Many people break their portfolio down into two pieces:I often read about people setting up a LMP using a multi-decade TIPS ladder. For those who do that, what is the rest of your allocation to? All equities, or some equity-bond ratio that when included with the TIPS ladder results in your overall desired AA?
1. A portfolio whose income stream is deterministic. (I personally don't like the term LMP because it's not like I listed all of my expenses one by one, categorized them as subject to inflation or not, then summed up all of the ones that are subject to inflation and purchased a TIPS ladder to cover that).
2. A risk portfolio which is a portfolio whose future returns are probabilistic. This can be any AA you chose.
In my case #2 is an all equity 80/20 (US stock/International stock) AA but it could be any AA one is comfortable with.
Generally speaking, only #2 is targeted for a certain AA. There is no reason to target the entire portfolio's AA anymore because the purpose of #1 above is to generate a deterministic income stream. If you target an AA for the entire portfolio, you will now be subject to having to buy and sell individual TIPS bonds to rebalance. That's not only inconvenient, it breaks the entire purpose of having the steady, deterministic income stream in the first place.
For me, while I do not target an AA for the overall portfolio, I still monitor it. Why? I really have no idea, probably out of habit. It really doesn't have a lot of meaning now and I don't do anything with the information. I do monitor my 80/20 stock and would rebalance if it drifted very far from my target allocation.
Cheers.
Statistics: Posted by dcabler — Tue Apr 15, 2025 5:42 am
