I understand and agree with your first two points. Unfortunately, in my reading of this discussion I think many made the leap to long term nominals rather than TIPS at just the wrong time. Same with some older people nearing retirement that do potential have a long enough time horizon but far less inflation protection elsewhere.vineviz wrote: ↑Sun Apr 10, 2022 8:02 amI have three thoughts on this:secondopinion wrote: ↑Fri Mar 18, 2022 10:33 amNominal expenses in the far future for an individual are rare. I personally think that long-term treasuries are more speculative than a safe investment; most of the time, you are getting beta, which may work to one's advantage or disadvantage. Without any ability to adjust to inflation, long-term treasuries are also very speculative even if held to maturity. I can see the speculative value, but most here are trying to avoid speculation.BigJohn wrote: ↑Thu Mar 17, 2022 9:16 pmSure but what expenses does an individual have that are in nominal dollars that far out in the future? The only one I can think of is early in a long term fixed rate mortgage. In my mind this is hardly enough for most people to justify the first 20% of bonds in LTTs.secondopinion wrote: ↑Thu Mar 17, 2022 4:21 pm It is insurance for nominal expenses in the far future; that is what the comment is suggesting. With such nominal expenses, they are risk-free even with inflation and low yields because they are hedging out the expenses completely or close to it.
Without such nominal expenses, it is a bold speculation on the long-term future of the US dollar. Diversification is true either way you look at it; the question is whether one should be taking the risks with such a speculation.
Insurance companies have a lot of long term nominal expenses which is why they use LTTs as an appropriate risk matching strategy. However, they know that inflation is a wild card they can't predict. I think that's why you can no long purchase a COLA adjusted annuity, it's just not a risk that they want to take.
This lack of nominal expenses with the potential for purchasing power erosion if high and unexpected inflation arose is just the reason that I never bought into this strategy of using LTTs. For those that did, I hope the Fed gets inflation under control relatively quickly before the erosion gets any worse.
One is that the topic of this thread mentions "long-term Treasuries", not "long-term nominal Treasuries". TIPS are Treasuries too.
The second thought is that the rule of thumb is to put the first 20% of the portfolio into long-term Treasuries. Any portfolio which is 80%+ invested in stocks still has virtually all of its risk tied to the performance of the stock sleeve. And historically nominal Treasuries are a better diversifier than TIPS because the total return of TIPS is partially tied to economic growth, like stocks are. Plus, generally speaking, investors with high equity concentrations tend to be younger and naturally have inflation protection elsewhere in their portfolio (e.g. human capital, fixed rate mortgages, and so forth). Investors with more than 20% of their portfolio in bonds should increasingly focus on the risk exposure of the bonds themselves. Maybe that means the next 20% (or whatever) should be long-termTIPS, or short-term corporate bonds, or total bond market, etc.
The third thought is that the idea that nominal expenses are rare is a bit of a red herring, because it mistakes the price of goods as the thing we're trying to hedge. In truth, it is the amount of consumption that we are trying to hedge. It might be easy to assume that prices and consumption have the same inflation beta, but all the empirical evidence we have about retiree spending tells us differently. Retirement consumption does NOT have an inflation beta of 1, and for many retirees it is far less than one. So once you factor Social Security benefits into the picture, the consumption that must be funded by portfolio withdrawals is - for many, though certainly no all, investors - effectively nominal at least to a large degree.
Not sure I fully understand your third point so let me repeat what I think I read in different words. You seem to be saying that losing purchasing power to inflation isn’t as big a problem in later retirement because our consumptions goes down to offset the nominal loss. If that’s your point then while I acknowledge the math as being directional valid for most, I’m not sure that will hold for multiple years of 5+% inflation. It’s also not something that I think many/most are emotionally prepared to accept.