Interest rate risk can be addressed through duration matching bonds. A 100% duration matched TIPS portfolio will generate a risk-free stream of income. The volatility of the bond portfolio itself does not matter because the income it generates can be fixed.The reason to invest in stocks is to mitigate risk. Just because a bond fund is less volatile than stocks doesn't mean it has less interest rate risk, for example.
Stocks don't help to diversify a duration matched bond portfolio. It will increase the risk.
You may be misinterpreting what I wrote to mean: don't hold stocks, only hold duration matched bonds. What I was trying to say was that stocks don't diversify a duration matched TIPS portfolio—i.e. holding more stocks won't reduce the risk of the portfolio. It increases both risk and return compared to a 100% duration matched bond portfolio. You could locate anywhere on that risk-return spectrum depending on your risk aversion.I respectfully disagree. It is true that TIPS duration matched portfolio generates a risk free but taxable income stream but it does so at a significant opportunity cost. Current TIPS yields are about 2% real. I am 77 but I do not intend to settle for 2% real minus taxes as a long term income stream. For those who are very risk averse, volatility averse, and very wealthy, TIPs duration matching may satisfy your needs for income and be a good fit. But I personally am an optimist, and not risk averse or volatility averse. Unfortunately, I'm not that rich either. I personally don't think I'll ever have less than 40% or 50% equity in my portfolio. Having all TIPS and no equity puts a floor under your future real income flow, but importantly it puts an extremely low ceiling on it too. Long term equity hugely outperforms bonds.
I fully intend to leave a legacy to charity and to others and am willing to tolerate some equity risk and volatility in order to maximize my long term portfolio performance within the bounds of my own risk tolerance. My risk tolerance actually decreases as I age and I adjust the portfolio accordingly. I actually enjoy playing the investing game and managing my finances. I have been doing it for decades. Another point to remember if you're putting all your assets into fixed income duration matching--no one knows up front exactly what the length of his/her duration is. You might pass way next week, in a decade, or you might live to 110. I personally believe that widely diversified low cost equity plus quality short and intermediate duration nominal bonds and TIPS, plus a few years of living expenses kept in MMF--that portfolio charts a risk/reward path that I feel comfortable with. Putting all one's financial eggs in a duration matched TIPS basket is an appropriate choice for some but not for me. Know yourself and create your portfolio accordingly. You're the expert on who you are, not someone else.
I do have a concern that some other posters have mentioned. At some point if we live long enough, we lose sufficient cognitive skills and judgement to manage our finances. On the bright side, Buffett is 93 and still going strong and Charlie Munger was still sharp at 98. Both of them enjoyed playing the game and it probably prolonged their lives. Hopefully, when the time comes, I'll retain sufficient judgement to know when it's time to quit playing the game and to do the challenging job of selecting an honest competent financial advisor to help with the transition into this last phase. My relatives are not up to that job.
Garland Whizzer
Statistics: Posted by Ben Mathew — Thu May 23, 2024 11:19 pm — Replies 53 — Views 23016
