The answer is yes, you are allowed to go all TIPS/i-Bonds for your bond allocation.
Here's the rub. While inflation bonds in general can be considered as more perfect bonds, the problem is you can't really buy them at what I'll call "face value". They trade on the open market, and this is true from the day they are born and put up for auction. I-bonds themselves are perfect, but you can only get so much of them.
Philosophically, we take risk to get reward. Therefore, the lower the risk, the less the reward. Nominal bonds have increased risk, and so they must compensate investors for that. You should make more return on nominals than TIPS. However, if the purpose of bonds in your portfolio is to take winnings off of the table, for example, and yet not lose in real terms going forward, then why take risk with nominal bonds (which can be eaten up by inflation with no mechanism for recovery)? It's all about the purpose of bonds for you.
Also, the myth of deflation affecting TIPS is false as it is only relevant when TIPS are traded around on the open market at prices that realize the deflationary loss. In other words, you buy a TIPS from birth and hold it until maturity = deflation immunity. Granted you can't control what a fund does. This is one reason folks like grabbing the reins themselves and doing TIPS ladders.
Here's the rub. While inflation bonds in general can be considered as more perfect bonds, the problem is you can't really buy them at what I'll call "face value". They trade on the open market, and this is true from the day they are born and put up for auction. I-bonds themselves are perfect, but you can only get so much of them.
Philosophically, we take risk to get reward. Therefore, the lower the risk, the less the reward. Nominal bonds have increased risk, and so they must compensate investors for that. You should make more return on nominals than TIPS. However, if the purpose of bonds in your portfolio is to take winnings off of the table, for example, and yet not lose in real terms going forward, then why take risk with nominal bonds (which can be eaten up by inflation with no mechanism for recovery)? It's all about the purpose of bonds for you.
Also, the myth of deflation affecting TIPS is false as it is only relevant when TIPS are traded around on the open market at prices that realize the deflationary loss. In other words, you buy a TIPS from birth and hold it until maturity = deflation immunity. Granted you can't control what a fund does. This is one reason folks like grabbing the reins themselves and doing TIPS ladders.
Statistics: Posted by Dude2 — Fri Apr 12, 2024 4:22 am — Replies 6 — Views 994