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What would Zvi Bodie do today with TIPS?
Old 02-21-2014, 11:33 AM   #1
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What would Zvi Bodie do today with TIPS?

As most know, Zvi Bodie has advocated investing in TIPS for a secure retirement. Q&A with Zvi Bodie | Zvi Bodie

But, things have changed.

Just read the Vanguard prospectus on its VIPSX fund (inflation protected securities). The long-term manager is retiring in March 2014, among other volatile news. https://personal.vanguard.com/funds/...pdf?2210085388

So, I'm was curious to hear your opinions about a TIPS strategy. Anyone invested in this? Anyone sell out?

Thanks.
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Old 02-21-2014, 12:44 PM   #2
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We have planned our retirement not on Firecalc but simply on a 1% real return after inflation using a spreadsheet. We usually buy TIPS at auction. We did sell quite a bit of the TIPS and refinanced the house when rates bottomed out. We are re-buying TIPS at auction over time, as long at the real rate is at least 1% we're good to go. We think long term with TIPS, CDs ladders, stable value funds etc., 1% real is a more than reasonable expectation.

We just don't plan to spend much in retirement relative to our income so we can get 0% real and be in good shape.

That is it. We decided to sell most of the stocks as for us we don't see any reason to risk losing money. Even a relatively small percent of our portfolio times a possible 40% loss in one year throws off the spreadsheet too much.
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Old 02-21-2014, 06:13 PM   #3
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TIPS for retirement are a good choice for some who do not need much real return to meet their future needs. Many cannot take the return hit at today's rates.

now: 10yr TIPS are 0.6%
historical real 10yr rate is 2.3%

For my bonds I would want the TIPS to get closer to historical real returns before buying. In the mean time I'll stick with nominal intermediate bonds (maybe 5 year duration).

BTW, I do regret selling a bunch of TIPS in 2009 but other decisions in our portfolio more then compensated for the poor timing on TIPS sales.
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Old 02-21-2014, 10:34 PM   #4
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Rick Ferri has said 20% of your bond portfolio should be TIPS. That's what I follow.
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Old 02-21-2014, 11:01 PM   #5
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Quote:
Originally Posted by daylatedollarshort View Post
We have planned our retirement not on Firecalc but simply on a 1% real return after inflation using a spreadsheet. We usually buy TIPS at auction. We did sell quite a bit of the TIPS and refinanced the house when rates bottomed out. We are re-buying TIPS at auction over time, as long at the real rate is at least 1% we're good to go. We think long term with TIPS, CDs ladders, stable value funds etc., 1% real is a more than reasonable expectation.

We just don't plan to spend much in retirement relative to our income so we can get 0% real and be in good shape.

That is it. We decided to sell most of the stocks as for us we don't see any reason to risk losing money. Even a relatively small percent of our portfolio times a possible 40% loss in one year throws off the spreadsheet too much.
According to the above referenced Vanguard prospectus, you must be going out 20 years to get your 1%. Didn't they decline almost 20% last year? The Vanguard fund lost 9% in 2013. Doesn't seem a whole lot safer than stocks. I agree with the previous poster, that you may want to wait until yields get closer to their historical norm before loading up on TIPs.

Bernsteins Investor Manifesto states that the 30 years between 1952 and 1981 long term Treasury bonds returned just 2.33% while inflation was averaging 4.31%. While you aren't risking the 40% stock loss in one year, you lost over 60% during those 30 years. Interest rates are lower now than they were in 1952. During the same period stocks made 9.89%, five percent better than inflation. A 20-25% equity weighting could increase your returns and reduce your risk.
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Old 02-21-2014, 11:46 PM   #6
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Originally Posted by gcgang View Post
According to the above referenced Vanguard prospectus, you must be going out 20 years to get your 1%. Didn't they decline almost 20% last year? The Vanguard fund lost 9% in 2013. Doesn't seem a whole lot safer than stocks. I agree with the previous poster, that you may want to wait until yields get closer to their historical norm before loading up on TIPs.

Bernsteins Investor Manifesto states that the 30 years between 1952 and 1981 long term Treasury bonds returned just 2.33% while inflation was averaging 4.31%. While you aren't risking the 40% stock loss in one year, you lost over 60% during those 30 years. Interest rates are lower now than they were in 1952. During the same period stocks made 9.89%, five percent better than inflation. A 20-25% equity weighting could increase your returns and reduce your risk.
I am not buying TIPS funds. I am not buying long term Treasury bonds. I am buying TIPS at auction with set maturity dates and dollar cost averaging their yields over time, plus assorted other investments. I don't want to risk losing half my life savings at my age by having a poor sequence of returns risk early on in retirement:

"You can reduce the sequence-of-returns risk by reducing the risk of the portfolio. In other words, said Bernstein, “own less stocks.”

“To really get constant spending, one should be looking to hold fixed-income assets to maturity or use risk-pooling assets such as annuities,” Pfau wrote. “The inefficiencies of a constant spending strategy using volatile assets may be explained because of the added sequence-of-returns risk which offers no reward to investors.”

Others endorse this tactic too. “You can completely eliminate sequence-of-return risk by investing the money you need to spend in retirement in a safe bond ladder or fixed annuities,” said Cotton. “If you’re fortunate enough to have some left over, you can buy and hold stocks with that money.”

How to avoid sequence-of-return risk - Robert Powell's Retirement Portfolio - MarketWatch

Bernstein said in a recent interview, "How risky stocks are to a given investor depends upon which part of the life cycle he or she is in. For a younger investor, stocks aren't as risky as they seem. For the middle-aged, they're pretty risky. And for a retired person, they can be nuclear-level toxic."

"At the end of your career, you have no more earnings capacity left beyond Social Security or a pension. You have less of what life-cycle theory calls "human capital."

So if you have a long series of bad returns, plus you're withdrawing 4% or 5% of your portfolio to live on it, then in 10 to 12 years, you may not have anything left. Withdrawals during the distribution phase combined with a bad bear market can completely destroy a retirement"

The worst retirement investing mistake - Sep. 4, 2012

I am in the won the game why keep playing camp. We made most of our money from our human capital and are just investing for capital preservation and anything extra is gravy. Your mileage may differ.
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Old 02-22-2014, 05:39 AM   #7
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Similar to dlds, I am also buying them at auction over time. I own all extant issues from 2026 to the shiny new 2044s that haven't even been delivered yet (I just *love* that new-TIPs smell!).

For me it's liability matching, building a synthetic COLA'd pension, or whatever you want to call it. I buy the 30s every year and will continue to do so for some time. Some of those will have great real rates, some less so, but like any DCA strategy one imagines it'll average out over time.


I will also buy some 10s when the time comes, to fill out missing years from when they switched from issuing 20s to 30s. (2030-31, 2033-39)
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Old 02-22-2014, 11:03 AM   #8
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Speaking of William Bernstein, in his short book:

Amazon.com: Deep Risk: How History Informs Portfolio Design (Investing for Adults) eBook: William Bernstein: Books

I believe he hedges a bit and does not push a liability matching portfolio. He says that the 10 to 30 years portfolio timespan is a grey area. That would cover a lot of retired people.

I do think that a 25% drawdown over any 2 year period is something most of us should be mentally prepared for.

Anyway, we all have to think for ourselves. I use the "professional" advise with a large grain of caution.
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