Should I load up on TIPS? (And how does inflation adj work)
Should I load up on TIPS? (And how does inflation adj work)
In retirement accounts, what is the potential downside of moving some bonds, stable value funds, etc into TIPS? Inflation continues to be high and most tips are at above zero real yields. The only think I can figure is if real yields on TIPS increase, a lot, offsetting some of inflation gains. But I’m having a hard time seeing how this could be enough to cause them to underperform conventional bonds or stable value funds.
I guess another scenario would be the economy tanks and traditional bond yields dramatically drop and TIPS underperform or suffer a liquidity penalty. Again seem kind of remote and not really a serious danger.
Edit-Follow up: How does the inflation adjustment calculation work for TIPS?
I guess another scenario would be the economy tanks and traditional bond yields dramatically drop and TIPS underperform or suffer a liquidity penalty. Again seem kind of remote and not really a serious danger.
Edit-Follow up: How does the inflation adjustment calculation work for TIPS?
Last edited by JBTX on Fri Jun 24, 2022 2:16 am, edited 1 time in total.
Re: Should I load up on TIPS?
The downside is that inflation will be below the break-even rate and you will end up with less money than you would have with nominal bonds. One question to ask is how much of your future spending and income are inflation-dependent.
Re: Should I load up on TIPS?
The way I figure, the 5 year treasury is at about 3.26%, which probably puts the inflation component at about 3.0% over 5 years, assuming a slightly positive real rate. So do I think there is a danger of that current inflation running near 9%, will level out to an average of 3% over 5 years, with the average including the current high rates? Seems like that would require a pretty dramatic economic slowdown.
Any flaws in my logic?
Re: Should I load up on TIPS?
I'm no expert so I'll tap out of the discussion after this. The flaw to me is that you seem to think you know something the billions of dollars moving on treasuries doesn't know.
Re: Should I load up on TIPS?
They will guarantee you a real rate of return of near zero if held to maturity. Nominal bonds aren’t exactly much better right now.
- willthrill81
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Re: Should I load up on TIPS?
I've long argued that the default position for an investor's fixed income should be TIPS and I bonds. They remove the risk of unexpected inflation, which has historically been the largest threat to fixed income.
The Sensible Steward
Re: Should I load up on TIPS?
The thing about TIPS is they are hard for me to wrap my head around, their behavior isn’t entirely intuitive. At some point if nominal rates keep going up the conventional bonds may again be a better diversifier. For now I’m probably at least going to roll a chunk of money languishing in Vanguard retirement trust into TIPS funds. I already have some TIPS funds and have been getting as much ibonds as I can get my hands on.willthrill81 wrote: ↑Fri Jun 10, 2022 8:18 pm I've long argued that the default position for an investor's fixed income should be TIPS and I bonds. They remove the risk of unexpected inflation, which has historically been the largest threat to fixed income.
Re: Should I load up on TIPS?
I own bond funds (TIPs and nominals) and Ibonds, I've found that my head hurts less when I think about them in terms of nominal cash flow (for nominal treasuries) and inflation adjusted cash flow (for TIPs & Ibonds) instead of thinking about them in terms of their returns. Especially important as I'm transitioning into retirement very soon and will use an ABW-like withdrawal method. Doesn't make me smile when I look at the value of my portfolio these days, though.JBTX wrote: ↑Fri Jun 10, 2022 10:46 pmThe thing about TIPS is they are hard for me to wrap my head around, their behavior isn’t entirely intuitive. At some point if nominal rates keep going up the conventional bonds may again be a better diversifier. For now I’m probably at least going to roll a chunk of money languishing in Vanguard retirement trust into TIPS funds. I already have some TIPS funds and have been getting as much ibonds as I can get my hands on.willthrill81 wrote: ↑Fri Jun 10, 2022 8:18 pm I've long argued that the default position for an investor's fixed income should be TIPS and I bonds. They remove the risk of unexpected inflation, which has historically been the largest threat to fixed income.
Re: Should I load up on TIPS?
Downside to TIPS in retirement accounts: If inflation is low, the payout is low.JBTX wrote: ↑Fri Jun 10, 2022 6:46 pm In retirement accounts, what is the potential downside of moving some bonds, stable value funds, etc into TIPS? Inflation continues to be high and most tips are at above zero real yields. The only think I can figure is if real yields on TIPS increase, a lot, offsetting some of inflation gains. But I’m having a hard time seeing how this could be enough to cause them to underperform conventional bonds or stable value funds.
I guess another scenario would be the economy tanks and traditional bond yields dramatically drop and TIPS underperform or suffer a liquidity penalty. Again seem kind of remote and not really a serious danger.
The upside is the reverse.
Right now the 8-year-duration SCHP (all TIPS) ETF's payout is sweet.
Nominal or TIPS? great question!
Split the difference?
If I was going to invest on Monday, I would go either 50:50 TIPS/nominal or 70:30 TIPS/nominal, but that fits my situation; it might not fit yours.
Re: Should I load up on TIPS?
Might want to check out some of the multitude of vineviz's post on the subject nominals and TIPs and spending. I know that a few years ago, I changed my thinking from the "bonds are for ballast" to "bonds are for cashflow/income" especially as I near retirement.hudson wrote: ↑Sat Jun 11, 2022 5:33 amDownside TIPS in retirement accounts: If inflation is low, the payout is low.JBTX wrote: ↑Fri Jun 10, 2022 6:46 pm In retirement accounts, what is the potential downside of moving some bonds, stable value funds, etc into TIPS? Inflation continues to be high and most tips are at above zero real yields. The only think I can figure is if real yields on TIPS increase, a lot, offsetting some of inflation gains. But I’m having a hard time seeing how this could be enough to cause them to underperform conventional bonds or stable value funds.
I guess another scenario would be the economy tanks and traditional bond yields dramatically drop and TIPS underperform or suffer a liquidity penalty. Again seem kind of remote and not really a serious danger.
The upside is the reverse.
Right now the 8-year-duration SCHP (all TIPS) ETF's payout is sweet.
Nominal or TIPS? great question!
Split the difference?
On the return side of things, one thing I haven't put a lot of thought into, but it appears that over longer periods, nominal and TIPs funds of similar durations have had similar returns, despite shorter term divergences.
Cheers.
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Re: Should I load up on TIPS?
I don't believe there are any serious concerns besides the ones you're aware of. (Disclosure: I love TIPS and my holdings in marketable bonds are currently about ⅔ Vanguard Inflation-protected Securities--the intermediate-term fund--VAIPX, and only about ⅓ Total Bond).
The chief concern is that in the future it might turn out that something else might turn out to have been somewhat better. And that for whatever reason, probably including lower liquidity, TIPS funds have been somewhat more volatile than comparable nominal bond funds and have had somewhat lower risk-adjusted return.
John C. Bogle wrote that "Successful investing involves doing just a few things right and avoiding serious mistakes." A heavy TIPS tilt might turn out later in hindsight to be suboptimal, but I cannot believe it is a serious mistake. They are Treasury securities, how bad can they be?
Nominal bonds have an additional fundamental risk that TIPS do not have, so it would be reasonable for investors to demand compensation for that risk in some way. I don't expect inflation protection to come for free.
It continues to be a mystery to me why "Wall Street" talks down TIPS, but I think it does. (Of course, mainstream financial news almost never mentions series I savings bonds either).
The chief concern is that in the future it might turn out that something else might turn out to have been somewhat better. And that for whatever reason, probably including lower liquidity, TIPS funds have been somewhat more volatile than comparable nominal bond funds and have had somewhat lower risk-adjusted return.
John C. Bogle wrote that "Successful investing involves doing just a few things right and avoiding serious mistakes." A heavy TIPS tilt might turn out later in hindsight to be suboptimal, but I cannot believe it is a serious mistake. They are Treasury securities, how bad can they be?
Nominal bonds have an additional fundamental risk that TIPS do not have, so it would be reasonable for investors to demand compensation for that risk in some way. I don't expect inflation protection to come for free.
It continues to be a mystery to me why "Wall Street" talks down TIPS, but I think it does. (Of course, mainstream financial news almost never mentions series I savings bonds either).
I have never understood comments like this. An individual TIPS bond is no harder to understand than an international bond. A TIPS is just like a regular Treasury issue except that it is denominated in real dollars. All bonds have intuitive behavior from issue to maturity, and mysterious market behavior in between. All bond funds show the mysterious market behavior over short periods of time, but become fairly predictable over suitable holding periods. TIPS are not mysterious if you are using them as bonds and roughly holding them to maturity. They are only mysterious if you are trying to exploit what you hope are predictable patterns of short-term market fluctuations. I've seen complaints that the short-term market movements of TIPS have not have high correlations with the short-term fluctuations in inflation (during the time when inflation was low); but so what? The total return of a TIPS from issue to maturity has a 1.00 correlation with inflation.
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- burritoLover
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Re: Should I load up on TIPS?
Odd - when I joined in 2020, everyone was saying total bond is all you need - TIPS aren't necessary.
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Re: Should I load up on TIPS?
Exactly. I keep wondering what has happened to the two fund, simple Simon portfolio crowd, VTSAX and VBTLX, for those folks not prone to having International. Where do you keep the dollars needed for RMDs while not increasing or at least minimizing market risk? Any opinions on this? These are strange days indeed!
- willthrill81
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Re: Should I load up on TIPS?
TIPS have an additional component that complicates their returns compared to nominal bonds, but I don't why anyone would feel the need to understand all the intricacies of TIPS before investing in them.JBTX wrote: ↑Fri Jun 10, 2022 10:46 pmThe thing about TIPS is they are hard for me to wrap my head around, their behavior isn’t entirely intuitive. At some point if nominal rates keep going up the conventional bonds may again be a better diversifier. For now I’m probably at least going to roll a chunk of money languishing in Vanguard retirement trust into TIPS funds. I already have some TIPS funds and have been getting as much ibonds as I can get my hands on.willthrill81 wrote: ↑Fri Jun 10, 2022 8:18 pm I've long argued that the default position for an investor's fixed income should be TIPS and I bonds. They remove the risk of unexpected inflation, which has historically been the largest threat to fixed income.
You mention diversification, but TIPS haven't been any more correlated to stocks than TBM. If you really want diversification from something like TSM, I'd suggest that you consider something other than bonds.
The Sensible Steward
Re: Should I load up on TIPS?
When I think TIPS, I think long....duration matched.dcabler wrote: ↑Sat Jun 11, 2022 5:46 amMight want to check out some of the multitude of vineviz's post on the subject nominals and TIPs and spending. I know that a few years ago, I changed my thinking from the "bonds are for ballast" to "bonds are for cashflow/income" especially as I near retirement.hudson wrote: ↑Sat Jun 11, 2022 5:33 amDownside TIPS in retirement accounts: If inflation is low, the payout is low.JBTX wrote: ↑Fri Jun 10, 2022 6:46 pm In retirement accounts, what is the potential downside of moving some bonds, stable value funds, etc into TIPS? Inflation continues to be high and most tips are at above zero real yields. The only think I can figure is if real yields on TIPS increase, a lot, offsetting some of inflation gains. But I’m having a hard time seeing how this could be enough to cause them to underperform conventional bonds or stable value funds.
I guess another scenario would be the economy tanks and traditional bond yields dramatically drop and TIPS underperform or suffer a liquidity penalty. Again seem kind of remote and not really a serious danger.
The upside is the reverse.
Right now the 8-year-duration SCHP (all TIPS) ETF's payout is sweet.
Nominal or TIPS? great question!
Split the difference?
On the return side of things, one thing I haven't put a lot of thought into, but it appears that over longer periods, nominal and TIPs funds of similar durations have had similar returns, despite shorter term divergences.
Cheers.
Vineviz posts...YES! viewtopic.php?t=318412
dcabler posts...YES! for someone who is actually doing duration matching with TIPS...viewtopic.php?p=6241736&sid=99ce3f12f30 ... f#p6241736
Re: Should I load up on TIPS?
This has seemed compelling logic to me but for decades I was afraid that there somehow must be something wrong with doing that. At the beginning of this year I decided that this had to be right enough that I changed my fixed income from half in intermediate TIPS funds and half in intermediate Treasury funds to everything in intermediate TIPS funds except little bits of sloshing around cash. I have no interest in and think it is a mistake for long term investors to move fixed income around due to current conditions. This shift to all TIPS will certainly be permanent and it should have been that way from long ago. If people are interested the investment is SWRSX in a 401k. Also if people are interested I am long retired, so if that makes a difference to someone, there is that. I bonds are of no practical advantage given how my assets are set up but could be reasonable for lots of people.willthrill81 wrote: ↑Fri Jun 10, 2022 8:18 pm I've long argued that the default position for an investor's fixed income should be TIPS and I bonds. They remove the risk of unexpected inflation, which has historically been the largest threat to fixed income.
Re: Should I load up on TIPS?
My portfolio concept is of an entity with an expected return and a risk in real dollars. The idea of a cash flow from any component of that entity is not part of the picture. For purposes of cash flow management there are arbitrary portfolio withdrawals that only have to be accounted for relative to the future evolution of the portfolio value, ie newvalue = oldvalue + return gain - withdrawals.dcabler wrote: ↑Sat Jun 11, 2022 4:56 amI own bond funds (TIPs and nominals) and Ibonds, I've found that my head hurts less when I think about them in terms of nominal cash flow (for nominal treasuries) and inflation adjusted cash flow (for TIPs & Ibonds) instead of thinking about them in terms of their returns. Especially important as I'm transitioning into retirement very soon and will use an ABW-like withdrawal method. Doesn't make me smile when I look at the value of my portfolio these days, though.JBTX wrote: ↑Fri Jun 10, 2022 10:46 pmThe thing about TIPS is they are hard for me to wrap my head around, their behavior isn’t entirely intuitive. At some point if nominal rates keep going up the conventional bonds may again be a better diversifier. For now I’m probably at least going to roll a chunk of money languishing in Vanguard retirement trust into TIPS funds. I already have some TIPS funds and have been getting as much ibonds as I can get my hands on.willthrill81 wrote: ↑Fri Jun 10, 2022 8:18 pm I've long argued that the default position for an investor's fixed income should be TIPS and I bonds. They remove the risk of unexpected inflation, which has historically been the largest threat to fixed income.
Re: Should I load up on TIPS?
TIPS are not necessary and total bond is sufficient. I do think TIPS are a more logical choice for many investors, however.burritoLover wrote: ↑Sat Jun 11, 2022 7:07 am Odd - when I joined in 2020, everyone was saying total bond is all you need - TIPS aren't necessary.
It is important to realize that we are discussing nuances the effect of which is almost totally hidden in massive variability of results. But if there is a choice that one likes and you can't show that it is a mistake, then why not?
Re: Should I load up on TIPS?
At my age intermediate TIPS funds are pretty well duration matched. How far off the matching is for younger investors and how much it would matter would have to be shown, or has been shown. I confess to owning a bit in LPZ once.hudson wrote: ↑Sat Jun 11, 2022 8:15 am
When I think TIPS, I think long....duration matched.
Vineviz posts...YES! viewtopic.php?t=318412
dcabler posts...YES! for someone who is actually doing duration matching with TIPS...viewtopic.php?p=6241736&sid=99ce3f12f30 ... f#p6241736
A retiree can build a TIPS ladder LMP but I think that is way more machination than needed.
On the other hand for those with SS there is a real valued duration matched income stream that helps.
Re: Should I load up on TIPS?
I went 50/50 TIPS/nominals about 4 years ago, now at 60/40. Here’s my simple view. They have the same safety and interest rate risk as nominal treasuries of the same duration with the only difference being that TIPS provide inflation insurance. If actual inflation is above the break even rate, TIPS will have a higher return. Nominals will have a higher return in the opposite scenario. However, I don’t view these two sides as equal in terms of risk to my retirement portfolio.
Sure, inflation might be a bit below break even (currently running about 3% for 5 year). If that happens, then that loss is just the cost of inflation insurance. However, as we’ve seen, if inflation spikes, it can spike significantly. If the spike lasts more than a year or two, the loss of purchasing power with nominals is compounded. So I view TIPS as having a small downside risk with great upside protection.
My TIPS allocation has drifter up due to their higher returns combined with a conscious decision to only sell nominals to rebalance into stocks. I’m not planning to overtly move to a higher TIPS allocation but will allow these two things to continue let me drift higher over time.
Sure, inflation might be a bit below break even (currently running about 3% for 5 year). If that happens, then that loss is just the cost of inflation insurance. However, as we’ve seen, if inflation spikes, it can spike significantly. If the spike lasts more than a year or two, the loss of purchasing power with nominals is compounded. So I view TIPS as having a small downside risk with great upside protection.
My TIPS allocation has drifter up due to their higher returns combined with a conscious decision to only sell nominals to rebalance into stocks. I’m not planning to overtly move to a higher TIPS allocation but will allow these two things to continue let me drift higher over time.
"The greatest enemy of a good plan is the dream of a perfect plan" - Carl Von Clausewitz
Re: Should I load up on TIPS?
People have very differing view on TIPS, but I wonder how of that has to do with their overall asset allocation and life stage? For example, if I am accumulating and 80/20 stocks (or more), I'm not really worried about inflation protection (as it's covered by the stocks plus presumably my salary will increase). But if I'm retired and 20/80, then yeah I might be very concerned about inflation wiping out my otherwise "safe" portfolio.
Also, some people have an inflation-indexed pension + SS, some don't. So I think TIPS are really a tool in the toolbox that may be appropriate for some investors, not necessarily all.
I do think there's a lot of rate-chasing going on with so many people suddenly being interested in inflation protection all of a sudden though...
Also, some people have an inflation-indexed pension + SS, some don't. So I think TIPS are really a tool in the toolbox that may be appropriate for some investors, not necessarily all.
I do think there's a lot of rate-chasing going on with so many people suddenly being interested in inflation protection all of a sudden though...
Re: Should I load up on TIPS?
Yes, this is exactly right. As to pensions, the worst case may be how to manage a pension that is fixed and not inflation indexed, which also includes evaluating whether fixed SPIAs should be helpful or not.Atgard wrote: ↑Sat Jun 11, 2022 10:21 am People have very differing view on TIPS, but I wonder how of that has to do with their overall asset allocation and life stage? For example, if I am accumulating and 80/20 stocks (or more), I'm not really worried about inflation protection (as it's covered by the stocks plus presumably my salary will increase). But if I'm retired and 20/80, then yeah I might be very concerned about inflation wiping out my otherwise "safe" portfolio.
Also, some people have an inflation-indexed pension + SS, some don't. So I think TIPS are really a tool in the toolbox that may be appropriate for some investors, not necessarily all.
I do think there's a lot of rate-chasing going on with so many people suddenly being interested in inflation protection all of a sudden though...
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Re: Should I load up on TIPS?
Also, what Vineviz said regarding a TIPS allocation:
link to original postSpeaking very generally, it usually makes sense to hold some TIPS when your portfolio is is less than 70% stocks.
If your portfolio is less than 50% stocks it could make sense to have most of your bonds as TIPS.
A very rough rule of thumb, in table form:
LTT = Long-term TreasuriesCode: Select all
Stocks LTT TIPS STIG 100% 0% 0% 0% 90% 10% 0% 0% 80% 20% 0% 0% 70% 20% 10% 0% 60% 20% 20% 0% 50% 20% 30% 0% 40% 10% 40% 10% 30% 0% 50% 20%
TIPS = Broad TIPS fund (or Series I Savings Bonds or individual TIPS ladder)
STIG = Short-term investment grade corporate bond fund
As well as his thread,
"How Much in TIPS (or a new way to look at the efficient frontier)" link
Re: Should I load up on TIPS?
I couldn’t agree more. FWIW, I’m retired and at 40/60 allocation so I think TIPS are critical to the prudent risk management of my portfolio but would not advocate them for my children.Atgard wrote: ↑Sat Jun 11, 2022 10:21 am People have very differing view on TIPS, but I wonder how of that has to do with their overall asset allocation and life stage? For example, if I am accumulating and 80/20 stocks (or more), I'm not really worried about inflation protection (as it's covered by the stocks plus presumably my salary will increase). But if I'm retired and 20/80, then yeah I might be very concerned about inflation wiping out my otherwise "safe" portfolio.
Also, some people have an inflation-indexed pension + SS, some don't. So I think TIPS are really a tool in the toolbox that may be appropriate for some investors, not necessarily all.
I do think there's a lot of rate-chasing going on with so many people suddenly being interested in inflation protection all of a sudden though...
"The greatest enemy of a good plan is the dream of a perfect plan" - Carl Von Clausewitz
Re: Should I load up on TIPS?
100% TIPS and IBonds? That might work for most.willthrill81 wrote: ↑Fri Jun 10, 2022 8:18 pm I've long argued that the default position for an investor's fixed income should be TIPS and I bonds. They remove the risk of unexpected inflation, which has historically been the largest threat to fixed income.
It might not work for a retiree who wants consistent income. At the moment TIPS is paying out nicely. As you know, it hasn't always been this way.
Getting a 3% plus payout from nominal CDS or treasuries could be attractive to a retiree.
I like the combination of TIPS and nominal.
Re: Should I load up on TIPS?
Why on earth would someone relate the income in their cash flow management to payouts from one investment or another? The only investment where that is an issue is I bonds at 0% fixed because there is no payout and selling I bonds is a transaction that is not replaceable due to purchase limits.hudson wrote: ↑Sat Jun 11, 2022 11:24 am100% TIPS and IBonds? That might work for most.willthrill81 wrote: ↑Fri Jun 10, 2022 8:18 pm I've long argued that the default position for an investor's fixed income should be TIPS and I bonds. They remove the risk of unexpected inflation, which has historically been the largest threat to fixed income.
It might not work for a retiree who wants consistent income. At the moment TIPS is paying out nicely. As you know, it hasn't always been this way.
Getting a 3% plus payout from nominal CDS or treasuries could be attractive to a retiree.
I like the combination of TIPS and nominal.
Re: Should I load up on TIPS?
The thing about TIPS is they are hard for me to wrap my head around. +1JBTX wrote: ↑Fri Jun 10, 2022 10:46 pmThe thing about TIPS is they are hard for me to wrap my head around, their behavior isn’t entirely intuitive. At some point if nominal rates keep going up the conventional bonds may again be a better diversifier. For now I’m probably at least going to roll a chunk of money languishing in Vanguard retirement trust into TIPS funds. I already have some TIPS funds and have been getting as much ibonds as I can get my hands on.willthrill81 wrote: ↑Fri Jun 10, 2022 8:18 pm I've long argued that the default position for an investor's fixed income should be TIPS and I bonds. They remove the risk of unexpected inflation, which has historically been the largest threat to fixed income.
I could put money in Vanguard Short-Term Inflation-Protected Securities Index Fund Admiral Shares (VTAPX) at Vanguard inside my 401k. I just use Total Bonds because I don't understand VTAPX enough. Plus I'm only 10% bonds.
Re: Should I load up on TIPS?
You are correct if you buy individual TIPS and hold them to maturity they are no different than ibonds, tax impacts aside. But I always buy funds and ETFs so there is the short term impact of real rates that in theory I should ignore but I don’t.nisiprius wrote: ↑Sat Jun 11, 2022 6:05 am I don't believe there are any serious concerns besides the ones you're aware of. (Disclosure: I love TIPS and my holdings in marketable bonds are currently about ⅔ Vanguard Inflation-protected Securities--the intermediate-term fund--VAIPX, and only about ⅓ Total Bond).
The chief concern is that in the future it might turn out that something else might turn out to have been somewhat better. And that for whatever reason, probably including lower liquidity, TIPS funds have been somewhat more volatile than comparable nominal bond funds and have had somewhat lower risk-adjusted return.
John C. Bogle wrote that "Successful investing involves doing just a few things right and avoiding serious mistakes." A heavy TIPS tilt might turn out later in hindsight to be suboptimal, but I cannot believe it is a serious mistake. They are Treasury securities, how bad can they be?
Nominal bonds have an additional fundamental risk that TIPS do not have, so it would be reasonable for investors to demand compensation for that risk in some way. I don't expect inflation protection to come for free.
It continues to be a mystery to me why "Wall Street" talks down TIPS, but I think it does. (Of course, mainstream financial news almost never mentions series I savings bonds either).I have never understood comments like this. An individual TIPS bond is no harder to understand than an international bond. A TIPS is just like a regular Treasury issue except that it is denominated in real dollars. All bonds have intuitive behavior from issue to maturity, and mysterious market behavior in between. All bond funds show the mysterious market behavior over short periods of time, but become fairly predictable over suitable holding periods. TIPS are not mysterious if you are using them as bonds and roughly holding them to maturity. They are only mysterious if you are trying to exploit what you hope are predictable patterns of short-term market fluctuations. I've seen complaints that the short-term market movements of TIPS have not have high correlations with the short-term fluctuations in inflation (during the time when inflation was low); but so what? The total return of a TIPS from issue to maturity has a 1.00 correlation with inflation.
I found the chart of this etf instructive.
https://www.morningstar.com/etfs/arcx/tip/chart
Looking at the price, it is significantly down from its peaks as real rates have risen. At the same time change the graph to the beginning and the price has been more than 15% lower at its worst. Obviously this is just the share price and doesn’t include interest kicking off at the rate of inflation.
Re: Should I load up on TIPS?
The comparison to TBM is problematic because it includes both corporates (which can tank when stocks tank) and nominal treasuries (which often rise when stocks tank).willthrill81 wrote: ↑Sat Jun 11, 2022 8:12 am You mention diversification, but TIPS haven't been any more correlated to stocks than TBM. If you really want diversification from something like TSM, I'd suggest that you consider something other than bonds.
If we compare a TIPS fund (e.g., VIPSX) to a treasury fund (e.g., VFITX), we see that when the S&P 500 tanks (like in 2008 and 2020), the TIPS fund takes a hit while nominal treasuries soar. Two kinds of treasuries, different behaviors.
Of course, 2022 has something different happening... just trying to observe what's typical.
In one account, I have a one-fund solution in the form of a balanced fund (VBIAX) and don't touch it. In another account, I slice-and-dice, and own both TIPS and nominal treasury funds (as well as equities and others stuff... no corporate bonds). So my idea is to own both kinds of bonds and rebalance over time.
Strategic Macro Senior (top 1%, 2019 Bogleheads Contest)
Re: Should I load up on TIPS?
At the risk of coming off as defensive I have had TIPS in my portfolio for a couple of decades, as well as ibonds. Maybe 1/3 of bonds between the two? But lately I’ve been moving more towards 1/2, with bonds being a bigger part of the allocation as I age.Atgard wrote: ↑Sat Jun 11, 2022 10:21 am People have very differing view on TIPS, but I wonder how of that has to do with their overall asset allocation and life stage? For example, if I am accumulating and 80/20 stocks (or more), I'm not really worried about inflation protection (as it's covered by the stocks plus presumably my salary will increase). But if I'm retired and 20/80, then yeah I might be very concerned about inflation wiping out my otherwise "safe" portfolio.
Also, some people have an inflation-indexed pension + SS, some don't. So I think TIPS are really a tool in the toolbox that may be appropriate for some investors, not necessarily all.
I do think there's a lot of rate-chasing going on with so many people suddenly being interested in inflation protection all of a sudden though...
Re: Should I load up on TIPS?
Total bond (BND) has returned 0.74% annualized over the last five years.burritoLover wrote: ↑Sat Jun 11, 2022 7:07 am Odd - when I joined in 2020, everyone was saying total bond is all you need - TIPS aren't necessary.
https://www.morningstar.com/etfs/xnas/bnd/performance
It's failed to keep up with even 2% inflation.
Since it's really not acting as a ballast against stock price movement and it's not keeping up with inflation, then what's the point? Fixed income should have some purpose in the portfolio.
My current approach now is to max I Bonds and then buy 5 or 10 year TIPS until this makes up 10-20% of my portfolio and hold to maturity.
Now, if I can get nominal bonds that pay 5-6%, I'll start buying them.
Re: Should I load up on TIPS?
I'm one of those [mostly] two-fund guys: VTSAX and VBTLX (with just a smattering of short-term, inflation-protected TIPS [bought long ago when I was trying to adhere to grok87's manifesto]). My tIRA is all bonds (VBTLX & VTAPX) and my plan is to do RMDs from the VBTLX). In January I took some QCDs from the VTAPX for no particular reason.Hoffguit1980 wrote: ↑Sat Jun 11, 2022 8:02 amExactly. I keep wondering what has happened to the two fund, simple Simon portfolio crowd, VTSAX and VBTLX, for those folks not prone to having International. Where do you keep the dollars needed for RMDs while not increasing or at least minimizing market risk? Any opinions on this? These are strange days indeed!
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
Re: Should I load up on TIPS?
One does not need to know something that others do not to profit. Sometimes for reasons that you are not bound by (maintaining a certain credit risk for example) you can do things as an individual that those moving billions cannot.
Re: Should I load up on TIPS?
I would say if you feel we are in a very uncertain rate environment 6 month T-Bills would be the place.
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Re: Should I load up on TIPS?
That hasn't manifested itself in the correlations I've seen. TBM's correlation with the S&P 500 since inception has been -.03, while TIPS' has been .08. Both are essentially zero. Sure, there may be some short-term fluctuations, but I don't see why that would matter to a long-term investor.HanSolo wrote: ↑Sat Jun 11, 2022 12:09 pmThe comparison to TBM is problematic because it includes both corporates (which can tank when stocks tank) and nominal treasuries (which often rise when stocks tank).willthrill81 wrote: ↑Sat Jun 11, 2022 8:12 am You mention diversification, but TIPS haven't been any more correlated to stocks than TBM. If you really want diversification from something like TSM, I'd suggest that you consider something other than bonds.
If we compare a TIPS fund (e.g., VIPSX) to a treasury fund (e.g., VFITX), we see that when the S&P 500 tanks (like in 2008 and 2020), the TIPS fund takes a hit while nominal treasuries soar. Two kinds of treasuries, different behaviors.
Of course, 2022 has something different happening... just trying to observe what's typical.
In one account, I have a one-fund solution in the form of a balanced fund (VBIAX) and don't touch it. In another account, I slice-and-dice, and own both TIPS and nominal treasury funds (as well as equities and others stuff... no corporate bonds). So my idea is to own both kinds of bonds and rebalance over time.
The Sensible Steward
Re: Should I load up on TIPS?
I'm just reporting an observation, having looked at how the funds behaved during the stock market drops in question (2008 and 2020). They did, in fact, behave as I reported.willthrill81 wrote: ↑Sat Jun 11, 2022 6:51 pmThat hasn't manifested itself in the correlations I've seen. TBM's correlation with the S&P 500 since inception has been -.03, while TIPS' has been .08. Both are essentially zero. Sure, there may be some short-term fluctuations, but I don't see why that would matter to a long-term investor.HanSolo wrote: ↑Sat Jun 11, 2022 12:09 pm The comparison to TBM is problematic because it includes both corporates (which can tank when stocks tank) and nominal treasuries (which often rise when stocks tank).
If we compare a TIPS fund (e.g., VIPSX) to a treasury fund (e.g., VFITX), we see that when the S&P 500 tanks (like in 2008 and 2020), the TIPS fund takes a hit while nominal treasuries soar. Two kinds of treasuries, different behaviors.
Whether it matters or not is up to the individual investor. My personal preference is that if I'm going to rebalance during a major stock downturn, and I'm going to move money out of bonds, I'd rather use bond funds that are up at that time rather than down at that time. On that basis, it matters to me.
I accept that there are other considerations, and that different investors prioritize those considerations differently.
Strategic Macro Senior (top 1%, 2019 Bogleheads Contest)
Re: Should I load up on TIPS?
the August though October 2008 dive tips took was more than I was expecting to see. It was much worse than total bond market. I wound up selling my tips fund.HanSolo wrote: ↑Sat Jun 11, 2022 7:10 pmI'm just reporting an observation, having looked at how the funds behaved during the stock market drops in question (2008 and 2020). They did, in fact, behave as I reported.willthrill81 wrote: ↑Sat Jun 11, 2022 6:51 pmThat hasn't manifested itself in the correlations I've seen. TBM's correlation with the S&P 500 since inception has been -.03, while TIPS' has been .08. Both are essentially zero. Sure, there may be some short-term fluctuations, but I don't see why that would matter to a long-term investor.HanSolo wrote: ↑Sat Jun 11, 2022 12:09 pm The comparison to TBM is problematic because it includes both corporates (which can tank when stocks tank) and nominal treasuries (which often rise when stocks tank).
If we compare a TIPS fund (e.g., VIPSX) to a treasury fund (e.g., VFITX), we see that when the S&P 500 tanks (like in 2008 and 2020), the TIPS fund takes a hit while nominal treasuries soar. Two kinds of treasuries, different behaviors.
Whether it matters or not is up to the individual investor. My personal preference is that if I'm going to rebalance during a major stock downturn, and I'm going to move money out of bonds, I'd rather use bond funds that are up at that time rather than down at that time. On that basis, it matters to me.
I accept that there are other considerations, and that different investors prioritize those considerations differently.
https://www.portfoliovisualizer.com/bac ... ion2_2=100
previous discussion years ago
viewtopic.php?t=71481
Re: Should I load up on TIPS?
I loaded up on Jan2025s in October, 2008. Real yield was 3%+. I still have a lot of them which I'll hold to the end.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Re: Should I load up on TIPS?
To follow up, how exactly is the inflation component calculated for TIPS? I understand how ibonds work, but not TIPS inflation adjustment.
Re: Should I load up on TIPS?
A period of unexpected inflation is not anything BND can help with. That's what TIPS / I Bonds are for.rockstar wrote: ↑Sat Jun 11, 2022 12:18 pmTotal bond (BND) has returned 0.74% annualized over the last five years.burritoLover wrote: ↑Sat Jun 11, 2022 7:07 am Odd - when I joined in 2020, everyone was saying total bond is all you need - TIPS aren't necessary.
https://www.morningstar.com/etfs/xnas/bnd/performance
It's failed to keep up with even 2% inflation.
Since it's really not acting as a ballast against stock price movement and it's not keeping up with inflation, then what's the point? Fixed income should have some purpose in the portfolio.
My current approach now is to max I Bonds and then buy 5 or 10 year TIPS until this makes up 10-20% of my portfolio and hold to maturity.
Now, if I can get nominal bonds that pay 5-6%, I'll start buying them.
Bonds are ballast in the sense that the scope of their losses are 1) smaller than the broad stock market and 2) will eventually recover, assuming a large number of issuers don't default. We're only 7 months into the year. You cannot draw conclusions for a bond fund with a nearly 7 year duration based on a period of 7 months.
The true frustration is that many people (including myself) believe that bonds went up when stocks went down. That has never been the case -- they're nearly uncorrelated, which means they do whatever they want. It is an historically anomaly (but statistically to be expected) that the last 40 year made them appear negatively correlated.
Over those 40 years, inflation has been historically low, sometimes lower than the stated targets. Considering the people in their prime earning years have never experienced any inflation, almost none of us (myself included) had any sort of inflation protection built into our portfolios.
Re: Should I load up on TIPS?
This is described here: https://www.treasurydirect.gov/instit/a ... ipscpi.htm
and uses the index ratios here: https://www.treasurydirect.gov/instit/a ... 220610.pdf
Re: Should I load up on TIPS?
This is explained in the first two paragraphs of the left sidebar on this help page. Here is an example for the 5-year 1/8% TIPS Maturing 4/15/2027 re-auctioned yesterday for issuance on 6/30/2022.
Code: Select all
Row Col A Col B Col C Col D Col E Reference CPI Formula in Column D
1 Reference Reference Index
2 Month CPI [1] Date CPI Ratio [2]
-------- ------- --------- --------- -------
3 Jan 2022 281.148 4/01/2022
4 4/15/2022 282.34640 1.00000 =ROUND(B3+(B5-B3)*(DAY(C4)-1)/(C5-C3),5)
5 Feb 2022 283.716 5/01/2022 283.71600 1.00485 =B5
6 Mar 2022 287.504 6/01/2022 287.50400 1.01827 =B6
7 6/30/2022 289.05550 1.02376 =ROUND(B6+(B8-B6)*(DAY(C7)-1)/(C8-C6),5)
8 Apr 2022 289.109 7/01/2022 289.10900 1.02395 =B8
- Monthly CPI values from this BLS web page.
- Index ratio on 6/30/2022 issue date is the ratio of the Reference CPI on 6/30 to 4/15:
1.02376 = ROUND(289.05550 / 282.34640, 5)
Re: Should I load up on TIPS?
Thanks this helps. So it seems with TIPS they are kept pretty close to real CPI, on a quarterly basis, where as ibonds use a 6 month lagging measure that to a limited degree can be gamed as to when you enter or exit?#Cruncher wrote: ↑Fri Jun 24, 2022 12:25 pmThis is explained in the first two paragraphs of the left sidebar on this help page. Here is an example for the 5-year 1/8% TIPS Maturing 4/15/2027 re-auctioned yesterday for issuance on 6/30/2022.Code: Select all
Row Col A Col B Col C Col D Col E Reference CPI Formula in Column D 1 Reference Reference Index 2 Month CPI [1] Date CPI Ratio [2] -------- ------- --------- --------- ------- 3 Jan 2022 281.148 4/01/2022 4 4/15/2022 282.34640 1.00000 =ROUND(B3+(B5-B3)*(DAY(C4)-1)/(C5-C3),5) 5 Feb 2022 283.716 5/01/2022 283.71600 1.00485 =B5 6 Mar 2022 287.504 6/01/2022 287.50400 1.01827 =B6 7 6/30/2022 289.05550 1.02376 =ROUND(B6+(B8-B6)*(DAY(C7)-1)/(C8-C6),5) 8 Apr 2022 289.109 7/01/2022 289.10900 1.02395 =B8
- Monthly CPI values from this BLS web page.
- Index ratio on 6/30/2022 issue date is the ratio of the Reference CPI on 6/30 to 4/15:
1.02376 = ROUND(289.05550 / 282.34640, 5)
Re: Should I load up on TIPS? (And how does inflation adj work)
I don't see what's so complicated with TIPS. They have a inflation matching component and a real rate. The inflation matching is easy to understand, it gives you CPI rate, so if it is 9% on average this year you should get that. The real rates also adjusts based on market just like nominal bond rates. When they move up or down the price fluctuates just like a nominal bond. This is also not hard to understand. Then there is some price adjustments for inflation expectation and real rate expectations. I think having the two components throws people off as they can't see which one of these are causing the overall returns changes. The idea is to understand the components and not think too much into mapping the exact cause of returns for something with multiple components. Another way to look at this is equity returns which are made of many components, yet we don't see people complaining I don't understand them, you just accept it.
I moved most of my bond money early last year to TIPS, since I was getting more comfortable with the idea of inflation protecting my fixed income. At this time they are 2/3rd of my fixed income, the other 1/3rd is in nominal bonds almost all Treasury. I do not own TBM at all now. Long+Short+TIPS with average duration around 8 to 9 years, matching my retirement plans. I could add Short TIPS as I get more closer to retirement when my fixed income allocation increase, but I need to get my portfolio size even larger and then get Short TIPS rates to flip on positive side, that would be real nice thing. I may actually start buying individual TIPS in fact as I get closer to build a ladder, especially if real rates are positive, what's not to like? Very low inflation, okay, we had that and may be we will still get back to it, that's why I have some of it in nominals and keep duration of those close to 10 years. In my view a combination like this makes an all weather bond portfolio. I have some IBonds too, but they aren't large enough to count.
I moved most of my bond money early last year to TIPS, since I was getting more comfortable with the idea of inflation protecting my fixed income. At this time they are 2/3rd of my fixed income, the other 1/3rd is in nominal bonds almost all Treasury. I do not own TBM at all now. Long+Short+TIPS with average duration around 8 to 9 years, matching my retirement plans. I could add Short TIPS as I get more closer to retirement when my fixed income allocation increase, but I need to get my portfolio size even larger and then get Short TIPS rates to flip on positive side, that would be real nice thing. I may actually start buying individual TIPS in fact as I get closer to build a ladder, especially if real rates are positive, what's not to like? Very low inflation, okay, we had that and may be we will still get back to it, that's why I have some of it in nominals and keep duration of those close to 10 years. In my view a combination like this makes an all weather bond portfolio. I have some IBonds too, but they aren't large enough to count.
Re: Should I load up on TIPS? (And how does inflation adj work)
You are saying that with low inflation, nominal bonds are always better, but more often than not, this not been the case (over the last 22 years):
Year. Inflation 5 year CD
2018. 2.4%. 1.1%
2014. 1.6%. 0.7%
2010. 1.6%. 2.0%
2005. 3.4%. 2.4%
2000. 3.4%. 7.5%
Just another case for TIPS, against nominals, even in times of low inflation.
Re: Should I load up on TIPS? (And how does inflation adj work)
It’s not about the absolute value of inflation and whether it is high or low. It’s all about expected vs actual inflation. TIPS protect you and perform better if inflation spikes above expectations. Nominals do better if the actual comes in lower than expected.LISD wrote: ↑Fri Jun 24, 2022 11:23 pmYou are saying that with low inflation, nominal bonds are always better, but more often than not, this not been the case (over the last 22 years):
Year. Inflation 5 year CD
2018. 2.4%. 1.1%
2014. 1.6%. 0.7%
2010. 1.6%. 2.0%
2005. 3.4%. 2.4%
2000. 3.4%. 7.5%
Just another case for TIPS, against nominals, even in times of low inflation.
However, I don’t think the case to buy some TIPS should be based on your personal prediction of inflation. TIPS are portfolio insurance for high unexpected inflation. If they underperform nominals, that’s just the cost of the insurance policy.
"The greatest enemy of a good plan is the dream of a perfect plan" - Carl Von Clausewitz
Re: Should I load up on TIPS? (And how does inflation adj work)
Part of the return on TIPS is based on the actual inflation (CPI), so why would they protect me against inflation expectations (i.e., someone else's prediction of inflation)? If by 'inflation expectations' you just mean "a rise in inflation at a later date", then I understand because the TIPS would capture that rise too (nominals would not). Is that what you were referring to?BigJohn wrote: ↑Sat Jun 25, 2022 7:41 amIt’s all about expected vs actual inflation. TIPS protect you and perform better if inflation spikes above expectations. Nominals do better if the actual comes in lower than expected.LISD wrote: ↑Fri Jun 24, 2022 11:23 pmYou are saying that with low inflation, nominal bonds are always better, but more often than not, this not been the case (over the last 22 years):
Year. Inflation 5 year CD
2018. 2.4%. 1.1%
2014. 1.6%. 0.7%
2010. 1.6%. 2.0%
2005. 3.4%. 2.4%
2000. 3.4%. 7.5%
Just another case for TIPS, against nominals, even in times of low inflation.
I think I understand what you are saying about nominals: If I buy a 5 year CD for example, and inflation drops, I'm in a good place for the next 5 years: my real yield is high. My brother bought a 10 year CD in the 80s and reaped rates much larger than inflation the following years.
Now, what about if there is no change in the inflation rate? The data above shows that TIPS would outperform nominals (from 2010 to 2014, which were low inflation years, and relatively constant). Is that typically the case?
Re: Should I load up on TIPS? (And how does inflation adj work)
The expectation I’m talking about is the breakeven inflation. It’s the current market expectations based on the difference between nominal and TIPS rates (without the to-be-determined inflation adjustment). So yes, TIPS always protect you against actual inflation. It just that nominals will have a higher return if inflation is below that breakeven number.LISD wrote: ↑Sat Jun 25, 2022 10:04 amPart of the return on TIPS is based on the actual inflation (CPI), so why would they protect me against inflation expectations (i.e., someone else's prediction of inflation)? If by 'inflation expectations' you just mean "a rise in inflation at a later date", then I understand because the TIPS would capture that rise too (nominals would not). Is that what you were referring to?BigJohn wrote: ↑Sat Jun 25, 2022 7:41 amIt’s all about expected vs actual inflation. TIPS protect you and perform better if inflation spikes above expectations. Nominals do better if the actual comes in lower than expected.LISD wrote: ↑Fri Jun 24, 2022 11:23 pmYou are saying that with low inflation, nominal bonds are always better, but more often than not, this not been the case (over the last 22 years):
Year. Inflation 5 year CD
2018. 2.4%. 1.1%
2014. 1.6%. 0.7%
2010. 1.6%. 2.0%
2005. 3.4%. 2.4%
2000. 3.4%. 7.5%
Just another case for TIPS, against nominals, even in times of low inflation.
I think I understand what you are saying about nominals: If I buy a 5 year CD for example, and inflation drops, I'm in a good place for the next 5 years: my real yield is high. My brother bought a 10 year CD in the 80s and reaped rates much larger than inflation the following years.
Now, what about if there is no change in the inflation rate? The data above shows that TIPS would outperform nominals (from 2010 to 2014, which were low inflation years, and relatively constant). Is that typically the case?
Example here for the 5 year breakeven rate
https://fred.stlouisfed.org/graph/?g=KHyd
Edited to add a simple example…. So if the breakeven rate right now is 2.82% per the Fed website there are three potential outcomes.
Inflation at 2.82% - both types of bonds have the same return.
Inflation above 2.82% - TIPS will adjust and preserve your purchasing power no matter how high inflation goes. Nominal returns stay static and you lose purchasing power.
Inflation below 2.82% - TIPS will adjust and preserve your purchasing power. However, nominal returns will be higher than TIPS so you’d have additional purchasing power vs holding TIPS.
"The greatest enemy of a good plan is the dream of a perfect plan" - Carl Von Clausewitz
Re: Should I load up on TIPS? (And how does inflation adj work)
The explanations of expected vs unexpected inflation and conditions when TIPS or nominals deliver greater return are helpful. However, I think it is a mistake to decide between those choices to try to outperform. Either inflation indexing is important or it isn't, and that would be the deciding factor.
As I have posted elsewhere the decision for me is that inflation indexing is important and I made a (sort of) mistake of not just retiring on all TIPS. I have fixed that recently.
As I have posted elsewhere the decision for me is that inflation indexing is important and I made a (sort of) mistake of not just retiring on all TIPS. I have fixed that recently.
Re: Should I load up on TIPS? (And how does inflation adj work)
I could agree more! Either you need/want inflation insurance or you don’t. I went 50/50 TIPS four years ago because I wanted the insurance and was willing to accept a lower return if necessary as just the price of that insurance.dbr wrote: ↑Sat Jun 25, 2022 10:52 am The explanations of expected vs unexpected inflation and conditions when TIPS or nominals deliver greater return are helpful. However, I think it is a mistake to decide between those choices to try to outperform. Either inflation indexing is important or it isn't, and that would be the deciding factor.
As I have posted elsewhere the decision for me is that inflation indexing is important and I made a (sort of) mistake of not just retiring on all TIPS. I have fixed that recently.
"The greatest enemy of a good plan is the dream of a perfect plan" - Carl Von Clausewitz