I'm wondering whether it's worthwhile to allocate some of my bond portfolio in the Vanguard TIPS fund. I plan to work until about 2040, and I prefer (efficient) risk over return. I plan to buy and hold for the very long term.
What do I need to consider when deciding how much, if any, TIPS I should hold? Are there any long-term disadvantages to TIPS funds vs. non-inflation-protected bond funds?
Kiplinger reported in a thorough article that,
Should I buy TIPS now?
Some money managers will tell you that any time is a good time to buy TIPS as a hedge against inflation and that these bonds should always account for at least 10% of your fixed-income portfolio.
Another strategy could be as a market-weighted portion of your portfolio. According to Vanguard rep, TIPS account for about 1% of the market. They point out that TIPS, in short supply, are more susceptible to supply and demand fluctuations than other securities.
I've also found some very good information, albeit annoyingly fragmented, through this interview with Vanguard Principal John Hollyer, co-manager of Vanguard Inflation-Protected Securities Fund and the article's (fragmented) links:
What are the benefits of including TIPS in your portfolio?
There are two main benefits of TIPS bonds. The most unique features of TIPS are that they're essentially a Treasury (Treasuries dominate the U.S. dollar market for TIPS), and secondly they're indexed to inflation, so two of the key risks for bond investors -- credit/default risk and inflation risk -- are addressed by these securities. I characterize them as the long-term, risk-free rate. These bonds are free of those two risks, and that gives them some interesting properties. The mitigation of inflation risk through indexation causes them not to trade in lock-step with other bonds.
If we pull back for a minute into a portfolio context, we have an asset like inflation-indexed bonds that have expected returns not that much different than long-term treasury bonds, but a pattern of returns that will be somewhat different. Therefore, they can be a diversifying asset less correlated with the bond market, and help to reduce the overall volatility of the portfolio.
I'll probably try equally dividing my bond portfolio between international bonds, U.S. non-TIPS, and TIPS.
