TIPS in a Portfolio

[JDARNELL]

Folks,

General question how do people use TIPS in a portfolio? What are they for?

JDARNELL

[OldShooter]

Almost 100% of our fixed income tranche is in TIPS. They are insurance against the kind of inflation that was seen in the late 70s and early 80s. The insurance premium is the difference in yield between standard govvies and the TIPS. My feeling is that TIPS are a "Go big or go home" type thing. I see little value in, say, a 5% TIPS position. I don't think many share our approach, though.

[JDARNELL]

Thanks. I can’t seem to figure out what a small percentage would be of value in a portfolio.

[Out-to-Lunch]

Quote:

Originally Posted by JDARNELL Thanks. I can’t seem to figure out what a small percentage would be of value in a portfolio.

Like any investment, a small percentage has no discernible effect. That is true no matter what investment!

We are at about 40% of our Fixed Income (and therefore about 20% of the total portfolio) in TIPS. Probably the minimum to have any real effect.

[Koolau]

Quote:

Originally Posted by Out-to-Lunch Like any investment, a small percentage has no discernible effect. That is true no matter what investment! We are at about 40% of our Fixed Income (and therefore about 20% of the total portfolio) in TIPS. Probably the minimum to have any real effect.

Do folks buy individual TIPS or funds? Can you hold individual TIPS in a tIRA or 401(K)?

I'm not crazy about such low yielding instruments (right now) but have thought for a while that inflation protection should become more of a priority. Still casting about for ideas. YMMV

[big-papa]

I have both TIPs and Ibonds. For me the purpose is to create an inflation adjusted income stream to augment SS when I turn 70. SS + TIPs + Ibonds should provide enough to cover my most minimal living expenses for about 15 years, after which we'll consider a SPIA. The rest of the portfolio will make life worth living. If I had it to do all over again, I'd have woken up a bit earlier and would have probably just used Ibonds. But the $10K limit per SS# + $5K per tax filing limits what I can do in that space before I actually retire.

I own TIPs via funds held in an IRA and adjust the effective duration of the combination of TIPs funds I own to match the total duration I would have if I actually owned individual TIPs. Downside is I'm paying a small e/r and this requires a little maintenance that I do once per quarter and takes about 5 minutes. Upside is that I reinvest dividends and don't have to deal with purchasing new individual TIPs with the proceeds. Not saying this method is better, it probably isn't. And it definitely isn't the most common thing to do. But it suits me, might not suit you.

Cheers.

[mrfeh]

https://www.bogleheads.org/wiki/Trea...ected_Security
https://www.bogleheads.org/forum/viewtopic.php?t=287744
https://www.bogleheads.org/forum/viewtopic.php?t=301650

[big-papa]

Quote:

Originally Posted by Koolau Do folks buy individual TIPS or funds? Can you hold individual TIPS in a tIRA or 401(K)? I'm not crazy about such low yielding instruments (right now) but have thought for a while that inflation protection should become more of a priority. Still casting about for ideas. YMMV

You should be able to hold individual TIPS in a tIRA, depending on where you hold the tIRA. With a 401K, that's unlikely unless your 401K provides a brokerage window with very generous options. Last time I had a 401K with a brokerage window, it was limited to only purchasing mutual funds offered by the custodian.

Still, with the 401K you might have a couple of choices.
- If your plan offers in-service rollovers, you can roll over your 401K to an IRA and purchase them in the IRA
- If your plan doesn't offer in-service rollovers as a standard option, if you're older than 59.5, you can still do an in-service rollover to an IRA. I plan to use this method later this year to move some proceeds from my current 401K to my IRA due to not really liking the offerings in my 401K. Note, they don't have to make this process easy. My 401K custodian (Vanguard) requires that I do this via a phonecall instead of being able to do this online.

[njhowie]

Quote:

Originally Posted by big-papa You should be able to hold individual TIPS in a tIRA, depending on where you hold the tIRA. With a 401K, that's unlikely unless your 401K provides a brokerage window with very generous options. Last time I had a 401K with a brokerage window, it was limited to only purchasing mutual funds offered by the custodian. Still, with the 401K you might have a couple of choices. - If your plan offers in-service rollovers, you can roll over your 401K to an IRA and purchase them in the IRA - If your plan doesn't offer in-service rollovers as a standard option, if you're older than 59.5, you can still do an in-service rollover to an IRA. I plan to use this method later this year to move some proceeds from my current 401K to my IRA due to not really liking the offerings in my 401K. Note, they don't have to make this process easy. My 401K custodian (Vanguard) requires that I do this via a phonecall instead of being able to do this online.

VAIPX is an alternative in this situation - it is offered in DW's 401k

[big-papa]

Quote:

Originally Posted by njhowie VAIPX is an alternative in this situation - it is offered in DW's 401k

Yes - most 401K's today have at least 1 mutual fund offering in the TIPs space and that's an alternative to the previous poster's question about how to hold individual TIPs. On the other hand, just holding a single TIPs fund will not behave the same way as an individual TIPs ladder, unless the plan was to build a perpetual rolling ladder of individual TIPs which has similar holdings as the TIPs fund.

Cheers.

[Out-to-Lunch]

Quote:

Originally Posted by Koolau Do folks buy individual TIPS or funds? Can you hold individual TIPS in a tIRA or 401(K)? I'm not crazy about such low yielding instruments (right now) but have thought for a while that inflation protection should become more of a priority. Still casting about for ideas. YMMV

Big-papa pretty much covered this, but I will answer for my situation. All of my bond holdings are in 401k-type accounts, and only TIPS funds are available (no individual securities). When I retire, I am planning to roll a large chunk to a tIRA, and establish a TIPS ladder of individual bonds as a bridge to SS. I will probably include a chunk in TIPS funds, too, as part of my "normal" fixed-income holdings (i.e., not the bridge).

[OldShooter]

FWIW, remember that the yield curve for TIPS is quite different than for normal govvies. The latter curve is heavily influenced by inflation expectations where the TIPS curve seems to be mostly about interest rate expectations.

Bottom line for us, we bought our inflation insurance (large TIPS position) in the winter of 2006/7, buying just one issue: the 2s of 2026. The lowest coupon (minimizing reinvestment risk) and the longest (roughly our retirement planning horizon) we could get at the time. Certainly a ladder makes sense if there is a need for liability matching but we didn't think the hassle of a ladder would be doing anything for us.

A year or two ago I did do some shopping for TIPS as a temporary parking place for some money. One thing I learned is that pricing on short TIPS can be goofy-looking. The reason is that the face adjusts in January and July, so buying a month or two before the adjustment will make the price look high. Also, the adjustment amounts are known 6 months ahead, which also thickens the soup. My takeaway was to stay away from short TIPS and let the traders play their games. We are not fund buyers, but this would not make me afraid of short TIPS funds -- on the assumption that those traders know what they are doing.