Non-US equivalent of iBonds and TIPS?

[zbigi]

> So, you have no mental model that can justify purchasing finite risk/return assets in any circumstances.

I have. I prefer smaller risks for smaller returns to greater risks and greater returns. Hence, most (but not all) of my money is not in stock market. I just don't see it as a rational enough thing to put more than say 30% of my stash in it. For example, the SP500 in the last 10 years went up by 193%. In the same timeframe, WIG20 (Polish stock index) went down by 40% (nominal terms, it's much worse with inflation included). That does not make much sense, investors are literally not behaving rationally here. Will it the trend change in the next decades - who knows? I certainly don't want to bet the farm on either outcome. Very smart people make laughably wrong long-term predictions all the time (see link from Jacob, where it was predicted that 2010s will be a lame decade for US stocks because of the retirees selling their stocks already).

Or, in other words, investing is like poker - you try to make profitable decisions in the face of very high uncertainty. But, because the uncertainty is so high, you can very easily be wrong. In poker, you deal with it by making thousands of small bets - so any one mistake will not have disastrous consequences. Unfortunately, in long-term investing you make a huge bet every couple of years (or even less often). This means a single mistake can ruin you. Hence, I prefer the decisions to be as risk averse as possible.

[prudentelo]

Investing in stock for long term is not a picking/prediction exercise. Risk that broad, diversified, total return stock index goes consistently down over 30 years is like risk that your country disappeared or govt defaults on bonds (which HAS happened in 20th century whereas 30+ year board, diversified negative stock total return HAS NOT happened).

I do not know if Warsaw stock exchange is broad and diversified. Small stock exchange indices can be actually sector bets (e.g. Russia stock market was baiscally energy bet, not diversified like US or all-world). Generally do not advise home country bias (anti-diversification) or bet on small exchanges. Either way, 10 year is not reliable period for stock returns. If you have 10 year time horizon, need large bond component indeed. 65% sounds OK, maybe even low. But 10 year is not early retirement time horizon.

[zbigi]

Investing in stock for long term is not a picking/prediction exercise. Risk that broad, diversified, total return stock index goes consistently down over 30 years is like risk that your country disappeared or govt defaults on bonds (which HAS happened in 20th century whereas 30+ year board, diversified negative stock total return HAS NOT happened).

I do not know if Warsaw stock exchange is broad and diversified. Small stock exchange indices can be actually sector bets (e.g. Russia stock market was baiscally energy bet, not diversified like US or all-world). Generally do not advise home country bias (anti-diversification) or bet on small exchanges. Either way, 10 year is not reliable period for stock returns. If you have 10 year time horizon, need large bond component indeed. 65% sounds OK, maybe even low. But 10 year is not early retirement time horizon.

I just checked out the WIG20_TR index (index consisting of 20 biggest companies in polish stock market, incl. dividend reinvestment). Over the past ~25 years, it produced around zero nominal returns. Obviously, the real returns have been hugely negative. I'd say the index is diverse, it has companies from sectors such as: mining, petroleum, electric energy, telecoms, finance, chemical processing, retail, clothing, IT services, e-commerce, gamedev. By construction, no one sector can have more than 5 companies in the index. The country's GDP per capita over that time period has grown from $4500 USD to $15,600 USD, which should generally produce a corresponding increase in valuation of major companies. And yet, the index is a super lame duck. It would really suck to be the person who was saving for retirement this way during those 25 years.

As for avoiding the country bias - unfortunately it adds another huge risk factor. If say I invest majority of my money in US stock, and the value of the dollar in relation to my local currency halves (which has happened in the 2000-2010 period for example), it will obliterate my returns.

[prudentelo]

WIG20 index has total mark cap of ~100bn USD which would make it (entire index) ~60th largest component of SP500.

Currency hedge indeed wise, which cost few basis point

Nobody advice put 100% of money in Poland stock market, which seem to be your attempt to reframe discussion.

[Tyler9000]

All else equal, it seems that a directly held inflation linked bond would be more likely to protect from inflation while preserving principle than, say, a directly held non-inflation-linked bond or a bond ETF or a stock index ETF.

It depends on the inflation.

The thing about inflation-linked bonds (TIPS) is that the additional inflation protection guarantee comes at a price. The coupon payment of TIPS is always lower than that of a nominal bond of equivalent maturity. And the difference is equal to the market expectation of inflation over the life of the bond.

If inflation turns out to be higher than market expectations, then TIPS are definitely the better deal. If inflation is less than expectations, then nominal bonds are a better deal. And if inflation exactly matches expectations, then it's a wash. The money you are paid for the inflation protection is exactly offset by the lower interest you agreed to receive in exchange for the inflation guarantee.

So TIPS can really be thought of as speculative investments where you're betting on future inflation. Sometimes it pays off and sometimes it doesn't. Yes, if you hold them to maturity then you're guaranteed your inflation-adjusted principle back. But the odds of accomplishing the same goal (while making more money) is probably higher with nominal bonds than many people realize.

[conwy]

It depends on the inflation.

The thing about inflation-linked bonds (TIPS) is that the additional inflation protection guarantee comes at a price. The coupon payment of TIPS is always lower than that of a nominal bond of equivalent maturity. And the difference is equal to the market expectation of inflation over the life of the bond.

If inflation turns out to be higher than market expectations, then TIPS are definitely the better deal. If inflation is less than expectations, then nominal bonds are a better deal. And if inflation exactly matches expectations, then it's a wash. The money you are paid for the inflation protection is exactly offset by the lower interest you agreed to receive in exchange for the inflation guarantee.

So TIPS can really be thought of as speculative investments where you're betting on future inflation. Sometimes it pays off and sometimes it doesn't. Yes, if you hold them to maturity then you're guaranteed your inflation-adjusted principle back. But the odds of accomplishing the same goal (while making more money) is probably higher with nominal bonds than many people realize.

Look, if your goal is to maximise returns and you don’t care as much about reducing risk of losing some principle, the yes, as you say, holding TIPS is a speculation. You should really hold the whole market, including international stocks and bonds, and within bonds, you should hold both types of bond.

And I already have most of my portfolio in exactly the above, so I’m not afraid to take risk.

But the above assumes you only want to maximise returns and and are willing to risk losing some principle.

But that’s not the point of this post.

The real question of this post is: what if I want some part of my portfolio to maintain its principle value as the first priority, with maximising returns as a solidly second place priority?

From that perspective, it seems to me that TIPS / I-Bonds are the clear winner for that part of the portfolio.

There is simply no other kind of investment that I know of which can come as close to guaranteeing zero loss of principle while not being eroded by inflation. In fact TIPS / I-Bonds seem to have been explicitly designed to serve precisely this need.

So in this way of thinking, I’m not betting on future inflation. I don’t care what inflation turns out to be. My goal is to reduce or eliminate the risk of losing principle in real terms. With inflation indexed directly held bonds, I achieve that goal whether or not there is inflation after I buy them.

If there is inflation, my principle is protected in real terms.
If there is no inflation, my principle is still protected in real terms.

Can any other asset perform this function?

And again, just a reminder: I’m not so stupid as to put my whole portfolio in TIPS / equivalent. Only one part of the portfolio. I still invest in regular stock and bond funds, of course. So my portfolio on the whole still benefits from deflation. It just does so while maintaining some risk-free component.