TIPS fund for inflation

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aaaxl
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TIPS fund for inflation

Post by aaaxl »

Looking at TIPS/VTIP performance during this time of high inflation was surprising and disappointing to me. I see other posts that ask why, and the responses are mostly along the lines of "Yields went up for new bonds. So you would have to sell your bonds at a discount." I appreciate the responses, but honestly, a technical explanation doesn't really help me. I more need to understand the purpose of TIPS and how to use them.

I have half my bond allocation in VCSH (Short-Term Corporate Bonds) and half in VTIP (TIPS). My very simple goal was to have stable income / wealth preservation, during times of low inflation and during times of high inflation. But, now that we have high inflation and VTIP is falling, it feels like this strategy didn't fulfill my goal.

Is any of these close to the correct explanation?

(1) My strategy is fine. VTIP is actually protecting me against inflation now, despite the price going down (because of dividends or something).
(2) My strategy is fine. VTIP protects against unexpected inflation, and it did its job a year ago when inflation was unexpected, but now inflation is expected, so it's gone down a lot. But overall, this combination of funds has been doing its job well.
(3) My strategy was wrong, because ??? and instead I should do ???

Thanks in advance!
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Re: TIPS fund for inflation

Post by dbr »

You are missing some bond basics, which is that TIPS funds are indeed indexed for inflation and also share the property common to all bonds that the fund price varies with the prevailing interest rates, in the case of TIPS funds, the real interest rates that apply to the bonds in the fund.

The variation of the value of your holding with interest rates is complicated in that the first response to an upward or downward change in interest rates is for the value of your fund holding to fall or rise, respectively and then over time the value will rise or fall, respectively, and then will eventually reach a point of indifference after which rising interest rates will give you an accumulation of wealth greater than you would have had if rates had not changed and vice-versa for falling interest rates. Any attempt to actually project these results is derailed by the fact that interest rates are always changing in time. If you think that is complicated, it is, and it also comes with the territory so a person who does not like that should not buy bond funds. The same math applies to individual bonds with the difference that an individual bond approaches maturity and for one date in the year actually gives you back what you expect. Given that one day in the year is just a tiny thousandth of all the days, this is not an especially useful feature.* If one does not like all this complexity then one should also not buy individual bonds.

*An exception regarding holding to maturity might apply for holding very short bonds, such as Treasury Bills, which are a reasonable subsitute for cash. The other exception regarding holding to maturity might be setting aside a portion on one's portfolio as a ladder over a designated lenght of time to serve as annual income for that period of time. Doing that with TIPS is called a TIPS Liability Matching Portfolio. In investment planning this is not an investment but rather an income stream.

What one can do is buy bond funds with an expectation that over time they will produce a positive return while subject to constant volatility. That volatility and that return is generally less than for stocks, though in any period of time things can go the other way around. For a long term investor it makes sense to hold portfolios of stocks and bonds at an appropriate allocation to each depending on the risk and return one hope for. The time is scaled by the duration of the bond fund. Longer duration funds will take larger excursions with interest rates and take longer to change back. A short fund might have a duration of a couple or three years and could well be held for five years or more, intermediate funds have a duration of 5-8 years and might be planned to be held for ten or fifteen years, long funds have durations of maybe 15 years and are good holdings for three or four decades of investing. It is possible to minimize the effects of bond risk by matching the duration of the bond portfolio to the duration of the liabilities it will be liquidated to support. Most people probably don't hold long enough duration funds to actually do that.

TIPS differ from nominal bonds in that the principle is indexed by inflation and it is useful to quote the performance of TIPS in real dollars and real yields while nominal bonds are measured in nominal dollars and nominal yields. At any point in time the difference should be about what inflation is. It doesn't happen that nominal bonds have a negative nominal return, but both nominal bonds and TIPS can have a negative real return at times. That is a fact of life.

The idea that buying a TIPS fund is buying "protection" from inflation is a misunderstanding. "Protection" from inflation is a commodity that is not on sale in any market. It is just like the idea that "bonds are for safety." There is nothing in investing that is safe. There are simply different degrees of opportunities and consequences. While the Treasury labels TIPS as Treasury Inflation Protected Securities that wording only means that the principle is inflation indexed. Whether or not that constitutes "protection" might need some discussion.
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Re: TIPS fund for inflation

Post by bertilak »

I think the idea is that TIPS protect the future of your investment. They do not have an immediate effect. They are for future inflation, not inflation that just occurred. Too late for that!

That said, expected inflation is already baked in to current bond prices. TIPS protects against inflation that is unexpectedly high. Buying TIPS when everyone is expecting high inflation to come will not help.

I don't buy TIPS because I don't think it is a good idea to bet against current bond prices. TIPS are a form of insurance that I don't think I need. If you want or ned that insurance, TIPS (or ibonds) are for you. I think ibonds have a limit on how many you can buy.
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Re: TIPS fund for inflation

Post by 2pedals »

Both nominal and and TIPS funds are not stable in periods of increasing interest rates unless the increase was already priced in the market. The bond market prices adjust so that they provide current market yields relative to the bond type and duration.

You were incorrectly expecting bond value stability in a period of interest rate instability.
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Re: TIPS fund for inflation

Post by vineviz »

aaaxl wrote: Sun Nov 27, 2022 8:59 am
I have half my bond allocation in VCSH (Short-Term Corporate Bonds) and half in VTIP (TIPS). My very simple goal was to have stable income / wealth preservation, during times of low inflation and during times of high inflation. But, now that we have high inflation and VTIP is falling, it feels like this strategy didn't fulfill my goal.
Something that most people are not aware of is that "stable income" and "wealth preservation" are essentially diametrically opposed goals. The more of one you have, the less you have of the other.

Most retirees ultimately care most about having enough income: if you were sure to always have enough income to meet your needs, how much would "wealth preservation" truly matter to you.

Your focus on short-term bonds (e.g. VCHS and VTIP) puts more emphasis on the "wealth preservation" side of things and much less on "stable income". Which is fine if that's what you want. Just be aware of it.
aaaxl wrote: Sun Nov 27, 2022 8:59 am
Is any of these close to the correct explanation?

(1) My strategy is fine. VTIP is actually protecting me against inflation now, despite the price going down (because of dividends or something).
#1 is very close to the true explanation. TIPS provide more stable real (inflation-adjusted) income than nominal bonds do, and VTIP delivers this.
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Re: TIPS fund for inflation

Post by bertilak »

vineviz wrote: Sun Nov 27, 2022 10:49 am
Something that most people are not aware of is that "stable income" and "wealth preservation" are essentially diametrically opposed goals. The more of one you have, the less you have of the other.

Most retirees ultimately care most about having enough income: if you were sure to always have enough income to meet your needs, how much would "wealth preservation" truly matter to you.
Diametrically opposed, perhaps, yet both are legitimate goals. It would be devastating if my investments were unable to supply the needed income, but I also want to leave a meaningful legacy to heirs. Ideally, I can meet both goals and are they not fatally and totally opposed.
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Re: TIPS fund for inflation

Post by vineviz »

bertilak wrote: Sun Nov 27, 2022 12:21 pm Diametrically opposed, perhaps, yet both are legitimate goals. It would be devastating if my investments were unable to supply the needed income, but I also want to leave a meaningful legacy to heirs. Ideally, I can meet both goals and are they not fatally and totally opposed.
I suppose it depends on how hard you think about what a "meaningful legacy" genuinely looks like.

Your bequests are likely to be significantly larger if you are willing to invest in assets with some price volatility than if you are not, for instance.
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Re: TIPS fund for inflation

Post by bertilak »

vineviz wrote: Sun Nov 27, 2022 12:34 pm
bertilak wrote: Sun Nov 27, 2022 12:21 pm Diametrically opposed, perhaps, yet both are legitimate goals. It would be devastating if my investments were unable to supply the needed income, but I also want to leave a meaningful legacy to heirs. Ideally, I can meet both goals and are they not fatally and totally opposed.
I suppose it depends on how hard you think about what a "meaningful legacy" genuinely looks like.

Your bequests are likely to be significantly larger if you are willing to invest in assets with some price volatility than if you are not, for instance.
I have no hope of leaving each of my heirs financially independent. To me, "meaningful" is considerably less than that, meaning there is a lot of wiggle room.
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Re: TIPS fund for inflation

Post by Kevin M »

I'm not recommending it for your situation, but I'll just point out that very short-term TIPS have had positive nominal returns over the last year to year and a half. This is because the magnitude of the inflation adjustments has been larger than the magnitude of the real decline due to higher real yields.

Example: On 6/8/2021 I bought some of the 7/15/23 TIPS and a nominal Treasury maturing on the same date. The TIPS price return is about 3.1% and the nominal Treasury price return is about -2.76%. The TIPS price return consists of a real return of -7.8% and an inflation adjustment return of 11.8%.

As maturity increases, duration increases, which increases the negative impact of a given yield increase, while all TIPS get the same inflation adjustments. Of course staying short term increases reinvestment risk.

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aaaxl
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Re: TIPS fund for inflation

Post by aaaxl »

I think I’m getting it. Let me try to rephrase this in simple language, and see if I understand:

TIPS will do better than regular bonds in times of (unexpected?) inflation. It may still lose value during times of inflation, but it will lose less than nominal bonds of similar duration.

So, if I’ve decided that N% of my portfolio should be in bonds, it’s a reasonable strategy to put half of that in TIPS.

Is that in the right ballpark?
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Re: TIPS fund for inflation

Post by Kevin M »

aaaxl wrote: Sun Nov 27, 2022 4:22 pm I think I’m getting it. Let me try to rephrase this in simple language, and see if I understand:

TIPS will do better than regular bonds in times of (unexpected?) inflation. It may still lose value during times of inflation, but it will lose less than nominal bonds of similar duration.

So, if I’ve decided that N% of my portfolio should be in bonds, it’s a reasonable strategy to put half of that in TIPS.

Is that in the right ballpark?
To the first point, correct, and the shorter the term to maturity, the less will be lost when real yields increase, while they receive the same inflation return as all other TIPS.

There is no one answer for everyone, but I have been going about 50/50 with TIPS and nominal Treasuries with newly available cash. It happens to work out that that is nominals in taxable and TIPS in IRAs. I am staying short term with TIPS due to the lower price risk, and am accepting the higher reinvestment risk.

A more nuanced approach that's been propagated here is to determine your sensitivity to unexpected inflation, and adjust your TIPS holdings accordingly. For example, if social security covers a majority of your spending, you may not need as much in TIPS, since SS is adjusted for inflation.

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Re: TIPS fund for inflation

Post by dbr »

Kevin M wrote: Sun Nov 27, 2022 5:26 pm
A more nuanced approach that's been propagated here is to determine your sensitivity to unexpected inflation, and adjust your TIPS holdings accordingly. For example, if social security covers a majority of your spending, you may not need as much in TIPS, since SS is adjusted for inflation.

Kevin
I think this makes the most sense because the ex ante chances are that TIPS or Treasuries of the same duration will be a wash on overall average. One must never forget that all bonds have term risk.

An example the opposite of SS would be a person who holds a fixed pension or SPIA that loses purchasing power to inflation.

But one should not be confused. TIPS being "protected" against inflation do not somehow also "protect" other investments as well just by virtue of being owned as part of a portfolio. It isn't like owning a few TIPS will shore up your roof to not collapse under a heavy snowfall.
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Re: TIPS fund for inflation

Post by the_wiki »

TIPS pay higher coupon when inflation rises. And that is what they have done. The dividends for TiPS funds have been very high this year. I think I saw VTIP has paid out about 7.5%. So that was your inflation protection.
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Re: TIPS fund for inflation

Post by Kevin M »

the_wiki wrote: Sun Nov 27, 2022 8:41 pm TIPS pay higher coupon when inflation rises. And that is what they have done. The dividends for TiPS funds have been very high this year. I think I saw VTIP has paid out about 7.5%. So that was your inflation protection.
It's not just the coupon payments that are included in the fund distributions--it's also the accrued inflation adjustments. If you hold individual TIPS, you only get the coupons.

For longer-term TIPS, the accrued inflation adjustments have been much smaller in magnitude than the real price losses due to higher real yields. In very short term TIPS, the opposite has been true.
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Re: TIPS fund for inflation

Post by chrisdds98 »

is there an advantage to using vtip instead of stip? the vanguard fund has a slightly higher ER and pays dividends quarterly instead of monthly
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Re: TIPS fund for inflation

Post by vineviz »

chrisdds98 wrote: Sun Nov 27, 2022 11:30 pm is there an advantage to using vtip instead of stip? the vanguard fund has a slightly higher ER and pays dividends quarterly instead of monthly
Apart from preference for dividend frequency I see no reason to prefer one over the other.

Most investors should favor intermediate and long term TIPS over short term TIPS, in my opinion, but I guess that’s a different question.
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Re: TIPS fund for inflation

Post by NiceUnparticularMan »

A couple of basic thoughts:

(1) When bonds are expected to have negative real rates of return, that puts a sharp limit on how much "wealth preservation" you can expect even if you need no income at all from those bonds. And to the extent you plan on taking income, particularly inflation-adjusted income, out of those bonds, then they are going to lose real value even faster.

And that is what it is. Market pricing is outside of our control, and there is no cosmic guarantee that assets will be priced such that you can eat your cake and have it too. And I think people need to be cautious about assuming other assets are priced more favorably under such market conditions. TIPS make it transparent, but there are good reasons to assume other types of assets will likely be priced high at the same time.

Anyway, this of course was the case with Treasuries bought not long ago--that they were priced so high as to have negative real yields. Including nominal Treasuries. Probably including comparable high-quality US corporate bonds bought at the same time.

The good news is if you bought TIPS at those prices, then they are not going to do any worse than expected in terms of real returns. Poorly by historic standards, but not any more poorly than expected. The NAV drop in your TIPS fund does not actually imply otherwise, as long as you did a good job matching duration in the first place and now don't change your plans.

The bad news is if you bought nominal Treasuries or comparable high-quality US corporates, they are (very likely) going to do considerably worse than expected in terms of real returns. That isn't about the NAV drop per se, it is about the fact that unlike with TIPS, your nominal return was fixed, and therefore unexpectedly high inflation has (very likely) reduced the real returns you will get on those bonds below the already poor real returns you should originally have expected.

Which was a risk to buying nominal bonds instead of TIPS. Of course if inflation had been unexpectedly low, it would have worked out the other way.

(2) I personally see very little in terms of future "liabilities" I would face that are fixed nominally, and would not go up with inflation, including unexpected inflation. It is true that something like Social Security reduces my exposure to inflation/unexpected inflation, but what remains in terms of my planned/possible personal spending is still exposed to inflation/unexpected inflation, as in fact are my planned gifts to my beneficiaries (whether I give to them while I live or in my estate when I pass).

So to me, there is basically no liability-matching case for nominal bonds at all. Particularly since the implied "premium" to using TIPS instead of nominal bonds seems so negligibly low.

The other notable case for holding nominal bonds is they might improve the efficiency (risk-adjusted returns) of a long-term investment portfolio. I am personally skeptical about that argument given a really robust understanding of the risks personal investors should care about, including taking into account the asymmetric effects of unexpectedly high versus unexpectedly low inflation. MAYBE you can make a case for holding a small amount of unhedged bonds not in your currency, but I think it is a weak case.

So, my baseline assumption is to the extent I am investing in bonds at all (and I have to date been reluctant to do so at significant scale, preferring other forms of non-marketed "fixed income"), it should be 100% in TIPS. Social Security doesn't change that assessment, as to me it just reduces the amount I need to save in the form of marketed financial assets to provide for my own real income security.

But to come full circle--when bonds are priced so high that they are expected to return less than 0% real, "real income security" from your bonds means the amount of wealth those bonds "preserve" is going to draw down relatively rapidly. And again, it is probably an illusion to think other marketed assets at the time are not subject to the same high prices.
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Re: TIPS fund for inflation

Post by KlangFool »

OP,

1) If you do not know why XYZ bond fund is better than the total bond market index fund, you should not choose them.

2) TIPS fund is based on official inflation rate which may have absolutely nothing to do with the actual inflation that you experience as an individual. You do not spend like an average individual.

3) In summary, TIPS does nothing to protect you as an individual in terms of inflation.

4) To choose a short term bond fund versus Total Bond Market Index fund means that you assume that you can predict the future interest rate movement. As to why you think you can predict future interest rate movement, I have no idea.

5) I know that I do not know enough. I uses Total Bond Market Index fund.

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Re: TIPS fund for inflation

Post by NiceUnparticularMan »

KlangFool wrote: Mon Nov 28, 2022 9:24 am OP,

1) If you do not know why XYZ bond fund is better than the total bond market index fund, you should not choose them.
This logic is reversible. If you do not know why the (mis-named) "Total Bond" fund is better than XYZ bond fund (misnamed because of course many, many bonds are not included in "Total" Bond), you should not choose Total Bond either.

I understand there are people who nonetheless insist "Total Bond" is a reasonable default choice for all personal investors. It really isn't.

The rational default choice is a ladder matched as best as possible to your personal expected liabilities. "Total Bond" is not particularly close to such a ladder for most personal investors. It is therefore not a rational default choice for most personal investors.

Indeed, I note that the market for bonds is not just personal investors, it is also governments, corporations, universities, and so on. Even if "Total" Bond was actually total (and it isn't), it would just mean it was matching the average liabilities of all those entities buying bonds. That average is not particularly likely to match your liabilities, including because it involves many entities completely unlike you.

So, "Total" bond is not the average result of the bond buying of all personal investors. It is the average result of the bond buying of all bond investors generally, of which personal investors are only a subset. And as such, it is not a particularly notable default choice for any given personal investor.
2) TIPS fund is based on official inflation rate which may have absolutely nothing to do with the actual inflation that you experience as an individual. You do not spend like an average individual.

3) In summary, TIPS does nothing to protect you as an individual in terms of inflation.
This is of course excluding the rational middle option.

It is true the basket of goods and services used to determine the CPI may not exactly match the basket of goods and services you are buying. So, unexpected inflation protection with inflation measured by CPI is not as theoretically ideal for you as an inflation-adjusted asset that used a personalized inflation measure would be.

But it is not therefore true that no unexpected inflation protection is worth just as much to you as unexpected CPI inflation protection is worth to you. The former is, of course, likely to depart even more from that ideal measure of inflation than CPI, at least for most personal investors.

So in the absence of something better, it makes sense for most US investors to settle for TIPS. In contrast, it doesn't make sense for most US investors to be indifferent between TIPS and equivalent nominal bonds, as the latter are even farther from the ideal than the former.
4) To choose a short term bond fund versus Total Bond Market Index fund means that you assume that you can predict the future interest rate movement. As to why you think you can predict future interest rate movement, I have no idea.
Again, it would make sense to choose a shorter term bond fund if you were matching liabilities with a shorter term. Total Bond varies over time, but it currently has an average duration of 6.4 years, and an average effective maturity of 8.8 years. If you were planning to spend your bond investment in, say, 3 years, it would make no particular sense to prefer Total Bond.

Of course many retirement savers plan to spend their investment over a much longer period. So much longer, in fact, that Total Bond ends up too short to really match their planned spending schedule.

It would really only be a small subset of personal investors, therefore, who would rationally choose something with the term structure of Total Bond (whatever it happens to be at a given time).

Of course these are all old arguments here. There are some people who are simply adamant about the idea that the particular set of bonds included in "Total Bond" just must be a rational default choice for personal investors. But there truly is no good reason to assume that to be so.
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Re: TIPS fund for inflation

Post by vineviz »

KlangFool wrote: Mon Nov 28, 2022 9:24 am 1) If you do not know why XYZ bond fund is better than the total bond market index fund, you should not choose them.
This is almost entirely backwards and is based on an implicit assumption that a total bond market index fund should be considered the default bond investment for most investors, when in fact most investors should assume that the TIPS fund is the default choice.
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Re: TIPS fund for inflation

Post by KlangFool »

vineviz wrote: Mon Nov 28, 2022 10:37 am
KlangFool wrote: Mon Nov 28, 2022 9:24 am 1) If you do not know why XYZ bond fund is better than the total bond market index fund, you should not choose them.
This is almost entirely backwards and is based on an implicit assumption that a total bond market index fund should be considered the default bond investment for most investors, when in fact most investors should assume that the TIPS fund is the default choice.
vineviz,

That assumption is flawed in that the goal of the bond fund in the portfolio is to beat or match the official inflation rate.

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Re: TIPS fund for inflation

Post by KlangFool »

NiceUnparticularMan wrote: Mon Nov 28, 2022 10:37 am
KlangFool wrote: Mon Nov 28, 2022 9:24 am OP,

1) If you do not know why XYZ bond fund is better than the total bond market index fund, you should not choose them.
This logic is reversible. If you do not know why the (mis-named) "Total Bond" fund is better than XYZ bond fund (misnamed because of course many, many bonds are not included in "Total" Bond), you should not choose Total Bond either.

I understand there are people who nonetheless insist "Total Bond" is a reasonable default choice for all personal investors. It really isn't.

The rational default choice is a ladder matched as best as possible to your personal expected liabilities. "Total Bond" is not particularly close to such a ladder for most personal investors. It is therefore not a rational default choice for most personal investors.

Indeed, I note that the market for bonds is not just personal investors, it is also governments, corporations, universities, and so on. Even if "Total" Bond was actually total (and it isn't), it would just mean it was matching the average liabilities of all those entities buying bonds. That average is not particularly likely to match your liabilities, including because it involves many entities completely unlike you.

So, "Total" bond is not the average result of the bond buying of all personal investors. It is the average result of the bond buying of all bond investors generally, of which personal investors are only a subset. And as such, it is not a particularly notable default choice for any given personal investor.
2) TIPS fund is based on official inflation rate which may have absolutely nothing to do with the actual inflation that you experience as an individual. You do not spend like an average individual.

3) In summary, TIPS does nothing to protect you as an individual in terms of inflation.
This is of course excluding the rational middle option.

It is true the basket of goods and services used to determine the CPI may not exactly match the basket of goods and services you are buying. So, unexpected inflation protection with inflation measured by CPI is not as theoretically ideal for you as an inflation-adjusted asset that used a personalized inflation measure would be.

But it is not therefore true that no unexpected inflation protection is worth just as much to you as unexpected CPI inflation protection is worth to you. The former is, of course, likely to depart even more from that ideal measure of inflation than CPI, at least for most personal investors.

So in the absence of something better, it makes sense for most US investors to settle for TIPS. In contrast, it doesn't make sense for most US investors to be indifferent between TIPS and equivalent nominal bonds, as the latter are even farther from the ideal than the former.
4) To choose a short term bond fund versus Total Bond Market Index fund means that you assume that you can predict the future interest rate movement. As to why you think you can predict future interest rate movement, I have no idea.
Again, it would make sense to choose a shorter term bond fund if you were matching liabilities with a shorter term. Total Bond varies over time, but it currently has an average duration of 6.4 years, and an average effective maturity of 8.8 years. If you were planning to spend your bond investment in, say, 3 years, it would make no particular sense to prefer Total Bond.

Of course many retirement savers plan to spend their investment over a much longer period. So much longer, in fact, that Total Bond ends up too short to really match their planned spending schedule.

It would really only be a small subset of personal investors, therefore, who would rationally choose something with the term structure of Total Bond (whatever it happens to be at a given time).

Of course these are all old arguments here. There are some people who are simply adamant about the idea that the particular set of bonds included in "Total Bond" just must be a rational default choice for personal investors. But there truly is no good reason to assume that to be so.
NiceUnparticularMan,

1) Someone that buy and sell bonds in a bond ladder = a bond fund manager.

"Again, it would make sense to choose a shorter term bond fund if you were matching liabilities with a shorter term."

2) That only works if someone can predict their future liabilities reliably. Aka, someone can predict their future.

"If you were planning to spend your bond investment in, say, 3 years, it would make no particular sense to prefer Total Bond."

3) "Man Plan, God Laugh"
- Yiddish Proverb.

Life does not have to turn out exactly as per our plan. It does not make sense to assume that we can predict our future.

"So much longer, in fact, that Total Bond ends up too short to really match their planned spending schedule."

4) That means it is just right for folks that know they cannot predict their future.

5) It is irrational to assume that we can predict our future and our life would turn out exactly as planned.

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Re: TIPS fund for inflation

Post by KlangFool »

Folks,

It is very simple.

If you are smart and you can predict your future and future interest rate movement, go right ahead and be your own bond fund manager. Choose something other than the total bond market index fund and be confident in your decision. Otherwise, choose total bond market index fund.

As why some folks rationally believe that they can predict their future and/or future interest rate movement, I have no idea. I know that I am not smart enough.

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Re: TIPS fund for inflation

Post by NiceUnparticularMan »

KlangFool wrote: Mon Nov 28, 2022 10:53 am
NiceUnparticularMan wrote: Mon Nov 28, 2022 10:37 am
KlangFool wrote: Mon Nov 28, 2022 9:24 am OP,

1) If you do not know why XYZ bond fund is better than the total bond market index fund, you should not choose them.
This logic is reversible. If you do not know why the (mis-named) "Total Bond" fund is better than XYZ bond fund (misnamed because of course many, many bonds are not included in "Total" Bond), you should not choose Total Bond either.

I understand there are people who nonetheless insist "Total Bond" is a reasonable default choice for all personal investors. It really isn't.

The rational default choice is a ladder matched as best as possible to your personal expected liabilities. "Total Bond" is not particularly close to such a ladder for most personal investors. It is therefore not a rational default choice for most personal investors.

Indeed, I note that the market for bonds is not just personal investors, it is also governments, corporations, universities, and so on. Even if "Total" Bond was actually total (and it isn't), it would just mean it was matching the average liabilities of all those entities buying bonds. That average is not particularly likely to match your liabilities, including because it involves many entities completely unlike you.

So, "Total" bond is not the average result of the bond buying of all personal investors. It is the average result of the bond buying of all bond investors generally, of which personal investors are only a subset. And as such, it is not a particularly notable default choice for any given personal investor.
2) TIPS fund is based on official inflation rate which may have absolutely nothing to do with the actual inflation that you experience as an individual. You do not spend like an average individual.

3) In summary, TIPS does nothing to protect you as an individual in terms of inflation.
This is of course excluding the rational middle option.

It is true the basket of goods and services used to determine the CPI may not exactly match the basket of goods and services you are buying. So, unexpected inflation protection with inflation measured by CPI is not as theoretically ideal for you as an inflation-adjusted asset that used a personalized inflation measure would be.

But it is not therefore true that no unexpected inflation protection is worth just as much to you as unexpected CPI inflation protection is worth to you. The former is, of course, likely to depart even more from that ideal measure of inflation than CPI, at least for most personal investors.

So in the absence of something better, it makes sense for most US investors to settle for TIPS. In contrast, it doesn't make sense for most US investors to be indifferent between TIPS and equivalent nominal bonds, as the latter are even farther from the ideal than the former.
4) To choose a short term bond fund versus Total Bond Market Index fund means that you assume that you can predict the future interest rate movement. As to why you think you can predict future interest rate movement, I have no idea.
Again, it would make sense to choose a shorter term bond fund if you were matching liabilities with a shorter term. Total Bond varies over time, but it currently has an average duration of 6.4 years, and an average effective maturity of 8.8 years. If you were planning to spend your bond investment in, say, 3 years, it would make no particular sense to prefer Total Bond.

Of course many retirement savers plan to spend their investment over a much longer period. So much longer, in fact, that Total Bond ends up too short to really match their planned spending schedule.

It would really only be a small subset of personal investors, therefore, who would rationally choose something with the term structure of Total Bond (whatever it happens to be at a given time).

Of course these are all old arguments here. There are some people who are simply adamant about the idea that the particular set of bonds included in "Total Bond" just must be a rational default choice for personal investors. But there truly is no good reason to assume that to be so.
NiceUnparticularMan,

1) Someone that buy and sell bonds in a bond ladder = a bond fund manager.
Well, personal investors have been buying individual bonds in what we call bond ladders as long as individuals bonds have been available.

But it is true that usually rather than do that, you can choose a small number of bond funds, potentially as few as just one, to roughly do what you want.

"Total Bond" is in that sense a choice of one particular sort of bond ladder, specifically a particular sort of rolling bond ladder.

It is not therefore the rational default choice for all personal investors. That would only be true if that particular sort of rolling bond ladder was close to what would make sense for that individual personal investor.
"Again, it would make sense to choose a shorter term bond fund if you were matching liabilities with a shorter term."

2) That only works if someone can predict their future liabilities reliably. Aka, someone can predict their future.


"If you were planning to spend your bond investment in, say, 3 years, it would make no particular sense to prefer Total Bond."

3) "Man Plan, God Laugh"
- Yiddish Proverb.



Life does not have to turn out exactly as per our plan. It does not make sense to assume that we can predict our future.
If you can't predict the future at all, then saving is pointless.

All saving is therefore based on SOME rough idea of what the future MIGHT look like. However, we are necessarily very uncertain about what will actually happen.

I tend to agree that given those uncertainties, one should do lots of contingency planning. Really, this is just understanding and applying the concept of "risk" in a rational way to the situation we personal investors find ourselves in.

So, after thinking all that through, some particular fixed-income plan may make sense for a given personal investor--although rationally, your plan might change as you get new information.

But it would be purely coincidental if Total Bond happened to be particularly close to that fixed-income plan. And it is particularly unlikely it would ALWAYS be particularly close, as opposed to just something that happened to be close during a particular window in time.
"So much longer, in fact, that Total Bond ends up too short to really match their planned spending schedule."

4) That means it is just right for folks that know they cannot predict their future.
This is regrettably invalid reasoning.

Suppose you truly have no idea of the duration of your future spending.

Why would investing in bonds with 6.4 years of average duration then be 'just right"?

6.4 years would be no more "just right" than 1 year, or 15 years, or whatever. By hypothesis, you truly have no idea, and therefore it is completely arbitrary to say 6.4 years is "just right".

Again, I agree the uncertainty of the future is a major problem for personal investors.

It is very much a false comfort to think Total Bond is somehow an obvious solution to this problem. Instead, without having SOME way of at least guessing at the future, it is just as bad an idea as any choice you could make.

And as soon as you start trying to narrow down your choices in a rational way, Total Bond is not going to stand out as particularly a good idea.

So yes, you have properly described a difficult problem.

Unfortunately, you have not properly described Total Bond as an obvious solution to this problem.
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Re: TIPS fund for inflation

Post by vineviz »

KlangFool wrote: Mon Nov 28, 2022 10:47 am
vineviz wrote: Mon Nov 28, 2022 10:37 am
KlangFool wrote: Mon Nov 28, 2022 9:24 am 1) If you do not know why XYZ bond fund is better than the total bond market index fund, you should not choose them.
This is almost entirely backwards and is based on an implicit assumption that a total bond market index fund should be considered the default bond investment for most investors, when in fact most investors should assume that the TIPS fund is the default choice.
That assumption is flawed in that the goal of the bond fund in the portfolio is to beat or match the official inflation rate.
That is not the goal of any bond fund I mentioned.
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Re: TIPS fund for inflation

Post by NiceUnparticularMan »

KlangFool wrote: Mon Nov 28, 2022 11:04 am Folks,

It is very simple.

If you are smart and you can predict your future and future interest rate movement, go right ahead and be your own bond fund manager. Choose something other than the total bond market index fund and be confident in your decision. Otherwise, choose total bond market index fund.

As why some folks rationally believe that they can predict their future and/or future interest rate movement, I have no idea. I know that I am not smart enough.

KlangFool
Again, you are excluding a rather obvious possibility.

The most obvious possibility is to invest your retirement savings in something like a Target fund. These days, you likely have some decent choices available in your retirement plan. To the extent you also have your own self-managed accounts, you could choose one from any number of reputable companies. And then you will get whatever mix of fixed income over time that the fiduciaries managing those funds think best.

To apply KlangFool's logic to this excluded possibility, if you choose instead to invest only in Total Bond, this is basically like assuming you are better at understanding how to determine asset allocations in light of forward-looking asset models, human capital models, and lifetime human consumption models, than the fiduciaries who manage such Target funds.

In other words, choosing Total Bond is not the choice of someone who believes they should not be playing that game. It is in fact playing that game, and insisting you are smart enough to know better than those fiduciaries such that you can beat them at that game.
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Re: TIPS fund for inflation

Post by NiceUnparticularMan »

vineviz wrote: Mon Nov 28, 2022 10:37 am
KlangFool wrote: Mon Nov 28, 2022 9:24 am 1) If you do not know why XYZ bond fund is better than the total bond market index fund, you should not choose them.
This is almost entirely backwards and is based on an implicit assumption that a total bond market index fund should be considered the default bond investment for most investors, when in fact most investors should assume that the TIPS fund is the default choice.
Yeah, except perhaps for people who have some specific reason to believe they only have a relatively short lifespan remaining, the fairly obvious default bond investment for US personal investors saving for their retirement is some sort of longer TIPS fund. I am definitely not insisting there is never any reason to vary from that default, but if you are going to choose a "one size fits almost all" bond fund for such investors, that is the logical default choice.

Which doesn't mean it is an entirely risk-free choice. But every alternative is going to be risky too, and in ways that are more likely to increase and not decrease the total risk associated with the investment (given that definition of the investor).
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Re: TIPS fund for inflation

Post by KlangFool »

And as soon as you start trying to narrow down your choices in a rational way, Total Bond is not going to stand out as particularly a good idea. wrote: Mon Nov 28, 2022 11:26 am
KlangFool wrote: Mon Nov 28, 2022 11:04 am Folks,

It is very simple.

If you are smart and you can predict your future and future interest rate movement, go right ahead and be your own bond fund manager. Choose something other than the total bond market index fund and be confident in your decision. Otherwise, choose total bond market index fund.

As why some folks rationally believe that they can predict their future and/or future interest rate movement, I have no idea. I know that I am not smart enough.

KlangFool
Again, you are excluding a rather obvious possibility.

The most obvious possibility is to invest your retirement savings in something like a Target fund.
That is assuming that the investor can predict correctly when they would retire.

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Re: TIPS fund for inflation

Post by Tyler Aspect »

Bond funds hold fixed income investments, but their net asset value and yields are marked to market. If market yields go up, then net asset value is marked down, but yield marked up (maintaining same income stream as before). Also bonds trending toward maturity gradually approach par value.

As long as your bond holding period is longer than twice the duration of a bond fund I feel it is safe to ignore temporary bond fund net asset value losses, because your yield is boosted at the same time. Eventually you do get all your par values back.

I do not like TIPs that much, because I suspect our government consistently lowball inflation figures.
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Re: TIPS fund for inflation

Post by vineviz »

KlangFool wrote: Mon Nov 28, 2022 11:36 am

Again, you are excluding a rather obvious possibility.

The most obvious possibility is to invest your retirement savings in something like a Target fund.
That is assuming that the investor can predict correctly when they would retire.
This is incorrect.

The assumption is merely that the investor knows when they EXPECT to retire which, honestly, involves little more than knowing the year of their own birth.

For most investors, that's a pretty safe assumption.
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Re: TIPS fund for inflation

Post by KlangFool »

vineviz wrote: Mon Nov 28, 2022 12:46 pm
KlangFool wrote: Mon Nov 28, 2022 11:36 am

Again, you are excluding a rather obvious possibility.

The most obvious possibility is to invest your retirement savings in something like a Target fund.
That is assuming that the investor can predict correctly when they would retire.
This is incorrect.

The assumption is merely that the investor knows when they EXPECT to retire which, honestly, involves little more than knowing the year of their own birth.

For most investors, that's a pretty safe assumption.
In summary, assumption again. If it is wrong, that is too bad....

Meanwhile, there is a safer approach. Assume nothing. It is much better than "pretty safe".

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Re: TIPS fund for inflation

Post by vineviz »

KlangFool wrote: Mon Nov 28, 2022 1:09 pm
vineviz wrote: Mon Nov 28, 2022 12:46 pm
KlangFool wrote: Mon Nov 28, 2022 11:36 am

Again, you are excluding a rather obvious possibility.

The most obvious possibility is to invest your retirement savings in something like a Target fund.
That is assuming that the investor can predict correctly when they would retire.
This is incorrect.

The assumption is merely that the investor knows when they EXPECT to retire which, honestly, involves little more than knowing the year of their own birth.

For most investors, that's a pretty safe assumption.
In summary, assumption again. If it is wrong, that is too bad....

Meanwhile, there is a safer approach. Assume nothing. It is much better than "pretty safe".

KlangFool
You’re making many more assumptions than anyone else in this thread.

You either aren’t aware of them or you’re intentionally ignoring them.
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Re: TIPS fund for inflation

Post by KlangFool »

vineviz wrote: Mon Nov 28, 2022 2:14 pm
KlangFool wrote: Mon Nov 28, 2022 1:09 pm
vineviz wrote: Mon Nov 28, 2022 12:46 pm
KlangFool wrote: Mon Nov 28, 2022 11:36 am

Again, you are excluding a rather obvious possibility.

The most obvious possibility is to invest your retirement savings in something like a Target fund.
That is assuming that the investor can predict correctly when they would retire.
This is incorrect.

The assumption is merely that the investor knows when they EXPECT to retire which, honestly, involves little more than knowing the year of their own birth.

For most investors, that's a pretty safe assumption.
In summary, assumption again. If it is wrong, that is too bad....

Meanwhile, there is a safer approach. Assume nothing. It is much better than "pretty safe".

KlangFool
You’re making many more assumptions than anyone else in this thread.

You either aren’t aware of them or you’re intentionally ignoring them.
Versus making assumptions that may not be true.

It is very simple.

A) Assuming that you can predict your future liability and future interest rate movement, make a bet on short term or long term bond bond.

B) Assuming that you know nothing. Use the total bond market index fund = Intermediate term.

(A) or (B)?

C) Assuming you can predict your retirement date, use the target date retirement fund based on that assumption.

D) Assuming that you know nothing, pick a target date retirement fund with an AA from 70/30 to 30/70 and you can retire at any date.

(C) or (D)?

In order to optimize, the investor has to make some assumption. But, if those assumptions are wrong, the optimization failed and worst outcome is possible.

The alternative is to assume nothing. Do not optimize. Take the middle ground. It would not be best but it would not be worst too. Balance is the key. In the face of future uncertainty, IMHO, that is the most rational approach.

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Re: TIPS fund for inflation

Post by vineviz »

KlangFool wrote: Mon Nov 28, 2022 2:42 pm
Versus making assumptions that may not be true.
Your assumption that a total bond market should be the default choice for investors is, in fact, NOT true.

That’s the point I was making.
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Re: TIPS fund for inflation

Post by slicendice »

KlangFool wrote: Mon Nov 28, 2022 2:42 pm
In order to optimize, the investor has to make some assumption. But, if those assumptions are wrong, the optimization failed and worst outcome is possible.

The alternative is to assume nothing. Do not optimize. Take the middle ground. It would not be best but it would not be worst too. Balance is the key. In the face of future uncertainty, IMHO, that is the most rational approach.

KlangFool
It would help your argument if you could provide some quantitative examples of reasonable assumptions not coming to fruition perhaps using historical data.

For example, what are the historical consequences for hypothetical investor that planned a 35 year retirement starting at age 60, but became involuntarily retired at age 55? Assume 60:40 allocation and for the sake of argument just talk about bonds. How would holding total bond market (your default position) vs long term treasuries (or TIPS) improve the outcomes for this investor?
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Re: TIPS fund for inflation

Post by KlangFool »

slicendice wrote: Mon Nov 28, 2022 3:32 pm
How would holding total bond market (your default position) vs long term treasuries (or TIPS) improve the outcomes for this investor?
slicendice,

1) Do you agree that in some instances that long term treasuries or TIPS would do very well or very bad versus other bond funds?

2) Do you agree that in all cases, Total Bond Market Index would not be the worst or the best among the bond funds?

3) Can you predict the future interest rate movement in order to make sure that the long term treasuries or TIPS would do very well?

4) If the answer to (3) is no, why (2) is not the right answer?

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Re: TIPS fund for inflation

Post by slicendice »

KlangFool wrote: Mon Nov 28, 2022 3:42 pm
slicendice wrote: Mon Nov 28, 2022 3:32 pm
How would holding total bond market (your default position) vs long term treasuries (or TIPS) improve the outcomes for this investor?
slicendice,

1) Do you agree that in some instances that long term treasuries or TIPS would do very well or very bad versus other bond funds?

2) Do you agree that in all cases, Total Bond Market Index would not be the worst or the best among the bond funds?

You have your answer in answering question (1) and (2).

KlangFool
The problem here is "very bad" "very well" "best" and "worst" need a quantitative argument attached to assess the significance of the difference in outcomes being described.

to answer your question for my hypothetical 55 year old unexpected early retiree.

1) This person will almost certainly be better served having a long term bond portfolio initially.
2) Yes, I can think of worse places to be than TBM, but that doesn't mean one should rigidly default to total bond market. There are several reasons why this investor would be taking excess interest rate, inflation, credit, and call risks by holding TBM versus TIPS.
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Re: TIPS fund for inflation

Post by slicendice »

KlangFool wrote: Mon Nov 28, 2022 3:42 pm
3) Can you predict the future interest rate movement in order to make sure that the long term treasuries or TIPS would do very well?

4) If the answer to (3) is no, why (2) is not the right answer?

KlangFool
3) The 55 year old retiree needs cash flows over 40 years now instead of 35. The average duration of these cashflows is now 20 years, matching the duration of the long term bond portfolio. Therefore changes in future interest rates are irrelevant, no need to make predictions. If these long term bonds are TIPS the investor will be as indifferent as possible to unexpected inflation.
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Re: TIPS fund for inflation

Post by LISD »

Kevin M wrote: Sun Nov 27, 2022 1:01 pm
Example: On 6/8/2021 I bought some of the 7/15/23 TIPS and a nominal Treasury maturing on the same date. The TIPS price return is about 3.1% and the nominal Treasury price return is about -2.76%. The TIPS price return consists of a real return of -7.8% and an inflation adjustment return of 11.8%.

Kevin
Kevin, in your example: over the same time frame, due to rising interest rates, your Treasury lost 2.76% while your TIPS lost 7.8%. Given that both had the same Maturity (duration), why is that?

Why is the TIPS more sensitive to interest rate changes? Because the real yields on TIPS increased more than the nominal yields on Treasuries?
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Re: TIPS fund for inflation

Post by NiceUnparticularMan »

KlangFool wrote: Mon Nov 28, 2022 11:36 am That is assuming that the investor can predict correctly when they would retire.
Fortunately, it is not.

What you should be using here is something like what is typically called a "central estimate". The idea is you know the actual date of retirement is uncertain, but you pick a date where the probability distribution is roughly centered, meaning the probability-weighted scenarios in which you would retire earlier add up to roughly the same as the probability-weighted scenarios in which you would retire later. There are more sophisticated versions of this which deal with issues like tail risk, but at a certain point you are not really going to be adding anything of practical significance to your estimate.

OK, so you do NOT need to "predict correctly" when you will retire. You do need a reasonable central estimate--at a given time. Fortunately, typically all this is not particularly sensitive to the exact date you pick, so you don't have to worry about being overly precise. Also, at least in tax-deferred accounts, you can always change your fund choice in the event you get important new information that would warrant significantly changing your central estimate. Like, if you become disabled and have early retirement forced on you, then you can take appropriate steps as warranted.

Now, some might be tempted to say, "What if I don't want to even do that?"

Well, this is one of those decision problems where de facto you are going to make a decision, whether or not you admit it to yourself. Like, if you choose an asset allocation that would be appropriate if your central estimate was 20 years off, but not if it was 5 years off, then you have de facto adopted a 20 year central estimate--even if you deny it. And if you stick with that allocation even if you, say, unexpectedly get disabled, that is also de facto a decision about what to do with that new information (albeit not a particularly rational one).

OK, so people who choose a low-cost Target Date fund with a reasonable central estimate, with a plan to change their choice as new information warrants, are being as intellectually humble as possible. Obviously, at any given point in time, they are in the best position to assess their health, family situation (and their health), career plans and risks, retirement goals, giving goals, and so on. No one who doesn't know them can do that in a reasonable way for them.

But then they can leave to the fiduciaries in charge of their Target Date fund the task of figuring out an appropriate asset allocation glide path.

Or, they can insist they are smarter than that, and do something different instead. But that is not intellectual humility, that is in fact insisting they know better.
Last edited by NiceUnparticularMan on Wed Nov 30, 2022 11:34 am, edited 1 time in total.
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Re: TIPS fund for inflation

Post by NiceUnparticularMan »

Tyler Aspect wrote: Mon Nov 28, 2022 11:53 am I do not like TIPs that much, because I suspect our government consistently lowball inflation figures.
The thing is, the implied cost of the unexpected inflation protection is negligible.

So even if it is only partial protection, it still seems obviously worth that negligible cost (assuming you have liabilities that would go up with inflation, even if more than reported inflation). But then you do need to think about additional protections as well.
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Re: TIPS fund for inflation

Post by NiceUnparticularMan »

KlangFool wrote: Mon Nov 28, 2022 2:42 pm B) Assuming that you know nothing. Use the total bond market index fund = Intermediate term.
You keep repeating this proposition, but it really does not make sense.

If you truly assume you know nothing, all future planning, including saving present income in the form of investments in order to provide income in the future, is pointless.

So the correct answer is:

B) Assuming that you know nothing, spend it as you get it.

However, most people here are willing to ESTIMATE (not assume with certainty, just estimate) enough about their possible futures such that saving and investing become a reasonably good idea. You don't need much--just understanding you are a human being capable of working for more income than you need to satisfy your goals presently, but also wanting to retire at some point, is a very big start toward making some reasonable estimates.

But as soon as you are willing to make such estimates, you can no longer insist that out of all the possible investments, Total Bond happens to be the best investment you can choose.

So there truly is no "argument from ignorance" for Total Bond. If you take it seriously enough, there is an argument for not saving at all. But not for choosing that particular savings vehicle.
In order to optimize, the investor has to make some assumption. But, if those assumptions are wrong, the optimization failed and worst outcome is possible.
So this is basically a strawman argument.

Once you understand you are only making central estimates, and that indeed those estimates can and should change in light of new information, then of course it is possible the plan you form based on your central estimate will not turn out to be the plan you would have chosen with the benefit of hindsight.

But that's life. And anyone who thinks "optimization" of your financial plans means you will actually get the best possible outcome with the benefit of hindsight deeply misunderstands what is possible. Instead, it is virtually certain that with the benefit of hindsight, there will be hypothetical plans that would have worked out better. But also others that would have worked out worse. All you are really aiming for is a reasonable shot at a middling outcome.

Once again, though, people who choose ANY financial plan are de facto making this same sort of bet. That is unavoidable, the question is instead whether you have made reasonable use of the information available to you when deciding where to place your bet.

And properly understood, Total Bond is just another number on the roulette wheel, no more or less obvious a choice than many others.

So choosing Total Bond, particularly for life, isn't somehow making less of a particular bet. And if you do that for no particularly good reasons, it isn't a particularly better plan than randomly choosing any other bet on the wheel.
The alternative is to assume nothing. Do not optimize. Take the middle ground.
So with a proper understanding of what optimization means in this context, it actually just means "taking the middle ground," meaning doing what makes sense given a reasonable central estimate.

The real issue here is therefore how you define "the middle ground". And Total Bond is not in fact some privileged "middle ground" solution. If you actually really think about who buys bonds, AND what sorts of bonds are excluded from Total Bond, it is clearly NOT a reasonable choice for a "middle ground" solution for a typical retirement saver.

So yes, by all means, go ahead and choose a reasonable "middle ground" to guide your long-term financial planning.

But understand that Total Bond does not define such a middle ground, and indeed is logically not particularly close to it.
Balance is the key. In the face of future uncertainty, IMHO, that is the most rational approach.
Indeed. And insisting that using only Total Bond, for life, is a balanced approach to retirement saving is not a reasonable proposition.
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Re: TIPS fund for inflation

Post by NiceUnparticularMan »

KlangFool wrote: Mon Nov 28, 2022 3:42 pm 2) Do you agree that in all cases, Total Bond Market Index would not be the worst or the best among the bond funds?
This is true of all the notable bond fund alternatives. None are likely to be either the best or the worst for a given retirement saver with the benefit of hindsight.
3) Can you predict the future interest rate movement in order to make sure that the long term treasuries or TIPS would do very well?
3b) If you are talking about a long period, with uncertain inflation, can you predict future interest rates AND inflation rates in order to make sure that rolling nominal intermediate term bonds would do very well?
4) If the answer to (3) is no, why (2) is not the right answer?
Because if the answer to (3b) is also no, then nothing in particular stands out about Total Bond.

Well, aside from the fact that if you are trying to provide against real liabilities over a longer period, rolling nominal bonds with a relatively short terms is obviously increasing your risk.

So, you should be asking yourself why you would take those additional risks, if you don't have to for some reason.
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Re: TIPS fund for inflation

Post by squirrel1963 »

vineviz wrote: Mon Nov 28, 2022 10:37 am
KlangFool wrote: Mon Nov 28, 2022 9:24 am 1) If you do not know why XYZ bond fund is better than the total bond market index fund, you should not choose them.
This is almost entirely backwards and is based on an implicit assumption that a total bond market index fund should be considered the default bond investment for most investors, when in fact most investors should assume that the TIPS fund is the default choice.
Completely agree on this, especially if you are retired.
People in accumulation phase not wanting to do all TIPS could do half TIPS and half muni or treasuries. (I never really liked total bond market -- I'm a big fan of taking the risk on the equity side).
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Re: TIPS fund for inflation

Post by squirrel1963 »

KlangFool wrote: Mon Nov 28, 2022 11:04 am Folks,

It is very simple.

If you are smart and you can predict your future and future interest rate movement, go right ahead and be your own bond fund manager. Choose something other than the total bond market index fund and be confident in your decision. Otherwise, choose total bond market index fund.

As why some folks rationally believe that they can predict their future and/or future interest rate movement, I have no idea. I know that I am not smart enough.

KlangFool
Picking TIPS as default vs TBM has nothing to do with future interest rates, which are unknowable.
For most people, especially retired people, unexpected inflation is by far the biggest enemy to their portfolio, hence the reason I have a TIPS ladder, to protect purchasing power.
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Re: TIPS fund for inflation

Post by vineviz »

squirrel1963 wrote: Wed Nov 30, 2022 11:40 am
vineviz wrote: Mon Nov 28, 2022 10:37 am
KlangFool wrote: Mon Nov 28, 2022 9:24 am 1) If you do not know why XYZ bond fund is better than the total bond market index fund, you should not choose them.
This is almost entirely backwards and is based on an implicit assumption that a total bond market index fund should be considered the default bond investment for most investors, when in fact most investors should assume that the TIPS fund is the default choice.
Completely agree on this, especially if you are retired.
People in accumulation phase not wanting to do all TIPS could do half TIPS and half muni or treasuries. (I never really liked total bond market -- I'm a big fan of taking the risk on the equity side).
I'd say that many investors who are solidly in their accumulation phase (especially the first half of it) arguably have a legitimate reason to favor nominal bonds for two reasons: 1) most such workers should be invested mostly in equities, and corporate earnings generally contain a fairly strong long-term inflation hedging component; and 2) most workers experience real wage growth until the last decade or so of their careers, so their savings is already effectively in real dollars instead of nominal dollars.

I still think the default assumption for most investors should be TIPS, but merely point out that there are reasons that some investors might make a legitimate calculation that nominal bonds are as desirable under certain circumstances and possibly more desirable under others.

And - for these reasons - I certainly agree with you that any investor who is particularly worried about the possibility of an unplanned early retirement would be someone who should be MORE inclined to favor TIPS over something like a total bond market fund. Not the other way around.
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Re: TIPS fund for inflation

Post by KlangFool »

NiceUnparticularMan wrote: Wed Nov 30, 2022 11:24 am
B) Assuming that you know nothing, spend it as you get it.
NiceUnparticularMan,

Or,

Assuming that you know nothing, you save as much as you spend. Take a balanced approach between present and future.

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Re: TIPS fund for inflation

Post by KlangFool »

squirrel1963 wrote: Wed Nov 30, 2022 11:51 am
KlangFool wrote: Mon Nov 28, 2022 11:04 am Folks,

It is very simple.

If you are smart and you can predict your future and future interest rate movement, go right ahead and be your own bond fund manager. Choose something other than the total bond market index fund and be confident in your decision. Otherwise, choose total bond market index fund.

As why some folks rationally believe that they can predict their future and/or future interest rate movement, I have no idea. I know that I am not smart enough.

KlangFool
Picking TIPS as default vs TBM has nothing to do with future interest rates, which are unknowable.
For most people, especially retired people, unexpected inflation is by far the biggest enemy to their portfolio, hence the reason I have a TIPS ladder, to protect purchasing power.
squirrel1963,

Given that I do not believe that official inflation rate has any relevance or relationship with the actual inflation experienced at the individual level, this statement is false.

If you believe that official inflation rate matches your real annual expense increases, go right ahead.

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Re: TIPS fund for inflation

Post by vineviz »

KlangFool wrote: Wed Nov 30, 2022 12:09 pm Given that I do not believe that official inflation rate has any relevance or relationship with the actual inflation experienced at the individual level, this statement is false.
More likely, your belief is incorrect.
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Re: TIPS fund for inflation

Post by squirrel1963 »

vineviz wrote: Wed Nov 30, 2022 12:13 pm
KlangFool wrote: Wed Nov 30, 2022 12:09 pm Given that I do not believe that official inflation rate has any relevance or relationship with the actual inflation experienced at the individual level, this statement is false.
More likely, your belief is incorrect.
Agree.
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