Adding to Holdings in TIP

I know it seems strange that on another day when it seems like stocks are destined for infinite glory that I am adding to my existing holdings in TIP, the iShares Barclays TIPS Bond Fond (TIPS = Treasury Inflation-Protected Securities). I also remain overall bearish so a steep correction in the stock market will probably bring out deflationist fervor all over again. (The kind of rampant speculation that has descended upon the market this month has two potential outcomes whose relative likelihood I dare not guess: a deflationary (and temporary) contraction or an explosion of inflationary pressure). However, a friend forwarded to me an excellent article that convinced me to almost double my holdings.

The article is called “You can’t handle the truth about stocks.” Joe Light interviews economist Zvi Bodie who reminds us that we cannot save for retirement without risk in some aspect of our lives, contrary to the cookie-cutter advice that is typically doled out to retail investors. More importantly, he makes the great point that if you are a big saver then you have already chosen to accept a lower standard of living now for a higher standard of living during retirement. This higher rate of saving means you can take much less risk in your retirement portfolio and keep more assets in true inflation-protected holdings like the TIP. Stock investing is often promoted as the only way to protect your nest egg from the ravages of inflation, yet, during periods of high inflation, stocks have performed terribly (particularly the 1970s). So, given I fear inflation in the future much more than deflation, and given I am a high saver, it makes sense to carry a larger percentage of my portfolio in TIPS than I currently do. Trade executed…

Be careful out there!

Full disclosure: long TIP

9 thoughts on “Adding to Holdings in TIP

  1. He’s right, but like many economists he’s not quite living in the real world. Like he says, most people need to take on the extra risk to have enough money in retirement. Unrealistic is thinking that anyone beyond a few outliers is going to set aside 20% a year, every year between age 25 and 65. It really does not happen much outside the life cycle theory. Eugene Steurle at the Urban Institute, and undoubtedly others, did a paper several years ago showing the impact of working just 1 more year than you anticipated (more income plus you don’t draw down savings) and it had a significant impact so working longer is the most realistic option for most people. I still like TIPS a lot but don’t buy into the 100% advice. For some reason I haven’t seen articles on it lately, but the best retirement calculators use Monte Carlo simulations that show the probability of outliving your money under different investing and inflation scenarios. It’d be fun (for me at least) to see how different TIPs allocations impact the calculation.

  2. Good points. But I think throwing those numbers out there can wake people up to realize the breadth of their options, especially if they are going for lower risk strategies.

  3. MCNB, you don’t need to wait for a study. You can do the calculation yourself. Go to and select the calculator entitled “retirement withdrawal calculator.” You’ll be asked to provide a hypothetical average yield, an assumed inflation rate, duration, and nest egg amount. To simulate a very, very conservative TIPS portfolio, use a 4% yield and an inflation rate of 3% (a real rate of return of 1%). The calculator will demonstrate that using a SWR of 4% (i.e., taking out 4% the first year and adjusting upwards by 3% each year), your nest egg will last between 28 and 29 years.

    You can use 4/3, 5/4, 6/5, etc., so long as the spread is 1%, it’ll last 28 to 29 years using the 4% SWR.

    So, it can be done 100% TIPS. Not that I’m doing that, mind you. But I’m 40/60 (I’m retired), and roughly 70% of that “60” (in bonds) is in TIPS or long-ladder CDs.

    PS: you can substitute any asset class you know is going to give you a guaranteed 1% spread over inflation, but I haven’t found one yet. There is a drawback to the calculator of course, since it can’t fiddle itself from spread to spread over the duration (i.e., .5/-1.5 one year, 5/4 the next, then back to 2/1, etc.). So, you have to have a leap of faith. But, it’s the best example of how a 1% guaranteed spread works that I know of.


  4. Thanks, John! Very useful site. I am definitely not going 100% TIP. In fact, my current TIP holdings are still a small portion of the overall portfolio. But I am planning on increasing it further – I have been waiting for another deflationary scare to add at lower prices, but it looks like I will not get the opportunity anytime soon.

  5. Hi People,

    Is there something I am not getting here? when I check on the TIP fund I see a yield of 10%+ but when I check when was last a dividend paid it was like in 2008…

    How this works then????? will be grateful if someone can explain…


  6. Yes, that very same one,,,, TIP from Barclays… are you referring also to this one? When I put it on the site I see a yield of over 10%…

    on the other side are they paying dividends constantly?

    thanks for your time

  7. Hi Gustav,
    I can only guess that BigCharts has incorrect information or has a different timeframe than Yahoo!Finance. The yield on TIP is certainly not 10% on an annual basis. I bought my first tranche of TIP in November, since then the yield has been around 3-4%. I did not get my first dividend payment until April and since then it has been paid monthly. I hope that helps!

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