Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

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TheTimeLord
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Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by TheTimeLord »

TIPS and I-Bonds now make up about 13% of my portfolio. I plan to continue to purchase TIPS for liability matching purposes. Is there a limit to the percentage of my portfolio that should be in these inflation protected instruments?
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protagonist
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Re: Is there a limit to the percentage of my portfolio should be in inflation protected instruments?

Post by protagonist »

My own opinion is no, but it depends on your personal goals.

If you are pretty sure you have enough money to fund your retirement if inflation does not eat away at your assets, and if you are satisfied with the standard of living that will allow you, then you have "won the game", and there is no good reason to put that at risk. TIPS and I-bonds could be all you need or want, if for no other reason to keep you free of worry and stress. And it would free your time and mind up for other things besides finance.

If you are unsure of the above, then investing in the stock market may provide you with what you need in the future....just realize it comes with risks and you have to assess your risk tolerance to figure out how much risk you are willing to take. The caveat here is that assessing one's risk tolerance is not easy (especially for newer investors, but even for seasoned investors, since none of us are old enough to have experienced a severe crash with long-term sustained losses).

If you have more than enough money to fund your retirement, you might prefer having the portion of your money you don't need (or that could conceivably up your lifestyle game or provide your heirs with more) in riskier instruments (like stocks).

I would probably have almost all my money in TIPS had I not come into the game late, when TIPS were not such a great idea, and when I would face large capital gains tax selling my equities. Now that TIPS are a more viable option I need to re-think this....is it worth taking the big up-front tax hit by selling stocks, especially if TIPS yields continue to increase?
Last edited by protagonist on Wed Jun 29, 2022 12:46 pm, edited 3 times in total.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by JBTX »

TheTimeLord wrote: Wed Jun 29, 2022 11:30 am TIPS and I-Bonds now make up about 13% of my portfolio. I plan to continue to purchase TIPS for liability matching purposes. Is there a limit to the percentage of my portfolio that should be in these inflation protected instruments?
I’m somewhere in that ballpark. I’m more likely to increase a bit vs decrease near term but probably not dramatically. I don’t think there is a limit to TIPS exposure but as long term regular bond interest rates rise the likelihood increases they will be more competitive long term increases, and well as providing more “ballast” to stocks.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by BabaWawa »

TheTimeLord wrote: Wed Jun 29, 2022 11:30 am TIPS and I-Bonds now make up about 13% of my portfolio. I plan to continue to purchase TIPS for liability matching purposes. Is there a limit to the percentage of my portfolio that should be in these inflation protected instruments?
Over 10 years ago, 50% of fixed income in TIPs was the normal on this forum. Then with no inflation on the horizon, folks started dropping TIPs and we had the 3 fund simplified portfolio using only total bond. Now inflation is rampant and TIPs are of interest again. For me, I don't pretend to know what inflation or interest rates will do and maintain about 25-30% of fixed income in TIPs forever. Guess I never understand why "stay the course" only applies to equities and not bonds.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by TheTimeLord »

BabaWawa wrote: Wed Jun 29, 2022 12:28 pm
TheTimeLord wrote: Wed Jun 29, 2022 11:30 am TIPS and I-Bonds now make up about 13% of my portfolio. I plan to continue to purchase TIPS for liability matching purposes. Is there a limit to the percentage of my portfolio that should be in these inflation protected instruments?
Over 10 years ago, 50% of fixed income in TIPs was the normal on this forum. Then with no inflation on the horizon, folks started dropping TIPs and we had the 3 fund simplified portfolio using only total bond. Now inflation is rampant and TIPs are of interest again. For me, I don't pretend to know what inflation or interest rates will do and maintain about 25-30% of fixed income in TIPs forever. Guess I never understand why "stay the course" only applies to equities and not bonds.
I have consistently bought I-Bonds for years, the TIPS are a new addition now that I feel I have enough and I am liability matching until I reach SS.

The main reason I am asking is I realized TIPS are sort of the flavor of the day investment and I don't want to get carried away just because they are today's trendy investment.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by TomatoTomahto »

BabaWawa wrote: Wed Jun 29, 2022 12:28 pm [snip…]Guess I never understand why "stay the course" only applies to equities and not bonds.
“Buy the haystack” apparently only applies to US equities also. Humpty Dumpty explained it.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by BabaWawa »

TomatoTomahto wrote: Wed Jun 29, 2022 12:36 pm
BabaWawa wrote: Wed Jun 29, 2022 12:28 pm [snip…]Guess I never understand why "stay the course" only applies to equities and not bonds.
“Buy the haystack” apparently only applies to US equities also. Humpty Dumpty explained it.
"Don't just do something, stand there" also only for equities too?
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by protagonist »

TomatoTomahto wrote: Wed Jun 29, 2022 12:36 pm
BabaWawa wrote: Wed Jun 29, 2022 12:28 pm [snip…]Guess I never understand why "stay the course" only applies to equities and not bonds.
“Buy the haystack” apparently only applies to US equities also. Humpty Dumpty explained it.
"Stay the course" only has relevance to me in the sense of not selling out of panic (or, conversely, "backing up the truck" whenever the market takes a dive).
It does not mean refusing to change your mind or alter your beliefs when confronted with new information or in response to a changing reality. If that were my approach, I would still be "staying the course" according to my beliefs in the 90s (or even when I was a teenager!) and I might be broke (or worse) today. IMHO intellectual flexibility is an important survival tool.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by burritoLover »

Those who dumped TIPS were making a future prediction - that high inflation wasn't going to be a overarching concern going forward. Now those same investors are adding and over-allocating to TIPS, again making a future prediction - that high inflation is going to be a major concern long-term. Maybe you should stop trying to make predictions and just make a reasonable portfolio choice.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by gmaynardkrebs »

TheTimeLord wrote: Wed Jun 29, 2022 12:34 pm The main reason I am asking is I realized TIPS are sort of the flavor of the day investment and I don't want to get carried away just because they are today's trendy investment.
They've been my flavor of the day for over 20 years! Having lived through the inflation of the 70s and 80s, I remember how scary that was -- and I was young then! Could be a little PTSD in that, but what's going on now means that it's not ALL PTSD. Pretty much all of my bonds are in TIPS or TIPS funds now.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by KlangFool »

TheTimeLord wrote: Wed Jun 29, 2022 11:30 am TIPS and I-Bonds now make up about 13% of my portfolio. I plan to continue to purchase TIPS for liability matching purposes. Is there a limit to the percentage of my portfolio that should be in these inflation protected instruments?
TheTimeLord,

How many years of expense is that? 10 years? 20 years?

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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by homebuyer6426 »

Instead of holding TIPs, I rely on having a high stock allocation to outpace inflation. Stocks had such a great decade that it would take a lot of inflation to erase that progress. If I were older, might get something more stable than stocks, but not necessarily TIPs.

I don't think TIPs make sense to people still deep in the accumulation phase who have a stomach for risk. If a formula was devised for how much TIPs one should hold, I imagine it should include the person's age or years until retirement.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by Logan Roy »

TheTimeLord wrote: Wed Jun 29, 2022 11:30 am TIPS and I-Bonds now make up about 13% of my portfolio. I plan to continue to purchase TIPS for liability matching purposes. Is there a limit to the percentage of my portfolio that should be in these inflation protected instruments?
In my experience testing optimal portfolios over the past 50 years, about a third in some combination of TIPS and gold has tended to work out well. Upping your allocation now, though, does have an uncomfortable feel of market timing. I'm no bond trading expert, but I might be buying longer duration now, to hedge rate falls.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by TheTimeLord »

burritoLover wrote: Wed Jun 29, 2022 1:00 pm Those who dumped TIPS were making a future prediction - that high inflation wasn't going to be a overarching concern going forward. Now those same investors are adding and over-allocating to TIPS, again making a future prediction - that high inflation is going to be a major concern long-term. Maybe you should stop trying to make predictions and just make a reasonable portfolio choice.
Interesting, but I am buying TIPS in my liability matching because they will work for me in either a high or low inflationary environment.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by gmaynardkrebs »

homebuyer6426 wrote: Wed Jun 29, 2022 1:11 pm Instead of holding TIPs, I rely on having a high stock allocation to outpace inflation. Stocks had such a great decade that it would take a lot of inflation to erase that progress. If I were older, might get something more stable than stocks, but not necessarily TIPs.

I don't think TIPs make sense to people still deep in the accumulation phase who have a stomach for risk. If a formula was devised for how much TIPs one should hold, I imagine it should include the person's age or years until retirement.
Even for a younger person, I think TIPS do make sense as part of a liability matching portfolio. Not sure I like the phrase having a "stomach for risk" -- gamblers have that -- but your objectively measured capacity to bear the risks of stocks under-performing expectations.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by TheTimeLord »

Logan Roy wrote: Wed Jun 29, 2022 1:24 pm
TheTimeLord wrote: Wed Jun 29, 2022 11:30 am TIPS and I-Bonds now make up about 13% of my portfolio. I plan to continue to purchase TIPS for liability matching purposes. Is there a limit to the percentage of my portfolio that should be in these inflation protected instruments?
In my experience testing optimal portfolios over the past 50 years, about a third in some combination of TIPS and gold has tended to work out well. Upping your allocation now, though, does have an uncomfortable feel of market timing. I'm no bond trading expert, but I might be buying longer duration now, to hedge rate falls.
Not sure liability matching and longer duration go together. Also, to be clear, I am not buying bond funds, I am buying individual issues with the intent to hold them to maturity. FWIW, all the TIPS I have purchased to date have a positive yield.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by MathWizard »

I am planning on I Bonds for first tier Efund.
They are returning 0% real. I expect higher for my portfolio,
so I don't want them to be more than a few months of expenses.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by marcopolo »

protagonist wrote: Wed Jun 29, 2022 12:56 pm
TomatoTomahto wrote: Wed Jun 29, 2022 12:36 pm
BabaWawa wrote: Wed Jun 29, 2022 12:28 pm [snip…]Guess I never understand why "stay the course" only applies to equities and not bonds.
“Buy the haystack” apparently only applies to US equities also. Humpty Dumpty explained it.
"Stay the course" only has relevance to me in the sense of not selling out of panic (or, conversely, "backing up the truck" whenever the market takes a dive).
It does not mean refusing to change your mind or alter your beliefs when confronted with new information or in response to a changing reality. If that were my approach, I would still be "staying the course" according to my beliefs in the 90s (or even when I was a teenager!) and I might be broke (or worse) today. IMHO intellectual flexibility is an important survival tool.
Just to play devil's advocate...

Some would say that what you call "selling out of panic" or "backing up the truck" are really just another form of "alter your beliefs when confronted with new information or in response to a changing reality"

The line between "stay the course" and "adapt to new information" seems pretty fuzzy, and is mostly in the eye of the beholder.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by burritoLover »

TheTimeLord wrote: Wed Jun 29, 2022 1:25 pm
burritoLover wrote: Wed Jun 29, 2022 1:00 pm Those who dumped TIPS were making a future prediction - that high inflation wasn't going to be a overarching concern going forward. Now those same investors are adding and over-allocating to TIPS, again making a future prediction - that high inflation is going to be a major concern long-term. Maybe you should stop trying to make predictions and just make a reasonable portfolio choice.
Interesting, but I am buying TIPS in my liability matching because they will work for me in either a high or low inflationary environment.
So when did you decide to switch to liability matching?
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by protagonist »

TheTimeLord wrote: Wed Jun 29, 2022 12:34 pm

The main reason I am asking is I realized TIPS are sort of the flavor of the day investment and I don't want to get carried away just because they are today's trendy investment.
Not all trends are bad. Some are based on arguably dubious logic, like crypto (or Hummers as passenger vehicles, or tongue piercing), whereas the ability of others to do what they purport to do are hard to refute.
I don't think of it so much as a trend, as a logical investment if your main objective is to predictively keep up with or beat inflation with minimal risk (a big caveat). It will serve your purpose now. It was not so logical when other safe investments, like CDs , were beating inflation but TIPS were losing to inflation- there were arguably better choices.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by TheTimeLord »

burritoLover wrote: Wed Jun 29, 2022 1:43 pm
TheTimeLord wrote: Wed Jun 29, 2022 1:25 pm
burritoLover wrote: Wed Jun 29, 2022 1:00 pm Those who dumped TIPS were making a future prediction - that high inflation wasn't going to be a overarching concern going forward. Now those same investors are adding and over-allocating to TIPS, again making a future prediction - that high inflation is going to be a major concern long-term. Maybe you should stop trying to make predictions and just make a reasonable portfolio choice.
Interesting, but I am buying TIPS in my liability matching because they will work for me in either a high or low inflationary environment.
So when did you decide to switch to liability matching?
I have always believed the retirement years from when I retire to roughly when I take I take SS are the most valuable. Liability matching those years seems to me the best way to insulate then from the ups and downs of the market and TIPS seem like the most effective tool currently available. I have purchased I-Bonds, off and on, for over 20 years.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by Logan Roy »

TheTimeLord wrote: Wed Jun 29, 2022 1:29 pm
Logan Roy wrote: Wed Jun 29, 2022 1:24 pm
TheTimeLord wrote: Wed Jun 29, 2022 11:30 am TIPS and I-Bonds now make up about 13% of my portfolio. I plan to continue to purchase TIPS for liability matching purposes. Is there a limit to the percentage of my portfolio that should be in these inflation protected instruments?
In my experience testing optimal portfolios over the past 50 years, about a third in some combination of TIPS and gold has tended to work out well. Upping your allocation now, though, does have an uncomfortable feel of market timing. I'm no bond trading expert, but I might be buying longer duration now, to hedge rate falls.
Not sure liability matching and longer duration go together. Also, to be clear, I am not buying bond funds, I am buying individual issues with the intent to hold them to maturity. FWIW, all the TIPS I have purchased to date have a positive yield.
My issue with the short end is that the inflation adjustment was priced in quite a while ago, and the yield spread implies inflation headed back towards 2%(? – I haven't looked at the numbers in a while) 2023-24(?).

If you've already got 13% at the shorter end, it might be the longer end I'd be adding now, as that's where you've had large drops, so you'd get this effective deflation hedge if things swung back, with lots of potential upside should you want to rebalance. It's exceptionally tricky – I doubt there are any glaring inefficiencies. It's just that you don't want to be in the habit of rear view mirror investing. At this stage, it seems like a trade, and by buying longer duration, you'd at least be hedging that trade.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by burritoLover »

TheTimeLord wrote: Wed Jun 29, 2022 1:54 pm
burritoLover wrote: Wed Jun 29, 2022 1:43 pm
TheTimeLord wrote: Wed Jun 29, 2022 1:25 pm
burritoLover wrote: Wed Jun 29, 2022 1:00 pm Those who dumped TIPS were making a future prediction - that high inflation wasn't going to be a overarching concern going forward. Now those same investors are adding and over-allocating to TIPS, again making a future prediction - that high inflation is going to be a major concern long-term. Maybe you should stop trying to make predictions and just make a reasonable portfolio choice.
Interesting, but I am buying TIPS in my liability matching because they will work for me in either a high or low inflationary environment.
So when did you decide to switch to liability matching?
I have always believed the retirement years from when I retire to roughly when I take I take SS are the most valuable. Liability matching those years seems to me the best way to insulate then from the ups and downs of the market and TIPS seem like the most effective tool currently available. I have purchased I-Bonds, off and on, for over 20 years.
Seems like the 50/50 is still reasonable which in your case might be 50% short-term treasures / 50% short-term TIPS?
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by marcopolo »

TheTimeLord wrote: Wed Jun 29, 2022 1:54 pm
burritoLover wrote: Wed Jun 29, 2022 1:43 pm
TheTimeLord wrote: Wed Jun 29, 2022 1:25 pm
burritoLover wrote: Wed Jun 29, 2022 1:00 pm Those who dumped TIPS were making a future prediction - that high inflation wasn't going to be a overarching concern going forward. Now those same investors are adding and over-allocating to TIPS, again making a future prediction - that high inflation is going to be a major concern long-term. Maybe you should stop trying to make predictions and just make a reasonable portfolio choice.
Interesting, but I am buying TIPS in my liability matching because they will work for me in either a high or low inflationary environment.
So when did you decide to switch to liability matching?
I have always believed the retirement years from when I retire to roughly when I take I take SS are the most valuable. Liability matching those years seems to me the best way to insulate then from the ups and downs of the market and TIPS seem like the most effective tool currently available. I have purchased I-Bonds, off and on, for over 20 years.
Did you feel the same way when you previously retired during better market conditions? Or is this perhaps a little bit of recency bias or performance chasing?
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by TheTimeLord »

marcopolo wrote: Wed Jun 29, 2022 3:05 pm
TheTimeLord wrote: Wed Jun 29, 2022 1:54 pm
burritoLover wrote: Wed Jun 29, 2022 1:43 pm
TheTimeLord wrote: Wed Jun 29, 2022 1:25 pm
burritoLover wrote: Wed Jun 29, 2022 1:00 pm Those who dumped TIPS were making a future prediction - that high inflation wasn't going to be a overarching concern going forward. Now those same investors are adding and over-allocating to TIPS, again making a future prediction - that high inflation is going to be a major concern long-term. Maybe you should stop trying to make predictions and just make a reasonable portfolio choice.
Interesting, but I am buying TIPS in my liability matching because they will work for me in either a high or low inflationary environment.
So when did you decide to switch to liability matching?
I have always believed the retirement years from when I retire to roughly when I take I take SS are the most valuable. Liability matching those years seems to me the best way to insulate then from the ups and downs of the market and TIPS seem like the most effective tool currently available. I have purchased I-Bonds, off and on, for over 20 years.
Did you feel the same way when you previously retired during better market conditions? Or is this perhaps a little bit of recency bias or performance chasing?
I always felt that way about the early years of retirement. Liability matching and TIPS just seem like the best available solution. It is also much less capital intensive 9 years down the road from my first whack at retirement. As far as performance chasing, I am just looking for a way to get roughly 0% real on my liability match money.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by BigJohn »

TheTimeLord wrote: Wed Jun 29, 2022 1:25 pm
burritoLover wrote: Wed Jun 29, 2022 1:00 pm Those who dumped TIPS were making a future prediction - that high inflation wasn't going to be a overarching concern going forward. Now those same investors are adding and over-allocating to TIPS, again making a future prediction - that high inflation is going to be a major concern long-term. Maybe you should stop trying to make predictions and just make a reasonable portfolio choice.
Interesting, but I am buying TIPS in my liability matching because they will work for me in either a high or low inflationary environment.
This is exactly the reason I went to 50/50 TIPS/nominals about 4 years ago. Between higher returns and rebalancing to stock using nominals only, it’s now 60/40 which is 30% or so of my total portfolio. I’m not planning on actively rebalancing higher but I will let drift up as I see no real downside to holding more TIPS in retirement.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by Katietsu »

Take a look at the DFA target date finds. Once they reach retirement year, a majority of the fund is made up of “Income Risk Management.” Per DFA: Income Risk Management can be comprised of inflation-protected and ultra-short fixed income securities.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by Artsdoctor »

TimeLord,

I don't think I'd want my entire portfolio in TIPS the same way I don't think that an LMP should be your entire source of portfolio income either.

I have a LMP which goes from age 65-85, and it's exclusively made up of TIPS. The LMP makes up about 1/3 of my entire investment portfolio. I set it up years ago and I have no regrets. It was tough to recommend a TIPS LMP when every single bond's real yield was in negative territory but you're in a more affordable environment now.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by ScubaHogg »

Are you asking how much of your fixed income portfolio inflation protected securities should make up? Or how much of your total portfolio? That seems like two very different answers

I for one think inflation protected bonds should the default answer for the fixed income side and that the question should be, "should I add nominal bonds to my fixed income portfolio" instead of the other way around. Historically inflation has been the number one threat to bond holders worldwide and now we have an instrument that effectively neutralizes that risk at a small to non-existent cost.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by TheTimeLord »

ScubaHogg wrote: Wed Jun 29, 2022 8:35 pm Are you asking how much of your fixed income portfolio inflation protected securities should make up? Or how much of your total portfolio? That seems like two very different answers

I for one think inflation protected bonds should the default answer for the fixed income side and that the question should be, "should I add nominal bonds to my fixed income portfolio" instead of the other way around. Historically inflation has been the number one threat to bond holders worldwide and now we have an instrument that effectively neutralizes that risk at a small to non-existent cost.
I was asking as a percentage of my portfolio in case there was some issue I was missing.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by protagonist »

marcopolo wrote: Wed Jun 29, 2022 1:37 pm

The line between "stay the course" and "adapt to new information" seems pretty fuzzy, and is mostly in the eye of the beholder.
I agree that the line is fuzzy.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by rossington »

KlangFool wrote: Wed Jun 29, 2022 1:05 pm
TheTimeLord wrote: Wed Jun 29, 2022 11:30 am TIPS and I-Bonds now make up about 13% of my portfolio. I plan to continue to purchase TIPS for liability matching purposes. Is there a limit to the percentage of my portfolio that should be in these inflation protected instruments?
TheTimeLord,

How many years of expense is that? 10 years? 20 years?

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This is what I would also ask. The size of one's portfolio is certainly a determining factor.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by protagonist »

burritoLover wrote: Wed Jun 29, 2022 1:00 pm Those who dumped TIPS were making a future prediction - that high inflation wasn't going to be a overarching concern going forward. Now those same investors are adding and over-allocating to TIPS, again making a future prediction - that high inflation is going to be a major concern long-term. Maybe you should stop trying to make predictions and just make a reasonable portfolio choice.
Neither of those scenarios were true in my case. Prediction had nothing to do with it. I buy TIPS to provide security and take prediction out of the equation. I don't care if inflation is high or low....TIPS will allow me to preserve my nest egg. Either way, I will know how exactly how much money I will make in real terms. Nominal gains are meaningless. Stock market investing, on the other hand, does involve prediction.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by WhiteMaxima »

I have 25% real asset fund (tip commedities combo) at the beginning of this year. YTD this fund up 10%. Offset some of other investment loss. I reduced it to 10% to purchase other asset (SPY500 and International) which are in major corrected value.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by bridge2benefits »

TheTimeLord wrote: Wed Jun 29, 2022 4:20 pm I always felt that way about the early years of retirement. Liability matching and TIPS just seem like the best available solution. It is also much less capital intensive 9 years down the road from my first whack at retirement. As far as performance chasing, I am just looking for a way to get roughly 0% real on my liability match money.
If that's your goal, duration matched TIPS and I Bonds are a great solution. It's not the most popular approach here, but you're not alone. I'm doing something similar, building a TIPS ladder as a bridge to Social Security (almost 50% of my portfolio, with plans to increase further), in order to reduce sequence of returns risk in retirement. The TIPS and I Bonds portion of my portfolio will not be exposed to sequence of returns risk.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by AerialWombat »

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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by Small Savanna »

Definitely no more than 100%
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by bridge2benefits »

protagonist wrote: Wed Jun 29, 2022 11:14 pm
burritoLover wrote: Wed Jun 29, 2022 1:00 pm Those who dumped TIPS were making a future prediction - that high inflation wasn't going to be a overarching concern going forward. Now those same investors are adding and over-allocating to TIPS, again making a future prediction - that high inflation is going to be a major concern long-term. Maybe you should stop trying to make predictions and just make a reasonable portfolio choice.
Neither of those scenarios were true in my case. Prediction had nothing to do with it. I buy TIPS to provide security and take prediction out of the equation. I don't care if inflation is high or low....TIPS will allow me to preserve my nest egg. Either way, I will know how exactly how much money I will make in real terms. Nominal gains are meaningless. Stock market investing, on the other hand, does involve prediction.
Exactly. Not everyone who buys TIPS is making a bet that they will return more than nominal bonds. Perhaps institutional traders take that approach, but many of us are buying TIPS to guarantee future real purchasing power, and we don't care whether nominal bonds end up returning more than TIPS over our time horizon.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by marcopolo »

bridge2benefits wrote: Thu Jun 30, 2022 12:33 am
protagonist wrote: Wed Jun 29, 2022 11:14 pm
burritoLover wrote: Wed Jun 29, 2022 1:00 pm Those who dumped TIPS were making a future prediction - that high inflation wasn't going to be a overarching concern going forward. Now those same investors are adding and over-allocating to TIPS, again making a future prediction - that high inflation is going to be a major concern long-term. Maybe you should stop trying to make predictions and just make a reasonable portfolio choice.
Neither of those scenarios were true in my case. Prediction had nothing to do with it. I buy TIPS to provide security and take prediction out of the equation. I don't care if inflation is high or low....TIPS will allow me to preserve my nest egg. Either way, I will know how exactly how much money I will make in real terms. Nominal gains are meaningless. Stock market investing, on the other hand, does involve prediction.
Exactly. Not everyone who buys TIPS is making a bet that they will return more than nominal bonds. Perhaps institutional traders take that approach, but many of us are buying TIPS to guarantee future real purchasing power, and we don't care whether nominal bonds end up returning more than TIPS over our time horizon.
That might be more believable (in general, not for you specifically) if it weren't for the fact of all the people all of a sudden deciding TIPs are the solution now that inflation has shown up, at least for a while. I suspect many will change their minds again if/when inflation goes back down.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by Dude2 »

Small Savanna wrote: Thu Jun 30, 2022 12:32 am Definitely no more than 100%
:D

It sounds like there is a very specific problem to be solved which is to match real liabilities between the ages of x to y. I don't understand how you (Timelord) don't understand that TIPS are exactly the right vehicle to use to solve this problem. 100% TIPS is the I'm done with this now I can turn my homework in. What else are you looking for? You want to solve the problem a bit more elegantly perhaps to curry favor with the professor? That's out of scope to solving the problem.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by TheTimeLord »

protagonist wrote: Wed Jun 29, 2022 11:14 pm
burritoLover wrote: Wed Jun 29, 2022 1:00 pm Those who dumped TIPS were making a future prediction - that high inflation wasn't going to be a overarching concern going forward. Now those same investors are adding and over-allocating to TIPS, again making a future prediction - that high inflation is going to be a major concern long-term. Maybe you should stop trying to make predictions and just make a reasonable portfolio choice.
Neither of those scenarios were true in my case. Prediction had nothing to do with it. I buy TIPS to provide security and take prediction out of the equation. I don't care if inflation is high or low....TIPS will allow me to preserve my nest egg. Either way, I will know how exactly how much money I will make in real terms. Nominal gains are meaningless. Stock market investing, on the other hand, does involve prediction.
Exactly.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by TheTimeLord »

marcopolo wrote: Thu Jun 30, 2022 2:57 am
bridge2benefits wrote: Thu Jun 30, 2022 12:33 am
protagonist wrote: Wed Jun 29, 2022 11:14 pm
burritoLover wrote: Wed Jun 29, 2022 1:00 pm Those who dumped TIPS were making a future prediction - that high inflation wasn't going to be a overarching concern going forward. Now those same investors are adding and over-allocating to TIPS, again making a future prediction - that high inflation is going to be a major concern long-term. Maybe you should stop trying to make predictions and just make a reasonable portfolio choice.
Neither of those scenarios were true in my case. Prediction had nothing to do with it. I buy TIPS to provide security and take prediction out of the equation. I don't care if inflation is high or low....TIPS will allow me to preserve my nest egg. Either way, I will know how exactly how much money I will make in real terms. Nominal gains are meaningless. Stock market investing, on the other hand, does involve prediction.
Exactly. Not everyone who buys TIPS is making a bet that they will return more than nominal bonds. Perhaps institutional traders take that approach, but many of us are buying TIPS to guarantee future real purchasing power, and we don't care whether nominal bonds end up returning more than TIPS over our time horizon.
That might be more believable (in general, not for you specifically) if it weren't for the fact of all the people all of a sudden deciding TIPs are the solution now that inflation has shown up, at least for a while. I suspect many will change their minds again if/when inflation goes back down.
You are probably correct, people are always chasing the hot trend usually too late, but I think there are a lot of people who have had very good fortune in the stock market for the past decade and are beginning to believe the biggest planning challenge they have left is bridging to SS and they are choosing TIPS as their tool of choice. Excuse the lack of periods.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by TheTimeLord »

Added 6 months to my Liability Matching Ladder this morning.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by SJIRon »

I'm 61 (wife 60) and retired, with a liability matching bond ladder reaching to age 84. The ladder comprises about 60% of our portfolio.

The bond ladder was supposed to be 100% TIPS, but it's only 85% TIPS. I cheated when completing the ladder in early 2019. TIPS were starting to get more expensive as rates dropped. So instead of waiting for TIPS auctions per my plan, I cheated and bought a 5 year CD (3.125%) and 10 year CD (3.25%) for two of the ladder rungs.

Because what's the chances of inflation being greater than 3%, right? I felt clever for about a year. Not feeling so clever now. Though happy that most of the ladder rungs are TIPS.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by nedsaid »

TheTimeLord wrote: Wed Jun 29, 2022 11:30 am TIPS and I-Bonds now make up about 13% of my portfolio. I plan to continue to purchase TIPS for liability matching purposes. Is there a limit to the percentage of my portfolio that should be in these inflation protected instruments?
I think the old Boglehead guideline of TIPS being 50% of a Fixed Income portfolio is not bad. Hard to say what the number should be, it depends upon the individual situation.

Another issue is that asset classes, even TIPS don't always act as expected. In 2008-2009, they were down 10%-12% before rebounding smartly. We found out TIPS were less liquid than nominal US Treasuries and thus acted differently in a crisis. My bad assumption was that since TIPS were US Treasury instruments that they would act in similar fashion to nominal US Treasuries in a crisis and boy was I wrong. With inflation up about 8%, it might be surprising to see Intermediate Term TIPS down 7% while the US Bond Index is down about 12%. Shouldn't TIPS have been up by 8%? What we found is that TIPS have duration risk just like nominal bonds and they too were down when interest rates went up.

Yet another issue that we find, is that for Asset Classes that are supposed to fight inflation, the inflation adjustment will come but that adjustment is often not instantaneous. You will most likely see that adjustment some time down the road. For example, stocks are supposed to be the ultimate inflation fighter but as we saw during the Stagflation 1970's, it took a decade or more for stocks to recover in real inflation adjusted dollars. After World War II, it took bonds perhaps a generation to recover in real terms from inflation. With TIPS, it might take I dunno, three or four years maybe to get your inflation adjustment.

I am a big fan of TIPS but just keep in mind that shorter term, seemingly strange things can happen.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by TheTimeLord »

nedsaid wrote: Thu Jun 30, 2022 10:05 am
TheTimeLord wrote: Wed Jun 29, 2022 11:30 am TIPS and I-Bonds now make up about 13% of my portfolio. I plan to continue to purchase TIPS for liability matching purposes. Is there a limit to the percentage of my portfolio that should be in these inflation protected instruments?
I think the old Boglehead guideline of TIPS being 50% of a Fixed Income portfolio is not bad. Hard to say what the number should be, it depends upon the individual situation.

Another issue is that asset classes, even TIPS don't always act as expected. In 2008-2009, they were down 10%-12% before rebounding smartly. We found out TIPS were less liquid than nominal US Treasuries and thus acted differently in a crisis. My bad assumption was that since TIPS were US Treasury instruments that they would act in similar fashion to nominal US Treasuries in a crisis and boy was I wrong. With inflation up about 8%, it might be surprising to see Intermediate Term TIPS down 7% while the US Bond Index is down about 12%. Shouldn't TIPS have been up by 8%? What we found is that TIPS have duration risk just like nominal bonds and they too were down when interest rates went up.

Yet another issue that we find, is that for Asset Classes that are supposed to fight inflation, the inflation adjustment will come but that adjustment is often not instantaneous. You will most likely see that adjustment some time down the road. For example, stocks are supposed to be the ultimate inflation fighter but as we saw during the Stagflation 1970's, it took a decade or more for stocks to recover in real inflation adjusted dollars. After World War II, it took bonds perhaps a generation to recover in real terms from inflation. With TIPS, it might take I dunno, three or four years maybe to get your inflation adjustment.

I am a big fan of TIPS but just keep in mind that shorter term, seemingly strange things can happen.
I know TIPS and especially TIP funds can have peculiar behavior in the short term, but I think like with most things fixed income holding them to maturity cures a lot of ills.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by nedsaid »

TheTimeLord wrote: Thu Jun 30, 2022 10:12 am
nedsaid wrote: Thu Jun 30, 2022 10:05 am
TheTimeLord wrote: Wed Jun 29, 2022 11:30 am TIPS and I-Bonds now make up about 13% of my portfolio. I plan to continue to purchase TIPS for liability matching purposes. Is there a limit to the percentage of my portfolio that should be in these inflation protected instruments?
I think the old Boglehead guideline of TIPS being 50% of a Fixed Income portfolio is not bad. Hard to say what the number should be, it depends upon the individual situation.

Another issue is that asset classes, even TIPS don't always act as expected. In 2008-2009, they were down 10%-12% before rebounding smartly. We found out TIPS were less liquid than nominal US Treasuries and thus acted differently in a crisis. My bad assumption was that since TIPS were US Treasury instruments that they would act in similar fashion to nominal US Treasuries in a crisis and boy was I wrong. With inflation up about 8%, it might be surprising to see Intermediate Term TIPS down 7% while the US Bond Index is down about 12%. Shouldn't TIPS have been up by 8%? What we found is that TIPS have duration risk just like nominal bonds and they too were down when interest rates went up.

Yet another issue that we find, is that for Asset Classes that are supposed to fight inflation, the inflation adjustment will come but that adjustment is often not instantaneous. You will most likely see that adjustment some time down the road. For example, stocks are supposed to be the ultimate inflation fighter but as we saw during the Stagflation 1970's, it took a decade or more for stocks to recover in real inflation adjusted dollars. After World War II, it took bonds perhaps a generation to recover in real terms from inflation. With TIPS, it might take I dunno, three or four years maybe to get your inflation adjustment.

I am a big fan of TIPS but just keep in mind that shorter term, seemingly strange things can happen.
I know TIPS and especially TIP funds can have peculiar behavior in the short term, but I think like with most things fixed income holding them to maturity cures a lot of ills.
Yes, Nedsaid had to learn such things by experience. The things I shared above seem elementary to experienced investors but newer investors will often be surprised. I am still learning and even I am shocked by my own naivete.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by TheTimeLord »

nedsaid wrote: Thu Jun 30, 2022 10:25 am
TheTimeLord wrote: Thu Jun 30, 2022 10:12 am
nedsaid wrote: Thu Jun 30, 2022 10:05 am
TheTimeLord wrote: Wed Jun 29, 2022 11:30 am TIPS and I-Bonds now make up about 13% of my portfolio. I plan to continue to purchase TIPS for liability matching purposes. Is there a limit to the percentage of my portfolio that should be in these inflation protected instruments?
I think the old Boglehead guideline of TIPS being 50% of a Fixed Income portfolio is not bad. Hard to say what the number should be, it depends upon the individual situation.

Another issue is that asset classes, even TIPS don't always act as expected. In 2008-2009, they were down 10%-12% before rebounding smartly. We found out TIPS were less liquid than nominal US Treasuries and thus acted differently in a crisis. My bad assumption was that since TIPS were US Treasury instruments that they would act in similar fashion to nominal US Treasuries in a crisis and boy was I wrong. With inflation up about 8%, it might be surprising to see Intermediate Term TIPS down 7% while the US Bond Index is down about 12%. Shouldn't TIPS have been up by 8%? What we found is that TIPS have duration risk just like nominal bonds and they too were down when interest rates went up.

Yet another issue that we find, is that for Asset Classes that are supposed to fight inflation, the inflation adjustment will come but that adjustment is often not instantaneous. You will most likely see that adjustment some time down the road. For example, stocks are supposed to be the ultimate inflation fighter but as we saw during the Stagflation 1970's, it took a decade or more for stocks to recover in real inflation adjusted dollars. After World War II, it took bonds perhaps a generation to recover in real terms from inflation. With TIPS, it might take I dunno, three or four years maybe to get your inflation adjustment.

I am a big fan of TIPS but just keep in mind that shorter term, seemingly strange things can happen.
I know TIPS and especially TIP funds can have peculiar behavior in the short term, but I think like with most things fixed income holding them to maturity cures a lot of ills.
Yes, Nedsaid had to learn such things by experience. The things I shared above seem elementary to experienced investors but newer investors will often be surprised. I am still learning and even I am shocked by my own naivete.
You are correct to point them out. TIPS are a lot like cats, nominals are more like dogs.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by BigJohn »

nedsaid wrote: Thu Jun 30, 2022 10:05 am Another issue is that asset classes, even TIPS don't always act as expected. In 2008-2009, they were down 10%-12% before rebounding smartly. We found out TIPS were less liquid than nominal US Treasuries and thus acted differently in a crisis. My bad assumption was that since TIPS were US Treasury instruments that they would act in similar fashion to nominal US Treasuries in a crisis and boy was I wrong. With inflation up about 8%, it might be surprising to see Intermediate Term TIPS down 7% while the US Bond Index is down about 12%. Shouldn't TIPS have been up by 8%? What we found is that TIPS have duration risk just like nominal bonds and they too were down when interest rates went up.

With TIPS, it might take I dunno, three or four years maybe to get your inflation adjustment.
Fair points to keep in mind. As a big believer in TIPS, at least for retirement portfolios I'd say the following.

2008-09 was certainly an unexpected short term liquidity issue. but that shouldn't be a worry for a medium/long term retirement investor, However, it would make their use to quick rebalance into stocks more problematic. The learning? Could be a reason to keep some nominals if this is important to you.

Duration risk is duration risk no matter the bond instrument chosen. However, the 5% spread (over 6 months if those are YTD numbers?) between TIPS and nominals demonstrates that TIPS are doing their job as expected. The learning? TIPS aren't a magic bullet to eliminate duration risk so you still need to understand that risk and chose your duration with your eyes wide open.

As far as lag time, I think that's baked into how TIPS inflation adjustment is calculated and paid. It shouldn't be more than 6 months if you're using a MF/ETF that pays out the inflation adjustment. If you hold individual TIPS you'll wait until maturity to collect.
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Re: Is there a limit to the percentage of my portfolio that should be in inflation protected instruments?

Post by nedsaid »

BigJohn wrote: Thu Jun 30, 2022 10:30 am
nedsaid wrote: Thu Jun 30, 2022 10:05 am Another issue is that asset classes, even TIPS don't always act as expected. In 2008-2009, they were down 10%-12% before rebounding smartly. We found out TIPS were less liquid than nominal US Treasuries and thus acted differently in a crisis. My bad assumption was that since TIPS were US Treasury instruments that they would act in similar fashion to nominal US Treasuries in a crisis and boy was I wrong. With inflation up about 8%, it might be surprising to see Intermediate Term TIPS down 7% while the US Bond Index is down about 12%. Shouldn't TIPS have been up by 8%? What we found is that TIPS have duration risk just like nominal bonds and they too were down when interest rates went up.

With TIPS, it might take I dunno, three or four years maybe to get your inflation adjustment.
Fair points to keep in mind. As a big believer in TIPS, at least for retirement portfolios I'd say the following.

2008-09 was certainly an unexpected short term liquidity issue. but that shouldn't be a worry for a medium/long term retirement investor, However, it would make their use to quick rebalance into stocks more problematic. The learning? Could be a reason to keep some nominals if this is important to you.

Duration risk is duration risk no matter the bond instrument chosen. However, the 5% spread (over 6 months if those are YTD numbers?) between TIPS and nominals demonstrates that TIPS are doing their job as expected. The learning? TIPS aren't a magic bullet to eliminate duration risk so you still need to understand that risk and chose your duration with your eyes wide open.

As far as lag time, I think that's baked into how TIPS inflation adjustment is calculated and paid. It shouldn't be more than 6 months if you're using a MF/ETF that pays out the inflation adjustment. If you hold individual TIPS you'll wait until maturity to collect.
I should have been more clear. There is an adjustment to the principal of a TIPS bond and the interest paid is also adjusted by the increase in the principal. What I was saying is that if your TIPS are down 7% when inflation is running 8%, in the short run you lost 15% of your purchasing power. It might take a year, two years, three years, whatever to get a market price where you recover all that temporarily lost purchasing power. My understanding is that if you hold the bond to maturity or the TIPS fund to its average maturity that you will see the recovery of purchasing power I was talking about.

Not sure I am explaining what I am trying to say very well, someone might have to post an example to make this more clear. One part of the explanation is that there is a difference between the par value of the bond and what it trades for at any given time. So lets say a TIPS bond has a par value of $100 and got a semiannual 4% adjustment, the par value of the bond is $104 though it might trade at lets say $96. The bond is trading at a discount to par because interest rates have been rising. As the bond gets closer and closer to maturity, that discount will narrow until it disappears.
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