because 100% TIPS is logical doesn't exclude the possibility of other allocations also being logical. Example, in a taxable account TIPS inflation adjustments are treated as income each year even though (phantom income) so one might choose 100% TIPS for most of one's fixed income exposure in a tax-deferred account but nominal bonds in taxable for the rest.willthrill81 wrote: ↑Thu Oct 14, 2021 10:50 pmMore or less, yes.Makaveli wrote: ↑Thu Oct 14, 2021 9:56 pmDoes this statement apply to all age groups and level of FI?willthrill81 wrote: ↑Wed Oct 13, 2021 11:29 am TIPS remove the impact of unexpected inflation from the funds used to buy them and do so for very little, potentially even zero, cost. As such, they seem like close to a no-brainer to me. I've heard very esoteric arguments against this (e.g., 'not all expenses track CPI and some are nominal, so some nominal bonds make sense'), but the reality is that inflation risk has likely been the single biggest risk historically to bonds, and TIPS (and I bonds) remove the risk of unexpected inflation as noted above.
So I agree that 100% TIPS for one's fixed income is certainly logical.
If you have two investment options available to you, both offer the same expected return, but one is much more exposed to a serious risk, which one should you logically choose? Does your age or level of assets have any impact on the decision?
Given the above, would folks still recommend allocating monies to TIPS. Then rebalance in 401(k) via Total Bond to US EQ.
Re: Why use anything but TIPS?
I recently bought TIPS, mostly switching monies from Fidelity GNMA to Fidelity Inflation Protected Bond Index. My belief here is that increased inflation will stick around longer than originally predicted and I wouldn't be shocked if inflation comes in a bit higher than forecasted. It was about a 1% shift within my portfolio, I did a previous 1% shift earlier this year. So I am cautiously adding to my TIPS allocation.
The Fed keeps saying that this burst of inflation is "transitory", I wish they would quit saying that. It is making me a bit nervous. I do remember the inflation of the 1970's and what I am now seeing is a bit spooky, sort of nightmares of 1970's Stagflation returning. So in 2021, I have shifted about 2% of my portfolio towards TIPS and if higher inflation continues, I will go back and buy some more. I tell you, if I had a dollar for every time I hear the word "transitory" associated with inflation, I would be rich!
The Fed keeps saying that this burst of inflation is "transitory", I wish they would quit saying that. It is making me a bit nervous. I do remember the inflation of the 1970's and what I am now seeing is a bit spooky, sort of nightmares of 1970's Stagflation returning. So in 2021, I have shifted about 2% of my portfolio towards TIPS and if higher inflation continues, I will go back and buy some more. I tell you, if I had a dollar for every time I hear the word "transitory" associated with inflation, I would be rich!
A fool and his money are good for business.
Re: Why use anything but TIPS?
Does your plan offer a brokerage link to buy a range of funds? All my TIPS and Treasuries in my 401k are in the brokerage offering.Makaveli wrote: ↑Thu Oct 21, 2021 8:10 am
This is another aspect I struggle with. Which may apply to many non-retiree's. I would assume that most 20-30-40's YO fixed income is held in 401(k) plans. I am interested in shifting a portion of my FI to TIPS yet would need to do so in my brokerage account since there are only stable value, active/passive Bond funds in 401(k). I am leveraging the wisdom of the forum as this part of my portfolio does not interest me as much.
Given the above, would folks still recommend allocating monies to TIPS. Then rebalance in 401(k) via Total Bond to US EQ.
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Re: Why use anything but TIPS?
In a very low interest rate environment holding bonds in tax-deferred vs taxable doesn't make a huge difference (unless your networth is very high).Makaveli wrote: ↑Thu Oct 21, 2021 8:10 amThis is another aspect I struggle with. Which may apply to many non-retiree's. I would assume that most 20-30-40's YO fixed income is held in 401(k) plans. I am interested in shifting a portion of my FI to TIPS yet would need to do so in my brokerage account since there are only stable value, active/passive Bond funds in 401(k). I am leveraging the wisdom of the forum as this part of my portfolio does not interest me as much.willthrill81 wrote: ↑Fri Oct 15, 2021 1:29 pmFair enough, though any bonds in taxable may be sub-optimal.sycamore wrote: ↑Fri Oct 15, 2021 1:11 pmTo explore the "logical" aspect, I would think that just because 100% TIPS is logical doesn't exclude the possibility of other allocations also being logical. Example, in a taxable account TIPS inflation adjustments are treated as income each year even though (phantom income) so one might choose 100% TIPS for most of one's fixed income exposure in a tax-deferred account but nominal bonds in taxable for the rest.willthrill81 wrote: ↑Thu Oct 14, 2021 10:50 pmMore or less, yes.
If you have two investment options available to you, both offer the same expected return, but one is much more exposed to a serious risk, which one should you logically choose? Does your age or level of assets have any impact on the decision?
Given the above, would folks still recommend allocating monies to TIPS. Then rebalance in 401(k) via Total Bond to US EQ.
Do that shouldn't stop you (if TIPS are what you want)
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