starting TIPS ladder in Roth

[want2er]

Late to the game. Just learning & looking for some feedback. I'm single, soon be 54, thinking that I'll be working 8-9 more years. SS, 403b, small Roth, and small taxable savings will be sources of income. I'm planning to fully fund my Roth each year until retirement ($6000/yr). Anyone have an opinion on buying TIPS at auction each year until retirement so that I slowly create a (very small) "ladder"? The past few years have convinced me that I want more security & less risk.

Thanks!

 

[chinaco]

There are TIPS mutual funds. VG has a low cost fund.

 

[want2er]

Thanks, Chinaco. Several folks on Bogleheads also recommended bond funds. I'll check them out.

 

[TooFrugal]

The drawback with bond fund is they never mature. With buying TIPS at auction and owning them directly one of the advantages is that you get the par value back when they mature. They can go up in value with inflation, but they have a floor of par so it limits your downside risk.

 

[want2er]

The drawback with bond fund is they never mature. With buying TIPS at auction and owning them directly one of the advantages is that you get the par value back when they mature. They can go up in value with inflation, but they have a floor of par so it limits your downside risk.

Too Frugal,

That was my understanding & the reason that I'm thinking of buying/owning the actual TIPS.

Guess I'm just wondering if it makes sense to "slowly" set up a ladder. And if my Roth would be the appropriate place. All the articles that I've read talk about setting up a ladder by taking a lump sum of money & purchasing TIPS of different maturities on the secondary market, then replacing at maturity with TIPS from auction. And some suggest that the Roth would be better for stocks (with potential higher yield?).

Thanks for the feedback!

 

[TooFrugal]

We have our own 401K plan for our small businesses set up through Fidelity. It has some drawbacks, but one of the advantages is if you buy TIPS at auction they do not charge a service fee as long as you place the order on your own online.

 

[LOL!]

My problem with TIPS is that the yields are at historical lows. See for example St. Louis Fed: Series: DFII10, 10-Year Treasury Inflation-Indexed Security, Constant Maturity Everyone wants them, so there is a bubble in TIPS going on right now. They also only help you with unexpected inflation. All bond funds price in expected inflation, so you get most of the inflation protection offered by TIPS in a regular bond fund.

So if you buy a TIPS fund like Vanguard's VIPSX, you can lose money. If you buy TIPS bonds directly, you don't make any money. You might as well buy a total bond market index fund or GNMAs or a short-term bond fund.

There are times to buy TIPS (when they are cheap), but I don't think now is one of them.

That's my 2 cents.

 

[MasterBlaster]

Mental Game

The drawback with bond fund is they never mature. With buying TIPS at auction and owning them directly one of the advantages is that you get the par value back when they mature. They can go up in value with inflation, but they have a floor of par so it limits your downside risk.

The bond funds get par back also when the bonds mature.

If you hold a bond paying less than market rates you have lost even though your bond doesn't get marked-to-market.

There is no real benefit in holding bonds yourself. To think otherwise is to delude yourself.

 

[Darryl]

My and DW Roths are mostly TIPS and we intend to keep maxing Roths with TIPS, was 20yr now 30yr. When I stop believing I will be around 30 yrs in the future we will backfill with shorter maturities. It doesn't matter if you buy at auction (no transaction fee at schwab, fidelity etc.) or on the secondary market. It does matter what real yield you get. TIPS are expensive right now. I was able to buy a 2.25 real in April and regret not filling both accts then. If rates don't improve before I finish filling for 2010 I'll probably just leave in cash in the Roth until I can get 2%+.
As far as needing to put the high potential stocks in Roth (the argument is reasonable) they are high potential because they are higher risk. I look at it from the opposite side as a guy who has limited tax favored space and has suffered some ugly losses on equities in the Roths that space is now gone. If you put a more stable asset in the Roth you get to keep utilizing the space. Put that risky equity in taxable and you can tax loss harvest and get uncle Sam to share the pain.

 

[TooFrugal]

There is no real benefit in holding bonds yourself. To think otherwise is to delude yourself.

Well, you can make that blanket statement, but I have a lot of books that list detailed pros and cons of bonds verses bond funds, and TIPS versus TIPS funds. There are distinct advantages and disadvantages to each type of investment.

It doesn't matter if you buy at auction (no transaction fee at schwab, fidelity etc.) or on the secondary market.

The advantage to the auctions is that the new issue bonds are sold close to par. Some of the TIPS on the secondary market have inflation factors applied, so if there were ever extended deflation you might only get back the par value when the bonds mature.

 

[haha]

My and DW Roths are full of TIPS and we intend to keep maxing Roths with TIPS was 20yr now 30yr. When I stop believing I will be around 30 yrs in the future we will backfill with shorter maturities. It doesn't matter if you buy at auction (no transaction fee at schwab, fidelity etc.) or on the secondary market. It does matter what real yield you get. TIPS are expensive right now. I was able to buy a 2.25 real in April and regret not filling both accts then. If rates don't improve before I finish filling for 2010 I'll probably just leave in cash in the Roth until I can get 2%+.
As far as needing to put the high potential stocks in Roth (the argument is reasonable) they are high potential because they are higher risk. I look at it from the opposite side as a guy who has limited tax favored space and has suffered some ugly losses on equities in the Roths that space is now gone. If you put a more stable asset in the Roth you get to keep utilizing the space. Put that risky equity in taxable and you can tax loss harvest and get uncle Sam to share the pain.

Good analysis. I think about this the same way, although I do still like some potential doubles or triples in my Roth. No crap, just quality stuff with perhaps some kicker that might pay off. But your concept of the precious capacity of a Roth is a very good one. IMO, no place to go wild on options. (Though I did buy some VXX in mine earlier this year and got a quick double.) Not on the entire Roth, just on the VXX.

Ha

 

[Darryl]

The advantage to the auctions is that the new issue bonds are sold close to par. Some of the TIPS on the secondary market have inflation factors applied, so if there were ever extended deflation you might only get back the par value when the bonds mature.

Agreed if buying on the secondary and pay over par you are risking the premium.

 

[Darryl]

Good analysis. I think about this the same way, although I do still like some potential doubles or triples in my Roth. No crap, just quality stuff with perhaps some kicker that might pay off. But your concept of the precious capacity of a Roth is a very good one. IMO, no place to go wild on options. (Though I did buy some VXX in mine earlier this year and got a quick double.) Not on the entire Roth, just on the VXX.

Ha

Ha Thanks, I only wish I could have developed this philosophy in half the time and for half the price.

 

[want2er]

WOW! Thanks for all the feedback...pro & con. So much to consider!

 

[TooFrugal]

There is no real benefit in holding bonds yourself. To think otherwise is to delude yourself.

Here is one article with a possible disadvantage to holding a TIPS fund instead of individual TIPS. (This issue would also apply to buying TIPS in the secondary market with inflation factors already applied. )


"The deflation promise. If you're worried that prices may fall and you want to take advantage of TIPS original principal guarantee, you should consider buying new TIPS directly from the Treasury at an upcoming auction. That's because the funds that hold TIPS purposefully hold a variety of maturities, including some TIPS that were issued five or even 10 years ago. Those earlier TIPS have already experienced a cumulative CPI-driven boost in their principal values—perhaps 25 percent more in some cases, observes John Hollyer, co-manager of Vanguard's TIPS fund. If deflation does become a problem, he says, investors in an existing basket of outstanding TIPS will lose a lot of principal before hitting their original principal guarantees. "

From - 5 Tips For Investing in TIPS: Treasury Inflation Protected Securities - The Best Life (usnews.com)

 

[thefinancebuff]

My problem with TIPS is that the yields are at historical lows. See for example St. Louis Fed: Series: DFII10, 10-Year Treasury Inflation-Indexed Security, Constant Maturity Everyone wants them, so there is a bubble in TIPS going on right now. They also only help you with unexpected inflation. All bond funds price in expected inflation, so you get most of the inflation protection offered by TIPS in a regular bond fund.

Yields on regular bonds are also at a historical low. Everyone wants nominal Treasurys even more. You have to see if the expected inflation built into the nominal bond yield is enough. If it's too low, TIPS can still be a better deal than regular bonds.

 

[jayc]

I took a quick look at the 10 yr TIPS and saw yields of 2 - 3 1/2 %. Why make it so complicated? Why not just get the Penfed 7 yr at 3.75%.

 

[ziggy29]

My problem with TIPS is that the yields are at historical lows. See for example St. Louis Fed: Series: DFII10, 10-Year Treasury Inflation-Indexed Security, Constant Maturity Everyone wants them, so there is a bubble in TIPS going on right now. They also only help you with unexpected inflation. All bond funds price in expected inflation, so you get most of the inflation protection offered by TIPS in a regular bond fund.

Maybe. But really I expect TIPS to be more pricey when inflation kicks in, and people want the inflation protection. TIPS have benefited somewhat from the "flight to safety" in that they are Treasuries, but in an era of little or no inflation more people are opting for the traditional Treasury product.

I happily bought quite of bit of laddered individual TIPS in November 2008 when they were priced to a nearly 3% real yield and sit comfortably with those until they mature. It's possible they can drop in price if a "Treasury bubble" pops, but I'm looking at return based on my purchase price, and I doubt they'd fall too much from that level.

 

[LOL!]

Yep, I bought VIPSX when the blue line was up there at 2.5%. After interest rates dropped and the NAV went way up, I sold and realized the capital gains as I am a total return investor. The cap gains paid for a few years of future interest while I wait in other bond funds.

 

[antmary]

Some great info on TIPS!

We hold 1/2 of our Roth funds in TIPS funds, and 1/2 in the Intermediate Treasury fund - both from Vanguard. I was told that bond funds go into tax-advantaged vehicles.

For the taxable part of the portfolio, we hold 60/40 Total Stock Market and FTSE ex-US, from Vanguard as well.

Plus we hold 5% in gold.

As we age, the portfolio will change re: asset allocation.

Whenever I consider adding funds, etc., I feel most comfortable when doing so within the context of the entire portfolio. All these oars in the water will hopefully keep our boat afloat!

 

[Independent]

I think "slowly" makes a lot of sense. TIPS yields/prices move around. If I'm risk averse enough to be buying TIPS, then I probably like the idea of spreading my purchases across a variety of price points.

(That said, I put a big lump sum into Vanguard's TIPS fund. But that was because my qualified savings were in a 401k without a TIPS option, so I had to wait until I could transfer to an IRA.)

 

[haha]

The advantage to the auctions is that the new issue bonds are sold close to par. Some of the TIPS on the secondary market have inflation factors applied, so if there were ever extended deflation you might only get back the par value when the bonds mature.

You made a very careful distinction here-new issue bonds sold at auction are sold close to par. However, not all TIPS sold at auction are new issues. Some are reissues of earlier bonds, and these may well not be at par.

I dont really understand this well, I just noticed it when shopping to buy some at auction.

Ha

 

[jebmke]

I'm about ready to sell off all our TIPS. Yields are just too low and I think it is time to do a Swedroe shift to low duration nominals.

 

[Gone4Good]

I'm about ready to sell off all our TIPS. Yields are just too low and I think it is time to do a Swedroe shift to low duration nominals.

Agreed. There are some alternatives for near zero duration products that yield more than 10-yr bonds, some CDs come to mind. "Stable value" funds in 401(k)s also, as long as you understand the risks of these.

You risk losing out on any additional capital appreciation if yields continue to head south, but you still benefit from what will be above market interest rates. With 10-yr treasuries at ~2.5%, near their "the world is ending low," further declines seem limited unless the U.S. is really heading for deflation. On the other hand, if rates back up, you can swap back in to higher yields at very little cost. It seems like a good risk / reward proposition right now.

I have about 50% of my fixed income portfolio (including cash) now in near-zero duration products with an average yield of 2.95%. I think that beats the hell out of the bond index yielding 2.54% with a duration of 4.3.

 

[Gone4Good]

My problem with TIPS is that the yields are at historical lows. See for example St. Louis Fed: Series: DFII10, 10-Year Treasury Inflation-Indexed Security, Constant Maturity

I also agree with this. You might want to look at current real yields, ranging from (.11%) for 5-yr, that's right, negative real yields for 5-yr maturities, to 1.59% for 30-yr maturities, and see if they'll work for your retirement plan. Most folks around here talk about a 4% withdrawal rate, although everyone seems to shoot for something lower. A TIPS ladder, at current yields probably allows for a less than 1% withdrawal rate before you start consuming principal. Not many people could save enough to swing that.