If you are going to do duration matching with TIPS funds you first have to find the duration of the targeted income stream and then match that duration with the average duration of the two funds. (That's why it is called duration matching.) Such matching will be provide significant immunization if you have an exact amount of income you want to withdrawal every year. But since interest rates are changing frequently you will need to frequently update the duration of the income stream because that duration will change with the change in interest rates. How often is frequently. I would say at least once a quarter, but to work really well once a month.
A simpler method to provide partial immunization and provides about the same immunization, particularly if you don't always withdraw the exact targeted amount, is duration targeting. About 35 years ago Marty Leibowitz and his colleagues at Salomon Brothers demonstrated that if the investor targets the average duration of the funds to be half the period of the investment horizon that strategy will provide partial immunization because the targeting process closely approximates the initial yield level – regardless of whether yields rise or fall. Leibowitz named this partial immunization method duration targeting.
With either duration matching or duration targeting you are not simulating a TIPS ladder. While all three methods provide safe income only duration matching and duration targeting explicitly consider duration. A bond ladder is using cash flow matching. While the results will be similar, the methods are distinct. In other words, when you are using duration matching you are matching the duration of the bond assets to the duration of the targeted income stream, not to the duration of a TIPS ladder.
BobK
A simpler method to provide partial immunization and provides about the same immunization, particularly if you don't always withdraw the exact targeted amount, is duration targeting. About 35 years ago Marty Leibowitz and his colleagues at Salomon Brothers demonstrated that if the investor targets the average duration of the funds to be half the period of the investment horizon that strategy will provide partial immunization because the targeting process closely approximates the initial yield level – regardless of whether yields rise or fall. Leibowitz named this partial immunization method duration targeting.
With either duration matching or duration targeting you are not simulating a TIPS ladder. While all three methods provide safe income only duration matching and duration targeting explicitly consider duration. A bond ladder is using cash flow matching. While the results will be similar, the methods are distinct. In other words, when you are using duration matching you are matching the duration of the bond assets to the duration of the targeted income stream, not to the duration of a TIPS ladder.
BobK
Statistics: Posted by bobcat2 — Fri Jan 16, 2026 10:21 am — Replies 30 — Views 1494