I'm really using this to point out why phrases like "I have TIPS ladder, so I'm guaranteed to have income" are dangerous. Most seasoned Bogleheads already have a portfolio which has a mix of equities and fixed income that should negate this risk. But newer investors who are less seasoned may hear some of these things and not realize that while TIPS are in theory protected from inflation, there is nuance to that statement and TIPS have not been around enough to understand what happens in these types of situations. The fact that the risks are lower doesn't mean they aren't important as their impact is very high.I can see that as an argument for not going 100% fixed income, but the risks you're talking about seem far less likely than the risk of moderate inflation. Plus, if things go that bad, can you trust the equities will continue to have value either?In the Weimar Republic shareholders did okay, those holding cash were wiped out. If TIPS had existed in Germany in 1922, how confident would you be that they would have worked as planned through to 1925? I'm skeptical. So for that reason, I think of TIPS as a good hedge against mild to moderate inflation, but to think of them as a guarantee is a bridge too far. Having equities for such situations seems like a better bet.
If things are that bad equities should (given time) recover to be worth something, since they represent an ownership share of the economy. Even if some the companies are bankrupted and sold to other companies someone has to end up owning those and if you owned the entire market to start with you should end up significantly better off than those holding bonds or cash. In Germany those holding cash were ruined. Ma Krupp was still a very wealthy woman afterwards because her wealth was in equities.
Mind you, this is applicable to a severe inflation event. There are different circumstances where equities become worthless, along with bonds and cash. See Russia 1917.
Statistics: Posted by rogue_economist — Fri Aug 30, 2024 6:36 pm