Now that long TIPS yields are 60 bp off their highs I will…

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
McQ
Posts: 1414
Joined: Fri Jun 18, 2021 12:21 am
Location: California

Re: Now that long TIPS again yield more than 1.70% I will…

Post by McQ »

Kevin M wrote: Tue May 23, 2023 1:16 pm
McQ wrote: Mon May 22, 2023 5:09 pm Bought some more LTPZ at 59.25 today (2047 bond now yielding 1.75%).

I have no dog in the bonds / bond funds game; it's just that I can't easily buy TIPS in the brokerage account of the 401(k) account I am using (as I can do in my accounts at Vanguard). LTPZ is a convenience, to be revisited later.

With three purchases of LTPZ at 59 - 60 in the past few days, I guess I'm voting with my feet against the likelihood of long TIPS surging over 2.0% again on this cycle. Great if it happens; I'm still only nibbling, and could move up to bites and then gulps if rates did rise further.

Accumulating long TIPS at 1.70%+ nibble by nibble is in the spirit of "Let not the perfect be the enemy of the good." Holding off on purchases for most of the last six months was in the spirit of, "a real yield of 1.25% to 1.50% isn't good enough for me."
You're tempting me again (have been staying short term so far). Have some cash coming from a maturing IRA CD in a few days (matures tomorrow at a credit union, IRA transfer form already in their possession), so will reconsider then. I think the likelihood of me living 20 more years is not very high, but I like the idea of a barbell, capturing the higher yields at the longer end and at the shorter end.

...
How is the fund yield 1.75% when the highest ask yield is 1.72%, and the average is 1.68%?

Kevin
To clarify: I buy the fund (LTPZ) but I quote yields in terms of the underlying bonds, typically the highest yielding (2047), which IIRC was at 1.748% that day on the WSJ page. I'm condemned for now to the fund due to 401(k) brokerage limits; I quote the bond yield because plenty of BH, as notably you, buy the bonds, and because I won't always own LTPZ.

PS. lovin' that meme you introduced: "he that shall not be named." :wink:
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.
Topic Author
McQ
Posts: 1414
Joined: Fri Jun 18, 2021 12:21 am
Location: California

Re: Now that long TIPS again yield more than 1.70% I will…

Post by McQ »

watchnerd wrote: Mon May 22, 2023 5:15 pm
McQ wrote: Mon May 22, 2023 5:09 pm Bought some more LTPZ at 59.25 today (2047 bond now yielding 1.75%).

...
With three purchases of LTPZ at 59 - 60 in the past few days, I guess I'm voting with my feet against the likelihood of long TIPS surging over 2.0% again on this cycle. Great if it happens; I'm still only nibbling, and could move up to bites and then gulps if rates did rise further.

Accumulating long TIPS at 1.70%+ nibble by nibble is in the spirit of "Let not the perfect be the enemy of the good." Holding off on purchases for most of the last six months was in the spirit of, "a real yield of 1.25% to 1.50% isn't good enough for me."
The danger of nibbling is that 2.0% may never happen.

And if 1.70% is good enough, why not buy what you need while it's still available?
Great point about the dangers of nibbling. Which in my case, is a form of greed, waiting and hoping that TIPS yields will go back to 2.0% or even more. Didn't work for me in October; still hoping today. But hedging my hopes by nibbling.

Now, to "why not buy what you need while it's still available?" Short answer: I don't need TIPS in any amount, or any more TIPS than I have.

I only need to be a utility maximizer across my entire portfolio. To torture a metaphor, in adding TIPS I'm rearranging deck chairs on the Starship Enterprise to get a better view of the light show as my portfolio goes to warp speed.

I have more than enough; but I still aspire to maximize utility. The thread is hundreds of posts long now, so let me review a couple of earlier items.

1. Not being anonymous on the forum, I stipulating a fictional portfolio to calibrate my actions re TIPS: $1,000,000 to start, 60% in equities, 40% in fixed income other than TIPS, with much of that locked up in Wellesley and Wellington.

By the end of October, on that scale, I had moved $100,000 to TIPS. With nibbles in December, March, and now, plus appreciation, that's up to $150,000. I'm fully prepared to go all the way to $400,000, cracking my W funds as needed; but only if the price is right.

2. For the 120 years from 1900, Dimson, Marsh and Staunton find the real yield on long nominal bonds to have been 2.0%, in the US and in the World ex-US both. That's why 2.0% is the breakpoint re, say, TLT; except, as willthrill181 used to say, the asymmetric risk of inflation favors TIPS at equal real yields. The more so, when TLT on trailing 12-month inflation has a negative yield.

3. Paul Schmelzing finds a multi-century decline in real rates, with the trendline predicted real rate for, say, 2030 quite a bit below 2.0% (or 1.70%)

In my pursuit of utility maximization I attempt to buy low (lost the second part of that meme). Worked for me in March 2020, in 2008-09, and in 2001-03. Left a lot of money on the table after early 2019 because nothing seemed low enough to buy.

When TIPS seem low (in price) I buy more. I hope they go lower--then I can buy even more.

It's all I know how to do: buy low.
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.
User avatar
watchnerd
Posts: 13609
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

McQ wrote: Tue May 23, 2023 10:24 pm
watchnerd wrote: Mon May 22, 2023 5:15 pm
McQ wrote: Mon May 22, 2023 5:09 pm Bought some more LTPZ at 59.25 today (2047 bond now yielding 1.75%).

...
With three purchases of LTPZ at 59 - 60 in the past few days, I guess I'm voting with my feet against the likelihood of long TIPS surging over 2.0% again on this cycle. Great if it happens; I'm still only nibbling, and could move up to bites and then gulps if rates did rise further.

Accumulating long TIPS at 1.70%+ nibble by nibble is in the spirit of "Let not the perfect be the enemy of the good." Holding off on purchases for most of the last six months was in the spirit of, "a real yield of 1.25% to 1.50% isn't good enough for me."
The danger of nibbling is that 2.0% may never happen.

And if 1.70% is good enough, why not buy what you need while it's still available?
Great point about the dangers of nibbling. Which in my case, is a form of greed, waiting and hoping that TIPS yields will go back to 2.0% or even more. Didn't work for me in October; still hoping today. But hedging my hopes by nibbling.

Now, to "why not buy what you need while it's still available?" Short answer: I don't need TIPS in any amount, or any more TIPS than I have.

I only need to be a utility maximizer across my entire portfolio. To torture a metaphor, in adding TIPS I'm rearranging deck chairs on the Starship Enterprise to get a better view of the light show as my portfolio goes to warp speed.

I have more than enough; but I still aspire to maximize utility. The thread is hundreds of posts long now, so let me review a couple of earlier items.

1. Not being anonymous on the forum, I stipulating a fictional portfolio to calibrate my actions re TIPS: $1,000,000 to start, 60% in equities, 40% in fixed income other than TIPS, with much of that locked up in Wellesley and Wellington.

By the end of October, on that scale, I had moved $100,000 to TIPS. With nibbles in December, March, and now, plus appreciation, that's up to $150,000. I'm fully prepared to go all the way to $400,000, cracking my W funds as needed; but only if the price is right.

2. For the 120 years from 1900, Dimson, Marsh and Staunton find the real yield on long nominal bonds to have been 2.0%, in the US and in the World ex-US both. That's why 2.0% is the breakpoint re, say, TLT; except, as willthrill181 used to say, the asymmetric risk of inflation favors TIPS at equal real yields. The more so, when TLT on trailing 12-month inflation has a negative yield.

3. Paul Schmelzing finds a multi-century decline in real rates, with the trendline predicted real rate for, say, 2030 quite a bit below 2.0% (or 1.70%)

In my pursuit of utility maximization I attempt to buy low (lost the second part of that meme). Worked for me in March 2020, in 2008-09, and in 2001-03. Left a lot of money on the table after early 2019 because nothing seemed low enough to buy.

When TIPS seem low (in price) I buy more. I hope they go lower--then I can buy even more.

It's all I know how to do: buy low.
I dunno...

2.0% vs 1.7% is just a 15% difference.

That seems like it could be with the error band of the data.

And interest rates have been in a century-long secular decline.

It could be that if we ran the study 30 years from now with 150 years of data we'd get a new breakeven point is, say, 1.75-1.85%.

2.0% on the nose (to 1 sig fig!) seems like false precision.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
NiceUnparticularMan
Posts: 6103
Joined: Sat Mar 11, 2017 6:51 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by NiceUnparticularMan »

Kevin M wrote: Tue May 23, 2023 7:02 pm
NiceUnparticularMan wrote: Tue May 23, 2023 3:42 pm
Kevin M wrote: Tue May 23, 2023 3:09 pm You don't get the benefit of the return to par at maturity effect for the longer term holdings.
I note if you do this per the recommendations, basically you are tracking long bonds all the way down to the short end even though they are being sold and re-bought along the way. And since the shortest funds are 0-5 funds (like STIP or VTIP), you actually are getting a similar "roll return".
I don't think so. If the yield curve is positive, you're selling long at higher yields (lower prices), and buying short term at lower yields (higher prices).
So again, imagine longer Fund A buys a long bond, then sells that as a medium bond when it reaches the bottom of its maturity window, and at the same time shorter Fund B buys that same medium bond at the same price because it has reached the top of its maturity window, and then holds that bond to 0.

That will be financially equivalent to you buying the same bond while long and holding it to 0. In fact, you will get the same roll return on that bond if this is done for you by A and B--some of that roll return will be realized by A, and some by B, but together it will be the same as what you get if you do it all yourself.

Now, in practice this is not so neat in that your funds might have overlap, and if you are trying to simulate a fixed ladder, you will be doing additional selling (and maybe buying).

But here is the magic formula. If you:

(a) Invest the same initial amount;
(b) Match the same initial average duration as your target ladder;
(c) Withdraw the same income on the same schedule; and
(d) Manage the fund balances to keep continually matching the same average duration as your target ladder over time;

. . . then you will end up in about the same place, including the contribution from roll returns.

This "alchemy" works because of those duration side constraints. Your funds may be doing all sorts of buying and selling, and you may be doing additional selling (and maybe buying) on top of that. But, if you track the same average duration, that means any price effects from the yield curve, or yield curve changes, will end up being pretty much the same either way.

Nifty.

Some of the prior threads on this subject showed this with more mathematical detail, but that is the upshot as to why if your "fund ladder" meets those conditions, it will not depart much for its target individual ladder.
User avatar
Kevin M
Posts: 15750
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Now that long TIPS again yield more than 1.70% I will…

Post by Kevin M »

slicendice wrote: Tue May 23, 2023 7:43 pm
Kevin M wrote: Tue May 23, 2023 6:56 pm
slicendice wrote: Tue May 23, 2023 3:30 pm I think it is a little soon to litigate the 20% in LTT thread as it was intended for long term investors who are able to overlook short term volatility. When we were staring into the abyss in March of 2020, they were sure nice to have in the portfolio. In times when they shine, one pines for holding more than only 20% that is for sure.

In line with the topic of this thread though,long TIPS at 1.7% real seem a much better deal than long treasuries at 3.8-4% nominal and with the time to retirement getting relatively short 100% of my new bond purchases are LTPZ.
What abyss? I barely noticed it, and simply added more stocks to the portfolios where it was appropriate.

My own portfolio was already over target in stocks, so all I did was a little market timing in my Roth, and have cashed out all but the first three of those lots at a 5-10% profit.

The last abyss I remember staring into was in late 2008, and I just continued to add to stocks even though my anxiety level was through the roof. Since then, nada in terms of an emotional response.
Well good for you I guess. Frankly, sitting in my house under lock down, unable to buy certain basic household commodities with a contagious, life-threatening virus circling in the air and 20+ percent unemployed with our only near-term path to a resolution of the crisis, the development of a highly effective vaccine based on a clinically unproven at the time technology was way more stressful than the 2008 debacle.
Ah, I thought we were talking about big stock market downturns associated with major financial crises. I don't remember March 2020 that way. I'm sure it was different for different people. It was a bummer not getting to see the kids and grandkids as much, I hated wearing a mask because it fogs up my glasses, and although we never ran out of TP, I was worried about it. My heart goes out to those who lost loved ones to COVID, or who lost jobs because of it, etc.. We personally did not experience any losses among our family and friends, nor were there any significant financial shocks to any of us.

I definitely do not remember feeling the gut wrenching anxiety as I watched the value of my relatively conservative portfolio plummet, as I did in 2008. At one point I had to stop watching or reading any financial news, and cut myself off as much as I could from even hearing what the stock market was doing, except for one day each week when I would gather up my courage and throw more cash into what appeared to be a black hole at the time. I haven't experienced anything close to that since late 2008.

Sorry if I offended you.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
User avatar
Kevin M
Posts: 15750
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Now that long TIPS again yield more than 1.70% I will…

Post by Kevin M »

NiceUnparticularMan wrote: Wed May 24, 2023 7:55 am
Kevin M wrote: Tue May 23, 2023 7:02 pm
NiceUnparticularMan wrote: Tue May 23, 2023 3:42 pm
Kevin M wrote: Tue May 23, 2023 3:09 pm You don't get the benefit of the return to par at maturity effect for the longer term holdings.
I note if you do this per the recommendations, basically you are tracking long bonds all the way down to the short end even though they are being sold and re-bought along the way. And since the shortest funds are 0-5 funds (like STIP or VTIP), you actually are getting a similar "roll return".
I don't think so. If the yield curve is positive, you're selling long at higher yields (lower prices), and buying short term at lower yields (higher prices).
So again, imagine longer Fund A buys a long bond, then sells that as a medium bond when it reaches the bottom of its maturity window, and at the same time shorter Fund B buys that same medium bond at the same price because it has reached the top of its maturity window, and then holds that bond to 0.

That will be financially equivalent to you buying the same bond while long and holding it to 0. In fact, you will get the same roll return on that bond if this is done for you by A and B--some of that roll return will be realized by A, and some by B, but together it will be the same as what you get if you do it all yourself.
Again, I don't think so.

You seem to be imagining a stable yield curve. I am discussing the scenario where yield increases significantly, and for simplicity, let's assume a parallel shift in the yield curve.

If the upward shift is large enough, the so-called roll return will be negative. To simplify, assume starting with par value of 100 for both long and short term bonds. Due to the increasing yields, the value of the long bond at its maturity window will be less than 100, and less than the value of the short bond. So you sell the long bond at a loss, but you don't get the recovery to par from its low to 100, you only get the recovery of the short bond from its low to 100, which is less than the former.
If I make a calculation error, #Cruncher probably will let me know.
NiceUnparticularMan
Posts: 6103
Joined: Sat Mar 11, 2017 6:51 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by NiceUnparticularMan »

Kevin M wrote: Wed May 24, 2023 12:00 pm
NiceUnparticularMan wrote: Wed May 24, 2023 7:55 am
Kevin M wrote: Tue May 23, 2023 7:02 pm
NiceUnparticularMan wrote: Tue May 23, 2023 3:42 pm
Kevin M wrote: Tue May 23, 2023 3:09 pm You don't get the benefit of the return to par at maturity effect for the longer term holdings.
I note if you do this per the recommendations, basically you are tracking long bonds all the way down to the short end even though they are being sold and re-bought along the way. And since the shortest funds are 0-5 funds (like STIP or VTIP), you actually are getting a similar "roll return".
I don't think so. If the yield curve is positive, you're selling long at higher yields (lower prices), and buying short term at lower yields (higher prices).
So again, imagine longer Fund A buys a long bond, then sells that as a medium bond when it reaches the bottom of its maturity window, and at the same time shorter Fund B buys that same medium bond at the same price because it has reached the top of its maturity window, and then holds that bond to 0.

That will be financially equivalent to you buying the same bond while long and holding it to 0. In fact, you will get the same roll return on that bond if this is done for you by A and B--some of that roll return will be realized by A, and some by B, but together it will be the same as what you get if you do it all yourself.
Again, I don't think so.

You seem to be imagining a stable yield curve. I am discussing the scenario where yield increases significantly, and for simplicity, let's assume a parallel shift in the yield curve.

If the upward shift is large enough, the so-called roll return will be negative.
Correct. This is also true for an individual bond.

Say you buy a 10-year bond at a certain price with an upward sloping yield curve such that maturing bonds at that time have a higher price than your 10-year bond. At that moment, you are expecting a positive roll return.

Then in the 10 years between that point in time and maturity, the yield curve shifts up. In fact, it shifts up so much that maturing bonds are now priced lower than the price you originally paid for your 10-year bond. Oops, now your actual roll return will be negative.
To simplify, assume starting with par value of 100 for both long and short term bonds. Due to the increasing yields, the value of the long bond at its maturity window will be less than 100, and less than the value of the short bond. So you sell the long bond at a loss, but you don't get the recovery to par from its low to 100, you only get the recovery of the short bond from its low to 100, which is less than the former.
So say at 10 years before maturity, you buy a 10-year bond priced at P0(10), and a maturing bond at the time is priced at P0(0). An upward sloping yield curve means P0(10) is higher than P0(0).

Ten years later, though, a maturing bond is priced at P10(0), and due to yields increasing, P10(0) is now less than P0(10). This is the case above, and oh well, negative roll return. I note it is true that if the yield curve is still upward sloping, P10(10) might be lower than P10(0), but this does nothing for you because you bought this bond at P0(10), which is by hypothesis a lot higher than P10(10). C'est la vie.

OK, so say at 10 years before maturing, Bond Fund A buys that bond at P0(10). Five years before maturing, Fund A sells that bond at P5(5). Simultaneously, Bond Fund B buys that bond at P5(5). 5 years later, Fund B gets the cash when it matures at P10(0).

How is that different from holding the individual bond without that simultaneous sell and buy at Year 5? It isn't. Given the same assumptions, together A and B will have the same negative roll return. Of course the details of which fund gets what roll return depend on pricing at Year 5. But since you held both funds, one way or another you get the same roll return.

Of course in the real world, there are many, many individual bonds working their way through your funds over time, and it is all messy.

However, if you do what I said above--faithfully track the duration of your target bond ladder--the mathematics of what duration means implies it will all end up roughly like that simplified case. And as a result, whatever total roll return you get, positive or negative, will be about the same as whatever total roll return the target ladder gets.
JBTX
Posts: 11205
Joined: Wed Jul 26, 2017 12:46 pm

Re: Now that long TIPS again yield more than 1.70% I will…

Post by JBTX »

watchnerd wrote: Tue May 23, 2023 4:15 pm
JBTX wrote: Tue May 23, 2023 4:01 pm
watchnerd wrote: Tue May 23, 2023 3:55 pm
JBTX wrote: Tue May 23, 2023 3:37 pm I’m just too lazy right now
If you've ever bought individual bonds via bond desk before, it's just as easy.
I’ve never bought an individual bond other than savings bonds on TD.

I don’t doubt it’s easy. But seems to me if you are going to do a ladder, it should be large enough to matter. Is it worth doing a ladder of a bunch of $5000 ones (I have no clue of the denominations) or even $10k ones? So you get to really talking about restructuring most of your bond portfolio around this ladder. For me, I’d have to restructure and combine some IRAs and 401ks to make it logistically feasible.
Our ladder rungs are in 6 months of basic living expenses per rung because TIPS mature (and are auctioned) on January and July dates. For us that's $42k per rung / $84k per year in present dollars. We have 14 years in the ladder to act as bridge from possible early retirement in the present until we can take full SS at 67.

So it takes a chunk of change and we didn't make the pivot until 2021 / age 51 to reduce our equity exposure to fund the ladder.
Setting up a ladder to bridge early retirement to delayed social security makes a lot of sense. Our situation is more complex. I’m not sure if I am going to work again. I can file for Ss early in 2 years and it probably make senses to do so because of additional adult child disability benefits that would bring for disabled son. I don’t have a solid feel for when my wife will retire etc etc.

Thus in our case I’m not sure it’s worth the effort.
User avatar
Kevin M
Posts: 15750
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Now that long TIPS again yield more than 1.70% I will…

Post by Kevin M »

NiceUnparticularMan wrote: Wed May 24, 2023 12:30 pm
Kevin M wrote: Wed May 24, 2023 12:00 pm
NiceUnparticularMan wrote: Wed May 24, 2023 7:55 am
Kevin M wrote: Tue May 23, 2023 7:02 pm
NiceUnparticularMan wrote: Tue May 23, 2023 3:42 pm I note if you do this per the recommendations, basically you are tracking long bonds all the way down to the short end even though they are being sold and re-bought along the way. And since the shortest funds are 0-5 funds (like STIP or VTIP), you actually are getting a similar "roll return".
I don't think so. If the yield curve is positive, you're selling long at higher yields (lower prices), and buying short term at lower yields (higher prices).
So again, imagine longer Fund A buys a long bond, then sells that as a medium bond when it reaches the bottom of its maturity window, and at the same time shorter Fund B buys that same medium bond at the same price because it has reached the top of its maturity window, and then holds that bond to 0.

That will be financially equivalent to you buying the same bond while long and holding it to 0. In fact, you will get the same roll return on that bond if this is done for you by A and B--some of that roll return will be realized by A, and some by B, but together it will be the same as what you get if you do it all yourself.
Again, I don't think so.

You seem to be imagining a stable yield curve. I am discussing the scenario where yield increases significantly, and for simplicity, let's assume a parallel shift in the yield curve.

If the upward shift is large enough, the so-called roll return will be negative.
Correct. This is also true for an individual bond.
I think you are misunderstanding what we're comparing, which is a non-rolling ladder of TIPS vs. a TIPS fund.

With a non-rolling ladder, you use the maturing bond to cover your liabilities for that period. You continue to hold longer maturity bonds until they mature. You never need to rebalance by selling longer term to buy shorter term. This give the longer term bonds time to return to par at maturity, so you don't ever need to sell in unfavorable market conditions.

With a fund, you sell shares of the fund, which essentially is selling some of each maturity held by the fund. For a long term fund, none of those bonds will have matured, so you're getting whatever the market happens to give you at the time, which could be higher or lower than the return you expected for a given term. This happens when you rebalance as well as when you sell to cover your liabilities.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
NiceUnparticularMan
Posts: 6103
Joined: Sat Mar 11, 2017 6:51 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by NiceUnparticularMan »

Kevin M wrote: Wed May 24, 2023 2:43 pm
NiceUnparticularMan wrote: Wed May 24, 2023 12:30 pm
Kevin M wrote: Wed May 24, 2023 12:00 pm
NiceUnparticularMan wrote: Wed May 24, 2023 7:55 am
Kevin M wrote: Tue May 23, 2023 7:02 pm
I don't think so. If the yield curve is positive, you're selling long at higher yields (lower prices), and buying short term at lower yields (higher prices).
So again, imagine longer Fund A buys a long bond, then sells that as a medium bond when it reaches the bottom of its maturity window, and at the same time shorter Fund B buys that same medium bond at the same price because it has reached the top of its maturity window, and then holds that bond to 0.

That will be financially equivalent to you buying the same bond while long and holding it to 0. In fact, you will get the same roll return on that bond if this is done for you by A and B--some of that roll return will be realized by A, and some by B, but together it will be the same as what you get if you do it all yourself.
Again, I don't think so.

You seem to be imagining a stable yield curve. I am discussing the scenario where yield increases significantly, and for simplicity, let's assume a parallel shift in the yield curve.

If the upward shift is large enough, the so-called roll return will be negative.
Correct. This is also true for an individual bond.
I think you are misunderstanding what we're comparing, which is a non-rolling ladder of TIPS vs. a TIPS fund.
Sorry, we might have been talking past each other.

I was comparing using a shifting mix of 2 or 3 TIPS funds to simulate a non-rolling ladder of TIPS, to the non-rolling ladder of TIPS you are trying to simulate.

I'm going to continue answering like that, understanding this might not actually be a disagreement then.
With a non-rolling ladder, you use the maturing bond to cover your liabilities for that period. You continue to hold longer maturity bonds until they mature. You never need to rebalance by selling longer term to buy shorter term. This give the longer term bonds time to return to par at maturity, so you don't ever need to sell in unfavorable market conditions.
So understanding what I am talking about is using a shifting mix of 2 or 3 TIPS funds to simulate a non-rolling ladder--there is an equivalent effect where the longest bonds you buy in your longest fund later end up being medium bonds in your medium fund, later still end up being short bonds in your shortest fund, and then later still they are cashed at maturity by your shortest fund.

The fact the individual bonds in question are subject to buys and sells along the way doesn't really matter, because those transactions largely end up being a wash. Meaning every set of bonds sold in unfavorable rate conditions is being offset by a similar set of bonds being bought in favorable rate conditions, and vice-versa. And you know this is happening because you are managing your duration to match the duration of your target ladder.

Of course if you didn't shift your fund balances over time, you would constantly be replenishing the longest bonds, and thus it would simulate a rolling ladder. However, if you gradually shift your fund balances over time out of the long fund, and eventually eliminate it, then do the same thing with your medium fund, ending up with just a short fund which you then spend out, it ends up being close to the same thing as simply not buying new ladder rungs in the first place.
With a fund, you sell shares of the fund, which essentially is selling some of each maturity held by the fund.
So again understanding I am talking about using multiple funds . . . .

OK, beginning of the year between the three funds your overall duration is, say, 10. End of the year, you have withdrawn as much income as a non-rolling bond ladder with that same duration would have produced that year. End of the year, the non-rolling bond ladder has ticked down to a duration of 9. You manage your three fund balances so that the overall duration also ticks down to 9.

If you do all that, your three funds are actually going to be a very good approximation of the non-rolling ladder. Again, there are potentially a lot of moving parts inside the black box, but it is largely offsetting in a way that means it will stick close to the non-rolling ladder. And we know that because managing the income and duration to both track the non-rolling ladder means we are forcing that sort of offsetting, even if we are blissfully unaware of the details.

Again, maybe you already know all this, but that is what I have been discussing, how managing 2 or 3 funds can simulate a non-rolling ladder, including with respect to getting whatever roll returns the ladder gets.
User avatar
watchnerd
Posts: 13609
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

Kevin M wrote: Wed May 24, 2023 2:43 pm
I think you are misunderstanding what we're comparing, which is a non-rolling ladder of TIPS vs. a TIPS fund.

With a non-rolling ladder, you use the maturing bond to cover your liabilities for that period. You continue to hold longer maturity bonds until they mature. You never need to rebalance by selling longer term to buy shorter term. This give the longer term bonds time to return to par at maturity, so you don't ever need to sell in unfavorable market conditions.

With a fund, you sell shares of the fund, which essentially is selling some of each maturity held by the fund. For a long term fund, none of those bonds will have matured, so you're getting whatever the market happens to give you at the time, which could be higher or lower than the return you expected for a given term. This happens when you rebalance as well as when you sell to cover your liabilities.

Kevin
This is why I prefer a non-rolling ladder for LMP.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
User avatar
Kevin M
Posts: 15750
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Now that long TIPS again yield more than 1.70% I will…

Post by Kevin M »

NiceUnparticularMan wrote: Wed May 24, 2023 3:35 pm
Kevin M wrote: Wed May 24, 2023 2:43 pm
NiceUnparticularMan wrote: Wed May 24, 2023 12:30 pm
Kevin M wrote: Wed May 24, 2023 12:00 pm
NiceUnparticularMan wrote: Wed May 24, 2023 7:55 am So again, imagine longer Fund A buys a long bond, then sells that as a medium bond when it reaches the bottom of its maturity window, and at the same time shorter Fund B buys that same medium bond at the same price because it has reached the top of its maturity window, and then holds that bond to 0.

That will be financially equivalent to you buying the same bond while long and holding it to 0. In fact, you will get the same roll return on that bond if this is done for you by A and B--some of that roll return will be realized by A, and some by B, but together it will be the same as what you get if you do it all yourself.
Again, I don't think so.

You seem to be imagining a stable yield curve. I am discussing the scenario where yield increases significantly, and for simplicity, let's assume a parallel shift in the yield curve.

If the upward shift is large enough, the so-called roll return will be negative.
Correct. This is also true for an individual bond.
I think you are misunderstanding what we're comparing, which is a non-rolling ladder of TIPS vs. a TIPS fund.
Sorry, we might have been talking past each other.

I was comparing using a shifting mix of 2 or 3 TIPS funds to simulate a non-rolling ladder of TIPS, to the non-rolling ladder of TIPS you are trying to simulate.

I'm going to continue answering like that, understanding this might not actually be a disagreement then.
With a non-rolling ladder, you use the maturing bond to cover your liabilities for that period. You continue to hold longer maturity bonds until they mature. You never need to rebalance by selling longer term to buy shorter term. This give the longer term bonds time to return to par at maturity, so you don't ever need to sell in unfavorable market conditions.
So understanding what I am talking about is using a shifting mix of 2 or 3 TIPS funds to simulate a non-rolling ladder--there is an equivalent effect where the longest bonds you buy in your longest fund later end up being medium bonds in your medium fund, later still end up being short bonds in your shortest fund, and then later still they are cashed at maturity by your shortest fund.

The fact the individual bonds in question are subject to buys and sells along the way doesn't really matter, because those transactions largely end up being a wash. Meaning every set of bonds sold in unfavorable rate conditions is being offset by a similar set of bonds being bought in favorable rate conditions, and vice-versa. And you know this is happening because you are managing your duration to match the duration of your target ladder.

Of course if you didn't shift your fund balances over time, you would constantly be replenishing the longest bonds, and thus it would simulate a rolling ladder. However, if you gradually shift your fund balances over time out of the long fund, and eventually eliminate it, then do the same thing with your medium fund, ending up with just a short fund which you then spend out, it ends up being close to the same thing as simply not buying new ladder rungs in the first place.
With a fund, you sell shares of the fund, which essentially is selling some of each maturity held by the fund.
So again understanding I am talking about using multiple funds . . . .

OK, beginning of the year between the three funds your overall duration is, say, 10. End of the year, you have withdrawn as much income as a non-rolling bond ladder with that same duration would have produced that year. End of the year, the non-rolling bond ladder has ticked down to a duration of 9. You manage your three fund balances so that the overall duration also ticks down to 9.

If you do all that, your three funds are actually going to be a very good approximation of the non-rolling ladder. Again, there are potentially a lot of moving parts inside the black box, but it is largely offsetting in a way that means it will stick close to the non-rolling ladder. And we know that because managing the income and duration to both track the non-rolling ladder means we are forcing that sort of offsetting, even if we are blissfully unaware of the details.

Again, maybe you already know all this, but that is what I have been discussing, how managing 2 or 3 funds can simulate a non-rolling ladder, including with respect to getting whatever roll returns the ladder gets.
Yes, I have understood this approach for some years now. The rebalancing I mentioned is when you sell shares of a longer term fund to buy shares of a shorter term fund. I mentioned a couple of forum members that I highly respect that believe using funds is as good as a ladder.
Everything I'm saying is questioning that.

Clarification: having to sell shares of a longer term fund to meet liabilities would only apply to using one fund, so I shouldn't have even mentioned that. It's the "rebalancing" part that is the issue.

The one point you make that has merit, from my perspective, is this:
The fact the individual bonds in question are subject to buys and sells along the way doesn't really matter, because those transactions largely end up being a wash. Meaning every set of bonds sold in unfavorable rate conditions is being offset by a similar set of bonds being bought in favorable rate conditions, and vice-versa.
I'm guessing that the proponents of using funds for an LMP are counting on this as well, but I'll let them speak for themselves if they want.

If this were so, then I wouldn't be questioning the use of funds, but I don't want to rely on this assumption. If we have entered a long-term uptrend in yields, the favorable conditions to sell longer term shares to buy shorter term shares may not return over the holding period of interest.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
2pedals
Posts: 1988
Joined: Wed Dec 31, 2014 11:31 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by 2pedals »

If you buy two (or three) funds with different durations. You can simulate a non-rolling ladder. The funds are rolling so they continue to purchase so that the duration stays the same or nearly the same. Over time (monthly, quarterly, etc) the investor can sell longer-duration funds and sometimes even buying shorter-duration funds based on the reducing target duration. I have no concerns about the "rebalancing" part mentioned by Kevin M. Basically you offset fund non-rolling buying with your own fund selling to get your target duration.
User avatar
watchnerd
Posts: 13609
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

2pedals wrote: Wed May 24, 2023 4:22 pm If you buy two (or three) funds with different durations. You can simulate a non-rolling ladder. The funds are rolling so they continue to purchase so that the duration stays the same or nearly the same. Over time (monthly, quarterly, etc) the investor can sell longer-duration funds and sometimes even buying shorter-duration funds based on the reducing target duration. I have no concerns about the "rebalancing" part mentioned by Kevin M. Basically you offset fund non-rolling buying with your own fund selling to get your target duration.
Why simulate a non-rolling ladder when you can just buy individual TIPS, and thus have the thing itself?
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
2pedals
Posts: 1988
Joined: Wed Dec 31, 2014 11:31 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by 2pedals »

watchnerd wrote: Wed May 24, 2023 5:59 pm
2pedals wrote: Wed May 24, 2023 4:22 pm If you buy two (or three) funds with different durations. You can simulate a non-rolling ladder. The funds are rolling so they continue to purchase so that the duration stays the same or nearly the same. Over time (monthly, quarterly, etc) the investor can sell longer-duration funds and sometimes even buying shorter-duration funds based on the reducing target duration. I have no concerns about the "rebalancing" part mentioned by Kevin M. Basically you offset fund non-rolling buying with your own fund selling to get your target duration.
Why simulate a non-rolling ladder when you can just buy individual TIPS, and thus have the thing itself?
A good question. My thinking is DW will have fewer spending needs, after I am gone. DW gets my full pension and my social security. Hence, the non-rolling ladder would more than likely have to be reinvested. I don't have much faith that DW would reinvest the funds appropriately, i.e. too much cash drag. I feel more comfortable giving her directions to keep and/or turn on the dividends reinvestment feature and how to withdraw funds as needed.
User avatar
watchnerd
Posts: 13609
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

2pedals wrote: Wed May 24, 2023 6:23 pm
watchnerd wrote: Wed May 24, 2023 5:59 pm
2pedals wrote: Wed May 24, 2023 4:22 pm If you buy two (or three) funds with different durations. You can simulate a non-rolling ladder. The funds are rolling so they continue to purchase so that the duration stays the same or nearly the same. Over time (monthly, quarterly, etc) the investor can sell longer-duration funds and sometimes even buying shorter-duration funds based on the reducing target duration. I have no concerns about the "rebalancing" part mentioned by Kevin M. Basically you offset fund non-rolling buying with your own fund selling to get your target duration.
Why simulate a non-rolling ladder when you can just buy individual TIPS, and thus have the thing itself?
A good question. My thinking is DW will have fewer spending needs, after I am gone. DW gets my full pension and my social security. Hence, the non-rolling ladder would more than likely have to be reinvested. I don't have much faith that DW would reinvest the funds appropriately, i.e. too much cash drag. I feel more comfortable giving her directions to keep and/or turn on the dividends reinvestment feature and how to withdraw funds as needed.
Errrr.

Why is she reinvesting a non-rolling ladder instead of consuming it as income?

If it's "non rolling" it's not being reinvested.

If it's being reinvested, it's rolling.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
2pedals
Posts: 1988
Joined: Wed Dec 31, 2014 11:31 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by 2pedals »

watchnerd wrote: Wed May 24, 2023 6:29 pm
2pedals wrote: Wed May 24, 2023 6:23 pm
watchnerd wrote: Wed May 24, 2023 5:59 pm
2pedals wrote: Wed May 24, 2023 4:22 pm If you buy two (or three) funds with different durations. You can simulate a non-rolling ladder. The funds are rolling so they continue to purchase so that the duration stays the same or nearly the same. Over time (monthly, quarterly, etc) the investor can sell longer-duration funds and sometimes even buying shorter-duration funds based on the reducing target duration. I have no concerns about the "rebalancing" part mentioned by Kevin M. Basically you offset fund non-rolling buying with your own fund selling to get your target duration.
Why simulate a non-rolling ladder when you can just buy individual TIPS, and thus have the thing itself?
A good question. My thinking is DW will have fewer spending needs, after I am gone. DW gets my full pension and my social security. Hence, the non-rolling ladder would more than likely have to be reinvested. I don't have much faith that DW would reinvest the funds appropriately, i.e. too much cash drag. I feel more comfortable giving her directions to keep and/or turn on the dividends reinvestment feature and how to withdraw funds as needed.
Errrr.

Why is she reinvesting a non-rolling ladder instead of consuming it as income?

If it's "non rolling" it's not being reinvested.

If it's being reinvested, it's rolling.
Because LMP is no longer needed at my death.
User avatar
watchnerd
Posts: 13609
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

2pedals wrote: Wed May 24, 2023 6:32 pm
watchnerd wrote: Wed May 24, 2023 6:29 pm
2pedals wrote: Wed May 24, 2023 6:23 pm
watchnerd wrote: Wed May 24, 2023 5:59 pm
2pedals wrote: Wed May 24, 2023 4:22 pm If you buy two (or three) funds with different durations. You can simulate a non-rolling ladder. The funds are rolling so they continue to purchase so that the duration stays the same or nearly the same. Over time (monthly, quarterly, etc) the investor can sell longer-duration funds and sometimes even buying shorter-duration funds based on the reducing target duration. I have no concerns about the "rebalancing" part mentioned by Kevin M. Basically you offset fund non-rolling buying with your own fund selling to get your target duration.
Why simulate a non-rolling ladder when you can just buy individual TIPS, and thus have the thing itself?
A good question. My thinking is DW will have fewer spending needs, after I am gone. DW gets my full pension and my social security. Hence, the non-rolling ladder would more than likely have to be reinvested. I don't have much faith that DW would reinvest the funds appropriately, i.e. too much cash drag. I feel more comfortable giving her directions to keep and/or turn on the dividends reinvestment feature and how to withdraw funds as needed.
Errrr.

Why is she reinvesting a non-rolling ladder instead of consuming it as income?

If it's "non rolling" it's not being reinvested.

If it's being reinvested, it's rolling.
Because LMP is no longer needed at my death.
So you want a ladder that is non-rolling while you're alive and then begins rolling when you've passed?
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
2pedals
Posts: 1988
Joined: Wed Dec 31, 2014 11:31 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by 2pedals »

watchnerd wrote: Wed May 24, 2023 6:34 pm
2pedals wrote: Wed May 24, 2023 6:32 pm
watchnerd wrote: Wed May 24, 2023 6:29 pm
2pedals wrote: Wed May 24, 2023 6:23 pm
watchnerd wrote: Wed May 24, 2023 5:59 pm

Why simulate a non-rolling ladder when you can just buy individual TIPS, and thus have the thing itself?
A good question. My thinking is DW will have fewer spending needs, after I am gone. DW gets my full pension and my social security. Hence, the non-rolling ladder would more than likely have to be reinvested. I don't have much faith that DW would reinvest the funds appropriately, i.e. too much cash drag. I feel more comfortable giving her directions to keep and/or turn on the dividends reinvestment feature and how to withdraw funds as needed.
Errrr.

Why is she reinvesting a non-rolling ladder instead of consuming it as income?

If it's "non rolling" it's not being reinvested.

If it's being reinvested, it's rolling.
Because LMP is no longer needed at my death.
So you want a ladder that is non-rolling while you're alive and then begins rolling when you've passed?
Yes
User avatar
watchnerd
Posts: 13609
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

2pedals wrote: Wed May 24, 2023 6:36 pm Yes
This would be much easier to solve for if we knew when you're going to pass. ;)
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
2pedals
Posts: 1988
Joined: Wed Dec 31, 2014 11:31 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by 2pedals »

watchnerd wrote: Wed May 24, 2023 6:37 pm
2pedals wrote: Wed May 24, 2023 6:36 pm Yes
This would be much easier to solve for if we knew when you're going to pass. ;)
Or when I'll be rolling over in my grave? :shock:
User avatar
watchnerd
Posts: 13609
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

2pedals wrote: Wed May 24, 2023 6:42 pm
watchnerd wrote: Wed May 24, 2023 6:37 pm
2pedals wrote: Wed May 24, 2023 6:36 pm Yes
This would be much easier to solve for if we knew when you're going to pass. ;)
Or when I'll be rolling over in my grave? :shock:
Good pun :sharebeer
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
retiringwhen
Posts: 4703
Joined: Sat Jul 08, 2017 10:09 am
Location: New Jersey, USA

Re: Now that long TIPS again yield more than 1.70% I will…

Post by retiringwhen »

watchnerd wrote: Wed May 24, 2023 6:37 pm This would be much easier to solve for if we knew when you're going to pass. ;)
Duration matched funds would work just fine. The real problem here is that people actually believe they can project their future liabilities decades in advance sufficiently to buy it all at once in a non-rolling ladder. That is really not realistic. Life just doesn't work that way for anyone.

That is why I am using duration matched funds in a barbell weighting where I revisit my expected liabilities annually and adjust accordingly or when life throws us a curveball. Sure it is not as clean on paper, but it does track my expected expenses vs. portfolio value just fine.

Pretending that you are avoiding principal risk just replaces that risk with planning risks. What if you are wrong? What if you die in 5 mos. or you have significantly different expenses due to a windfall or major health issues?

BTW, funding a delayed SS plan is one exception and probably a reasonable effort if you are at least in your late 50s as long as it is limited to the scope of the forgone annuity income.
oxothuk
Posts: 889
Joined: Thu Nov 10, 2011 7:35 pm

Re: Now that long TIPS again yield more than 1.70% I will…

Post by oxothuk »

retiringwhen wrote: Wed May 24, 2023 6:48 pm Duration matched funds would work just fine. The real problem here is that people actually believe they can project their future liabilities decades in advance sufficiently to buy it all at once in a non-rolling ladder. That is really not realistic. Life just doesn't work that way for anyone.
Actually, I CAN project the size of RMDs I will have to take out of my IRA in the future. The IRS gives me a handy table to do so.

My non-rolling TIPS ladder is designed to match those future RMDs.
User avatar
watchnerd
Posts: 13609
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

retiringwhen wrote: Wed May 24, 2023 6:48 pm
BTW, funding a delayed SS plan is one exception and probably a reasonable effort if you are at least in your late 50s as long as it is limited to the scope of the forgone annuity income.
I think I'm reasonably confident that my 'bridge to SS' TIPS ladder from age 53 (this year) to full SS isn't going to extend past my lifespan.

If if I do die suddenly, well, my wife can decide what she wants to do with the maturing ladder rungs, survivor benefits, etc, etc
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
User avatar
bobcat2
Posts: 6074
Joined: Tue Feb 20, 2007 2:27 pm
Location: just barely Outside the Beltway

Re: Now that long TIPS again yield more than 1.70% I will…

Post by bobcat2 »

watchnerd wrote: Tue May 23, 2023 3:16 pm
Kevin M wrote: Tue May 23, 2023 3:09 pm
Several highly respected forum members here, e.g., BobK, have argued that you can accomplish an LMP (non rolling ladder) with two or three funds, as you suggest. I understand the argument, but I've never been convinced that there's no risk in the rebalancing part; i.e., selling shares of the long term fund when long term yields have increased significantly to buy shares of the shorter term fund. You don't get the benefit of the return to par at maturity effect for the longer term holdings.
I get the theory, I just don't see why one would would do it. It seems much simpler to buy individual TIPS for a non-rolling ladder. Cheaper ER, too.
Here are some reasons I prefer using duration matched TIPS funds and I-bonds instead of creating a TIPS bond ladder for safe flexible retirement income.

Part of my portfolio is in stocks. If they do well, as they did in 2021, I can easily add the extra unexpected earnings to my TIPS funds and slightly raise the annual withdrawal from safe assets for all remaining years. That’s difficult to do with a TIPS ladder. I can’t buy 3/5ths of a TIPS bond for every year of the next 23 years.

We don’t know how long we will live. We estimate how long we will live and build a TIPS ladder matching the estimate. Almost certainly our lifetime will be a different length than our estimate. What do I do if I outlive the ladder? What’s to be done if the surviving spouse out lives the ladder and becomes senile or has no interest in finance? What if it becomes clear that the ladder will outlive me? Once again, the funds and I-bonds are more flexible as they can be easily adjusted for changing investment horizons.

I don’t want to mess with TIPS bonds or TIPS funds beyond age 85 if I get there. Beyond age 85 most TIPS income will be replaced by I-bonds and longevity annuity income which I will begin purchasing in my late 70s. Buying longevity annuities, which are truly cheap, is also easier using TIPS funds rather than TIPS laddered bonds.

It is difficult to build a TIPS ladder over time. Ideally you want to begin purchasing your safe retirement assets 15-20 years before your expected retirement year. You don’t want to have a portfolio of risky assets until some financial target is hit in the future such as 25x or funded ratio of 100%. The problem is that your risky portfolio may never reach the target, resulting in a “whatever level” of safe retirement income. The level of safe income produced that way is hugely different in February 2000 compared to May 2002. It is hugely different from August 2008 to February 2009. A TIPS ladder is easy to construct at one time using this unsafe method that jeopardizes your targeted safe retirement income stream. It is significantly more difficult to construct safely over many years leading up to retirement.

Instead, you want to pick a level of safe retirement income as your retirement financial goal at least 15 years before retirement and work steadily toward that goal thru directing additional saving into safe assets and over time regularly moving assets from stocks to safe liability matched assets for future income. This is much easier to do using TIPS funds and I-bonds than building a TIPS ladder. There is also the problem that either your retirement income goal or your retirement target year may be changed as you get closer to retirement. Altering either of these is more easily done with funds and I-bonds than with laddered TIPS bonds. In short, you want to employ a liability driven investment (LDI) strategy over time rather than moving risky assets into a liability matched portfolio (LMP) at a point in time.

So while I don’t believe building a TIPS ladder at a point in time is a good idea (too risky to be ‘safe’ unless purchased using duration matched TIPS etfs/funds or I-bonds). But, if you want to build your duration matched TIPS at a point in time, I’d advise building a TIPS bond ladder and I wouldn’t use TIPs funds combinations. BTW, I see nothing wrong in building a TIPS ladder at a point in time using safe duration matched TIPS funds to pay for the ladder. And from that point on having just the ladder or both the ladder and duration matched funds.

I-bonds are the safest investible asset because they have neither interest rate risk nor inflation risk. As such I-bonds should certainly be in the conversation of safe retirement income. If you purchase an I-bond when you are over age 70 you have essentially purchased a real life annuity. :wink:

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
exodusing
Posts: 2196
Joined: Thu Oct 13, 2022 7:32 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by exodusing »

If you're holding your TIPS portfolio in taxable, tax reporting is simpler with a fund.

A fund is easier for a less sophisticated person to add to and withdraw from than individual TIPS, especially in small quantities.

Withdrawing from a ladder may be easier, but there is the problem that there are no TIPS maturing from 2034 to 2039.
bobcat2 wrote: Wed May 24, 2023 7:31 pmPart of my portfolio is in stocks. If they do well, as they did in 2021, I can easily add the extra unexpected earnings to my TIPS funds and slightly raise the annual withdrawal from safe assets for all remaining years. That’s difficult to do with a TIPS ladder. I can’t buy 3/5ths of a TIPS bond for every year of the next 23 years.
Instead of buying 3/5ths of a TIPS for every year of the next 23 years, you could buy a TIPS or a couple of TIPS with an average maturity of 11.5 years (or whatever average maturity your fund purchases would have had). I'll acknowledge adjusting between two funds is easier than adjusting 23 TIPS.
User avatar
TheTimeLord
Posts: 12092
Joined: Fri Jul 26, 2013 2:05 pm

Re: Now that long TIPS again yield more than 1.70% I will…

Post by TheTimeLord »

Being a simple man I have found a LMP/TIPS ladder built with individual bonds maturing at set intervals the easiest for me to grasp.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
muel87
Posts: 478
Joined: Mon Jan 09, 2023 2:11 pm
Location: Rockville, MD

Re: Now that long TIPS again yield more than 1.70% I will…

Post by muel87 »

Jaylat wrote: Mon May 22, 2023 3:57 pm
Kevin M wrote: Mon May 22, 2023 2:44 pm What I learned from BobK some years ago is that for an investment to be risk free, there must be a match between liabilities and assets in both investment horizon and unit of account. The latter is a fancy way of saying that real liabilities should be matched by assets with "guaranteed" real returns (TIPS, I bonds), and nominal liabilities should be matched with assets with "guaranteed" nominal returns.. I pointed this out in my initial conversations with you know who.

Note the first underlined/bolded part. This was rarely if ever mentioned in these discussions as I recall. I don't necessarily want my fixed income to be risk free, so I don't necessarily match investment horizon. I also don't particularly want a risk-free negative expected real return, so wasn't particularly interested in long term bonds of any sort when that was the case.

I'm more with Bill Bernstein, who pretty much sucked it up and stuck with short-term Treasuries when long-term real yields were negative, although I used direct CDs for which I received an average premium over Treasuries of about 1.15 percentage points. So glad I did that.

Kevin
Glad to see we agree on this too. I spent (wasted?) a lot of time on that thread arguing with he-who-shall-not-be-named and getting the same treatment.

The really sad part was that I received a PM from a Boglehead who had bought into the “buy LTT to minimize interest rate risk” mantra, and was shocked to see his bond portfolio collapse in value. He really had no understanding of the risks involved in buying LTT.

Also agree with your / Bob K’s characterization regarding units of account. However, to me the larger point is that for investors (especially those saving for retirement), the biggest risk in structuring a bond portfolio is NOT interest rate risk.

The major risk they face is the potential for a long-term underperformance of their bond portfolio. Buying LTT, and even LT TIPS, exposes the investor to this risk. Keeping a significant portion in STT or ST bonds mitigates this risk somewhat, depending on the shape of the yield curve.

That’s why I’m a Bill Bernstein fan as well.
So he was shocked to see his LTT prices behave exactly as he you'd expect them to? Was he hoping to buy LTTs and not see the price fluctuate much? What part about it was sad?

How does keeping a significant portion of bonds in STT and rolling them over for a long period of time mitigate risk, and what is the "underperformance risk" you are referring to?
Jaylat
Posts: 349
Joined: Sat Mar 12, 2016 10:11 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by Jaylat »

muel87 wrote: Wed May 24, 2023 9:03 pm
Jaylat wrote: Mon May 22, 2023 3:57 pm
Kevin M wrote: Mon May 22, 2023 2:44 pm What I learned from BobK some years ago is that for an investment to be risk free, there must be a match between liabilities and assets in both investment horizon and unit of account. The latter is a fancy way of saying that real liabilities should be matched by assets with "guaranteed" real returns (TIPS, I bonds), and nominal liabilities should be matched with assets with "guaranteed" nominal returns.. I pointed this out in my initial conversations with you know who.

Note the first underlined/bolded part. This was rarely if ever mentioned in these discussions as I recall. I don't necessarily want my fixed income to be risk free, so I don't necessarily match investment horizon. I also don't particularly want a risk-free negative expected real return, so wasn't particularly interested in long term bonds of any sort when that was the case.

I'm more with Bill Bernstein, who pretty much sucked it up and stuck with short-term Treasuries when long-term real yields were negative, although I used direct CDs for which I received an average premium over Treasuries of about 1.15 percentage points. So glad I did that.

Kevin
Glad to see we agree on this too. I spent (wasted?) a lot of time on that thread arguing with he-who-shall-not-be-named and getting the same treatment.

The really sad part was that I received a PM from a Boglehead who had bought into the “buy LTT to minimize interest rate risk” mantra, and was shocked to see his bond portfolio collapse in value. He really had no understanding of the risks involved in buying LTT.

Also agree with your / Bob K’s characterization regarding units of account. However, to me the larger point is that for investors (especially those saving for retirement), the biggest risk in structuring a bond portfolio is NOT interest rate risk.

The major risk they face is the potential for a long-term underperformance of their bond portfolio. Buying LTT, and even LT TIPS, exposes the investor to this risk. Keeping a significant portion in STT or ST bonds mitigates this risk somewhat, depending on the shape of the yield curve.

That’s why I’m a Bill Bernstein fan as well.
So he was shocked to see his LTT prices behave exactly as he you'd expect them to? Was he hoping to buy LTTs and not see the price fluctuate much? What part about it was sad?

How does keeping a significant portion of bonds in STT and rolling them over for a long period of time mitigate risk, and what is the "underperformance risk" you are referring to?
Hi muel87, if you really are interested in the answers to your queries, I suggest you read my comments on that (now locked) thread regarding 20% of fixed income in LTT. I go through all that in great detail. If you have questions after that I'd be glad to elucidate.
dcabler
Posts: 4482
Joined: Wed Feb 19, 2014 10:30 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by dcabler »

bobcat2 wrote: Wed May 24, 2023 7:31 pm
watchnerd wrote: Tue May 23, 2023 3:16 pm
Kevin M wrote: Tue May 23, 2023 3:09 pm
Several highly respected forum members here, e.g., BobK, have argued that you can accomplish an LMP (non rolling ladder) with two or three funds, as you suggest. I understand the argument, but I've never been convinced that there's no risk in the rebalancing part; i.e., selling shares of the long term fund when long term yields have increased significantly to buy shares of the shorter term fund. You don't get the benefit of the return to par at maturity effect for the longer term holdings.
I get the theory, I just don't see why one would would do it. It seems much simpler to buy individual TIPS for a non-rolling ladder. Cheaper ER, too.
Here are some reasons I prefer using duration matched TIPS funds and I-bonds instead of creating a TIPS bond ladder for safe flexible retirement income.

Part of my portfolio is in stocks. If they do well, as they did in 2021, I can easily add the extra unexpected earnings to my TIPS funds and slightly raise the annual withdrawal from safe assets for all remaining years. That’s difficult to do with a TIPS ladder. I can’t buy 3/5ths of a TIPS bond for every year of the next 23 years.

We don’t know how long we will live. We estimate how long we will live and build a TIPS ladder matching the estimate. Almost certainly our lifetime will be a different length than our estimate. What do I do if I outlive the ladder? What’s to be done if the surviving spouse out lives the ladder and becomes senile or has no interest in finance? What if it becomes clear that the ladder will outlive me? Once again, the funds and I-bonds are more flexible as they can be easily adjusted for changing investment horizons.

I don’t want to mess with TIPS bonds or TIPS funds beyond age 85 if I get there. Beyond age 85 most TIPS income will be replaced by I-bonds and longevity annuity income which I will begin purchasing in my late 70s. Buying longevity annuities, which are truly cheap, is also easier using TIPS funds rather than TIPS laddered bonds.

It is difficult to build a TIPS ladder over time. Ideally you want to begin purchasing your safe retirement assets 15-20 years before your expected retirement year. You don’t want to have a portfolio of risky assets until some financial target is hit in the future such as 25x or funded ratio of 100%. The problem is that your risky portfolio may never reach the target, resulting in a “whatever level” of safe retirement income. The level of safe income produced that way is hugely different in February 2000 compared to May 2002. It is hugely different from August 2008 to February 2009. A TIPS ladder is easy to construct at one time using this unsafe method that jeopardizes your targeted safe retirement income stream. It is significantly more difficult to construct safely over many years leading up to retirement.

Instead, you want to pick a level of safe retirement income as your retirement financial goal at least 15 years before retirement and work steadily toward that goal thru directing additional saving into safe assets and over time regularly moving assets from stocks to safe liability matched assets for future income. This is much easier to do using TIPS funds and I-bonds than building a TIPS ladder. There is also the problem that either your retirement income goal or your retirement target year may be changed as you get closer to retirement. Altering either of these is more easily done with funds and I-bonds than with laddered TIPS bonds. In short, you want to employ a liability driven investment (LDI) strategy over time rather than moving risky assets into a liability matched portfolio (LMP) at a point in time.

So while I don’t believe building a TIPS ladder at a point in time is a good idea (too risky to be ‘safe’ unless purchased using duration matched TIPS etfs/funds or I-bonds). But, if you want to build your duration matched TIPS at a point in time, I’d advise building a TIPS bond ladder and I wouldn’t use TIPs funds combinations. BTW, I see nothing wrong in building a TIPS ladder at a point in time using safe duration matched TIPS funds to pay for the ladder. And from that point on having just the ladder or both the ladder and duration matched funds.

I-bonds are the safest investible asset because they have neither interest rate risk nor inflation risk. As such I-bonds should certainly be in the conversation of safe retirement income. If you purchase an I-bond when you are over age 70 you have essentially purchased a real life annuity. :wink:

BobK
My thoughts line up well with the above. There are also some other things to consider. Another positive is you don't have to deal with the TIPS black hole - that is, those years for which there currently are no TIPS maturing. But there is maintenance involved regarding rebalancing. I'm doing it quarterly by rebalancing between the two funds since that's also when I'm making withdrawals. But to do that requires data sources, specifically the current real duration and real yields of the funds you're using. Today, the SEC only recommends, but does not require that such funds report real yield. So of course not every fund reports it since they're not required to do so. Fortunately, #cruncher publishes the data weekly in this thread: viewtopic.php?f=10&t=104845&start=100

However, I can't count on #cruncher or some future successor to keep this up over the length of my retirement, so I've spent time learning what he's done and I'm generating the data myself. I do have future plans to create a modified version of this spreadsheet and take the actual data from the funds themselves to generate yield & duration.

You can also take some hybrid approaches between a TIPS ladder of individual bonds and duration matching using funds. For example, you might choose to use one method for an SS Bridge and the other for current income for whatever reason. You can also move from duration matching with bond funds to a ladder of individual bonds for any number of reasons. One might be to wait until we're on the other side of the black hole, for example. One concern I have is for my own situation should I pre-decease or otherwise become incapacitated. My wife can run rings around me in Excel (She was a CS major whereas I'm only an EE), but her interest in our investing life is significantly below mine. So I have a couple of plan B ideas, one of which is to consider converting to a ladder of individual bonds at some point in the future so that she has "set and forget" income on the bond side. Another is a conversion to a SPIA if it looks like we're both reasonably healthy once we hit our 80's. Like BobK, we have Ibonds maturing after TIPS run out and will continue to buy those for the next few years...

Either method has its pros and cons as far as I'm concerned. But I think it would be cool if some low cost ETF came along that would generate inflation adjusted income via TIPS over specific, pre-determined time periods.

Cheers.
NiceUnparticularMan
Posts: 6103
Joined: Sat Mar 11, 2017 6:51 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by NiceUnparticularMan »

watchnerd wrote: Wed May 24, 2023 3:42 pm This is why I prefer a non-rolling ladder for LMP.
Holding aside the BobK method for the moment . . .

My main concern with a non-rolling ladder is just that at advanced ages, for every year you live, your expected life span tends to increase a good chunk of a year (and actually a bigger fraction the later we are talking).

Not a full year, and obviously it ends up being a bigger cumulative difference over many years.

Still, the sort of scenario that worries me is something like this.

Spouse 1 and Spouse 2 are 70, decent health, higher SES. Spouse 1 is interested in this stuff, Spouse 2 isn't, but Spouse 1 lays out for them a non-rolling ladder of 15 years, say.

OK, they both make it to 71. What next? Well, at that age, looking at some actuarial tables, Spouse 1 might decide to extend it like half a year or so. So Spouse 1 buys another 6 month rung.

And so on for a while.

OK, say they are now 80, and maybe have around a 10 year ladder left--5 of the original 15, and another 5 of extended rungs. And Spouse 1 gets dementia.

What then happens? Well, Spouse 1 is no longer able to extend the ladder. Spouse 2 is uninterested.

If it is a non-rolling ladder, it ends in 10 years. Which may be fine, but it also may leave them exposed (not that it really matters, but I note that while dementia can reduce lifespan, it doesn't always cut it dramatically).

Like, one or both make it to 90. By that point, maybe Spouse 1 would have extended it to 95 with new rungs. But Spouse 1 had dementia, and Spouse 2 was uninterested.

Is this the biggest deal? No.

Still, one of the advantages to the BobK approach is how it deals with this issue.

Like, if Spouse 1 is following the BobK approach, at 80 they had 2-3 TIPS funds that averaged out to 10 years (edit: probably 2, actually--a market fund like SCHP and a short-term fund like STIP do a decent job simulating a 10-year ladder). And then when Spouse 1 got dementia, this turned into a rolling 10-year ladder. Which diminished in value/income produced over time (no free lunches), but at age 91, it is still there, albeit worth less and producing less income.

Again, the biggest deal? No.

But as the Spouse 1 in that story, I am a little less concerned about what happens with my Spouse 2 in the BobK version.
Last edited by NiceUnparticularMan on Thu May 25, 2023 7:37 am, edited 3 times in total.
muel87
Posts: 478
Joined: Mon Jan 09, 2023 2:11 pm
Location: Rockville, MD

Re: Now that long TIPS again yield more than 1.70% I will…

Post by muel87 »

Jaylat wrote: Wed May 24, 2023 11:26 pm
muel87 wrote: Wed May 24, 2023 9:03 pm
Jaylat wrote: Mon May 22, 2023 3:57 pm
Kevin M wrote: Mon May 22, 2023 2:44 pm What I learned from BobK some years ago is that for an investment to be risk free, there must be a match between liabilities and assets in both investment horizon and unit of account. The latter is a fancy way of saying that real liabilities should be matched by assets with "guaranteed" real returns (TIPS, I bonds), and nominal liabilities should be matched with assets with "guaranteed" nominal returns.. I pointed this out in my initial conversations with you know who.

Note the first underlined/bolded part. This was rarely if ever mentioned in these discussions as I recall. I don't necessarily want my fixed income to be risk free, so I don't necessarily match investment horizon. I also don't particularly want a risk-free negative expected real return, so wasn't particularly interested in long term bonds of any sort when that was the case.

I'm more with Bill Bernstein, who pretty much sucked it up and stuck with short-term Treasuries when long-term real yields were negative, although I used direct CDs for which I received an average premium over Treasuries of about 1.15 percentage points. So glad I did that.

Kevin
Glad to see we agree on this too. I spent (wasted?) a lot of time on that thread arguing with he-who-shall-not-be-named and getting the same treatment.

The really sad part was that I received a PM from a Boglehead who had bought into the “buy LTT to minimize interest rate risk” mantra, and was shocked to see his bond portfolio collapse in value. He really had no understanding of the risks involved in buying LTT.

Also agree with your / Bob K’s characterization regarding units of account. However, to me the larger point is that for investors (especially those saving for retirement), the biggest risk in structuring a bond portfolio is NOT interest rate risk.

The major risk they face is the potential for a long-term underperformance of their bond portfolio. Buying LTT, and even LT TIPS, exposes the investor to this risk. Keeping a significant portion in STT or ST bonds mitigates this risk somewhat, depending on the shape of the yield curve.

That’s why I’m a Bill Bernstein fan as well.
So he was shocked to see his LTT prices behave exactly as he you'd expect them to? Was he hoping to buy LTTs and not see the price fluctuate much? What part about it was sad?

How does keeping a significant portion of bonds in STT and rolling them over for a long period of time mitigate risk, and what is the "underperformance risk" you are referring to?
Hi muel87, if you really are interested in the answers to your queries, I suggest you read my comments on that (now locked) thread regarding 20% of fixed income in LTT. I go through all that in great detail. If you have questions after that I'd be glad to elucidate.
I read that whole thread. I assumed by "underperformance" you were referring to something specific, otherwise are you referring to the idea that bonds return less than stocks as a risk of bonds?
NiceUnparticularMan
Posts: 6103
Joined: Sat Mar 11, 2017 6:51 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by NiceUnparticularMan »

By the way, as usual I am somewhat comforted by what DFA does in its Target funds. Obviously they couldn't use individual TIPS anyway, but in addition to using pretty much the BobK method to accumulate and then manage a LMP (with three funds), at R+15 they terminate at their Target Income portfolio, which is 20% global stocks, 80% fixed income. The fixed-income in turn is about 48% market TIPS, and 32% one-year fixed income (which actually holds some ex-US bonds, CDs, commercial paper, securities lending collateral, and cash in addition to Treasuries). Overall average duration for the fixed income in their Target Income fund is like 4.44.

If you retired at 65, R+15 is about 80. And at 80 that is a pretty good LMP! And since that is the terminal portfolio for their glidepath, that LMP wouldn't change any more as you would get even older--but really that is fine because it is still a good enough LMP if you are 90, and so on. Or so I assume, according to DFA's risk-return-income-optimization models.

My point is not, of course, that the DFA approach is necessarily the optimal approach, and again I think it is fine to do individual TIPS.

But I think this is a sort of external check of the logic that by something like around age 80, a suitable rolling LMP is likely reasonably close to optimal, meaning close enough so that DFA doesn't think it is worth bothering continuing with any more changes beyond that point. And so an approach which would automatically become a rolling ladder in the event the interested spouse's management services became unavailable at some point is not a bad idea either.
exodusing
Posts: 2196
Joined: Thu Oct 13, 2022 7:32 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by exodusing »

dcabler wrote: Thu May 25, 2023 5:01 am My thoughts line up well with the above. There are also some other things to consider. Another positive is you don't have to deal with the TIPS black hole - that is, those years for which there currently are no TIPS maturing.
You can deal with the black hole by buying individual TIPS maturing before and after the black hole. If you can blend funds to hit a target average duration, why can't you blend individual TIPS?
User avatar
watchnerd
Posts: 13609
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

NiceUnparticularMan wrote: Thu May 25, 2023 6:16 am
watchnerd wrote: Wed May 24, 2023 3:42 pm This is why I prefer a non-rolling ladder for LMP.
Holding aside the BobK method for the moment . . .

My main concern with a non-rolling ladder is just that at advanced ages, for every year you live, your expected life span tends to increase a good chunk of a year (and actually a bigger fraction the later we are talking).

Not a full year, and obviously it ends up being a bigger cumulative difference over many years.

Still, the sort of scenario that worries me is something like this.

Spouse 1 and Spouse 2 are 70, decent health, higher SES. Spouse 1 is interested in this stuff, Spouse 2 isn't, but Spouse 1 lays out for them a non-rolling ladder of 15 years, say.

OK, they both make it to 71. What next? Well, at that age, looking at some actuarial tables, Spouse 1 might decide to extend it like half a year or so. So Spouse 1 buys another 6 month rung.

And so on for a while.

OK, say they are now 80, and maybe have around a 10 year ladder left--5 of the original 15, and another 5 of extended rungs. And Spouse 1 gets dementia.

What then happens? Well, Spouse 1 is no longer able to extend the ladder. Spouse 2 is uninterested.

If it is a non-rolling ladder, it ends in 10 years. Which may be fine, but it also may leave them exposed (not that it really matters, but I note that while dementia can reduce lifespan, it doesn't always cut it dramatically).

Like, one or both make it to 90. By that point, maybe Spouse 1 would have extended it to 95 with new rungs. But Spouse 1 had dementia, and Spouse 2 was uninterested.

Is this the biggest deal? No.

Still, one of the advantages to the BobK approach is how it deals with this issue.

Like, if Spouse 1 is following the BobK approach, at 80 they had 2-3 TIPS funds that averaged out to 10 years (edit: probably 2, actually--a market fund like SCHP and a short-term fund like STIP do a decent job simulating a 10-year ladder). And then when Spouse 1 got dementia, this turned into a rolling 10-year ladder. Which diminished in value/income produced over time (no free lunches), but at age 91, it is still there, albeit worth less and producing less income.

Again, the biggest deal? No.

But as the Spouse 1 in that story, I am a little less concerned about what happens with my Spouse 2 in the BobK version.
That gave me a headache in the present and I don't have dementia yet!
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
oxothuk
Posts: 889
Joined: Thu Nov 10, 2011 7:35 pm

Re: Now that long TIPS again yield more than 1.70% I will…

Post by oxothuk »

exodusing wrote: Thu May 25, 2023 7:29 am
dcabler wrote: Thu May 25, 2023 5:01 am My thoughts line up well with the above. There are also some other things to consider. Another positive is you don't have to deal with the TIPS black hole - that is, those years for which there currently are no TIPS maturing.
You can deal with the black hole by buying individual TIPS maturing before and after the black hole. If you can blend funds to hit a target average duration, why can't you blend individual TIPS?
You can. That’s what I’m doing.
I also have detailed instructions for DW on how many 2033s and 2040s to exchange each year for new issues when they become available.
NiceUnparticularMan
Posts: 6103
Joined: Sat Mar 11, 2017 6:51 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by NiceUnparticularMan »

watchnerd wrote: Thu May 25, 2023 7:40 am That gave me a headache in the present and I don't have dementia yet!
Not my favorite subject, but various recent life events have impressed on me the virtues of making whatever retirement plan I come up with robust to my unexpected absence/inability as a portfolio manager.

Big picture, ANY reasonable LMP + Social Security plan is already well into the robust side of the spectrum, so that is good. And part of why I am anything but dogmatic about exactly how one constructs the LMP.

Still, things like judicious use of annuities, automatically rolling funds, and so on provide a little extra protection against longevity-plus-personal-inability scenarios like the above. So, a nuance, but still one I have spent a little time considering.
exodusing
Posts: 2196
Joined: Thu Oct 13, 2022 7:32 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by exodusing »

I've been thinking about how to hold TIPS in taxable for part of a LMP since I'm running out of IRA space. All things equal, I prefer a ladder, since it's easy to deal with once set up.

Funds make tax reporting simpler than dealing with individual TIPS. However, rebalancing between funds is a taxable event while a maturing TIPS is not. Tax reporting is a bit of a hassle, but gains have a real economic cost.

Any thoughts on the subject?
oxothuk
Posts: 889
Joined: Thu Nov 10, 2011 7:35 pm

Re: Now that long TIPS again yield more than 1.70% I will…

Post by oxothuk »

exodusing wrote: Thu May 25, 2023 8:43 am I've been thinking about how to hold TIPS in taxable for part of a LMP since I'm running out of IRA space. All things equal, I prefer a ladder, since it's easy to deal with once set up.
I assume you've already maxed out I-bonds?
NiceUnparticularMan
Posts: 6103
Joined: Sat Mar 11, 2017 6:51 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by NiceUnparticularMan »

exodusing wrote: Thu May 25, 2023 8:43 am I've been thinking about how to hold TIPS in taxable for part of a LMP since I'm running out of IRA space. All things equal, I prefer a ladder, since it's easy to deal with once set up.

Funds make tax reporting simpler than dealing with individual TIPS. However, rebalancing between funds is a taxable event while a maturing TIPS is not. Tax reporting is a bit of a hassle, but gains have a real economic cost.

Any thoughts on the subject?
By way of background, I have put together a simulated 10ish-year TIPS ladder with a couple TIPS funds in taxable for use in early retirement when we think we will be preferentially drawing income from taxable.

As usual you can do it either way, but one convenience involving TIPS funds in taxable is they actually distribute the inflation adjustments, which is handy because the IRS treats them as taxable income in the year they occur. With individual TIPS you don't get such distributions so have to figure out how to produce the income needed to pay those taxes. Again financially the consequences are ultimately the same, but the fund distributions can simplify things a bit.

In fact, this gets a bit complicated as it is contingent on actual inflation, but under a lot of scenarios if you take those distributions of inflation adjustments as part of your spendable income, it actually helps your ladder roll less, meaning you will need to do less to manage the balances to match a non-rolling TIPS ladder.

In fact, tentatively I am planning to just see if between our TIPS interest, TIPS inflation adjustment distributions, and taxable income from stock funds (so, all the unavoidable taxable income), that is enough income from taxable in early retirement. Meaning other than spending the income that ends up in our taxable cash account, we would not really need to do anything else to generate income from taxable, and would hopefully not feel the need to do any rebalancing either.

Then if we do want more income from taxable, we can sell TIPS funds shares to further conform that portfolio to a non-rolling ladder. And hopefully that will not generate much additional taxable income because the inflation adjustments will already have been distributed, and so the only capital gains/losses should be coming from real rate changes.

Anyway, I can't emphasize enough that you can do the exact same things with individual TIPS, meaning there is no special tax magic to any of this. But from my perspective, using funds could make this relatively easy for us to manage, which to me has a lot of appeal.
exodusing
Posts: 2196
Joined: Thu Oct 13, 2022 7:32 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by exodusing »

oxothuk wrote: Thu May 25, 2023 9:14 am
exodusing wrote: Thu May 25, 2023 8:43 am I've been thinking about how to hold TIPS in taxable for part of a LMP since I'm running out of IRA space. All things equal, I prefer a ladder, since it's easy to deal with once set up.
I assume you've already maxed out I-bonds?
At the moment, they yield less than TIPS. Our tax rate will be higher once RMDs, Social Security and pensions start, so the tax deferral feature is not attractive.
Bill Bernstein
Posts: 853
Joined: Sat Jun 23, 2007 12:47 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by Bill Bernstein »

This is a good discussion of the ladder vs. fund issue, but it reminds me of a comment made by Mike Piper at the last boglefest, that folks get too wound up in the minutiae of asset allocation but ignore the big stuff, particularly proper life/disability/liability/long term care insurance, keeping your heirs informed, etc.

Apropos this discussion, it's not immediately obvious to me how a demented spouse will find it easier to deal with TIPS funds than with a discrete ladder. Once the dementia proceeds beyond a certain point, either will prove beyond daunting.

In that instance, far, far more important than arranging the deck chairs on the TIPS Titanic is making sure that you identify someone well ahead of time who can manage your portfolio, preferably a trustworthy kid who can do the math, and if you don't have one of those, someone else who can do the job.

Re. funds, it would be really, really nice if there was a long-term TIPS fund that charged less than 20 bp. Failing that, I'll happily deal with a nice slug of 2040-2050s maturity individual issues, thank you.
retiringwhen
Posts: 4703
Joined: Sat Jul 08, 2017 10:09 am
Location: New Jersey, USA

Re: Now that long TIPS again yield more than 1.70% I will…

Post by retiringwhen »

Bill Bernstein wrote: Thu May 25, 2023 10:21 am It would be really, really nice if there was a long-term TIPS fund that charged less than 20 bp. Failing that, I'll happily deal with a nice slug of 2040-2050s maturity individual issues, thank you.
I kindly ask Vanguard for this every time I have an opportunity.
Jaylat
Posts: 349
Joined: Sat Mar 12, 2016 10:11 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by Jaylat »

muel87 wrote: Thu May 25, 2023 6:39 am I read that whole thread. I assumed by "underperformance" you were referring to something specific, otherwise are you referring to the idea that bonds return less than stocks as a risk of bonds?
I'm referring to the underperformance of one fixed income portfolio vs. another. The underperformance risk arises when an investor chooses to buy LTT (or otherwise lock in his fixed income return) at a time when rates are historically low. BobK refers to this risk as being subject to a "whatever level" of income based on prevailing rates. See his comments above:
It is difficult to build a TIPS ladder over time. Ideally you want to begin purchasing your safe retirement assets 15-20 years before your expected retirement year. You don’t want to have a portfolio of risky assets until some financial target is hit in the future such as 25x or funded ratio of 100%. The problem is that your risky portfolio may never reach the target, resulting in a “whatever level” of safe retirement income. The level of safe income produced that way is hugely different in February 2000 compared to May 2002. It is hugely different from August 2008 to February 2009. A TIPS ladder is easy to construct at one time using this unsafe method that jeopardizes your targeted safe retirement income stream. It is significantly more difficult to construct safely over many years leading up to retirement.
The entire premise of this thread "Now that long TIPS again yield more than 1.70% I will…" is that some years are objectively better than others to make long term fixed rate investments. Unlike with stocks, you can actually make an objective statement that timing most certainly does matter in buying bonds, just as some years are better than others in refinancing your mortgage. Using TIPS real yields as a gauge is a pretty good way to determine if the current time to invest in LTT is right.

Investors who locked in their fixed rate portfolios at very low historic interest rates, such as the poor guy who sent me the PM, are seeing a significant underperformance of their fixed rate portfolio. That underperformance is reflected in the current reduced value of their portfolio, and reflects the annual deficit in interest income vs. someone who bought at higher current yields.
exodusing
Posts: 2196
Joined: Thu Oct 13, 2022 7:32 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by exodusing »

NiceUnparticularMan wrote: Thu May 25, 2023 9:31 am By way of background, I have put together a simulated 10ish-year TIPS ladder with a couple TIPS funds in taxable for use in early retirement when we think we will be preferentially drawing income from taxable.

As usual you can do it either way, but one convenience involving TIPS funds in taxable is they actually distribute the inflation adjustments, which is handy because the IRS treats them as taxable income in the year they occur. With individual TIPS you don't get such distributions so have to figure out how to produce the income needed to pay those taxes. Again financially the consequences are ultimately the same, but the fund distributions can simplify things a bit.

In fact, this gets a bit complicated as it is contingent on actual inflation, but under a lot of scenarios if you take those distributions of inflation adjustments as part of your spendable income, it actually helps your ladder roll less, meaning you will need to do less to manage the balances to match a non-rolling TIPS ladder.

In fact, tentatively I am planning to just see if between our TIPS interest, TIPS inflation adjustment distributions, and taxable income from stock funds (so, all the unavoidable taxable income), that is enough income from taxable in early retirement. Meaning other than spending the income that ends up in our taxable cash account, we would not really need to do anything else to generate income from taxable, and would hopefully not feel the need to do any rebalancing either.

Then if we do want more income from taxable, we can sell TIPS funds shares to further conform that portfolio to a non-rolling ladder. And hopefully that will not generate much additional taxable income because the inflation adjustments will already have been distributed, and so the only capital gains/losses should be coming from real rate changes.

Anyway, I can't emphasize enough that you can do the exact same things with individual TIPS, meaning there is no special tax magic to any of this. But from my perspective, using funds could make this relatively easy for us to manage, which to me has a lot of appeal.
We're thinking of TIPS as an inflation adjusted annuity. Our existing ladder, in an IRA, should take us to our mid to late 90s. For management, all we have to do is withdraw cash (from interest and maturing principle), no trading or rebalancing needed. This seems much simpler than dealing with funds.

A normal rule of thumb is duration/maturity should match horizon and for retirement you'd use 1/2 of expected remaining lifespan. This suggests reducing duration/maturity as time goes by, which means thinking about things with funds, rather than just withdrawing cash.

I'm not concerned about funding the taxes on the TIPS inflation adjustment.

Capital gains from sales due to real rate changes is the issue for funds that I referenced above (although the gain does provide cash). It's hard to say how much of a problem this will be, given the unpredictability of future real rates. Individual TIPS wouldn't have that problem if held to maturity.

Ignoring taxes and complexity, I agree there's no significant difference between a non-rolling ladder and duration (or probably even maturity) matched funds. Or, for that matter, a rolling ladder and a fund.
User avatar
watchnerd
Posts: 13609
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

Bill Bernstein wrote: Thu May 25, 2023 10:21 am Re. funds, it would be really, really nice if there was a long-term TIPS fund that charged less than 20 bp. Failing that, I'll happily deal with a nice slug of 2040-2050s maturity individual issues, thank you.
It's not obvious to me why TIPS funds shouldn't have ultra low expenses.

They seem pretty simple compared to other funds (limited number of total issues, new issues only come out every 6 months).

May it's just a scale problem / AUM is too small?
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
dcabler
Posts: 4482
Joined: Wed Feb 19, 2014 10:30 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by dcabler »

exodusing wrote: Thu May 25, 2023 7:29 am
dcabler wrote: Thu May 25, 2023 5:01 am My thoughts line up well with the above. There are also some other things to consider. Another positive is you don't have to deal with the TIPS black hole - that is, those years for which there currently are no TIPS maturing.
You can deal with the black hole by buying individual TIPS maturing before and after the black hole. If you can blend funds to hit a target average duration, why can't you blend individual TIPS?
Yes, this is a known solution to the problem, purchasing extra before and after the hole. It's even built into #cruncher's spreadsheet. I didn't say there was no solution to this problem when building a ladder of TIPS. It's just that it's automatic when using funds because you don't do anything different before, during, or after those years where the hole exists....

Cheers
dcabler
Posts: 4482
Joined: Wed Feb 19, 2014 10:30 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by dcabler »

Bill Bernstein wrote: Thu May 25, 2023 10:21 am This is a good discussion of the ladder vs. fund issue, but it reminds me of a comment made by Mike Piper at the last boglefest, that folks get too wound up in the minutiae of asset allocation but ignore the big stuff, particularly proper life/disability/liability/long term care insurance, keeping your heirs informed, etc.

Apropos this discussion, it's not immediately obvious to me how a demented spouse will find it easier to deal with TIPS funds than with a discrete ladder. Once the dementia proceeds beyond a certain point, either will prove beyond daunting.

In that instance, far, far more important than arranging the deck chairs on the TIPS Titanic is making sure that you identify someone well ahead of time who can manage your portfolio, preferably a trustworthy kid who can do the math, and if you don't have one of those, someone else who can do the job.

Re. funds, it would be really, really nice if there was a long-term TIPS fund that charged less than 20 bp. Failing that, I'll happily deal with a nice slug of 2040-2050s maturity individual issues, thank you.
Re future incapability, that's why several of us have put together plan B's for such events that don't involve TIPS funds. I keep hoping that there will be a competitor to LTPZ someday, available to everybody (unlike DFA's DRXIX at 0.13%) but it's at least mitigated by the fact that the total charges drop over time as you own less LTPZ and more of something cheaper, like SCHP (0.04%). At some point, LTPZ goes away as you then move to a combination of something like SCHP (0.04%) and STIP (0.03%).

Cheers
Bill Bernstein
Posts: 853
Joined: Sat Jun 23, 2007 12:47 am

Re: Now that long TIPS again yield more than 1.70% I will…

Post by Bill Bernstein »

It's not obvious to me why TIPS funds shouldn't have ultra low expenses.
1) PIMCO. Need one say more?
2) Vanguard, Schwab, and Fido, who offer rock-bottom bond ETFs in other asset classes, are not yet interested. I'm guessing they will be sooner or later. (BlackRock is very hit and miss in the ER department. Some of their funds are inexpensive, but they never seem to miss an opportunity to charge 12-20bp if they think they can get away with it.)
Post Reply