So if the stocks made 2% real over 10-15 years, or less, what would you do with the stocks at that point?Depends on sequence of returns...So 10-15 years into the ladder are you still holding all of the stocks at the end?A) Build a 20 year TIPS ladder (Rates are decent at the moment)Yeah - maybe, but I still can’t get past the point that this whole comparison is setting up a choice that virtually nobody makes.Our 1st Draft Conclusion (above) envisions two groups.
One group that would be willing to buy 20+ yr TIPS at "Any" YTM (if it meets their minimum spending needs) for SWAN purposes because they don't trust markets to repeat long-term past performance.
And a second group who would only buy Long TIPS if they are priced to compete with LT-Stock returns. (e.g. Trust historical stocks returns to continue)
But this misses a third group who uses historical Bond Yields as their buy-threshold instead of historical stock returns. They reason that they're always going to hold some fixed income anyway, so why not just lock it in now if TIPS Yields exceed a long-term historical average like 2% real. (e.g Trust historical Bond Yields to continue but Not stocks)
Framed this way, there are 3 tiers to answering the question of our thread:
By example, "I will buy 20+ Yr TIPS when YTM's...."
1- Meet my minimum spending needs; Or
2- Meet my minimum spending needs, AND exceed 2% average real historical bond yields (-4.3%; 7.2%); Or
3 -Compete with historical stock returns. (6% Avg, 0-3% worst case from 20 to 30 years, respectively)
1. Hold TIPS 20+ years and liquidate when needed or
2. Hold stocks 20 + years and liquidate when needed.
Realistically nobody does number 2. Over the course of 20 years they will convert some or most (or all) of that to bonds and cash. If you need that money in 5 years, on your 90th year of life, you aren’t going to keep it 100% stocks when you are 85.
As such the comparison of 20+ years of TIPS vs 20+ years of stocks is irrelevant.
B) Save off some extra just-in-case cash (TIPS can be illiquid at times)
C) Put the rest in a Global Market Cap Stock index.
Then,
If Mr. Market is kind along the way (very likely) back-fill your TIPS ladder....
If you happen to be the guy investing at the top of the next Great Depression, you should still be fine as you'll still have your starting multiple of Expenses left (minus 20X), 20 years into your retirement....
You could just as easily buy DIA with a cost escalator at the end and be pretty well protected.
But the goal is to get long-term stock exposure while locking in a known source for the next 20 years of expenses...
Seems to me 1-20 years at 100% bonds, then 20+ years at 100% stocks is a rather arbitrary asset allocation.
Statistics: Posted by JBTX — Sun Jun 16, 2024 12:25 am