At what inflation level does your statement " ... I wouldn't rely on them in the slightest for protection against high inflation." become true? To me your statement makes no sense at all.
True enough, but there has really been no time in modern investment history where deflation was an issue.
https://www.investopedia.com/ask/an...re-any-periods-major-deflation-us-history.asp YMMV but it is just not something that I worry about.
Indeed! IMHO OldShooter has probably forgotten more about TIPS investing than most of us will ever know about the topic; I've certainly learned a lot from him about TIPS specifically and bond investing in general over the years and am most grateful.
Speaking of high-level info on TIPS, the Allan Roth article in Advisor Perspectives which I re-posted on Bogleheads has attracted not only Mr. Roth but William Bernstein to the discussion, making the thread as a whole just about the best "TIPS primer" I can think of in getting a sense of the unique and probably soon-to-disappear opportunity in TIPS right now.
What Roth and Bernstein recommend is using a TIPS ladder (or, less perfectly but still effectively, a duration-matched set of TIPS funds and ETFS) in conjunction with actual or estimated SS benefits and any pensions or annuities, to cover all of one's essential expenses. And what's unusual about the current situation is that it's possible to lock in ~4.3% real returns for 30 years, which is better than many experts expect to see from balanced (60:40, 50:50) stock:bond portfolios going forward. Roth for example has a 45:55 target allocation and seems to be converting most if not all of his fixed income position into TIPS.
I disagree completely with those claiming that regular Treasuries are superior to TIPS. There's a great (albeit epic length) discussion of this topic on Bogleheads as well but the OP's comments are probably sufficient:
"We've seen a lot of discussion pertaining to the performance of TBM and TIPS over the last year, which is understandable since TBM has experienced its biggest nominal drawdown in its history and inflation is at the highest levels seen in over 40 years. Many investors have chosen to retain their nominal bond holdings, especially TBM, while many others have chosen to (hopefully, permanently) move part or all their fixed income to TIPS.
An aspect of the nominal bond vs. TIPS issue that is often overlooked is the asymmetric risk investors are exposed to with nominal bonds like TBM. Note that this assumes both that an investor's future spending and other liabilities will be in at least roughly real (i.e., inflation-adjusted) dollars and that the CPI used to derive TIPS' yields is a reasonably good measure of inflation. In general, these seem to be fairly reasonable assumptions, and I ask that we do not derail this discussion on questioning them as this is apt to get the thread locked.
My contention that there is asymmetric risk in the decision to allocate one's fixed income in nominal bonds, such as TBM, or inflation-linked bonds, such as TIPS.
With individual TIPS held to maturity, their real return known with precision at the time of purchase. There is no risk to the future buying power of TIPS given the stated assumptions in the first paragraph.
But with nominal Treasuries, their real return unknown with precision at the time of purchase. Only their nominal starting yield is known. They are completely exposed to the risk of unexpected inflation, which has historically been the single biggest risk to fixed income holdings.
Therefore, absent deflation, it is indisputable that nominal Treasuries are riskier than TIPS when it comes to funding future consumption in real dollars. But there's another way to consider this that further demonstrates the same point.
If we assume that inflation is highly unlikely to average below 0% over a given decade, we can assume then that the best possible real returns of 10 year nominal Treasuries is their starting nominal yield of 2.65%. But there is no limit to how low the real returns of 10 year nominal Treasuries can be. In other words, 10 year Treasuries have very long left-tail risk. With TIPS held to maturity, their real return is, again, known with precision at the time of purchase.
Some claim that nominal bonds like 10 year Treasuries, funds like TBM, etc. have a higher expected real return than do TIPS. This is debatable since TIPS have a slight return premium over Treasuries due to their slightly lower liquidity. But in any event, any such higher expected return of nominal Treasuries over TIPS appears to be widely agreed upon to be very small and possibly zero.
Therefore, due to the uncertainty surrounding future inflation, there is uncertainty regarding the future real returns of nominal Treasuries (and nominal bonds, such as TBM), whereas there is no uncertainty regarding the real returns of TIPS as these are known at the time of purchase. Given that the expected benefit of nominal Treasuries compared to TIPS is no more than tiny, I contend that the risks faced by nominal Treasuries (and other nominal bonds) compared to those of TIPS are asymmetric and tilted significantly in favor of TIPS. Nominal Treasuries and other bonds are exposed to significant risks that are absent from TIPS, and those risks are not accompanied by a corresponding expectation of higher returns.
While it's true that nominal Treasuries are preferred in the presence of deflation, TIPS have some, though not as much, protection in that regard also since, upon maturity, the bearer will be paid the greater of their adjusted principal or their original principal. However, given that inflation has been a far bigger historic risk to investors than has deflation, I do not believe the better performance of nominal Treasuries to justify the uncertainty regarding their future inflation-adjusted value."
https://www.bogleheads.org/forum/viewtopic.php?t=382830
