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Old 07-26-2009, 08:47 AM   #21
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if a significant portion of your FIRE status is dependent on a non-COLA'd pension, you need to make a defensive effort to construct the balance of your portfolio to do well in an inflationary environment. TIP's, equities, commodities........... Pay your money, take your chances......
Well, as some people have said here before, many of us can live with being half right but not 100% wrong. I think that is one of the key values of diversification even in retirement (some might say *especially* in retirement since you are so dependent on the performance of your assets).

Stocks? Should keep up with (and beat) inflation over the long run, but we have all too recently seen what can happen in even a six month period (September '08 - March '09). Ouch.

Commodities? Should provide inflation protection, but are volatile and not really provide "growth" in the long term. Also prone to boom and bust cycles with bubbles, as in oil going to $145 before cratering under $40.

TIPS? In theory it should provide guaranteed real return (held to maturity). But if your spending habits don't match the CPI, it may not be all it's cracked up to be. I would wager that the personal inflation of most people exceeds the CPI, especially if they aren't buying a lot of discretionary items. And TIPS *funds* can and do lose principal.

Real estate? Again -- the supply is fixed so when the economy and population grow, it *should* rise in value long term. But it's very heavily leveraged in most cases and thus subject to very painful corrections through deleveraging.

The good news is that perfect storms like we recently saw are rare, when just about nothing works but cash. Usually at least some of these will be rising or holding value when others fall -- helping (in most cases) to prevent being "100% wrong."
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Old 07-26-2009, 10:31 AM   #22
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But if your spending habits don't match the CPI, it may not be all it's cracked up to be.
CFB would always trot this out, and it always struck me as a hollow statement. True, but hollow.

The question isn't whether TIPS are going to keep up with my Personal Inflation Index. The Q is are they a decent hedge against inflation in general and/or are they better/worse than any other inflation hedge available to me.

In parallel with many other discussions I have had on this forum, it is not so much a question of good/bad, it is a question of better/worse than available alternatives.

So I would look at your alternatives in that light. I personally own no TIPS now, but if they look attractive I'd like to add some to add some diversification to the portfolio.

-ERD50
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Old 07-26-2009, 12:28 PM   #23
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CFB would always trot this out, and it always struck me as a hollow statement. True, but hollow.

The question isn't whether TIPS are going to keep up with my Personal Inflation Index. The Q is are they a decent hedge against inflation in general and/or are they better/worse than any other inflation hedge available to me.
Well, there is certainly as much correlation between the return of TIPS and the rate of inflation as with any investment. But I wouldn't go so far as to say it's "hollow."

In reality, one's "personal real return" on TIPS is not the X% representing the real coupon yield, it's CPI+X% minus one's personal inflation rate. If someone in today's economy buys a lot of consumer electronics and other big-ticket "stuff" that's being discounted in an economy with weak demand for them, chances are that their personal inflation rate is very low (or even negative) and thus the "real personal return" on TIPS is quite high.

On the other hand, if they buy mostly consumer staples, pay for their own health insurance and are putting children through college, their personal inflation rate may be so high as to make the real return on TIPS negative based on personal inflation.

So I don't think it's really "hollow." I think anyone who is considering TIPS needs to understand this. People with different consumption patterns in today's economy are likely to have different personal rates of inflation, and possibly very different. I think most people educated enough to understand TIPS understands that their personal rate of inflation isn't going to exactly match the CPI, but I think some people may not realize just how different theirs can be.
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Old 07-26-2009, 12:55 PM   #24
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So I don't think it's really "hollow." I think anyone who is considering TIPS needs to understand this. People with different consumption patterns in today's economy are likely to have different personal rates of inflation, and possibly very different. I think most people educated enough to understand TIPS understands that their personal rate of inflation isn't going to exactly match the CPI, but I think some people may not realize just how different theirs can be.
Oh, I'm not arguing that one's Personal Inflation Index (PII) will or will not match the CPI, not at all.

What I'm trying to say is, that is irrelevant as to whether TIPS are a good choice as an inflation hedge. It's either TIPS or something else, and I don't know of any "something else" that is matched to anyone's PII.

Example:

A) CPI end up being 3% for the next 30 years.

B) TIPS provide a real return of 2% over that time.

C) Investment X provides a real return of 3% over that time.

D) Investment Y provides a real return of 1% over that time.

Now, let's take the case where ERD50's PII ends up being 5% over that time. Clearly, (in hind sight), Investment X is best, at 3% real return.

And, let's take the case where ERD50's PII ends up being 1% over that time. Clearly, (in hind sight), Investment X is best, at 3% real return.

So, regardless of my PII, the highest real return is best. My PII was not a factor in that decision, that is why I call it "hollow". Yes, I may be in trouble if my II is 5%, but that doesn't change my investment selection.

Make sense?

-ERD50
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Old 07-27-2009, 03:08 PM   #25
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Here are the results from today's 20 yr TIP auction. The 2.387 yield was about what I expected and is congruent with what they were trading at in the aftermarket. I bought a few. The original issue in January came out at 2.5% which was nicer.........

PHP Code:
Description:                  19-Year 6-Month TIPS
Term
:                         19-Year 6-Month
Series
:                       TIPS of January 2029
Interest Rate
:                2-1/2%
High Yield:                   2.387%
Price:                        $101.340316
Allotted at High
:             97.30%
Accrued Interest*:            $1.08259
Total Tendered
**:             $13,748,204
Total Accepted
**:             $6,150,304
Issue Date
:                   07/31/2009
Dated Date
:                   07/15/2009
Original Issue Date
:          01/30/2009
Maturity Date
:                01/15/2029
CUSIP
:                        912810PZ5

*Per $1,000
**In thousands

Auction Results Press Release
:
http://www.treasurydirect.gov/instit/annceresult/press/preanre/2009/R_20090727_3.pdf


Historical Auction Results:
http://www.treasurydirect.gov/instit/annceresult/query/query.htm 
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