Cortopassi wrote: ↑Fri Sep 30, 2022 1:27 pm
Perfect! Wish I was able to read that earlier this year before putting a bunch into DIPSX (inflation protected fund in my 401k)
My experience since, exactly Tyler's comment:
You know how the Federal Reserve actively fights inflation by hiking interest rates? Due to that intervention, TIPS have a nasty habit of getting kneecapped right when they’re needed most.
So I understand better now that funds vs. individual bonds have a big holding until maturity difference.
Well, yes and no when it comes to the "TIPS have a nasty habit of getting kneecapped when they're needed most" statement. It's true but it's just as true of other bonds of similar duration and even truer of longer-duration bonds under many circumstances - as owners of TLT should surely know by now. The "needed most" thing suggests that TIPS buyers somehow thought that they'd bought some sort of magical instant inoculation against inflation instead of a Treasury bond with special features. And if that's what you want you buy your annual limit in iBonds, or if you do dabble in TIPS at least stick to VTIP.
Here's a comparison of Schwab's intermediate TIPS ETF with their regular Intermediate Treasury one:
https://www.portfoliovisualizer.com/bac ... ion2_2=100
And here's the same comparison for short-term bonds using VGSH and VTIP:
https://www.portfoliovisualizer.com/bac ... ion2_2=100
In both cases the returns are better from the TIPS funds and drawdowns are shallower.
For anyone who wants to go further down the rabbit hole with TIPS I posted Tyler's blog post on Bogleheads and there's a good bit of discussion there (with Tyler participating). I especially recommend the posts from vineviz, who may be the single most savvy bond expert (among many) on that forum:
https://www.bogleheads.org/forum/viewtopic.php?t=386923
This exchange between Tyler and vineviz specifically addresses the misconception that holding individual TIPS to maturity somehow changes the risks:
"Tyler9000 wrote:
However, as can be seen with the YTD return of a fund like TIP (currently -13% before inflation) "removing all risk" only applies to TIPS held individually all the way to maturity rather than through a liquid index fund that is subject to interest rate risk. One of my main goals with the article is to illustrate the difference."
vineviz: "We haven't touched on this, but this "difference" is also not actually a difference. A TIPS has the same amount of interest rate risk for an investor whether held directly or through a fund. It's not the method of holding that matters, but rather the degree of mismatch between the investor's investment horizon and the bond/fund's duration.
It's simply not true that a TIPS fund like has interest rate risk but an individual TIPS does not."
Anyway for me the take-away is that exactly as Dr. Bernstein says TIPS are best bought as individual bonds held to maturity to meet specific known expenses. But contrary to what Tyler and even Dr. Bernstein suggest TIPS funds aren't exactly a disaster - as long as you're treating them as the Treasury bonds they are, subject to the same ups and downs in their current value as any other Treasury, albeit with more short-term volatility. Expecting TIPS to save you in a market meltdown is foolish - but expecting other Treasuries (especially LTT's) to do so is exponentially more foolish and yet is a bedrock assumption on the part of many PP'ers. That canard is right up there with the claim that gold is an inflation hedge. 2022 is providing abundant proof that both of those ideas need to be retired.