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Old 08-24-2014, 03:52 PM   #41
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Those TIPS have a value, and it goes down just as surely whether the holder knows it or not. The adherents to this strategy could accomplish the same thing by buying TIPS ETFs/MFs, hold them for decades, and just not look at the statements.
It is not the same. With ladders you hold the individual bonds to maturity and if you have planned it right you have some maturing each year for income. Bond funds never mature so you are never guaranteed of getting your principal back and the yield varies as pooled bonds are bought and sold. This is laid out in The Bond book by Annette Thau. There is a reason Bodie uses ladders and not TIPS funds. This methodology does not work with TIPS funds.
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Old 08-24-2014, 08:55 PM   #42
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Because you can hold TIPS to maturity and make 1% real or whatever you buy them at for the duration. ... For a TIPS ladder you will not lose principal unless you sell prior to maturity.
You get the actual dollar back but not the 'real' dollar or the value of what a dollar will buy



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Old 08-24-2014, 09:02 PM   #43
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It is not the same. With ladders you hold the individual bonds to maturity and if you have planned it right you have some maturing each year for income. Bond funds never mature so you are never guaranteed of getting your principal back and the yield varies as pooled bonds are bought and sold. This is laid out in The Bond book by Annette Thau. There is a reason Bodie uses ladders and not TIPS funds. This methodology does not work with TIPS funds.
....and between purchase and maturity, you're paying full-freight income taxes on the phantom income of inflation-adjusted principal increases, compared to tax-advantage capital gains or qualified dividends taxed at 0%-15%.

God-forbid the retiree is 'lucky' enough to get a decent 2% real return on those TIPs, because the tax bill could be a major budget item.
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Old 08-24-2014, 09:12 PM   #44
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....and between purchase and maturity, you're paying full-freight income taxes on the phantom income of inflation-adjusted principal increases, compared to tax-advantage capital gains or qualified dividends taxed at 0%-15%.

God-forbid the retiree is 'lucky' enough to get a decent 2% real return on those TIPs, because the tax bill could be a major budget item.
TIPS work best in retirement accounts. A liability matching portfolio strategy is not necessarily composed of 100% TIPS nor are TIPS usually recommended for taxable accounts. For your particular situation, they may not be a good choice at all. They might be a good choice for others. There are pros and cons to most asset classes.
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Old 08-24-2014, 09:18 PM   #45
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You get the actual dollar back but not the 'real' dollar or the value of what a dollar will buy



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Unlike nominal treasury bonds, the principal in TIPS is adjusted for inflation:

https://www.treasurydirect.gov/indiv....htm#calculate

I don't know what you mean by not getting the "real" dollar back.
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Old 08-24-2014, 09:22 PM   #46
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TIPS work best in retirement accounts. A liability matching portfolio strategy is not necessarily composed of 100% TIPS nor are TIPS usually recommended for taxable accounts. For your particular situation, they may not be a good choice at all. No one is forcing you to buy any.
IIRC, Bernstein recommends munis, CDs, and short term treasuries in taxable accounts.
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Old 08-25-2014, 09:20 AM   #47
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And it doesn't appear top me that Bernstein even understands what a liability matching portfolio is. A human individual cannot accurately lay out the liabilities he will face, and at least in the current environment he could not find instruments to match his liabilities even if god told him when they would occur and how much they would be.
Yes. But "Liability Matching Portfolio" sounds very comforting.
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Old 08-25-2014, 11:56 AM   #48
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A human individual cannot accurately lay out the liabilities he will face, and at least in the current environment he could not find instruments to match his liabilities even if god told him when they would occur and how much they would be.

Ha
If a retiree household has expenses covered from SS and COLA pensions, that works for a LMP. I think there are a number of posters here who do that now, without even adding in other inflation adjusted income streams.

The concept has its pro and cons, but so does the 3 fund mutual fund approach:

Matching strategy - Bogleheads
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Old 08-25-2014, 12:39 PM   #49
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If a retiree household has expenses covered from SS and COLA pensions, that works for a LMP. I think there are a number of posters here who do that now, without even adding in other inflation adjusted income streams.

The concept has its pro and cons, but so does the 3 fund mutual fund approach:

Matching strategy - Bogleheads
If retirees have those two pension sources, they have no problem. Do you have these? Me neither, though I have SS begun at 70. Still, that leaves a long haul between a truly early retirement and age 70, or whenever one takes SS.

It's those of us who are not protected by these flows that need to plan for this. Cullen Roche has an interesting book Pragmatic Capitalism, that makes the obvious but frequently ignored point that life happens at odd and unpredictable times.

Currently, without the questionable prospective returns of equity investments, what are we looking at? Perhaps real returns of 1%. And unless these are from TIPS or Ibonds, there is risk in these projections of real return, unless we use very short durations in which case the real returns are mostly negative. OK, say we are willing to work like crazy and live like no monk would likely live these days, and we and our equally monkish spouses are ready to retire at age 50 with $5million. Wohoo, easy street. But wait, 1% of $5million is $50,000. Well that is about 1/2 or what a King County Metro Driver pulls down, so as long as we are able to find our material needs at Goodwill, we're golden. Oh there is a spouse? Well $25,000 per cap isn't bad, after all we are only penta-millionaires. Shoulda saved more I guess.

One could treat the $5mil like a pot to be drawn down and spend more. That's the idea behind the annuity recs. But our guru fails to mention that it is impossible or nearly so to purchase a quality, indexed annuity.

I would rather throw my future into a mixed portfolio, which seems to be what he is currently fleeing.

Ha
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Old 08-25-2014, 01:00 PM   #50
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If retirees have those two pension sources, they have no problem. Do you have these? Me neither, though I have SS begun at 70. Still, that leaves a long haul between a truly early retirement and age 70, or whenever one takes SS.
We are able to use the LPM approach or else I wouldn't take so much abuse here for even bringing it up. I wish I'd heard more about it years ago.

This portfolio may not work for every poster here. It may not work for most posters here. But for some it might work much better than the 3 fund approach because it avoids this possibility:

"This is sequence of returns risk! People are more vulnerable to the returns experienced when their portfolios are larger because a given percentage change has a bigger impact on absolute wealth. A big portfolio drop at the end could possibly wipe out all of the portfolio gains from the first 25 years of one’s career."

Wade Pfau's Retirement Researcher Blog: You Can't Control When You're Born... Revisiting Sequence of Returns Risk

Check out the maximum SS benefits and compare that to the Consumer Expenditure Survey:

https://faq.ssa.gov/ics/support/KBAn...+4&docID=13009

Households at the higher end might be able to live off SS alone. To ER they would only need to cover the years prior to SS benefits. Then pensions, safe assets returns, rental income, royalties, home equity might all add to the mix.


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Old 08-25-2014, 04:40 PM   #51
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I don't know what you mean by not getting the "real" dollar back.
It's an old economic term.

When I started driving, I got a gallon of gas for 99.99c. I now pay almost $4. So if I put $1 in an investment and got $1 back years later, I would have lost 75% of purchasing power

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Old 08-25-2014, 04:54 PM   #52
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It's an old economic term.

When I started driving, I got a gallon of gas for 99.99c. I now pay almost $4. So if I put $1 in an investment and got $1 back years later, I would have lost 75% of purchasing power

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I think that is the whole point of the TIPS and I bond recommendations. You don't get the dollar back later. You get the $4 per the link in the prior post.
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Old 08-31-2014, 04:36 PM   #53
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i got the book today but to be honest every time i read a page my hair hurts or i fall a sleep.

so far i think it is way to dry to hold my attention.
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Old 08-31-2014, 07:20 PM   #54
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I feel like there are maybe 5 financial books that one must read to become financially literate. Bernstein has now written 6 books and only one is mandatory. I hate it when someone has one great idea and needs to turn it into a franchise. He has become a windsock, whichever way the wind blows. That's what happens when you become a financial advisor. It's hard to justify your fee when all you can say is "stay the course."

Also, a +1 for Haha comments
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Old 09-01-2014, 12:41 AM   #55
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I'm now about 2/3 of the way finished with it. I must say the graphs on the kindle are kinda of hard to read. It is a loaned book so I can transfer it to the PC.

Bernstein is good writer and makes interesting points, but I kinda of agree 6 books is sort of overkill.

Berkshire Hathaway Now?
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Old 09-01-2014, 01:14 AM   #56
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Indeed it could have been much worse. During that time I remember thinking to myself, this is probably the best buying time in my lifetime, on the other hand, there are some very unpopular political decisions that had to be taken in Washington, and if we took the wrong ones, this could indeed have turned out very badly. Luckily we squeaked through. I didn't sell anything but I didn't buy either, partly because of my age, nearing retirement, and partly because I had been 100% equities, but mostly because I worried that there was so much popular pressure to immediately balance the budget (from all the panicked equity selling crowd I guess), that the politicians would succumb and send us rolling into a long depression.

In hindsight it did turn out to be one of the best buying opportunities ever. But we were lucky and dodged that bullet. Will we continue to be as lucky next time? Remember the majority is panicked and selling, and they are voting and panicking the politicians at the very time we need cool heads. That is the really unpredictable part.
Honestly, I don't think it could have been much worse, if you were familiar with stock valuations it was obvious at the time.

Here are couple of posts I made at the time.

Ziggy bought Berkshire at $<50 B shares (75K A shares) at the time I said I'd be shocked if he didn't double his money in 5 years. I also confidently predicted that Dow would close above 16,000 by 12/31/2013.

Another post written a few days before the bottom of the market. I do say the market could drop another 25%, but honestly that is as bad as it could have gotten. No matter what the government did.

In Nov 2008, I was looking at Apple it was selling for about $13 once you subtracted out the cash the company was selling for $10/share. Even if the government screwed up the economy so bad that nobody could ever afford an Apple product ever again the company was easily worth $20, just on its Chinese and emerging market sales. I didn't have any cash so I couldn't buy the stock but I wrote 1+ year put at the equivalent of $8/share


The great thing about multinational (and Berkshire is more domestic) but most Dow +big tech companies are highly international, is that no matter how badly the US government screws up they'll still do ok. Apple at that price I think would have required the complete collapse of the financial system world wide.
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Old 09-01-2014, 02:29 AM   #57
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One of things I did after reading the book is move out of intermediate corporate bonds (and reduce short term corporate bond exposure) and to instead prefer Treasuries and CDs.
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Old 09-01-2014, 07:40 AM   #58
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i started skipping around the chapters last night. no way i can actually read this stuff. i rather watch paint dry.
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Old 09-01-2014, 09:07 AM   #59
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i started skipping around the chapters last night. no way i can actually read this stuff. i rather watch paint dry.
We all have different interests ;-) I found if fascinating, finished it in about 18 hours after I downloaded it, and there was a full night's sleep in there ;-)
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Old 09-01-2014, 12:07 PM   #60
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We all have different interests ;-) I found if fascinating, finished it in about 18 hours after I downloaded it, and there was a full night's sleep in there ;-)
Ever see the commercial where the actor says he read cover & cover not cover to cover? That's me

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