Author Topic: Buy and hold TIPS, or jump in & out of market?  (Read 4606 times)

joer1212

  • Bristles
  • ***
  • Posts: 330
Buy and hold TIPS, or jump in & out of market?
« on: March 18, 2013, 12:35:29 PM »
Should I keep a TIPS fund (VIPSX) as a permanent part of my portfolio (rebalancing regularly), or should I purchase and sell this TIPS fund according to yield?

About half of my Roth IRA is in VIPSX. This is about 8% of my total portfolio.
My original plan was to have this fixed percentage in TIPS in my portfolio at all times, without regard to current yields, duration, etc. I simply would rebalance whenever the dollar value of VIPSX would veer too much from the 8% target allocation.

However, lately I have been hearing a lot of noise about jumping in and out of TIPS (timing the market) according to current yields and duration. This seems to go against everything I've ever learned about the benefits and superiority of passive investing. Not only that, but once you start attempting to time the market with TIPS, why wouldn't you do the same thing with other fixed income asset classes (total bond; stable value, etc)?
Also, isn't the purpose of an asset class in one's portfolio to work in synergy with the others? Once you temporarily remove an entire asset class from your portfolio to time the market, doesn't that leave a hole in it while you're waiting to jump back in?

Someone please shed some light on this for me.






yolfer

  • Pencil Stache
  • ****
  • Posts: 552
  • Age: 39
  • Location: Seattle, WA, USA
    • Camp Mustache
Re: Buy and hold TIPS, or jump in & out of market?
« Reply #1 on: March 18, 2013, 01:07:55 PM »
However, lately I have been hearing a lot of noise about jumping in and out of TIPS (timing the market) according to current yields and duration. This seems to go against everything I've ever learned about the benefits and superiority of passive investing. Not only that, but once you start attempting to time the market with TIPS, why wouldn't you do the same thing with other fixed income asset classes (total bond; stable value, etc)?
Also, isn't the purpose of an asset class in one's portfolio to work in synergy with the others? Once you temporarily remove an entire asset class from your portfolio to time the market, doesn't that leave a hole in it while you're waiting to jump back in?

I'd be interested to read the "noise" you're talking about, but it sounds exactly like noise. Your gut judgement is right that market timing is counterproductive and it's also psychologically weird to think one can time the TIPS market and not the markets of one's other asset classes.

I hold VIPSX as 10% of my portfolio. I'll buy/sell it to maintain that allocation, but I don't time the market on any of my holdings, including TIPS. Maybe some more experienced investors can weigh in here about how they change their asset allocations based on some factors I don't understand...

KingCoin

  • Pencil Stache
  • ****
  • Posts: 783
  • Location: Manhattan
  • Achieved FI @ 30
Re: Buy and hold TIPS, or jump in & out of market?
« Reply #2 on: March 18, 2013, 02:24:59 PM »
I hold VIPSX as 10% of my portfolio. I'll buy/sell it to maintain that allocation, but I don't time the market on any of my holdings, including TIPS. Maybe some more experienced investors can weigh in here about how they change their asset allocations based on some factors I don't understand...

You could make an argument that it's time to rejigger your allocation when an asset is at an extreme valuation. TIPS are at an extreme valuation right now. How extreme? They have a negative real yield. That is, over the medium to long term, YOUR MONEY IS GUARANTEED TO LOSE VALUE IN TIPS. That's not my opinion, that's a direct corollary to current prices. You can check out how much damage will be done to your money on the treasury's website:
http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield

I'm not knocking the static portfolio. I think it's a great way to go. But I think TIPS are basically a short term, "enhanced cash", portfolio hedge at these levels. If you have a decent investment horizon, accepting a negative real yield is a bitter, and probably unnecessary pill to swallow. Maybe you make some money back in an extremely volatile market through rebalancing.

The obvious argument against this kind of thing is that defining "extreme" can be a tricky business. It's all too easy to justify psychological investment whims by labeling some asset "extreme". Maybe you just read smedleyb's comment that the market is topping and we "could" see the "mother of all crashes". This sets you up for whipsaw and other market timing mistakes. To impose some discipline, you could set up a rules based allocation approach. For instance, if avg P/E ratio is between 10-20 you hold 60% stocks, between 20-28 you hold 50% stocks, and above 28 you hold 40% stocks. Of course, this gets complicated quickly, and "rules" are all too easy to break, which is why a static portfolio allocation is completely sensible.

joer1212

  • Bristles
  • ***
  • Posts: 330
Re: Buy and hold TIPS, or jump in & out of market?
« Reply #3 on: March 18, 2013, 02:32:26 PM »
Quote
I'd be interested to read the "noise" you're talking about, but it sounds exactly like noise. Your gut judgement is right that market timing is counterproductive and it's also psychologically weird to think one can time the TIPS market and not the markets of one's other asset classes.

I hold VIPSX as 10% of my portfolio. I'll buy/sell it to maintain that allocation, but I don't time the market on any of my holdings, including TIPS. Maybe some more experienced investors can weigh in here about how they change their asset allocations based on some factors I don't understand...

One example is Larry Swedroe's book The Only Guide To Alternative Investments You'll Ever Need. In it he describes a strategy of buying and selling TIPS according to current yields, and altering the duration of individual TIPS based on those yields. If yields fall below a certain threshold (I think it's 1.5%), then you would get out of TIPS altogether.
While Larry says there is "nothing wrong" with buying and holding and rebalancing TIPS, he believes that a disciplined active strategy will result in superior returns. How "superior" these returns will be is anyone's guess, and the time and effort cost required to implement this active strategy is another unknown.

However, I'm beginning to wonder if maybe there is some validity in this view. For example, if we had to rebalance TIPS (VIPSX) in our portfolio right now by purchasing more, we would essentially be buying high, as TIPS are currently expensive and low-yielding. This is exactly the opposite of what we want to be doing (buying low, selling high). So in some circumstances rebalancing TIPS may not always work to our advantage, like it does with other asset classes.
I'm relatively new to investing, so my speculations could be totally wrong.

 

brewer12345

  • Handlebar Stache
  • *****
  • Posts: 1383
Re: Buy and hold TIPS, or jump in & out of market?
« Reply #4 on: March 18, 2013, 02:42:42 PM »
I think there are some markets where it is more reasonable to make these calls than others.  For example, the squirrely little backwater that is junk bonds is prone to overvaluation and subsequent busts (rinse and repeat).  It isn't that hard to figure out when to get out of the water by watching spreads compared to historical levels.  When to get back in is even more obvious (after the crashes).  But this also means that you will spend a significant amount of time out of this market.  That does not bother me for a small percentage allocation like junk.

In the case of anything to do with treasuries, I would not try to time it simply because these markets are among the most liquid and most followed in teh world.  Hard to find serious inefficiencies there.

joer1212

  • Bristles
  • ***
  • Posts: 330
Re: Buy and hold TIPS, or jump in & out of market?
« Reply #5 on: March 18, 2013, 02:48:00 PM »
Quote
You could make an argument that it's time to rejigger your allocation when an asset is at an extreme valuation. TIPS are at an extreme valuation right now. How extreme? They have a negative real yield. That is, over the medium to long term, YOUR MONEY IS GUARANTEED TO LOSE VALUE IN TIPS. That's not my opinion, that's a direct corollary to current prices. You can check out how much damage will be done to your money on the treasury's website:
http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield

I'm not knocking the static portfolio. I think it's a great way to go. But I think TIPS are basically a short term, "enhanced cash", portfolio hedge at these levels. If you have a decent investment horizon, accepting a negative real yield is a bitter, and probably unnecessary pill to swallow. Maybe you make some money back in an extremely volatile market through rebalancing.

The obvious argument against this kind of thing is that defining "extreme" can be a tricky business. It's all too easy to justify psychological investment whims by labeling some asset "extreme". Maybe you just read smedleyb's comment that the market is topping and we "could" see the "mother of all crashes". This sets you up for whipsaw and other market timing mistakes. To impose some discipline, you could set up a rules based allocation approach. For instance, if avg P/E ratio is between 10-20 you hold 60% stocks, between 20-28 you hold 50% stocks, and above 28 you hold 40% stocks. Of course, this gets complicated quickly, and "rules" are all too easy to break, which is why a static portfolio allocation is completely sensible.


But what about the other benefits of TIPS, such as protecting against unexpected inflation, and having a low correlation with other asset classes in my portfolio? Shouldn't this also be factored into the active vs. passive debate, since these benefits could potentially offset any negative aspects of holding TIPS right now? If you remove TIPS altogether from your portfolio for a couple of years, waiting for yields to rise, you will miss out on these benefits. 
Viewed in isolation, TIPS right now may seem like a bad bet, but doesn't this change when viewed in the context of a globally diversified portfolio?
It just seems to get very complicated, bordering on inscrutable.
« Last Edit: March 18, 2013, 02:55:50 PM by joer1212 »

KingCoin

  • Pencil Stache
  • ****
  • Posts: 783
  • Location: Manhattan
  • Achieved FI @ 30
Re: Buy and hold TIPS, or jump in & out of market?
« Reply #6 on: March 18, 2013, 02:58:59 PM »
But what about the other benefits of TIPS, such as protecting against unexpected inflation, and having a low correlation with other asset classes in my portfolio? Shouldn't this also be factored into the active vs. passive debate? If you remove TIPS altogether from your portfolio for a couple of years, waiting for yields to rise, you will miss out on these benefits. 

Yes. In the short term, TIPS will likely reduce portfolio volatility, and will aid outperformance to the downside. Over the long term, stocks and REITS will track inflation, which obviates the need to piss away money in TIPS.

joer1212

  • Bristles
  • ***
  • Posts: 330
Re: Buy and hold TIPS, or jump in & out of market?
« Reply #7 on: March 19, 2013, 01:42:25 AM »
Quote
Yes. In the short term, TIPS will likely reduce portfolio volatility, and will aid outperformance to the downside. Over the long term, stocks and REITS will track inflation, which obviates the need to piss away money in TIPS.

So, you would not include TIPS in your portfolio at all, under any conditions, or just the present economic conditions?

chucklesmcgee

  • Pencil Stache
  • ****
  • Posts: 613
Re: Buy and hold TIPS, or jump in & out of market?
« Reply #8 on: March 20, 2013, 05:43:24 PM »
Quote
Yes. In the short term, TIPS will likely reduce portfolio volatility, and will aid outperformance to the downside. Over the long term, stocks and REITS will track inflation, which obviates the need to piss away money in TIPS.

So, you would not include TIPS in your portfolio at all, under any conditions, or just the present economic conditions?

I think if you're old, don't need any portfolio growth and will be relying on your stash TIPS aren't awful. If we were to experience hyperinflation/stagflation, TIPS actually could be a real life saver. Otherwise, if you're young and can tolerate some mid-term volatility, TIPs are probably a poor choice.