Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Better inflation hedge: TIPs or Wellesley?
Old 04-25-2007, 01:50 PM   #1
Moderator Emeritus
Rich_by_the_Bay's Avatar
 
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
Better inflation hedge: TIPs or Wellesley?

Which do you think would be a better choice to hedge inflation: TIPs or a well-diversified income/dividend fund like Wellesley (65:35 bonds:dividend stocks)?

Assume a 3 to 4 year horizon meaning you could hold off withdrawing for that many years of inflation if necessary.
__________________

__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
Rich_by_the_Bay is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: Better inflation hedge: TIPs or Wellesley?
Old 04-25-2007, 02:04 PM   #2
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: Better inflation hedge: TIPs or Wellesley?

A fund with 65% in nominal bonds would be almost the worst possible inflation hedge, but if your timeframe is only 3-4 years, I wouldn't worry too much about inflationary erosion.
__________________

__________________
wabmester is offline   Reply With Quote
Re: Better inflation hedge: TIPs or Wellesley?
Old 04-25-2007, 03:14 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: Better inflation hedge: TIPs or Wellesley?

Buy some 5 year TIPS.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: Better inflation hedge: TIPs or Wellesley?
Old 04-25-2007, 10:33 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: Better inflation hedge: TIPs or Wellesley?

Well, here again we're looking at the fine mechanics rather than the function. My only trouble is with the time horizon. In less than 5 years, almost anything can happen. That having been said, I think we can say with some minor authority that basing from the current working environment, that substantially different CPI numbers over the next 5 years arent a huge probability.

Given that Wellesleys long term performance of exceeding the average CPI by 4-5%, that its a better buy LONG TERM than your garden variety inflation protected security.

For periods of 4-5 years...I'd go with a 5 year CD in the 6% range and leave it at that or stick with a money market.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: Better inflation hedge: TIPs or Wellesley?
Old 04-26-2007, 12:01 AM   #5
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: Better inflation hedge: TIPs or Wellesley?

Quote:
Originally Posted by Cute Fuzzy Bunny
Given that Wellesleys long term performance of exceeding the average CPI by 4-5%, that its a better buy LONG TERM than your garden variety inflation protected security.
Interesting logic. Take a look at Vanguard's long-term bond fund, VWESX. Average return since inception (1973) was 8.79%, well above average inflation during that period. Does that mean that nominal bonds are a good inflation hedge? Of course not. Does that mean that people who buy bonds today should expect forward average returns to be near 8.79%? Of course not.

Past performance means little, and average past performance means even less. If you're looking for an inflation hedge, you probably want to look at how asset classes did in the face of increasing or high inflation. Nominal bonds did very poorly. Stocks didn't do so great either.
__________________
wabmester is offline   Reply With Quote
Re: Better inflation hedge: TIPs or Wellesley?
Old 04-26-2007, 01:22 AM   #6
Full time employment: Posting here.
 
Join Date: Jan 2006
Posts: 899
Re: Better inflation hedge: TIPs or Wellesley?

I recall that the Wellesley manager stating that they usually performing particularly poorly during rising interest rates. I think that they have a fairly long duration.
__________________
mb is offline   Reply With Quote
Re: Better inflation hedge: TIPs or Wellesley?
Old 04-26-2007, 07:35 AM   #7
Moderator Emeritus
Rich_by_the_Bay's Avatar
 
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
Re: Better inflation hedge: TIPs or Wellesley?

Quote:
Originally Posted by Cute Fuzzy Bunny
Given that Wellesleys long term performance of exceeding the average CPI by 4-5%, that its a better buy LONG TERM than your garden variety inflation protected security.
That was the gist of my original question: given two generally conservative investments, is the guaranteed inflation-beating performance of TIPs outweighed by the otherwise far superior performance of a sound income-divident fund during non-inflationary conditions.

How long do inflationary flares last? If I give Wellesley a 5 year head start by assuming no rampant inflation for 5 years, TIPs would have to do VERY well to make that up during say a 2 year inflation in years 6 and 7.

Bottom line, I'm trying to decide whether to include TIPs in my fixed income piece, or just hold a little more Wellesley and take my chances. Either way, most will be in short term bonds and this is for the long end of my fixed holdings.
__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
Rich_by_the_Bay is offline   Reply With Quote
Re: Better inflation hedge: TIPs or Wellesley?
Old 04-26-2007, 07:37 AM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: Better inflation hedge: TIPs or Wellesley?

Quote:
Originally Posted by Rich_in_Tampa
How long do inflationary flares last?
1966-1982. Do you feel lucky?
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: Better inflation hedge: TIPs or Wellesley?
Old 04-26-2007, 09:13 AM   #9
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas Hill Country
Posts: 42,107
Re: Better inflation hedge: TIPs or Wellesley?

I couldn't locate annual performance numbers back any further than 1975, but just out of curiosity here's Wellesley annual returns for 75-82 vs the CPI for that year:

Return CPI
1982 23.3 6.1
1981 8.7 10.4
1980 11.9 13.5
1979 6.2 11.3
1978 3.6 7.7
1977 4.3 6.5
1976 23.3 5.8
1975 17.5 9.1

The five year stretch from 1977 through 1981 looks kinda rough...


__________________
Numbers is hard

When I hit 70, it hit back

Retired in 2005 at age 58, no pension
REWahoo is offline   Reply With Quote
Re: Better inflation hedge: TIPs or Wellesley?
Old 04-26-2007, 09:20 AM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: Better inflation hedge: TIPs or Wellesley?

Ok wab, so historic data doesnt mean anything, so that leaves us with what?
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: Better inflation hedge: TIPs or Wellesley?
Old 04-26-2007, 10:36 AM   #11
Moderator Emeritus
Rich_by_the_Bay's Avatar
 
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
Re: Better inflation hedge: TIPs or Wellesley?

Quote:
Originally Posted by REWahoo!
The five year stretch from 1977 through 1981 looks kinda rough...
Interesting bad-case-scenario yet, even then, with the few years where W returned 7-15% better better than CPI, the final total may not be that much worse. If you can wait it out that long...
__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
Rich_by_the_Bay is offline   Reply With Quote
Re: Better inflation hedge: TIPs or Wellesley?
Old 04-26-2007, 10:41 AM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: Better inflation hedge: TIPs or Wellesley?

Quote:
Originally Posted by Rich_in_Tampa
Interesting bad-case-scenario yet, even then, with the few years where W returned 7-15% better better than CPI, the final total may not be that much worse. If you can wait it out that long...
Uhuh, but look at the title of the thread: better inflation hedge. Not "which asset has a higher return?" When inflation spiked historically, it hasn't been all that great for Wellesley.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: Better inflation hedge: TIPs or Wellesley?
Old 04-26-2007, 10:50 AM   #13
Moderator Emeritus
Rich_by_the_Bay's Avatar
 
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
Re: Better inflation hedge: TIPs or Wellesley?

Quote:
Originally Posted by brewer12345
Uhuh, but look at the title of the thread: better inflation hedge. Not "which asset has a higher return?" When inflation spiked historically, it hasn't been all that great for Wellesley.
I guess that's right, but W seems good at preserving capital if nothing else.

I'm feeling like a couple year expenses in TIPs (at most) is wise, even if it puts a little drag on overall returns for the fixed income piece.
__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
Rich_by_the_Bay is offline   Reply With Quote
Re: Better inflation hedge: TIPs or Wellesley?
Old 04-26-2007, 11:19 AM   #14
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: Better inflation hedge: TIPs or Wellesley?

Quote:
Originally Posted by Cute Fuzzy Bunny
Ok wab, so historic data doesnt mean anything, so that leaves us with what?
Only those "fine mechanics" that you so disdain.

Wellesley is 65% nominal bonds, right? Today, nominal bond yields are around 5%, and the embedded inflation estimate in those bonds is around 2.5%.

So, we don't need hyperinflation for nominal bonds to suck. If inflation goes up, that causes interest rates to go up, and bond values go down according to their duration. That's practically physics. If inflation stays above 3%, the total return on those bonds stay low relative to inflation-index bonds. In the case of high inflation, the total return on those bonds will be negative in real terms.

No historical data required. Use today's bond yields to predict future returns, use today's duration to predict capital loss and gain, use today's inflation estimate to predict effects of higher or lower inflation.
__________________
wabmester is offline   Reply With Quote
Re: Better inflation hedge: TIPs or Wellesley?
Old 04-26-2007, 11:24 AM   #15
Thinks s/he gets paid by the post
jIMOh's Avatar
 
Join Date: Apr 2007
Location: Milford, OH
Posts: 2,085
Re: Better inflation hedge: TIPs or Wellesley?

Quote:
Originally Posted by Rich_in_Tampa
Which do you think would be a better choice to hedge inflation: TIPs or a well-diversified income/dividend fund like Wellesley (65:35 bonds:dividend stocks)?

Assume a 3 to 4 year horizon meaning you could hold off withdrawing for that many years of inflation if necessary.
If I needed to maintain purchasing power of money over 5 years, I'd look more to a fund like PRPFX, than Wellesley or TIPs. The prospectus of PRPFX suggests it's goal is to maintain purchasing power... if you look it owns commodities (gold, metals), stocks and bonds to make sure it has maintained purchasing power.

__________________
Light travels faster than sound. That is why some people appear bright until you hear them speak. One person's stupidity is another person's job security.
jIMOh is offline   Reply With Quote
Re: Better inflation hedge: TIPs or Wellesley?
Old 04-26-2007, 04:18 PM   #16
Recycles dryer sheets
 
Join Date: Nov 2005
Posts: 152
Re: Better inflation hedge: TIPs or Wellesley?

Honestly to protect against rapid inflation I would simply own 5% - 10% of a commodity index.
__________________
trixs is offline   Reply With Quote
Re: Better inflation hedge: TIPs or Wellesley?
Old 04-26-2007, 04:20 PM   #17
Moderator Emeritus
Rich_by_the_Bay's Avatar
 
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
Re: Better inflation hedge: TIPs or Wellesley?

Quote:
Originally Posted by trixs
Honestly to protect against rapid inflation I would simply own 5% - 10% of a commodity index.
That makes sense on the protection side, but in between inflationary times, that's be quite a ride. I am pretty "capital preservation-oriented" in the draw down phase, I guess.
__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
Rich_by_the_Bay is offline   Reply With Quote
Re: Better inflation hedge: TIPs or Wellesley?
Old 04-26-2007, 04:24 PM   #18
Recycles dryer sheets
 
Join Date: Nov 2005
Posts: 152
Re: Better inflation hedge: TIPs or Wellesley?

Quote:
Originally Posted by Rich_in_Tampa
That makes sense on the protection side, but in between inflationary times, that's be quite a ride. I am pretty "capital preservation-oriented" in the draw down phase, I guess.
Oh just taking a look at something like DBC and you can see the wild ride heh.

However, what would something do to your portfolio that does not directly track stock prices? It will reduce volatility and smooth the ride. This could actually increase your returns because you buy low and sell high with reblanacing. :

Then again I might just be crazy!
__________________
trixs is offline   Reply With Quote
Re: Better inflation hedge: TIPs or Wellesley?
Old 04-26-2007, 04:50 PM   #19
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: Better inflation hedge: TIPs or Wellesley?

We're all trying to guess at the question Rich is really asking.

He's leaving us clues! My interpretation of what Rich really wants is potentially high upside with little or no downside. The holy grail of investing.

He seems to think Wellesley can provide that based on historical performance, and he's looking for confirmation that he is right.

IMHO, Wellesley is nothing but a fund with lots of nominal bonds and a smidgen of large value. The performance of that fund should be fine as long as the economy has solid growth and low inflation. Anything else, and all bets are off.

In the past 20-30 years, Wellesley has benefited from a few inputs that are no longer present (at least not to the same extent as they were):

1) High dividend yields on large value.

2) High bond yields.

3) A declining interest rate environment.

4) 2+ decades of speculative P/E growth.

If you believe that these ingredients still exist, then there's a fair chance that Wellesley will perform as well as it did in the past.
__________________
wabmester is offline   Reply With Quote
Re: Better inflation hedge: TIPs or Wellesley?
Old 04-26-2007, 05:09 PM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2003
Location: Kansas City
Posts: 7,408
Re: Better inflation hedge: TIPs or Wellesley?

Wellllllllllll

How about the choice between a bunch of civil service cats 'calculatiing' or Mr Market.

Kinda reminds one of a Dirty Harry movie or something - eh!

heh heh heh heh heh heh heh heh heh heh heh - 8).

And it's that time again folks! - Pssst Wellesley

That's my vote and I'm sticking to it. Even though I 'actually' own Target Retirement.
__________________

__________________
unclemick is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Is an Annuity a good way to get over a SWR of 5%? astromeria FIRE and Money 177 10-27-2006 05:23 PM
Bond Funds? Question about Rational Investing Patrick FIRE and Money 100 10-26-2006 03:01 PM
TIPS vs. Corporate Inflation Protected Securities rapoole FIRE and Money 8 01-07-2005 03:53 PM
SWR, terminal values, TIPS, I-bnds & comm paper sgeeeee FIRE and Money 144 02-25-2004 04:35 PM
TIPS vs. Mutual Fund with TIPS? Telly FIRE and Money 12 07-16-2003 12:21 PM

 

 
All times are GMT -6. The time now is 08:54 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.