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Re: Bond Funds? Question about Rational Investing
Old 10-19-2006, 02:14 PM   #21
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Re: Bond Funds? Question about Rational Investing

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Originally Posted by brewer12345
Looks like 5 year TIPS are yielding around 2.63%.
Why would anyone want to buy these when you can get 5.5% in a checking account? Just curious.
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Re: Bond Funds? Question about Rational Investing
Old 10-19-2006, 02:19 PM   #22
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Re: Bond Funds? Question about Rational Investing

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Why would anyone want to buy these when you can get 5.5% in a checking account? Just curious.
Oy! One last time on TIPS: the yield is a real yield. That means you get paid wahtever the yield is plus inflation as measured by the CPI. So if CPI=3.5% and yield=2.5%, total (nominal) yield is 3.5+2.5 = 6%.
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Re: Bond Funds? Question about Rational Investing
Old 10-19-2006, 02:27 PM   #23
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Re: Bond Funds? Question about Rational Investing

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Oy! One last time on TIPS: the yield is a real yield. That means you get paid wahtever the yield is plus inflation as measured by the CPI. So if CPI=3.5% and yield=2.5%, total (nominal) yield is 3.5+2.5 = 6%.
Thanks. So if the CPI is 2%, you get 4.5%? So you're gambling on how much inflation there will be, again?
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Re: Bond Funds? Question about Rational Investing
Old 10-19-2006, 02:33 PM   #24
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Re: Bond Funds? Question about Rational Investing

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Originally Posted by brewer12345
Oy! One last time on TIPS: the yield is a real yield. That means you get paid wahtever the yield is plus inflation as measured by the CPI. So if CPI=3.5% and yield=2.5%, total (nominal) yield is 3.5+2.5 = 6%.
Nice explaination. I even understand it. BTW Brewer, have you noticed the nice move BULK has made lately?
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Re: Bond Funds? Question about Rational Investing
Old 10-19-2006, 02:38 PM   #25
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Re: Bond Funds? Question about Rational Investing

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Originally Posted by Patrick
Thanks. So if the CPI is 2%, you get 4.5%? So you're gambling on how much inflation there will be, again?
That's supposedly the beauty. Whether CPI is 5% or 50%, you supposedly make your 2.5% either way.

-CC
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Re: Bond Funds? Question about Rational Investing
Old 10-19-2006, 02:44 PM   #26
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Re: Bond Funds? Question about Rational Investing

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Originally Posted by DOG52
Nice explaination. I even understand it. BTW Brewer, have you noticed the nice move BULK has made lately?
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Re: Bond Funds? Question about Rational Investing
Old 10-19-2006, 02:58 PM   #27
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Re: Bond Funds? Question about Rational Investing

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Originally Posted by Nords
But if you don't sell the bond then you'll collect interest until it matures, and you'll get your inflation-eroded principal back as well.
Isn't the inflation-erosion factor at work on money kept in a bond fund, also?

Quote:
If interest rates rise higher than your bond's interest rate, you'll have a huge opportunity loss by not being able to invest the money in another higher-returning asset.
If the money were in a fund instead, and I sold it, wouldn't I have paid the opportunity cost also at that point?
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Re: Bond Funds? Question about Rational Investing
Old 10-19-2006, 03:02 PM   #28
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Re: Bond Funds? Question about Rational Investing

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That's supposedly the beauty. Whether CPI is 5% or 50%, you supposedly make your 2.5% either way.

-CC
So why not use TIPS in the Rational Investing Portfolio instead of Bond Funds and get the guaranteed return without the possibility of a loss?
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Re: Bond Funds? Question about Rational Investing
Old 10-19-2006, 03:07 PM   #29
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Re: Bond Funds? Question about Rational Investing

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So why not use TIPS in the Rational Investing Portfolio instead of Bond Funds and get the guaranteed return without the possibility of a loss?
Fixed bonds and TIPS do well in different scenarios. In an environment where inflation is high and/or keeps accelerating, TIPS protect you from big losses because they automatically cover inflation. This is also when fixed bonds get killed.

In an environment where the economy is pitching into recession, the bottom is falling out of everything, and inflation is heading for zero or below, high grade fixed rate bonds do very well.

Having some of both means you have something that does well regardless of what happens.
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Re: Bond Funds? Question about Rational Investing
Old 10-19-2006, 03:20 PM   #30
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Re: Bond Funds? Question about Rational Investing

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Originally Posted by brewer12345
Oy! One last time on TIPS: the yield is a real yield. That means you get paid wahtever the yield is plus inflation as measured by the CPI. So if CPI=3.5% and yield=2.5%, total (nominal) yield is 3.5+2.5 = 6%.
What is the base CPI now
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Re: Bond Funds? Question about Rational Investing
Old 10-19-2006, 03:27 PM   #31
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Re: Bond Funds? Question about Rational Investing


Quote:
Originally Posted by brewer12345

In an environment where the economy is pitching into recession, the bottom is falling out of everything, and inflation is heading for zero or below, high grade fixed rate bonds do very well.
This makes perfect sense.

I'm trying to come up with the scenario where fixed rate bonds do well while TIPS get killed. Any takers?

I think it would happen when inflation is much-much lower than expected while the economy is booming and real interest rates are rising because of high investment demand (but not rising enough to offset the gain from the lower than expected inflation).

Does that sound right or is there a better scenario to show this?


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Re: Bond Funds? Question about Rational Investing
Old 10-19-2006, 03:33 PM   #32
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Re: Bond Funds? Question about Rational Investing

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Originally Posted by Patrick
Isn't the inflation-erosion factor at work on money kept in a bond fund, also?
If the money were in a fund instead, and I sold it, wouldn't I have paid the opportunity cost also at that point?
The questions like these (and their answers) are why we don't invest in bonds. If you want to make money then there are plenty of alternatives to bonds & bond funds.

I think that for most investors the purpose of bonds is just to reduce volatility, and we sidestep that with a couple years' expenses in cash.
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Re: Bond Funds? Question about Rational Investing
Old 10-19-2006, 03:55 PM   #33
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Re: Bond Funds? Question about Rational Investing

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Originally Posted by Patrick

If the money were in a fund instead, and I sold it, wouldn't I have paid the opportunity cost also at that point?
in theory, a good bond fund manager is replacing bonds reaching maturity with new ones, turning over issues etc. So, at least in the bond universe, you aren't losing nearly as much opportunity cost in a fund as you would be with individual bonds.
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Re: Bond Funds? Question about Rational Investing
Old 10-19-2006, 04:12 PM   #34
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Re: Bond Funds? Question about Rational Investing

An individual buyer of bonds can also buy with differing maturities and so achieve the same as a bond fund manager. This is what I have done.

FYI, I have 25% of my portfolio in CA muni bonds. This year, I have a 5.53% capital return to date with an average 3.25% dividend on top of that. So my total return to date is 8.78% (tax free).

Yes, muni bonds reduce volatility but their return has been far from shabby over the last 3 years (Last year my muni bonds returned 9% total -- and, again, that's tax-free).

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Re: Bond Funds? Question about Rational Investing
Old 10-19-2006, 04:20 PM   #35
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Re: Bond Funds? Question about Rational Investing

http://www.bls.gov/cpi/home.htm#overview

Says +2.1% over the last year. Minus food and energy, it's +2.9%. I guess I'm not sure which one TIPS uses without researching it more.

-CC
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Re: Bond Funds? Question about Rational Investing
Old 10-19-2006, 04:22 PM   #36
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Re: Bond Funds? Question about Rational Investing

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http://www.bls.gov/cpi/home.htm#overview

Says +2.1% over the last year. Minus food and energy, it's +2.9%. I guess I'm not sure which one TIPS uses without researching it more.

-CC
TIPS uses full CPI without anything taken away, but IIRC it uses a 6 month average.
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Re: Bond Funds? Question about Rational Investing
Old 10-19-2006, 05:47 PM   #37
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Re: Bond Funds? Question about Rational Investing

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Originally Posted by magellan
I'm trying to come up with the scenario where fixed rate bonds do well while TIPS get killed. Any takers?

I think it would happen when inflation is much-much lower than expected while the economy is booming and real interest rates are rising because of high investment demand (but not rising enough to offset the gain from the lower than expected inflation).
Right. Nominal bonds have a built-in guestimate of inflation over the life of the bond. TIPS will give you a better return than nominals when that market guestimate is low, and they'll give you a worse return when the inflation guestimate is too high. The current embedded inflation guestimate over the next 5 years is about 2.1%/year (4.75 nominal - 2.65 real).

The bottom-line for me is that TIPS remove the need to guess what inflation is going to do over the next 5- 10- or 20-years. I know I'll get 2.5% (or so) above whatever CPI-U prints.

Historically, nominal bonds have returned right around 2.5% above inflation, so you can lock in that average return by buying TIPS today. When (if) the TIPS real yield goes over 3% or so, then back up the truck and load her up!
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Re: Bond Funds? Question about Rational Investing
Old 10-19-2006, 07:16 PM   #38
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Re: Bond Funds? Question about Rational Investing

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And if we're buying them to make money, well, there are many more investments that make more money with not much more volatility-- especially when the yield curve is as flat as it is today!
Nords, can you list what those investments are? Thanks.
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Re: Bond Funds? Question about Rational Investing
Old 10-19-2006, 07:25 PM   #39
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Re: Bond Funds? Question about Rational Investing

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This makes perfect sense.

I'm trying to come up with the scenario where fixed rate bonds do well while TIPS get killed. Any takers?
Deflation. The principal balance of TIPS are adjusted upward and downward for changes in CPI.
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Re: Bond Funds? Question about Rational Investing
Old 10-19-2006, 07:42 PM   #40
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Re: Bond Funds? Question about Rational Investing

I don't know how to copy a quote from someone else, but I'm referring to Nord's statement above. It seems that it does not make much sense for us to have a 50/50 split of our portfolio, with bonds making so little. But I am concerned about volatility, as we are 60 and 57 years old. I am also interested in hearing what other investments you would recommend with not much more volatility than bond funds.
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