Bernstein on TIPS and T-bills

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quercus
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Bernstein on TIPS and T-bills

Post by quercus »

Folks who enjoy reading Bill Bernstein may be interested in a new article by him in Advisor Perspectives:
https://www.advisorperspectives.com/art ... at-age-104
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Re: Bernstein on TIPS and T-bills

Post by TheTimeLord »

quercus wrote: Thu Mar 23, 2023 10:49 am Folks who enjoy reading Bill Bernstein may be interested in a new article by him in Advisor Perspectives:
https://www.advisorperspectives.com/art ... at-age-104
Thanks.
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Re: Bernstein on TIPS and T-bills

Post by bigskyguy »

Thanks. I am the same age as Dr. Bernstein, and his understanding of this balance between risk taking and prudence is quite profound. "Thinking Fast and Slow" written by Daniel Kahneman (Nobel Prize winner in Economics - although he is not an economist but a behavioral psychologist) is the go to book on this area of thinking.
Thanks for bringing this article to my (our) attention.
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Re: Bernstein on TIPS and T-bills

Post by VictoriaF »

I was pleased that Bill Bernstein was citing Keith Stanovich, the original creator of the dual-system concept, rather than Daniel Kahneman who has popularized it in "Thinking, Fast and Slow." As Bill was also citing Warren Buffett about the limit of IQ differences in investing, I pulled out my copy of "What intelligence tests miss: The Psychology of rational thought" by Keith E. Stanovich.

In the book, Stanovich refers to a Dual-Process Model, which is essentially the same as a Dual-System Model, as the name has evolved over time. Stanovich writes that both Type-1 and Type-2 processes are parts of human intelligence, but IQ tests assess only Type-2 processes because it's easier to identify differences. Stanovich writes:

"In fact, there is not a contradiction at all if we understand that intelligence tests assess only those aspects of cognitive functioning on which people tent to show large differences. ... Intelligence tests are a bit like the personal ads in the newspaper -- they are about the things that distinguish people, not what makes them similar." (p. 27)

Intelligence tests tap into Type 2 (System 2) processing emphasizing cognitive decoupling that enables hypothetical thinking, and are associated with fluid intelligence.

Stanovich then describes a Tripartite model of mind, in which he subdivides Type-2 processes into "Algorithmic Mind" and "Reflective Mind." IQ tests assess Algorithmic Mind representing the efficiency of information processing. Reflective Mind, which is not assessed in IQ tests, represents one's goals, beliefs, choices, and other aspects of rationality.

To summarize:
- Autonomous Mind, which we know as Type-1/System-1 processes, represents some aspects of human intelligence but is not measured by IQ tests because differences between people are not easily discernible
- Algorithmic Mind is the efficiency part of what we know as Type-2/System-2 and is what is actually measured by IQ tests
- Reflective Mind is the rationality part of Type-2/System-2 and is not measured by IQ tests

Relating this to Bill's article:
- Differences in measured IQ correspond to the differences among people in their Algorithmic Mind, whereas prudent investing relies on the quality of the Reflective Mind. This explains Buffett's observation that “Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ."
- Short-term risk of TIPS triggers Autonomous Mind (Type-1/System-1 processes) and, if acted upon, could be detrimental to one's investing outcomes. T-Bills help to mitigate this risk.
- Algorithmic Mind (among other functions) provides control of System-2 over System-1.
- Reflective Mind enables an investor to decide to invest in TIPS and T-Bills and to plan a strategy for holding them.

Victoria
Last edited by VictoriaF on Thu Mar 23, 2023 1:24 pm, edited 1 time in total.
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Re: Bernstein on TIPS and T-bills

Post by Bill Bernstein »

Victoria:

Thanks so much for that eloquent dissection of System 2.

Stanovich, as you know, developed a battery of tests for rationality (RQ, if you will) that is orthogonal to IQ. Ie, there are a whole lot of folks out there with high IQs but low RQs, in both investing as well as in other fields.
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Re: Bernstein on TIPS and T-bills

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quercus wrote: Thu Mar 23, 2023 10:49 am Folks who enjoy reading Bill Bernstein may be interested in a new article by him in Advisor Perspectives:
https://www.advisorperspectives.com/art ... at-age-104
A really great read. I Bonds and TIPS have always been my favorite investments, even when I know equities are likely to do better. I almost wonder if we could turn investor preference for nominal bonds versus inflation linked bonds versus equities into some kind of personality test - one that actually means something. :wink:

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Re: Bernstein on TIPS and T-bills

Post by Artsdoctor »

quercus wrote: Thu Mar 23, 2023 10:49 am Folks who enjoy reading Bill Bernstein may be interested in a new article by him in Advisor Perspectives:
https://www.advisorperspectives.com/art ... at-age-104
Thank you very much for the link. It mirrors my long-time investing philosophy although spells out the reasoning far better than I will ever be able to.
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Re: Bernstein on TIPS and T-bills

Post by abc132 »

We have two of the three, but gamers figured this out long ago
1) Intelligence (IQ)
2) Wisdom (RQ)
3) Charisma - emotional IQ

Add #3 the ability to understand others emotional state and to express ideas in a way others can absorb.
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Re: Bernstein on TIPS and T-bills

Post by Stubbie »

quercus wrote: Thu Mar 23, 2023 10:49 am Folks who enjoy reading Bill Bernstein may be interested in a new article by him in Advisor Perspectives:
https://www.advisorperspectives.com/art ... at-age-104
Fantastic!
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Re: Bernstein on TIPS and T-bills

Post by David Althaus »

Seeking understanding:

1. Would equivalent 30-year treasury arbitrage away the advantage of the 30-year TIP if each held to maturity?
2. If no it implies the free lunch proven with equity diversification. Has such an effect been, or can it be studied by academicians?
3. If it is a free lunch does it provide enough boost to make the view worth the climb?
4. Can investors muster the steely determination to ride out the wild price swings? ExUS and March 2020 sell bond/buy gold threads immediately come to mind.

All the best
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Re: Bernstein on TIPS and T-bills

Post by VictoriaF »

David Althaus wrote: Thu Mar 23, 2023 1:45 pm 1. Would equivalent 30-year treasury arbitrage away the advantage of the 30-year TIP if each held to maturity?
30-year Treasuries held to maturity don't protect you from the inflation risk.

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Re: Bernstein on TIPS and T-bills

Post by Leesbro63 »

Does he talk about the issues with TIPS in taxable accounts for high tax bracket investors?
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Re: Bernstein on TIPS and T-bills

Post by AlwaysLearningMore »

When he says "...a SPIA’s supposed longevity insurance melts away in a blizzard of future funny money" that seems to cast financial aspersions on all of the non-CPI-indexed private pensions, as well as of course traditional SPIA's.

It's my understanding that purchasing a SPIA with a 2% or 3% inflation adjustment leads to a 20–30% haircut on the initial payment.

Series I Savings Bonds, which (with a little forethought during the accumulation years) can be purchased in adequate quantities for most individual investors (investor, spouse, plus each can have a trust, and even more options for purchase if desired).
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Re: Bernstein on TIPS and T-bills

Post by AlwaysLearningMore »

Leesbro63 wrote: Thu Mar 23, 2023 1:52 pm Does he talk about the issues with TIPS in taxable accounts for high tax bracket investors?
It's a short read, but no, he doesn't.
(The detailed answers that Rick Ferri and Oblivious Investor provided you in very recent threads should have covered that topic rather well, I would've thought.)
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Re: Bernstein on TIPS and T-bills

Post by Bill Bernstein »

funny money
What else do you call what happens to the purchasing power of a fixed nominal stream after 30 years of 5% inflation?

True, that's the outer limits of what we've seen in the US historically, but except for a short period after WWII, we've never had a debt/GDP as high as it is now, to say nothing that the US is likely committed to about $100T of explicit and implied spending obligations (Medicare, SS, Medicaid, to say nothing of the odd unscheduled pandemic, military commitment, weather disaster, terrorist event, etc).

Then cast your eyes abroad and back a century, and you'll see that long-lasting >5% inflation is as common as cottage cheese.

What are the odds of that? Maybe a lot less than 50/50, but not a risk I want to take with my retirement.

Re. TIPS in taxable, as pointed out, that's been well covered previously. There's no difference between getting an X% return in a nominal Treasury and the same nominal, after-inflation return, in a TIPS in a taxable account.
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Re: Bernstein on TIPS and T-bills

Post by Harmanic »

VictoriaF wrote: Thu Mar 23, 2023 12:47 pm I was pleased that Bill Bernstein was citing Keith Stanovich, the original creator of the dual-system concept, rather than Daniel Kahneman who has popularized it in "Thinking, Fast and Slow." As Bill was also citing Warren Buffett about the limit of IQ differences in investing, I pulled out my copy of "What intelligence tests miss: The Psychology of rational thought" by Keith E. Stanovich.
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Re: Bernstein on TIPS and T-bills

Post by GAAP »

VictoriaF wrote: Thu Mar 23, 2023 1:48 pm
David Althaus wrote: Thu Mar 23, 2023 1:45 pm 1. Would equivalent 30-year treasury arbitrage away the advantage of the 30-year TIP if each held to maturity?
30-year Treasuries held to maturity don't protect you from the inflation risk.

Victoria
And if inflation risk isn't the only risk you want to consider?
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Re: Bernstein on TIPS and T-bills

Post by Leesbro63 »

AlwaysLearningMore wrote: Thu Mar 23, 2023 3:35 pm
Leesbro63 wrote: Thu Mar 23, 2023 1:52 pm Does he talk about the issues with TIPS in taxable accounts for high tax bracket investors?
It's a short read, but no, he doesn't.
(The detailed answers that Rick Ferri and Oblivious Investor provided you in very recent threads should have covered that topic rather well, I would've thought.)
Thanks. They did. But I was hoping Dr. Bernstein would add something.
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Re: Bernstein on TIPS and T-bills

Post by Artsdoctor »

Leesbro63 wrote: Thu Mar 23, 2023 1:52 pm Does he talk about the issues with TIPS in taxable accounts for high tax bracket investors?
I wouldn't be so presumptuous to speak definitively for him, but I know that in the past he's advocated holding TIPS in tax-advantaged accounts.
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Re: Bernstein on TIPS and T-bills

Post by TheTimeLord »

Artsdoctor wrote: Thu Mar 23, 2023 6:05 pm
Leesbro63 wrote: Thu Mar 23, 2023 1:52 pm Does he talk about the issues with TIPS in taxable accounts for high tax bracket investors?
I wouldn't be so presumptuous to speak definitively for him, but I know that in the past he's advocated holding TIPS in tax-advantaged accounts.
The problem is as I understand it, he has limited tax advantaged space compared to his portfolio as a whole. That is why he is focused on TIPS in taxable accounts. I apologize if I am misrepresenting Leesbro63 situation.
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Re: Bernstein on TIPS and T-bills

Post by Selfdirected23 »

Interesting article.
Now that inflation has become an issue again I've become a fan of TIPS as an intermediate term investment option in retirement accounts. Advisors claiming that stocks are a better inflation hedge might look back to the last time inflation was this high. Historical market calculators (like this one https://dqydj.com/sp-500-return-calculator/ ) show multiple rolling 7-10+ year periods from 1969 through 1981 in which the SP500's inflation-adjusted returns (dividends reinvested) were negative. In that context the (risk-free) positive 1-2% inflation-adjusted return of a ladder of TIPS appears attractive for part of the AA of retirees (or near retirees) seeking preservation of their nest egg's purchasing power.
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Re: Bernstein on TIPS and T-bills

Post by Random Musings »

Wondering out loud if W. Bernstein would treat I-Bonds as another system 1 investment - albeit with a little liquidity issue at the start. But if you start rolling them, that becomes less material.

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Re: Bernstein on TIPS and T-bills

Post by Leesbro63 »

TheTimeLord wrote: Thu Mar 23, 2023 6:11 pm
Artsdoctor wrote: Thu Mar 23, 2023 6:05 pm
Leesbro63 wrote: Thu Mar 23, 2023 1:52 pm Does he talk about the issues with TIPS in taxable accounts for high tax bracket investors?
I wouldn't be so presumptuous to speak definitively for him, but I know that in the past he's advocated holding TIPS in tax-advantaged accounts.
The problem is as I understand it, he has limited tax advantaged space compared to his portfolio as a whole. That is why he is focused on TIPS in taxable accounts. I apologize if I am misrepresenting Leesbro63 situation.
Exactly. No misrepresentation. Thank you
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Re: Bernstein on TIPS and T-bills

Post by Damocles »

Bill Bernstein wrote: Thu Mar 23, 2023 1:03 pm Victoria:

Thanks so much for that eloquent dissection of System 2.

Stanovich, as you know, developed a battery of tests for rationality (RQ, if you will) that is orthogonal to IQ. Ie, there are a whole lot of folks out there with high IQs but low RQs, in both investing as well as in other fields.
Pretty sure Bill Bernstein just validated my INT 8, WIS 18 D&D 5e Cleric PC... ;)
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Re: Bernstein on TIPS and T-bills

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"A bond fund manager recently related to me his difficulty in figuring out the role of TIPS in his portfolios. After fumbling for a reply, I realized that he was right: like Social Security, they don’t occupy a formal slot in most folks’ asset allocation. Rather, they’re an excellent, though still imperfect, supplement to Social Security. In the same way that most retirees don’t capitalize their monthly government checks into the bond component of their portfolios, TIPS should be kept mentally separate from the policy asset allocation as well."

Yep.
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Re: Bernstein on TIPS and T-bills

Post by AlwaysLearningMore »

watchnerd wrote: Thu Mar 23, 2023 8:27 pm "A bond fund manager recently related to me his difficulty in figuring out the role of TIPS in his portfolios. After fumbling for a reply, I realized that he was right: like Social Security, they don’t occupy a formal slot in most folks’ asset allocation. Rather, they’re an excellent, though still imperfect, supplement to Social Security. In the same way that most retirees don’t capitalize their monthly government checks into the bond component of their portfolios, TIPS should be kept mentally separate from the policy asset allocation as well."

Yep.
No doubt others also recall the 50/50 TBM/TIPS split for the fixed income sleeve so popular (and subtly advocated) on the old M* Vanguard Diehards site? AFAIK TIPS haven't changed but there seem to be significant variations on how they're categorized in a portfolio.
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Re: Bernstein on TIPS and T-bills

Post by Blue456 »

VictoriaF wrote: Thu Mar 23, 2023 1:48 pm
David Althaus wrote: Thu Mar 23, 2023 1:45 pm 1. Would equivalent 30-year treasury arbitrage away the advantage of the 30-year TIP if each held to maturity?
30-year Treasuries held to maturity don't protect you from the inflation risk.

Victoria
But they protect you from the deflation risk.
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Re: Bernstein on TIPS and T-bills

Post by technovelist »

Bill Bernstein wrote: Thu Mar 23, 2023 3:53 pm
funny money
What else do you call what happens to the purchasing power of a fixed nominal stream after 30 years of 5% inflation?

True, that's the outer limits of what we've seen in the US historically, but except for a short period after WWII, we've never had a debt/GDP as high as it is now, to say nothing that the US is likely committed to about $100T of explicit and implied spending obligations (Medicare, SS, Medicaid, to say nothing of the odd unscheduled pandemic, military commitment, weather disaster, terrorist event, etc).

Then cast your eyes abroad and back a century, and you'll see that long-lasting >5% inflation is as common as cottage cheese.

What are the odds of that? Maybe a lot less than 50/50, but not a risk I want to take with my retirement.

Re. TIPS in taxable, as pointed out, that's been well covered previously. There's no difference between getting an X% return in a nominal Treasury and the same nominal, after-inflation return, in a TIPS in a taxable account.
What about gold?
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Re: Bernstein on TIPS and T-bills

Post by calmaniac »

Thanks Bill. Always learn something from your writings!

Question for the BH hive mind: Per Bernstein's article, my read is that holdings in the TSP G Fund would also be considered as addressing one's System 1 'Daffy Duck' urges, similar to T bills. Correct?
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Re: Bernstein on TIPS and T-bills

Post by averagedude »

This Dr. Bernstein is a genius. To add to his opinion, I believe that the dumbest thing that investors do is buying TIPS or annuities before maximizing their social security. Some people don't comprehend how valuable a pension is that is inflation protected for their entire lives, regardless of their longevity.
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Re: Bernstein on TIPS and T-bills

Post by Northern Flicker »

The inflation rate measure used to adjust TIPS for inflation (CPI-U) may deviate from the inflation rate of a retiree. This is especially true for a homeowner given the weight of housing in CPI-U. If we measure risk as the variance of 30-yr real returns using the personal inflation rate of the TIPS owner, a 30-yr TIPS held to maturity is a low risk investment, but it is not a risk-free investment.
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Re: Bernstein on TIPS and T-bills

Post by Ocean77 »

I read the article, but I still don't know why one would buy a TIPS that matures at age 104.
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Re: Bernstein on TIPS and T-bills

Post by Prokofiev »

Ocean77 wrote: Thu Mar 23, 2023 9:40 pm I read the article, but I still don't know why one would buy a TIPS that matures at age 104.
Wishful thinking?
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Re: Bernstein on TIPS and T-bills

Post by AlwaysLearningMore »

Northern Flicker wrote: Thu Mar 23, 2023 9:11 pm The inflation rate measure used to adjust TIPS for inflation (CPI-U) may deviate from the inflation rate of a retiree. This is especially true for a homeowner given the weight of housing in CPI-U. If we measure risk as the variance of 30-yr real returns using the personal inflation rate of the TIPS owner, a 30-yr TIPS held to maturity is a low risk investment, but it is not a risk-free investment.
Good point. Over 1/3 of current CPI-U is devoted to shelter.

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Re: Bernstein on TIPS and T-bills

Post by jackholloway »

Ocean77 wrote: Thu Mar 23, 2023 9:40 pm I read the article, but I still don't know why one would buy a TIPS that matures at age 104.
It frequently seems like much of this forum plans to live to that age, or at least strongly weights minimizing the risk of a lifestyle drop then.

I have a family member whose plan heavily depended on a pension from their spouses school job. Said spouse died at work at 66, putting paid to that plan. Had they retired when they first started expressing how much they hated their job at 62, their world would have been very different. Unfortunately, you don’t get to know which future you get, so balancing each risk in a way that does not leave you out of luck under the highest probability outcomes is probably the best you can do..
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Re: Bernstein on TIPS and T-bills

Post by AlwaysLearningMore »

jackholloway wrote: Thu Mar 23, 2023 10:10 pm
Ocean77 wrote: Thu Mar 23, 2023 9:40 pm I read the article, but I still don't know why one would buy a TIPS that matures at age 104.
It frequently seems like much of this forum plans to live to that age, or at least strongly weights minimizing the risk of a lifestyle drop then.

I have a family member whose plan heavily depended on a pension from their spouses school job. Said spouse died at work at 66, putting paid to that plan. Had they retired when they first started expressing how much they hated their job at 62, their world would have been very different. Unfortunately, you don’t get to know which future you get, so balancing each risk in a way that does not leave you out of luck under the highest probability outcomes is probably the best you can do..
Lots of optimism. Sort of a Lake Wobegon attitude towards longevity.

Per SSA, a 60 year-old woman can expect to live about 25 years, and a 60 year-old man about 21 years (if I'm reading the tables correctly).
https://www.ssa.gov/oact/STATS/table4c6.html

Survived by his wife? You bet.
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Last edited by AlwaysLearningMore on Thu Mar 23, 2023 11:03 pm, edited 1 time in total.
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Re: Bernstein on TIPS and T-bills

Post by Bill Bernstein »

Simple: participating in a 30-year TIPS auction is on every asset-class junkie's bucket list, and this was the first one in a long time that sported a decent coupon. (Which was higher for the 2010 and 2011 auctions, but I was way too young back then, and besides, in those two years there were cheaper things to buy.)
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Re: Bernstein on TIPS and T-bills

Post by 2pedals »

Prokofiev wrote: Thu Mar 23, 2023 10:07 pm
Ocean77 wrote: Thu Mar 23, 2023 9:40 pm I read the article, but I still don't know why one would buy a TIPS that matures at age 104.
Wishful thinking?
It does seem to be a system failure, for what liability? :confused Why not purchase equity? :confused
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Re: Bernstein on TIPS and T-bills

Post by jebmke »

Great food for thought. The goodly pile of Tips I bought in October, 2008 will finally mature in 2025 when I am 72. I've been thinking about re-upping on some longer dated ones. Maybe some 2053s that mature on my 100th birthday.
Last edited by jebmke on Thu Mar 23, 2023 10:56 pm, edited 1 time in total.
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Re: Bernstein on TIPS and T-bills

Post by watchnerd »

AlwaysLearningMore wrote: Thu Mar 23, 2023 8:44 pm

No doubt others also recall the 50/50 TBM/TIPS split for the fixed income sleeve so popular (and subtly advocated) on the old M* Vanguard Diehards site? AFAIK TIPS haven't changed but there seem to be significant variations on how they're categorized in a portfolio.
I don't recall this, no, sorry.

Nor do I think it would appeal to me.

I hold my nominal bonds as part of my risk port.

My TIPS ladder is part of my LMP.

Not my original idea -- just following concepts laid out by William Sharpe in his RISMAT series.
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Re: Bernstein on TIPS and T-bills

Post by AlwaysLearningMore »

watchnerd wrote: Thu Mar 23, 2023 10:55 pm
AlwaysLearningMore wrote: Thu Mar 23, 2023 8:44 pm

No doubt others also recall the 50/50 TBM/TIPS split for the fixed income sleeve so popular (and subtly advocated) on the old M* Vanguard Diehards site? AFAIK TIPS haven't changed but there seem to be significant variations on how they're categorized in a portfolio.
I don't recall this, no, sorry.

Nor do I think it would appeal to me.

I hold my nominal bonds as part of my risk port.

My TIPS ladder is part of my LMP.

Not my original idea -- just following concepts laid out by William Sharpe in his RISMAT series.
The M* discussion site has become hard to access.

Here's a 2009 post from BH
Taylor Larimore wrote: Fri Feb 13, 2009 12:44 pm Hi Kevin:

Congratulations on your excellent analysis and I can't fault your conclusion:
"Hold predominantly TIPS. Add some ST treasuries to smooth out NAV volatility according to personal taste"
You also wrote:
I'm still not seeing the allure of the 50:50 TIPS:TBM allocation.
Perhaps Morningstar's latest analysis will help:
"(TBM) has been extremely tough to beat over the long haul. Its broad diversification has helped shield investors from unexpected bumps in individual sectors. That same trait has left the fund less volatile than more than 40% of its peers including its sibling Vanguard Intermediate-Term Bond Index) over the trailing three-, five-, and 10-year trailing periods throught December 22, 2008.

The fund's steady-Eddie quality has also helped investors use it well, as evidenced by its top-quintile Morningstar Investor Returns over those same time periods.

Lastly, its rock-bottom 0.19% expense ratio give it a lasting built-in advantage. That levy is less than one third its typical no-load peer's, meaning the fund can deliver competitive results with less risk than the competition. That edge has become even more attractive as of late, as a number of its riskier foes are now contending with double-digit losses."
In my opinion, any of Vanguard's high-quality short or intermediate-term bond funds, combined with TIPS in a 50/50% - 25/75% ratio, should be an excellent combination in tax-deferred accounts.
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
dcabler
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Re: Bernstein on TIPS and T-bills

Post by dcabler »

watchnerd wrote: Thu Mar 23, 2023 8:27 pm "A bond fund manager recently related to me his difficulty in figuring out the role of TIPS in his portfolios. After fumbling for a reply, I realized that he was right: like Social Security, they don’t occupy a formal slot in most folks’ asset allocation. Rather, they’re an excellent, though still imperfect, supplement to Social Security. In the same way that most retirees don’t capitalize their monthly government checks into the bond component of their portfolios, TIPS should be kept mentally separate from the policy asset allocation as well."

Yep.
That's the paragraph I've sort of zoned in on as well.

As a soon to be retiree I 100% agree with "...they're an excellent, though still imperfect, supplement to Social Security". That's exactly how I'm using my duration matched TIPS and, eventually, Ibonds. And, yep, my TIPS and Ibonds are "mentally separate". In reality, not just "mentally separate" but actually separate as I do not rebalance between them and the stock portion of my portfolio.

Cheers
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Re: Bernstein on TIPS and T-bills

Post by tonyclifton »

Selfdirected23 wrote: Thu Mar 23, 2023 6:55 pm Interesting article.
Now that inflation has become an issue again I've become a fan of TIPS as an intermediate term investment option in retirement accounts. Advisors claiming that stocks are a better inflation hedge might look back to the last time inflation was this high. Historical market calculators (like this one https://dqydj.com/sp-500-return-calculator/ ) show multiple rolling 7-10+ year periods from 1969 through 1981 in which the SP500's inflation-adjusted returns (dividends reinvested) were negative. In that context the (risk-free) positive 1-2% inflation-adjusted return of a ladder of TIPS appears attractive for part of the AA of retirees (or near retirees) seeking preservation of their nest egg's purchasing power.
TIPS didn’t exist in the period 1969 through 1981. The first auction was January 1997. Seems to
me the current period we are in is their first real test. (I own TIPS in a TIPS mutual fund.)
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watchnerd
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Re: Bernstein on TIPS and T-bills

Post by watchnerd »

dcabler wrote: Fri Mar 24, 2023 4:40 am In reality, not just "mentally separate" but actually separate as I do not rebalance between them and the stock portion of my portfolio.

Cheers
Same.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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nedsaid
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Re: Bernstein on TIPS and T-bills

Post by nedsaid »

Bill Bernstein wrote: Thu Mar 23, 2023 3:53 pm
funny money
What else do you call what happens to the purchasing power of a fixed nominal stream after 30 years of 5% inflation?

True, that's the outer limits of what we've seen in the US historically, but except for a short period after WWII, we've never had a debt/GDP as high as it is now, to say nothing that the US is likely committed to about $100T of explicit and implied spending obligations (Medicare, SS, Medicaid, to say nothing of the odd unscheduled pandemic, military commitment, weather disaster, terrorist event, etc).

Then cast your eyes abroad and back a century, and you'll see that long-lasting >5% inflation is as common as cottage cheese.

What are the odds of that? Maybe a lot less than 50/50, but not a risk I want to take with my retirement.

Re. TIPS in taxable, as pointed out, that's been well covered previously. There's no difference between getting an X% return in a nominal Treasury and the same nominal, after-inflation return, in a TIPS in a taxable account.
What you are describing is the result of a demographic crash. Birthrates are important and we are only now beginning to discover this though there have been warnings for years. Much easier to rev up the printing presses than it is to make difficult policy decisions, hence inflation becomes not a bug but a feature. We will probably see articles coming out that inflation isn't so bad and that we should embrace it and not fear it. Just as we were pitched funemployment, I suppose there will be a term coined to capture the "positive" effects of inflation. Hint, I think it will be pitched as something like this, sustainability and less is more. Pretty much telling the populace to embrace lower living standards. Don't think the tactic will work, but it will be tried.
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Re: Bernstein on TIPS and T-bills

Post by dbr »

dcabler wrote: Fri Mar 24, 2023 4:40 am
watchnerd wrote: Thu Mar 23, 2023 8:27 pm "A bond fund manager recently related to me his difficulty in figuring out the role of TIPS in his portfolios. After fumbling for a reply, I realized that he was right: like Social Security, they don’t occupy a formal slot in most folks’ asset allocation. Rather, they’re an excellent, though still imperfect, supplement to Social Security. In the same way that most retirees don’t capitalize their monthly government checks into the bond component of their portfolios, TIPS should be kept mentally separate from the policy asset allocation as well."

Yep.
That's the paragraph I've sort of zoned in on as well.

As a soon to be retiree I 100% agree with "...they're an excellent, though still imperfect, supplement to Social Security". That's exactly how I'm using my duration matched TIPS and, eventually, Ibonds. And, yep, my TIPS and Ibonds are "mentally separate". In reality, not just "mentally separate" but actually separate as I do not rebalance between them and the stock portion of my portfolio.

Cheers
For a Bernstein TIPS LMP this seems to be completely rational as logically that use of TIPS is an income stream and not an asset at all. Anyway trying to rebalance such a thing is impractical.

I myself don't have an LMP structure and just own a TIPS fund as an asset just like any other and potentially subject to rebalancing in theory, though there is not much in practice.
guanonics
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Re: Bernstein on TIPS and T-bills

Post by guanonics »

Hi Dr. Bernstein,

Thanks for this article! I always enjoy reading your perspective. I just wanted to point out a small error for correction:
... we all know, for example, that 90% of drivers think they’re above average, which is a mathematical impossibility.
A counterexample is a population of nine drivers of equal skill and a tenth driver of lower skill.
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Re: Bernstein on TIPS and T-bills

Post by MrJedi »

The common strategy is to view Social Security as a source of income or reduction of portfolio withdrawals needed. I can see the train of thought to apply this to TIPS as well. But the trouble is how do you actually implement this? How do you account for the TIPS in the portfolio when analyzing how much portfolio withdrawal you need? If you are building a ladder, when do you start the ladder and when do you stop adding rungs and only withdraw? Assuming positive inflation over time, should you be adding larger and larger nominal dollars of TIPS each year to support a similar purchasing power each year when withdrawing?
Leesbro63
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Re: Bernstein on TIPS and T-bills

Post by Leesbro63 »

MrJedi wrote: Fri Mar 24, 2023 8:56 am The common strategy is to view Social Security as a source of income or reduction of portfolio withdrawals needed. I can see the train of thought to apply this to TIPS as well. But the trouble is how do you actually implement this? How do you account for the TIPS in the portfolio when analyzing how much portfolio withdrawal you need? If you are building a ladder, when do you start the ladder and when do you stop adding rungs and only withdraw? Assuming positive inflation over time, should you be adding larger and larger nominal dollars of TIPS each year to support a similar purchasing power each year when withdrawing?
Another problem for taxable portfolios is taxes. Depending on your situation, you may need to save $105,000, $110,000 or more, per year saved, for every $100,000 needed. To cover the wealth tax effect that high inflation causes to TIPS liability matching portfolios.
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watchnerd
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Re: Bernstein on TIPS and T-bills

Post by watchnerd »

MrJedi wrote: Fri Mar 24, 2023 8:56 am The common strategy is to view Social Security as a source of income or reduction of portfolio withdrawals needed. I can see the train of thought to apply this to TIPS as well. But the trouble is how do you actually implement this? How do you account for the TIPS in the portfolio when analyzing how much portfolio withdrawal you need? If you are building a ladder, when do you start the ladder and when do you stop adding rungs and only withdraw? Assuming positive inflation over time, should you be adding larger and larger nominal dollars of TIPS each year to support a similar purchasing power each year when withdrawing?
My ladder currently starts in 2025 (when I plan to retire at 55) and goes to 2037 (when I'll take SS). I haven't added rungs beyond 67 yet due to lack of available TIPS for those years, but will.

The rungs are large enough to cover my cost of living without luxuries.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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