Dimensional Fund Advisors (DFA) takes a more direct approach to immunizing retirement liabilities through their target-date retirement income funds. These funds provide a useful case study for understanding the role bond funds play in meeting retirement expenses.
In basic asset allocation for wealth accumulation, matching assets to liabilities is not a priority. The retirement liability (the desire to meet a spending goal in retirement) is not part of the analysis.
Any discussion of TIPS requires an additional mention of Series I Savings Bonds. This article will cover the basics of I Bonds.
Traditional bonds are priced around the objective of getting a return that exceeds expected inflation. If inflation is unexpectedly high, then the real return on nominal bonds is less.
The U.S. began issuing Treasury Inflation-Protected Securities (TIPS) in 1997. Backed by the full faith and credit of the U.S. government and assurances that inflation cannot eat away at their value, TIPS provide a risk-free asset for U.S.-based investors.
Understanding the relationship between bond risk and time to maturity and duration of a bond provides the basis for understanding the bond yield curve. The yield curve shows the yields to maturity for a series of bonds — typically U.S. Treasury bonds — with the same credit quality but different maturity dates, along with the term structure for interest rates.
We spend a lot of time talking about the importance of diversification. We have to look at bonds a little differently; they come with different risks than stocks.
Before we can discuss bonds in depth, it is important that we establish a common understanding of what bonds are and how they work. As a starting point, a bond is a contractual obligation to make a series of specific payments on specific dates.
Investing isn’t simply picking the best funds or building your perfect portfolio. Keeping your portfolio in line over the long term is just as important (if not more so).
Tax-loss harvesting, when done right, is the equivalent of turning your financial lemons into lemonade, by converting your market losses into tax savings. Successful tax-loss harvesting lowers your taxes without substantially impacting your long-term investment outcomes.