VTAPX vs VIPSX

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bpkasl
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VTAPX vs VIPSX

Post by bpkasl »

Both considered TIPS funds, aside from that VTAPX has a better return YTD.
To protect against inflation would this be best pick between the two?
I have VIPSX in my holdings and wife has VTAPX in hers and thinking about consolidating
rkhusky
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Re: VTAPX vs VIPSX

Post by rkhusky »

bpkasl wrote: Sat May 21, 2022 5:47 am Both considered TIPS funds, aside from that VTAPX has a better return YTD.
To protect against inflation would this be best pick between the two?
I have VIPSX in my holdings and wife has VTAPX in hers and thinking about consolidating
VTAPX is short term and VIPSX is intermediate term. VTAPX is less affected by interest rate changes compared to VIPSX, but pays less interest, which you can see by looking at 3,5,10 year returns. Interest rates have spiked up year-to-date causing VIPSX to drop more than VTAPX.

VIPSX is more appropriate if this is a long term holding. Once you reach $50K in the account, consider switching from VIPSX (Investor shares) to VAIPX (Admiral shares) for lower expense ratio.
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bpkasl
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Re: VTAPX vs VIPSX

Post by bpkasl »

Thanks for that simple explanation
Now to consider which direction rates will take since not sure about holding both
rkhusky
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Re: VTAPX vs VIPSX

Post by rkhusky »

bpkasl wrote: Sat May 21, 2022 7:30 am Thanks for that simple explanation
Now to consider which direction rates will take since not sure about holding both
Correctly guessing the direction of interest rates is at least as difficult as correctly guessing the direction of the stock market. It would be better to just pick the fund that matches your investing horizon. If the latter is 10+ years, choose the intermediate fund.
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vineviz
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Re: VTAPX vs VIPSX

Post by vineviz »

rkhusky wrote: Sat May 21, 2022 7:45 am
bpkasl wrote: Sat May 21, 2022 7:30 am Thanks for that simple explanation
Now to consider which direction rates will take since not sure about holding both
Correctly guessing the direction of interest rates is at least as difficult as correctly guessing the direction of the stock market. It would be better to just pick the fund that matches your investing horizon. If the latter is 10+ years, choose the intermediate fund.
+1

Just say "no" to market timing.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Mike Scott
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Re: VTAPX vs VIPSX

Post by Mike Scott »

I ended up splitting my TIPS 50/50 between these two funds.
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Re: VTAPX vs VIPSX

Post by Corvidae »

If you want less price volatility combined with a likely loss of purchasing power over time, use the short-term fund. If you can tolerate more price volatility with a greater likelihood of maintaining or increasing purchasing power, use the intermediate-term fund.
dbr
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Re: VTAPX vs VIPSX

Post by dbr »

bpkasl wrote: Sat May 21, 2022 5:47 am Both considered TIPS funds, aside from that VTAPX has a better return YTD.
To protect against inflation would this be best pick between the two?
I have VIPSX in my holdings and wife has VTAPX in hers and thinking about consolidating
The compensation for inflation is the same for all TIPS. The credit risk is the same for all TIPS, being US Treasury obligations.

The difference is term risk, meaning sensitivity to real interest rate changes. As a result, as mentioned by a previous poster, a longer duration fund offers higher expected return and greater volatility of return.

Which is best depends on what you are trying to do. That includes that you are most likely investing in a portfolio and not just picking one fund. For most long term portfolio investors an intermediate duration fund would align with a person's objectives better than a short duration fund.

If you are going to choose based on this year's YTD, then you are hopelessly lost altogether.
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Re: VTAPX vs VIPSX

Post by vineviz »

dbr wrote: Sat May 21, 2022 11:49 am
The compensation for inflation is the same for all TIPS. The credit risk is the same for all TIPS, being US Treasury obligations.
This isn’t strictly true, because of the way that the indexation lags work. The lag mechanism has a much stronger effect on shorter maturity TIPS.

See for instance https://www.frbsf.org/economic-research ... bonds/?amp
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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bpkasl
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Re: VTAPX vs VIPSX

Post by bpkasl »

Well on the bond side we hold VBIRX, VBTLX, VWEHX. Our goal was to have safe short term money parked in either VIPSX and/or VTAPX for 1-3 year withdrawals thinking anything is better than a money market but maybe not in 2022
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Re: VTAPX vs VIPSX

Post by Booper »

bpkasl wrote: Sat May 21, 2022 12:05 pm Well on the bond side we hold VBIRX, VBTLX, VWEHX. Our goal was to have safe short term money parked in either VIPSX and/or VTAPX for 1-3 year withdrawals thinking anything is better than a money market but maybe not in 2022
I'm in a similar position. Presumably, we all are: high inflation and low interest rates are a nasty combination. Add in a historically bad year for VBTLX due to rising interest rates and here we all are, looking for safety.

This is probably a good time to remind you (and me) of the famous quote:
“More money has been lost reaching for yield than at the point of a gun.”
(from https://preview5.advisorperspectives.co ... t-of-a-gun).

Due to a new job I have personally been reviewing things like my emergency fund, how much cash to keep on hand, the distinction between my long- and short- term investments and so on.

I just decided to move my emergency fund from a money market to VTAPX. That's actually what led me to click on this thread - I had never even heard of that fund before my recent research on short term bond funds and my decision to invest in it myself. And here I found someone else with the same situation as me.

I have also committed to maxing out I-Bond purchases.

I am fortunate to earn more money than I spend each month (even after maxing out retirement contributions). The recent dramatic drop in VBTLX made me realize that it's not a good place for me to park these funds, as I will likely want to spend the money before that duration is up, and recent history showed me what can happen there. So I decided to invest that money in VSBSX (Short Term Treasuries). It's not inflation protected, but I like that the distributions are monthly (where as VTAPX is quarterly).

At some level you have to realize that we're living through a bad time for holding onto cash (due to inflation). Like the quote above warns us - probably the worst thing you can do is lie to yourself about when you'll actually want the money in the hopes of getting a higher yield. Probably the only silver lining I can see with what's going on VBTLX right now is that it prevented me from putting any of my short term / emergency fund money in there going forward.
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jeffyscott
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Re: VTAPX vs VIPSX

Post by jeffyscott »

VIPSX/VAIPX, like TIPS index funds (such as Fidelity and Schwab offer), do already have about 1/2 their assets in TIPS that mature in 5 years or less. I don't feel a need to add even more to the short term for myself.
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Re: VTAPX vs VIPSX

Post by Corvidae »

bpkasl wrote: Sat May 21, 2022 12:05 pm Well on the bond side we hold VBIRX, VBTLX, VWEHX. Our goal was to have safe short term money parked in either VIPSX and/or VTAPX for 1-3 year withdrawals thinking anything is better than a money market but maybe not in 2022
I don't think a separate fund is necessary for near-term withdrawals. In such a plan, each year you would sell from one of your "other" funds and buy more of the short-term fund to replenish what you sell of the short-term fund to cover expenses. This is effectively selling the "other" fund to cover near-term expenses, except you shorten your overall duration by also holding the short-term fund; however, target duration is a separate question--you could achieve the target duration any number of ways. The objective in having an additional fund is not clear.
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Re: VTAPX vs VIPSX

Post by dbr »

Corvidae wrote: Sat May 21, 2022 2:04 pm
bpkasl wrote: Sat May 21, 2022 12:05 pm Well on the bond side we hold VBIRX, VBTLX, VWEHX. Our goal was to have safe short term money parked in either VIPSX and/or VTAPX for 1-3 year withdrawals thinking anything is better than a money market but maybe not in 2022
I don't think a separate fund is necessary for near-term withdrawals. In such a plan, each year you would sell from one of your "other" funds and buy more of the short-term fund to replenish what you sell of the short-term fund to cover expenses. This is effectively selling the "other" fund to cover near-term expenses, except you shorten your overall duration by also holding the short-term fund; however, target duration is a separate question--you could achieve the target duration any number of ways. The objective in having an additional fund is not clear.
Right. A process of small withdrawals over a long period of time is not to be confused with liquidating a whole position at one time. The latter could be at great risk to a downturn at the moment the money is needed. The former is at risk to not benefiting from higher return over time.

The concept of "when you are going to use the money" does not apply to most people who are, for example, in retirement and taking regular withdrawals over time spans of 20-30-40 years (Retire at 55 and live to 95 is 40 years; retire at 65 and live to 85 is 20 years.).

If a person wants to explore a more sophisticated mathematical model of withdrawals from bond assets it would be along the lines of matching investment and liability durations. In practice retirees may well own as much or more in stocks as in bonds so the portfolio as a whole has to be modeled.
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Re: VTAPX vs VIPSX

Post by Northern Flicker »

vineviz wrote: Sat May 21, 2022 11:59 am
dbr wrote: Sat May 21, 2022 11:49 am
The compensation for inflation is the same for all TIPS. The credit risk is the same for all TIPS, being US Treasury obligations.
This isn’t strictly true, because of the way that the indexation lags work. The lag mechanism has a much stronger effect on shorter maturity TIPS.

See for instance https://www.frbsf.org/economic-research ... bonds/?amp
Interesting work. The analysis was for individual bonds, and demonstrated that for 5 years or longer, there was no meaningful effect even with an 8-month lag because the effect was diluted by more quarters of inflation adjustment.

I think there also could be a diversification effect with a TIPS fund portfolio, where the bonds mature in different quarters, at least for the 10-year TIPS that is auctioned 6 times a year. The 5-year TIPS is only auctioned 3 times a year, and other than inflation index lag might be favored by a short-term TIPS fund to hold bonds with less seasoning and thus less deflation risk.
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Re: VTAPX vs VIPSX

Post by vineviz »

Northern Flicker wrote: Sat May 21, 2022 2:38 pm Interesting work. The analysis was for individual bonds, and demonstrated that for 5 years or longer, there was no meaningful effect even with an 8-month lag because the effect was diluted by more quarters of inflation adjustment.
That's right, but roughly 20% of the holdings of a fund like VTAPX are in TIPS with less than 1 year to maturity (where the effect is strongest) versus about 5% of the holdings of VIPSX.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: VTAPX vs VIPSX

Post by jeffyscott »

Northern Flicker wrote: Sat May 21, 2022 2:38 pm I think there also could be a diversification effect with a TIPS fund portfolio, where the bonds mature in different quarters, at least for the 10-year TIPS that is auctioned 6 times a year. The 5-year TIPS is only auctioned 3 times a year, and other than inflation index lag might be favored by a short-term TIPS fund to hold bonds with less seasoning and thus less deflation risk.
It looks like only two new auctions for each, though. The others are reopenings, so they don't mature in the same month as the auction occurs.

This month's 10 year, for example, matures in January 2032, since it was a reopening.
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Re: VTAPX vs VIPSX

Post by Northern Flicker »

vineviz wrote: Sat May 21, 2022 2:57 pm
Northern Flicker wrote: Sat May 21, 2022 2:38 pm Interesting work. The analysis was for individual bonds, and demonstrated that for 5 years or longer, there was no meaningful effect even with an 8-month lag because the effect was diluted by more quarters of inflation adjustment.
That's right, but roughly 20% of the holdings of a fund like VTAPX are in TIPS with less than 1 year to maturity (where the effect is strongest) versus about 5% of the holdings of VIPSX.
It also depends on when the bonds were purchased. If there bonds are bought on the secondary market close enough to having only 1 year left for maturity, the effect would be discounted into the price.
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Re: VTAPX vs VIPSX

Post by vineviz »

Northern Flicker wrote: Sun May 22, 2022 12:06 pm It also depends on when the bonds were purchased. If there bonds are bought on the secondary market close enough to having only 1 year left for maturity, the effect would be discounted into the price.
Only expected inflation could be "priced in" on the secondary market. Unexpected inflation would still expose the investor to the lag mechanism.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: VTAPX vs VIPSX

Post by Northern Flicker »

vineviz wrote: Sun May 22, 2022 12:51 pm
Northern Flicker wrote: Sun May 22, 2022 12:06 pm It also depends on when the bonds were purchased. If there bonds are bought on the secondary market close enough to having only 1 year left for maturity, the effect would be discounted into the price.
Only expected inflation could be "priced in" on the secondary market. Unexpected inflation would still expose the investor to the lag mechanism.
So for TIPS bought close enough to maturity on the secondary market, the deviation of expected and unexpected inflation should be minimal most of the time (but not always).

Some unknown fraction of the 20% of TIPS in the short-term fund were bought close enough to maturity for the effect to be priced in, and some unknown fraction of the effect for those should be discounted in.
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bpkasl
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Re: VTAPX vs VIPSX

Post by bpkasl »

vineviz wrote: Sat May 21, 2022 2:57 pm
Northern Flicker wrote: Sat May 21, 2022 2:38 pm Interesting work. The analysis was for individual bonds, and demonstrated that for 5 years or longer, there was no meaningful effect even with an 8-month lag because the effect was diluted by more quarters of inflation adjustment.
That's right, but roughly 20% of the holdings of a fund like VTAPX are in TIPS with less than 1 year to maturity (where the effect is strongest) versus about 5% of the holdings of VIPSX.

So with a 20% vs 5% holdings with less than one year maturity, VTAPX would be more affected in returns by short term inflation?
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Re: VTAPX vs VIPSX

Post by vineviz »

Basically, I think it's sufficient to say that TIPS are effectively nominal bonds for the last 3 months of their life because of the lag introduced by indexation.

For a 10-year TIPS this is relatively inconsequential because it represents just 2.5% of the bond's life. For a 1-year TIPS this represents 25% of the bond's life and, therefore, is more consequential.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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bpkasl
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Re: VTAPX vs VIPSX

Post by bpkasl »

vineviz wrote: Sun May 22, 2022 2:36 pm Basically, I think it's sufficient to say that TIPS are effectively nominal bonds for the last 3 months of their life because of the lag introduced by indexation.

For a 10-year TIPS this is relatively inconsequential because it represents just 2.5% of the bond's life. For a 1-year TIPS this represents 25% of the bond's life and, therefore, is more consequential.
Confusing
No perfect answer or AA
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Re: VTAPX vs VIPSX

Post by vineviz »

bpkasl wrote: Sun May 22, 2022 2:39 pm
vineviz wrote: Sun May 22, 2022 2:36 pm Basically, I think it's sufficient to say that TIPS are effectively nominal bonds for the last 3 months of their life because of the lag introduced by indexation.

For a 10-year TIPS this is relatively inconsequential because it represents just 2.5% of the bond's life. For a 1-year TIPS this represents 25% of the bond's life and, therefore, is more consequential.
Confusing
No perfect answer or AA
It is confusing, and a mere technicality.

The right answer, fortunately, is very easy: the duration of your bonds should match your investment horizon.

If you intend to spend down your portfolio completely over the next 2-5 years then VTAPX is your choice.

If you intend to spend down your portfolio over the next 5-15 years then VAIPX is your choice.

If your spending is more than 15 years away then you should call Vanguard and ask them to launch a long-term TIPS fund.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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bpkasl
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Re: VTAPX vs VIPSX

Post by bpkasl »

vineviz wrote: Sun May 22, 2022 2:46 pm
bpkasl wrote: Sun May 22, 2022 2:39 pm
vineviz wrote: Sun May 22, 2022 2:36 pm Basically, I think it's sufficient to say that TIPS are effectively nominal bonds for the last 3 months of their life because of the lag introduced by indexation.

For a 10-year TIPS this is relatively inconsequential because it represents just 2.5% of the bond's life. For a 1-year TIPS this represents 25% of the bond's life and, therefore, is more consequential.
Confusing
No perfect answer or AA
It is confusing, and a mere technicality.

The right answer, fortunately, is very easy: the duration of your bonds should match your investment horizon.

If you intend to spend down your portfolio completely over the next 2-5 years then VTAPX is your choice.

If you intend to spend down your portfolio over the next 5-15 years then VAIPX is your choice.

If your spending is more than 15 years away then you should call Vanguard and ask them to launch a long-term TIPS fund.
Thanks
We started a three bucket approach based on Morningstar when we retired Jan 2021
That entire year was enjoyable to watch all of the funds go up
Total stock market
Total bond
International
Wellington
VBIRX
VWEHX
And holdings in VIPSX and VTAPX
But now second guessing bucket one due to losses and hate to withdraw
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jeffyscott
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Re: VTAPX vs VIPSX

Post by jeffyscott »

vineviz wrote: Sun May 22, 2022 2:46 pm
bpkasl wrote: Sun May 22, 2022 2:39 pm
vineviz wrote: Sun May 22, 2022 2:36 pm Basically, I think it's sufficient to say that TIPS are effectively nominal bonds for the last 3 months of their life because of the lag introduced by indexation.

For a 10-year TIPS this is relatively inconsequential because it represents just 2.5% of the bond's life. For a 1-year TIPS this represents 25% of the bond's life and, therefore, is more consequential.
Confusing
No perfect answer or AA
It is confusing, and a mere technicality.

The right answer, fortunately, is very easy: the duration of your bonds should match your investment horizon.

If you intend to spend down your portfolio completely over the next 2-5 years then VTAPX is your choice.

If you intend to spend down your portfolio over the next 5-15 years then VAIPX is your choice.

If your spending is more than 15 years away then you should call Vanguard and ask them to launch a long-term TIPS fund.
If you really think you should only own TIPS that are 15 or more years from maturity, there are only 13 of them to buy, one for each year from 2040 to 2052. There's also at least one ETF for 15 year+ TIPS.
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Re: VTAPX vs VIPSX

Post by HeelaMonster »

vineviz wrote: Sun May 22, 2022 2:46 pm It is confusing, and a mere technicality.

The right answer, fortunately, is very easy: the duration of your bonds should match your investment horizon.

If you intend to spend down your portfolio completely over the next 2-5 years then VTAPX is your choice.

If you intend to spend down your portfolio over the next 5-15 years then VAIPX is your choice.

If your spending is more than 15 years away then you should call Vanguard and ask them to launch a long-term TIPS fund.
Very helpful to see spelled out this way. What would the recommendation be if one's investment horizon (for the funds in question) involved periodic conversions from Traditional to Roth IRA, over the next several years... after which there is no plan to withdraw from Roth, perhaps forever? In one sense the horizon would be open-ended ("...to infinity and beyond!"), BUT with annual withdrawals to convert and eventually to take RMDs. What bond fund(s) make sense to hold in a Traditional IRA, under those circumstances?
Last edited by HeelaMonster on Sun May 22, 2022 3:04 pm, edited 1 time in total.
Topic Author
bpkasl
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Re: VTAPX vs VIPSX

Post by bpkasl »

bpkasl wrote: Sun May 22, 2022 2:51 pm
vineviz wrote: Sun May 22, 2022 2:46 pm
bpkasl wrote: Sun May 22, 2022 2:39 pm
vineviz wrote: Sun May 22, 2022 2:36 pm Basically, I think it's sufficient to say that TIPS are effectively nominal bonds for the last 3 months of their life because of the lag introduced by indexation.

For a 10-year TIPS this is relatively inconsequential because it represents just 2.5% of the bond's life. For a 1-year TIPS this represents 25% of the bond's life and, therefore, is more consequential.
Confusing
No perfect answer or AA
It is confusing, and a mere technicality.

The right answer, fortunately, is very easy: the duration of your bonds should match your investment horizon.

If you intend to spend down your portfolio completely over the next 2-5 years then VTAPX is your choice.

If you intend to spend down your portfolio over the next 5-15 years then VAIPX is your choice.

If your spending is more than 15 years away then you should call Vanguard and ask them to launch a long-term TIPS fund.

And what about the 1-2 year window? MM stinks

Thanks
We started a three bucket approach based on Morningstar when we retired Jan 2021
That entire year was enjoyable to watch all of the funds go up
Total stock market
Total bond
International
Wellington
VBIRX
VWEHX
And holdings in VIPSX and VTAPX
But now second guessing bucket one due to losses and hate to withdraw
dbr
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Re: VTAPX vs VIPSX

Post by dbr »

bpkasl wrote: Sun May 22, 2022 3:03 pm

Thanks
We started a three bucket approach based on Morningstar when we retired Jan 2021
That entire year was enjoyable to watch all of the funds go up
Total stock market
Total bond
International
Wellington
VBIRX
VWEHX
And holdings in VIPSX and VTAPX
But now second guessing bucket one due to losses and hate to withdraw
Isn't the specification of a three bucket system that the "cash" bucket should not have any volatility. VIPSX does not meet that. VTAPX is probably sort of ok. Not having any return in that asset is ok.

Do I understand what you are doing?

It might be a buckets system presents too many conundrums and just withdrawing from a longer term portfolio would be fine. By definition that assumes that sometimes you take money when the portfolio has fallen but also when the portfolio has risen. A long term series of many small withdrawals is not managed the same way as a single large withdrawal at a point in time.
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Re: VTAPX vs VIPSX

Post by Robot Monster »

dbr wrote: Sat May 21, 2022 2:13 pm
Corvidae wrote: Sat May 21, 2022 2:04 pm
bpkasl wrote: Sat May 21, 2022 12:05 pm Well on the bond side we hold VBIRX, VBTLX, VWEHX. Our goal was to have safe short term money parked in either VIPSX and/or VTAPX for 1-3 year withdrawals thinking anything is better than a money market but maybe not in 2022
I don't think a separate fund is necessary for near-term withdrawals...
Right. A process of small withdrawals over a long period of time is not to be confused with liquidating a whole position at one time.
That is touching upon something I have been trying to become comfortable with. So, if you own VIPSX, you can slowly withdraw from that fund over a long time period, but how long is long? 14.6 years or more, I'm guessing, since VIPSX has an average duration of 7.3 years, as long as your withdrawal period remains at least double that, you can withdraw directly from VIPSX? Do I have that right?

Edit: this question appears to have been successful answered by Northern Flicker below.
Last edited by Robot Monster on Sun May 22, 2022 5:19 pm, edited 1 time in total.
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Re: VTAPX vs VIPSX

Post by vineviz »

HeelaMonster wrote: Sun May 22, 2022 3:02 pm
vineviz wrote: Sun May 22, 2022 2:46 pm It is confusing, and a mere technicality.

The right answer, fortunately, is very easy: the duration of your bonds should match your investment horizon.

If you intend to spend down your portfolio completely over the next 2-5 years then VTAPX is your choice.

If you intend to spend down your portfolio over the next 5-15 years then VAIPX is your choice.

If your spending is more than 15 years away then you should call Vanguard and ask them to launch a long-term TIPS fund.
Very helpful to see spelled out this way. What would the recommendation be if one's investment horizon (for the funds in question) involved periodic conversions from Traditional to Roth IRA, over the next several years... after which there is no plan to withdraw from Roth, perhaps forever? In one sense the horizon would be open-ended ("...to infinity and beyond!"), BUT with annual withdrawals to convert and eventually to take RMDs. What bond fund(s) make sense to hold in a Traditional IRA, under those circumstances?
Roth conversions and RMDs shouldn't be viewed as withdrawals, but rather as transfers from one account to another.

What matters for measuring your investment horizon is when your money will be spent (e.g. for food, housing, travel, taxes, etc.).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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vineviz
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Re: VTAPX vs VIPSX

Post by vineviz »

HeelaMonster wrote: Sun May 22, 2022 3:02 pm
vineviz wrote: Sun May 22, 2022 2:46 pm It is confusing, and a mere technicality.

The right answer, fortunately, is very easy: the duration of your bonds should match your investment horizon.

If you intend to spend down your portfolio completely over the next 2-5 years then VTAPX is your choice.

If you intend to spend down your portfolio over the next 5-15 years then VAIPX is your choice.

If your spending is more than 15 years away then you should call Vanguard and ask them to launch a long-term TIPS fund.
Very helpful to see spelled out this way. What would the recommendation be if one's investment horizon (for the funds in question) involved periodic conversions from Traditional to Roth IRA, over the next several years... after which there is no plan to withdraw from Roth, perhaps forever? In one sense the horizon would be open-ended ("...to infinity and beyond!"), BUT with annual withdrawals to convert and eventually to take RMDs. What bond fund(s) make sense to hold in a Traditional IRA, under those circumstances?
What matters for estimating your investment horizon is when the money is spent on goods and services. Roth conversions and RMDs are just transfers from one investment account to another.

This thread might add some detail: viewtopic.php?t=340252
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: VTAPX vs VIPSX

Post by Northern Flicker »

N years of retirement liabilities has a (Macaulay) duration of about (N + 1)/2 not N. So if you are funding 15 years, you would start with a duration of 8, and shorten the duration by half a year each year. Durations shorter than 8 would be set by holding a mix of VTIP/VTAPX and VAIPX. STIP is another short TIPS fund, and FIPDX and SCHP are other intermediate TIPS funds.

You also can consider that your retirement liabilities may be longer or shorter than projected, and if shorter, they may increase on a per year basis. This creates an asymmetry where the expected value of the duration of liabilities generally is shorter than the (deterministic) duration of projected liabilities.

A married couple where both do not die at the same time also creates some front loading of expenses, and shortening of expected duration.

K years from retirement with N years to be funded in retirement, the duration is approximately given by K + (N + 1)/2.

Asset duration should be matched to either the duration or expected duration of liabilities, not to the investment time horizon.
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Re: VTAPX vs VIPSX

Post by HeelaMonster »

vineviz wrote: Sun May 22, 2022 3:59 pm
HeelaMonster wrote: Sun May 22, 2022 3:02 pm
vineviz wrote: Sun May 22, 2022 2:46 pm It is confusing, and a mere technicality.

The right answer, fortunately, is very easy: the duration of your bonds should match your investment horizon.

If you intend to spend down your portfolio completely over the next 2-5 years then VTAPX is your choice.

If you intend to spend down your portfolio over the next 5-15 years then VAIPX is your choice.

If your spending is more than 15 years away then you should call Vanguard and ask them to launch a long-term TIPS fund.
Very helpful to see spelled out this way. What would the recommendation be if one's investment horizon (for the funds in question) involved periodic conversions from Traditional to Roth IRA, over the next several years... after which there is no plan to withdraw from Roth, perhaps forever? In one sense the horizon would be open-ended ("...to infinity and beyond!"), BUT with annual withdrawals to convert and eventually to take RMDs. What bond fund(s) make sense to hold in a Traditional IRA, under those circumstances?
Roth conversions and RMDs shouldn't be viewed as withdrawals, but rather as transfers from one account to another.

What matters for measuring your investment horizon is when your money will be spent (e.g. for food, housing, travel, taxes, etc.).
Thanks, understood. I almost added/confirmed that in my question above. I do view these as transfers/exchanges, and not as spending (by "withdrawals," I was just acknowledging that things do need to "move periodically from account A to account B," if that mattered in terms of recommendations).

As I tried to explain, but didn't do well enough, these funds may NEVER be spent on food, housing, travel, etc. Those are covered, largely or in whole, by other sources... so I should rarely be forced to tap either the traditional or Roth IRAs for those routine expenses. Thus, the "investment horizon" (if it can even be called that) for the funds in question is veeery long term, measured in decades if not in lifetimes.

With that understanding, my question still stands: Any recommendations for bond funds to hold in the traditional IRA, under those circumstances?
Last edited by HeelaMonster on Sun May 22, 2022 4:47 pm, edited 1 time in total.
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Re: VTAPX vs VIPSX

Post by vineviz »

HeelaMonster wrote: Sun May 22, 2022 4:29 pm With that understanding, my question still stands: Any recommendations for bond funds to hold in the traditional IRA, under those circumstances?
So you're suggesting that the investment horizon is essentially infinite, and that the money in the IRA will never be spent?

It's not obvious why a fixed income instrument would be chosen for that investment goal, since by definition, no income is needed. But in principle the longest duration bond fund you could find would be the indicated choice.

There are lots of good choices. Two popular ones are iShares Core 10+ Year USD Bond ETF (ILTB) and Vanguard Long-Term Treasury ETF (VGLT).
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Re: VTAPX vs VIPSX

Post by HeelaMonster »

vineviz wrote: Sun May 22, 2022 4:46 pm
HeelaMonster wrote: Sun May 22, 2022 4:29 pm With that understanding, my question still stands: Any recommendations for bond funds to hold in the traditional IRA, under those circumstances?
So you're suggesting that the investment horizon is essentially infinite, and that the money in the IRA will never be spent?

It's not obvious why a fixed income instrument would be chosen for that investment goal, since by definition, no income is needed. But in principle the longest duration bond fund you could find would be the indicated choice.

There are lots of good choices. Two popular ones are iShares Core 10+ Year USD Bond ETF (ILTB) and Vanguard Long-Term Treasury ETF (VGLT).
Correct. That's exactly what I meant by "In one sense the horizon would be open-ended ("...to infinity and beyond!")". Quoting Buzz Lightyear may have sounded tongue-in-cheek, but was really just an admission of good fortune. Once SS and pensions kick in, they should cover all expenses.

Thank you for the suggestions. I am warming to the possibility that we may need little if any fixed income, but we are just entering retirement and are not quite there yet in our thinking, until we complete the transition now underway and the picture really stabilizes.

P.S., and thanks for naming ETFs, which is what I need to use for the account in question. These funds are currently in Vanguard LifeStrategy Income Fund (VASIX), but I will be hamstrung by Early Redemption Fees on MFs.
Last edited by HeelaMonster on Mon May 23, 2022 7:52 am, edited 1 time in total.
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Re: VTAPX vs VIPSX

Post by Robot Monster »

Northern Flicker wrote: Sun May 22, 2022 4:04 pm N years of retirement liabilities has a (Macaulay) duration of about (N + 1)/2 not N. So if you are funding 15 years, you would start with a duration of 8, and shorten the duration by half a year each year. Durations shorter than 8 would be set by holding a mix of VTIP/VTAPX and VAIPX. STIP is another short TIPS fund, and FIPDX and SCHP are other intermediate TIPS funds.

You also can consider that your retirement liabilities may be longer or shorter than projected, and if shorter, they may increase on a per year basis. This creates an asymmetry where the expected value of the duration of liabilities generally is shorter than the (deterministic) duration of projected liabilities.

A married couple where both do not die at the same time also creates some front loading of expenses, and shortening of expected duration.

K years from retirement with N years to be funded in retirement, the duration is approximately given by K + (N + 1)/2.

Asset duration should be matched to either the duration or expected duration of liabilities, not to the investment time horizon.
Thank you. That's a very concise explanation about how to "escape" from a bond fund.
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Re: VTAPX vs VIPSX

Post by Northern Flicker »

If not yet in retirement, I think it is preferred to separate the accumulation phase and decumulation phase. The duration of cash flows during accumulation is muddied by continued contributions to the portfolio. Thus, one model can be used for how to hit the retirement target, and then matching assets and liabilities can be used in a straightforward manner when in decumulation, with (N+1)/2 as the duration of N evenly spaced retirement liabilities, in years in this case.
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Re: VTAPX vs VIPSX

Post by Morik »

Northern Flicker wrote: Sun May 22, 2022 4:04 pm K years from retirement with N years to be funded in retirement, the duration is approximately given by K + (N + 1)/2.
Is there somewhere I can go to learn about how this formula is derived/with examples? I tried searching on google but can't seem to find anything, I'm probably searching the wrong terms. E.g., "how to calculate macauly duration of retirement liabilities" gives a bunch of too-complex-for-me papers on how pension funds manage these things.

I had thought the formula was K + N/2; why the +1? Or to put it another way: find the amount of time it takes for half of the liability to be discharged, and this is the duration? Is that not quite correct?

If I had 2 liabilities of $1000, one in a year and one in two years, it sounds like the duration of these liabilities would be 1.5 years, not 1 year?
And then 6 months later, the duration is what? (When liability 1 is due in 6 months and liability 2 in 18 months.)
After the first payment, I assume the duration is then 1 year (single liability due in one year) and shrinks at a 1:1 ratio with passing time?
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Re: VTAPX vs VIPSX

Post by arcticpineapplecorp. »

bpkasl wrote: Sat May 21, 2022 7:30 am Now to consider which direction rates will take since not sure about holding both
well if 67 economists out of 67 economists couldn't correctly predict the direction of interest rates over a short period of time like 6 months, what makes you think you will do any better?

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Re: VTAPX vs VIPSX

Post by grabiner »

Morik wrote: Thu Jun 16, 2022 2:21 pm
Northern Flicker wrote: Sun May 22, 2022 4:04 pm K years from retirement with N years to be funded in retirement, the duration is approximately given by K + (N + 1)/2.
Is there somewhere I can go to learn about how this formula is derived/with examples? I tried searching on google but can't seem to find anything, I'm probably searching the wrong terms. E.g., "how to calculate macauly duration of retirement liabilities" gives a bunch of too-complex-for-me papers on how pension funds manage these things.

I had thought the formula was K + N/2; why the +1? Or to put it another way: find the amount of time it takes for half of the liability to be discharged, and this is the duration? Is that not quite correct?
The +1 depends on whether you consider needs to be discrete (one payment each year) or continuous (payments throughout the year).

The definition of the duration of a portfolio or a liability is the average of the individual payments, weighted by present value. For example, if you have $2000 in four-year zero-coupon bonds, and $1000 in ten-year zero-coupon bonds, your overall duration is six years.

Now, suppose that you will need the same number of present dollars in years K+1, K+2, ..., K+N. The average of those values is K+(N+1)/2. If K=10 and N=19, you could build a liability-matching portfolio with an 11-year bond, a 12-year bond, ..., and a 29-year bond, and that would have a duration of 20 years.

But if you view your needs as continuous, then the first year of retirement has a duration of K+1/2, not K+1, since you will be spending money throughout the year. If you match these liabilities with an annuity paying monthly (such as Social Security and most pensions), you will get 12 payments during the year, rather than one payment at the end of the year.
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