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Old 07-12-2007, 03:04 PM   #41
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Sorry for throwing some reasoned discussion on the pile. I'll try to avoid it as much as possible in the future.

Its a slightly red rubbed area. We had a pair of trolls running around a few years ago telling everyone to run like hell from anything except TIPS and to take the "real" rate and eat the portfolio, then be sure to die on schedule.

That didnt seem to be very prudent advice for the long haul ER. I believe both of those guys are experiencing some significant financial trouble after ten years of the tips-only diet.

In the meanwhile, as I mentioned in the other thread, the conventional wisdom seems...conventional. I'm not sure why inflation protecting a small slice of portfolio creates that much benefit, but then again, I guess as much diversification as possible is a good thing.

To a point.

Just "prairie dogging" the idea makes me wonder how an investor looks at a product like this, and says "Gee, some government agency crafts a formula...which is occasionally changed, which measures a working urban renter who pays no health care...which is nothing like me...and somehow that'll be close enough over 3-4+ decades to give me a reasonably linear and predictable return".

Dont get me wrong...offer me some TIPS with a 4% coopun and I'd buy some. At sub-3%...eh...
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Old 07-12-2007, 06:12 PM   #42
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Originally Posted by cute fuzzy bunny View Post
We had a pair of trolls running around a few years ago telling everyone to run like hell from anything except TIPS and to take the "real" rate and eat the portfolio, then be sure to die on schedule.
I wasn't a member of this forum when this happened but, as I'm sure you remember, there were some TIPS issued around the turn of the century with coupons in the 4% range (I think the highest was actually 4.25%). If these were the ones to which the "trolls" were referring, it may have been pretty good advice. There would be no need to "die on schedule" with a 4% coupon and 4% SWR since the principal at maturity would have been CPI-adjusted (again I'm making the "heroic" assumption that CPI-U is somewhat representative of actual inflation). IIRC, your INTC colleague and buddy, clifp, said he owned a batch of these 4.25% TIPS.
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Old 07-12-2007, 06:54 PM   #43
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Looks like results of today's auction of 10-year TIPS just announced: 2.625% coupon, 98.942199 price, 2.749% YTM.
I'm surprised these weren't issued with a coupon of 2.75% since it would yield a price closer to par, i.e. 100.009. It seems that they don't want to issue these above par. The only thing I can think of is that the amount above par is subject to deflation risk, although I thought (perhaps incorrectly) only the inflation adjustment was subject to deflation risk. Can someone clarify this?
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Old 07-12-2007, 07:24 PM   #44
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At the time of the 'advice', the high yield tips were available on the secondary market only, at a price that made the yield pretty much the same as "new" tips with the lower, roughly ~2% coupons.

Since the 'trolls' were banned...by every early retirement forum i'm aware of, I think its safe to remove the "''" marks...

I'd feel worse about regularly bringing up these points if the folks who actually sell TIPS didnt point out the exact same potential drawbacks.

A quarter to half percentage point variance in CPI vs your spending inflation would sort of suck over a decade or two, or three or four.
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Old 07-13-2007, 12:57 AM   #45
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... then be sure to die on schedule.
Hopefully any prudent investor (who is not in a position to be able
to not deplete their portfolio under pessimistic scenarios) schedules
their death at least 5-10 years beyond their actuarial life expectancy.

Quote:
I believe both of those guys are experiencing some significant financial trouble after ten years of the tips-only diet.
Yeah, same as any other XX-only diet, I reckon. I don't think anyone
here is recommending a TIPS-only portfolio. I plead guilty to having
posted a spreadsheet, months ago, showing how a TIPS-only portfolio
might be managed to provide a given SWR, but it was only as a
thought experiment, not a serious proposal.

Quote:
I'm not sure why inflation protecting a small slice of portfolio creates that much benefit, but then again, I guess as much diversification as possible is a good thing.
Yes indeed, I think you could make the same argument for any
diversification move, e.g. "I don't see why protecting a small slice
of a portfolio against poor domestic-equitiies performance creates
that much benefit" ...

Quote:
I'd feel worse about regularly bringing up these points if the folks who actually sell TIPS didnt point out the exact same potential drawbacks.
I'm glad you brought up these points - the first time - but I wonder how
often it's necessary to bring them up, in the same thread no less
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Old 07-13-2007, 09:30 AM   #46
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I guess I brought them up more than once because I thought we were having a discussion about it.

It doesnt seem that anyone was 'glad' that I brought them up because the facts I expressed were met with eye rolling and name calling.

I'm well aware that there is a type of investor that wants a measure of 'realness' or certainty or safety that they perceive this type of investment provides, and that pointing out the holes in that line of thinking is discomforting to them.

I'm also aware that a whole range of less experienced investors may be sucked into buying a low yielding adjusted product for which the adjustment may not even remotely apply...and screw themselves.

You know, the sort of folks who see glowing recommendations and buy clumps of Blockbuster, Movie Gallery and ISM/OSM only to watch the price drop like a rock? Then they find out later that the guy who was pushing them got out a week before at a favorable price.
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