To be clear, I'm not suggesting someone with a 30 year horizon put the entirety of their fixed income portion into a 30 year TIPS. Someone who targets an expense in 30 years likely has similar targets for each year leading up to that point, and any rung of that ladder could be tapped in case of an emergency that exceeds their emergency fund.No one likes to lock up their money for 30 years, even if that money is targeted for use in 30 years, because life happens, and when that happens they want flexibility of accessing it. They don't want it to be down -30% which is what you get by buying a 30 year TIPS if rates went up. There is plenty of risk there. Cannot buy that argument it is riskless. If you are a robot with no expiry date then yes, it can buy that bond and use it for replacement of parts in 30 years, for a human not so much, because again life happens and we may need to have flexibility to tap that before.To be fair, this thread is predicated on backtesting, while vineviz's arguments were based on duration matching which doesn't depend on any prevailing interest rate environment or historical performance.You backtest an era of falling rates this is what you get.We have roundtripped to vineviz's thread first 20% in Bonds
That doesn’t make it a good plan for the future.
And I do think people are incorrectly focused on short term performance/volatility (as Kevin M has pointed out) when what really matters is the performance/volatility over the investment horizon. If you need the money 30 years from now, a 30 year TIPS is as riskless as you can get, with a 30 year nominal Treasury being close (IMHO). Bond ladders and barbells make a lot of sense to me.
This is why most investors like to think shorter duration, 2-3 years or 5-6 years at the most. I am currently at 9 years average duration, and will be bringing that down in anticipation of retirement, and I will not go any higher than that. I understand the whole concept of duration matching and eliminating reinvestment risk and all that good stuff, it just doesn't work for me or most investors because we aren't robots without expiry date. I have Social Security for that, it is a great duration matching tool, I don't need to double down on my retirement portfolio too.
I agree that exactly balancing interest rate risk with reinvestment risk isn't for all investors, but surely some amount of matching makes sense - I do not think long-term bonds should be avoided by default.
Statistics: Posted by geniekid — Thu Feb 22, 2024 1:42 pm — Replies 208 — Views 20758