TIPs and young dreamers

[wildcat]

Question:
Should young dreamers really hold TIPs are part of their fixed income allocation?

Theory:
Suppose this group is working and on average we receive raises of at least inflation: say 3-4%. Some years, we do better (say if you job hop) and some years we get the standard 3-4% (say if you stay at a position, same company).

TIPs provide us with a fixed return, for example Vanguard's TIPs Fund is currently yielding 2.56%, and a variable return based on inflation. This probably sounds like a reasonable deal if you are not working and have accumulated a large enough portfolio where you can be risk averse. What about the flip side for a young person with a small portfolio & still accumulating wealth a little a time?

Suppose this young dreamer holds a portfolio without fixed income or has a small portion of it allocated to non-inflation based fixed income. The portfolio - mostly due to dividends - yields 2.5% or so. The person has a steady job that usually covers the effects of inflation via raises.

If a young dreamer can cover inflation, hold a diversified portfolio that yields apprx. the same as say TIPs & has a steady income (kind of by my theory, the fixed portion) from employment, are TIPs a good idea to hold for this person?

I kind of question the value of TIPs for this crowd but please provide input.

 

[haha]

Question:
Should young dreamers really hold TIPs are part of their fixed income allocation?

Theory:
Suppose this group is working and on average we receive raises of at least inflation: say 3-4%. Some years, we do better (say if you job hop) and some years we get the standard 3-4% (say if you stay at a position, same company).

TIPs provide us with a fixed return, for example Vanguard's TIPs Fund is currently yielding 2.56%, and a variable return based on inflation. This probably sounds like a reasonable deal if you are not working and have accumulated a large enough portfolio where you can be risk averse. What about the flip side for a young person with a small portfolio & still accumulating wealth a little a time?

Suppose this young dreamer holds a portfolio without fixed income or has a small portion of it allocated to non-inflation based fixed income. The portfolio - mostly due to dividends - yields 2.5% or so. The person has a steady job that usually covers the effects of inflation via raises.

If a young dreamer can cover inflation, hold a diversified portfolio that yields apprx. the same as say TIPs & has a steady income (kind of by my theory, the fixed portion) from employment, are TIPs a good idea to hold for this person?

I kind of question the value of TIPs for this crowd but please provide input.

I tend to agree with you. I think everyone, young or old can benefit from a keeping some amount say 15 to 20% in T-bills. This has two functions- first, it gives you buying power when the market suddenly offers some bargains. Second, it is a safety backstop should you lose your job, get sick, etc.

IMO, gradual rebalancing as it is taught is just not the way markets work. They go along doing diddly squat- then Pow! Right in the kissa! Or when they are low and washed out there can be sudden huge up-moves.

Today, just by getting up early enough to see the open, and having plenty of cash, I was able to buy a few issues that I have owned for some time, am familiar with, and feel confident that they were down 5~10% in early going just because of confusion and illiquidity. In one case it is an issue that I last added to on Black Monday, 1987 under much more dramatic circumstances!

Ha

 

[maddythebeagle]

Today, just by getting up early enough to see the open, and having plenty of cash, I was able to buy a few issues that I have owned for some time, am familiar with, and feel confident that they were down 5~10% in early going just because of confusion and illiquidity. In one case it is an issue that I last added to on Black Monday, 1987 under much more dramatic circumstances!

names?

 

[haha]

names?

You know I would, but I really don't like to for several reasons. The biggest one is that I have overblown sense of responsibility. What if I were wrong? It can happen. Or change my mind?

Another is that I have found that the act of publicly stating something increases my need for consistency. I don't really want to feel any pressure to be consistent in investing. I hope to be profitable, not consistent!

Another reason is that I have a lot of cash-I don't want a bunch of millionaires from this board screwing up my attempts to buy cheap.

Another reason is the old suitability thing. Something may be fine for me, but not so good for you.

Another reason is that I don't like a lot of shoot from the hip criticism, which is easy to get on this board, and for free even!

But I am happy to share the general principle. Keep a watch list. Know what you would like to have and why, and what you might be willing to pay under various circumstances. And keep some cash to do it with- it has to be something in your brokerage account, not a CD somewhere, because at times you may have a very short window to act.

Then when markets are volatile, watch if you can, and if not put in some really optimistic buy orders the night before. You may just steal something- especially with a thinly traded issue.

And if that doesn't work, there is always Wellesley.

Ha

 

[FIRE'd@51]

Another reason is that I have a lot of cash-I don't want a bunch of millionaires from this board screwing up my attempts to buy cheap.

 

[twaddle]

Question:
Should young dreamers really hold TIPs are part of their fixed income allocation?

Well, first you need to ask whether the young dreamer really needs any fixed income allocation. You can make a good argument that your salary can act as your fixed income component.

If you decide you want bonds in your allocation, then yes, TIPS make sense for diversification.

Just think of nominal bonds as bonds in which the market is making a guess about the future CPI, and TIPS as bonds in which the CPI guess is removed. Bottom line: TIPS will perform differently than nominal bonds when the market guess about CPI is either high or low, and "different" is what you want for diversification and volatility reduction.

 

[Rich_by_the_Bay]

For me (age 58 ), TIPs might be useful to ease me through a couple of years of hot inflation. While I believe my stocks will eventually beat inflation handily, I prefer to keep them untouched for a long, long time. So maybe a couple of years worth of expenses in TIPS as part of my fixed equity portfolio, but that's about it.

If I were more than 10 years away from retirement I'd pass altogether on TIPs.

 

[haha]

Well, first you need to ask whether the young dreamer really needs any fixed income allocation. You can make a good argument that your salary can act as your fixed income component.

If you decide you want bonds in your allocation, then yes, TIPS make sense for diversification.

Just think of nominal bonds as bonds in which the market is making a guess about the future CPI, and TIPS as bonds in which the CPI guess is removed. Bottom line: TIPS will perform differently than nominal bonds when the market guess about CPI is either high or low, and "different" is what you want for diversification and volatility reduction.

This is an excellent answer. I just assumed he was willing to dispense with fixed as a more or less permanent portfolio stabilizer. To me, there are almost no arguments that make sense in favor of say 10 year treasuries at current sub 5% rates when compared to 10 year TIPS also at current coupon to maturity.

ha

 

[wildcat]

Tis true. If I were to hold some fixed income, I believe "Yrs to go" made a good suggestion in splitting it between the traditional bond holdings & TIPSs. A switch hitter approach.

But like the point I tried to make, I am pretty comfortable taking a pass on TIPs so long as I am working and the stash is small relative to what I would to retire on.