Why going "all-in" on TIPS isn't a good idea

[Kevin K.]

TIPS bonds don't get a lot of love on this forum (though iBonds do, at least of late) but I'm guessing that others have read some of the many posts on Bogleheads and other finance sites extolling the virtues of a 30 year TIPS ladder since it's now possible to construct such a ladder that permits inflation-adjusted spending of just under 5% per year. A

The well-known financial advisor Allan Roth's article "The 4% Rule Just Got a Whole Lot Easier" has received an enormous amount of coverage and discussion, but not this rejoinder to it:

https://www.advisorperspectives.com/art ... lot-easier

The author is by no means anti-TIPS (he uses them for ~20% of his fixed income position) but the limitations and problems he cites are well worth heeding, IMHO. Unsurprisingly they harken back to points made by Mssrs. Rowland and Lawson in their Permanent Portfolio book - for example, that buying fire insurance from the arsonist (the U.S. government in the form of the Bureau of Labor Statistics) isn't wise, and that TIPS offer no protection against deflation as well as not benefitting in the slightest from market flights-to-safety.

[vnatale]

TIPS bonds don't get a lot of love on this forum (though iBonds do, at least of late) but I'm guessing that others have read some of the many posts on Bogleheads and other finance sites extolling the virtues of a 30 year TIPS ladder since it's now possible to construct such a ladder that permits inflation-adjusted spending of just under 5% per year. A

The well-known financial advisor Allan Roth's article "The 4% Rule Just Got a Whole Lot Easier" has received an enormous amount of coverage and discussion, but not this rejoinder to it:

https://www.advisorperspectives.com/art ... lot-easier

The author is by no means anti-TIPS (he uses them for ~20% of his fixed income position) but the limitations and problems he cites are well worth heeding, IMHO. Unsurprisingly they harken back to points made by Mssrs. Rowland and Lawson in their Permanent Portfolio book - for example, that buying fire insurance from the arsonist (the U.S. government in the form of the Bureau of Labor Statistics) isn't wise, and that TIPS offer no protection against deflation as well as not benefitting in the slightest from market flights-to-safety.

Thanks for that rejoinder. Had been unaware of it. Will shortly be reading it.

However, I've always discounted the "buying fire insurance from the arsonist" reasoning as being somewhat alarmist.

Finally, if you go back to Bernstein ... for which are their higher probabilities? Inflation or deflation?

I'm happy to be protected from the higher probability, which is inflation, and which I believe can cause way higher damage than deflation.

[vnatale]

Just read it quickly but will later reread it. And, reread it yet again.

However, based upon that quick read and just addressing this:

"Roth and I disagree on his lead statement, that “the 4% rule just became a whole lot easier.” I disagree partly because he never addressed his level of commitment to this strategy. His $100,000 ladder surely doesn’t commit the whole portfolio to the strategy. He leaves wiggle room by suggesting he will likely add more to the approach. Every strategy can mitigate certain risks while, at the same time, add other risks. Roth’s strategy has this same basic flaw."

I have read that Roth later revealed that he increased his investment under this strategy to a full $1,000,000 therefore doing the proverbial "putting his money where his mouth is".

[Kevin K.]

Yeah I read that too but $1 million is just a big chunk (perhaps most or all) of he and his wife's tax-deferred accounts. Presumably he has a multiple of that in taxable.

[vnatale]

Yeah I read that too but $1 million is just a big chunk (perhaps most or all) of he and his wife's tax-deferred accounts. Presumably he has a multiple of that in taxable.

I think his current hourly rate is $450. Don't know how many hours a week he bills out at that rate. Seems to be a one person operation. He's definitely taking on new clients. I would refer people to him.

[dualstow]

Roth’s conclusions are based on “real return” projections, which ignore some important truths of retirement: CPI, the driver of real returns, is not an adequate measure of inflation. It ignores human behavior and serendipity, the ultimate arbiters of life’s events. And more systematically, it ignores the fact the CPI does not measure spending inflation; it measures changing prices for a theoretical basket of goods. When I see projections that assume every person’s spending increases at the same flawed rate of change, I shudder.

Human behavior is such an impotant part of the picture. I haven’t spent much time with financial planners, but I wonder to what extent it’s addressed. I suppose it depends on the planner.

[vnatale]

Roth’s conclusions are based on “real return” projections, which ignore some important truths of retirement: CPI, the driver of real returns, is not an adequate measure of inflation. It ignores human behavior and serendipity, the ultimate arbiters of life’s events. And more systematically, it ignores the fact the CPI does not measure spending inflation; it measures changing prices for a theoretical basket of goods. When I see projections that assume every person’s spending increases at the same flawed rate of change, I shudder.

Human behavior is such an impotant part of the picture. I haven’t spent much time with financial planners, but I wonder to what extent it’s addressed. I suppose it depends on the planner.

That is supposed to be one of the important services a planner brings to the process. Protecting investors from themselves.