Fixed Rate Investments & Inflation

[ERD50]

Well, I think you can see the state of my thinking (or lack of) or perhaps my fear of getting in a bad/stagnant stock market.

I'll just say that the time to be worried about getting in the market is when it is UP, not so much when it is down. And boy, are we DOWN!

You have to follow your comfort zone, but you might want to get your head around the idea that your fear is out of sync with the market. That might help.

TIPS real rates may go higher, with the tremendous demand for liquidity in the world. But IMO they are definitely getting into a buying zone.

3% real goes a long way toward solving the retirement funding problem, albeit with none of the fun of the last few weeks.

ha

haha, please keep us informed - I've ignored TIPS as everyone has been saying the real returns have not looked good for a long time. My portfolio could probably stand some of these, at the right yield.

I would not be retired today if I had not invested in equities. My allocation varied from maybe 20% to 120%.

So my task now is to keep repeating to myself- No Margin For A Retired Man; I Must Not Think Bad Thoughts.

Ha

I laughed an evil laugh at that one! The only thing that beats the excitement of the adrenaline rush of seeing your leveraged investment go up, up, up - is the "excitement" of watching your leveraged investment go down, down, down... ever so quickly.

What's the old saying? Experience is the best teacher? The good thing about my painful lesson was that I learned it BEFORE I retired. I'd hate to think what I might do to myself w/o that experience.

I do dabble it in a bit from time-to-time (options can really be the same as margin). But, before I do, I force myself to do the numbers and say OUT LOUD - "if this investment goes to ZERO, where will that leave me, and am I comfortable with that?". If I cannot answer that ZERO is an acceptable risk (small % of NW), I don't hit the SUBMIT THIS ORDER button.

I might re-phrase your statement a bit - margin is for people who can consider (and are capable of) going back to work!

-ERD50

 

[Helena]

Inflation is the norm... but these are not normal times.

Periodically the economy goes through [necessary] periods of deflation.

We are in such a deflationary period now.

Deflation favors those who are in cash and debt free.

 

[Fastfade]

With inflation the way it is, who knows what life will be like in two-three years.

That's why I'm interested in HA's comment regarding TIPS. If inflation really gets bad in a couple years like many are predicting, fixed CD rates might not cut it. I need to do some studying on TIPS, especially from a tax perspective and perhaps even a TIPS ladder.

 

[wolf]

FASTFADE. I do try and maximize my CD rates by using websites that follow rates nationwide. The best IMO so far is "bankdeals.blogspot.com".

It cover's banks and credit unions. After you search out these websites and read the forums for a couple of years, You will sorta of get a feel for what is true, what to watch out for and "learn from other peoples experiences"

Also, IMO, If you follow the crowd, you will end up like the CROWD. So sometimes it does makes sense to not do what everyone else tells you to do.

If I had followed the advice of the "experts", I would have lost a lot of my networth during the past month.

Also, during the dotcom boom, I was fortunate enought to get out before the drop, and invest my proceeds in 7% 5 year CD's at the time.

Now that I'm retired, I agree with you.....but as I mentioned before.....if you talk to a financial expert they will prove to you that you are wrong.
Without equities, inflation will eat you up.

Again, as I mentioned before, don't spend more that you earn, and use the excess earnings to protect you against future inflation.

Also, plan for future expenses, ie. car, vacations, etc.

One concern I do have is the ability to pay for long term care for a spouse.
Managing my monther-in-laws assisted living expenses is very expensive.
Here is CA, it's $2900 a month. If the person requires extra care it's ranges up to $4000 a month.

If you have not already, you might look into long term care insurance.
The price varies depending on if you want only a couple of years worth of coverage or lifetime.

In my experience, to save money, it seems males don't last to long after they get sick. At the most maybe 2 years. So longterm care for 2 years.

Females as we all know, live much longer. So longtermcare for them should be longer.

I'm still debating if we should purchase long term care.

I might just get it for my wife.

Back to inflatiion:

In my case, we have about 10% in equities, I was going to increase that percentage slightly because the market is so low, but I'm still not sure when.

Sorry again for the rambling story.

 

[socca]

With equities you get higher long term returns at the expense of higher short term volatility.

That's not a fact. It's a prediction based on a variety of assumptions that may or may not continue to be valid as the future unfolds. Determining the proper confidence level for a prediction means determining a confidence level for each of the assumptions supporting the prediction. This is more work than many people want to do.

 

[Fastfade]

FASTFADE. I do try and maximize my CD rates by using websites that follow rates nationwide. The best IMO so far is "bankdeals.blogspot.com".

One concern I do have is the ability to pay for long term care for a spouse.

If you have not already, you might look into long term care insurance.
The price varies depending on if you want only a couple of years worth of coverage or lifetime.

I'm still debating if we should purchase long term care.

I might just get it for my wife.

Hey there Wolf... Thanks for the link to "bankdeals.blogspot.com". I've put it in my Favorites and will take a look at it shortly.

As to Longterm Health Care, my wife and I purchased a policy from Genworth about 2.5 yrs ago. We got the "Shared Coverage Option with a monthly maximum of $3900 & Lifetime Max of $468,000. It also, includes a 5% Equal Benefit Increase on each Policy Anniversay. Our annual fixed Premium is $3471.

It's a faily standard policy and if one spouse dies, the surviving spouse can continue the policy at a reduced annual rate of 125% of the survivor's rate (~$1950/yr).

Thanks for sharing your experience and opinions

 

[FinanceDude]

Inflation is a big risk. TIPS are not a true inflation hedge, although some on here will disagree. That being said,I know folks 100% in CDs that are blissfully happy. I guess "to each their own"...........

Keep in mind that even after a fairly large pullback in oil, food and energy prices are FAR above the "fake" inflation numbers the govt feeds us........

 

[ziggy29]

That's why I'm interested in HA's comment regarding TIPS. If inflation really gets bad in a couple years like many are predicting, fixed CD rates might not cut it. I need to do some studying on TIPS, especially from a tax perspective and perhaps even a TIPS ladder.

I think the market is severely overestimating the chances for a period of prolonged low inflation (or even deflation). With the printing presses being cranked up to shore up banking systems and the credit market, I don't see a long period of low inflation.

If you believe that inflation (even the watered-down, dubious numbers the feds calculate) will exceed 1% for the next 20 years, TIPS are a better buy than regular Treasuries of the same maturity.

 

[FinanceDude]

If you believe that inflation (even the watered-down, dubious numbers the feds calculate) will exceed 1% for the next 20 years, TIPS are a better buy than regular Treasuries of the same maturity.

But NEITHER are a true hedge against inflation........

 

[ziggy29]

But NEITHER are a true hedge against inflation........

Not "real" inflation. TIPS are a hedge against the inflation calculation the government uses, which can be much different than the realities many people are feeling.

At least before taxes.

 

[FinanceDude]

Not "real" inflation. TIPS are a hedge against the inflation calculation the government uses, which can be much different than the realities many people are feeling.

At least before taxes.

So, they're flawed, just like I said........

The fixed base rate is WAY too low, and the arbitrary measuring they do every 6 months is even sillier. Yet, many people like them a lot......

 

[FinanceDude]

Enjoy all the posts regarding fixed incomes and inflation. I tell all my buddies at the golf course that my wife has taken it on as her personal responsibility to bring this country out of the recession. Her greatest fear is that she will die and not have spent all the money. I have always been frugal and take great comfort in knowing that we can do OK even in a sorry economy. All our investments are in CD's and a bond fund. I might even move the bond funds into laddered CD's. Wish I knew more about laddering. However, I sleep well at night and don't ever want to change that. I'm 72 and my wife is 70. If I die before her, she will go through the money like Grant took Richmond. I've written her a letter that's in the satety deposit box with instructions on how to operate the funds. Hope she takes time to find the letter.

laddering CDs is easy. You decide on a 5 or 7 year ladder or whatever, and then divide the money into equal amounts and invest. For instance, 20% of your CD money in a 1-year CD, 20% in a 2-year CD, etc. It's quite easy........

 

[ziggy29]

So, they're flawed, just like I said........

The fixed base rate is WAY too low, and the arbitrary measuring they do every 6 months is even sillier. Yet, many people like them a lot......

Are you kidding? The current base rate when compared to standard Treasuries of the same duration is less than 1% in many cases! Why would someone buy a regular Treasury unless they think inflation will be less than 1% on average for a long time?

I don't believe a fixed rate approaching 3% is "WAY too low." But again, I do also believe that the inflation numbers are cooked -- but not so cooked that they won't register more than 1% over the long term.

 

[FinanceDude]

Are you kidding? The current base rate when compared to standard Treasuries of the same duration is less than 1% in many cases! Why would someone buy a regular Treasury unless they think inflation will be less than 1% on average for a long time?

I don't believe a fixed rate approaching 3% is "WAY too low." But again, I do also believe that the inflation numbers are cooked -- but not so cooked that they won't register more than 1% over the long term.

Does ANYONE REALLY think inflation is 3.1% or whatever? Because, I don't.........

Did I ever say TIPS OR Treasuries WERE an inflation hedge? I don't think so.......

I am just in awe of the "flight to quality" that is happening, people locking in permanent losses and buying non-inflation hedge stuff. Of course, when the market rebounds, they're the same ones asking "when the right time to get in" is, usually when the Dow is over 11,500........

 

[Gearhead Jim]

But NEITHER are a true hedge against inflation........

What non-volitile investmets DO you think are the best-but-imperfect hedge against inflation? If you eliminate equities, commodities, real estate, and all the other things that tend to be either volitile or illiquid, it doesn't seem like much is left. Right now, TIPS look like a better bet than ordinary bonds (Treasury or high grade corporate) and probably better than CD laddering. You probably have some things in mind, please comment.
BTW, I am NOT suggesting an all-TIPS portfolio or even that all of someone's fixed income allocation, should be in TIPS.
Although I haven't done the detailed work necessary to prove or disprove it, my own personal inflation rate seems pretty close to the government numbers.

 

[FinanceDude]

What non-volitile investmets DO you think are the best-but-imperfect hedge against inflation?

Your statement is an oxymoron. Of course, I was referring to equities, namely high dividend paying stocks and ETFs, if you want sector play.

Right now, TIPS look like a better bet than ordinary bonds (Treasury or high grade corporate) and probably better than CD laddering. You probably have some things in mind, please comment.

There are some nice muni bond issues out there. I bought some for a client today, double tax exempt at a 5.25% coupon, selling at 98. Issue to A- rated.......

BTW, I am NOT suggesting an all-TIPS portfolio or even that all of someone's fixed income allocation, should be in TIPS.
Although I haven't done the detailed work necessary to prove or disprove it, my own personal inflation rate seems pretty close to the government numbers.

That's great, you must not use much energy or drive your vehicles much.........

 

[socca]

I know folks 100% in CDs that are blissfully happy.

I wish I was 100% in CDs right now. Instead, I have huge exposure to the muni market. Munis are getting hammered right now. Of course, compared to the average equity investor, my unrealized losses are small. Still, I'm not used to even small unrealized losses on my portfolio. Fortunately, I should have no need to ever realize these losses. If society doesn't collapse, I should be able to ride this out.

P.S. Muni fund managers perform a form of dollar-cost averaging for their long-term clients when they rollover higher-priced, lower-yielding bonds into lower-priced, higher-yielding bonds. So, even in a hostile environment, it's not all bad.

 

[roger r]

Fastfade,
I'm early retired at 57 and am also very conservative. My exposure to stocks is maybe less than 30% (depending on the day anymore). There will be times when your all fixed portfolio is envious, and other times when 100% stocks is envious, but I really think a conservative middle ground is the best. I've only invested money in stocks that I could hypothetically loose all and still be able to frugally get along. Every financial advisor and retirement book I've read has said that I am too conservative and will battle inflation, but there maybe some re-writing of books when our current situation is over.

I guess that's slightly a ramble, but if I were in your shoes, I think I would take a bigger look at what your income would be over your estimated life expectancy using you current investments and taking a typical inflation rate into account. And also what sort of nest egg you would like to leave, as you will probably be depleting the pricipal as inflation eats away at things. If this is enough to get by, maybe there is no reason to be involved in the stock market. Plenty of online calculators to help with this.

I personally don't see a problem with cost averaging into the market these days, but wouldn't buy anything that I would see the need to sell on the 5+ year horizon.

As one of my old finance professors would say, risk and return will always be intrinsically realted.

 

[Fastfade]

Fastfade,
I'm early retired at 57 and am also very conservative. My exposure to stocks is maybe less than 30% (depending on the day anymore). There will be times when your all fixed portfolio is envious, and other times when 100% stocks is envious, but I really think a conservative middle ground is the best. I've only invested money in stocks that I could hypothetically loose all and still be able to frugally get along. Every financial advisor and retirement book I've read has said that I am too conservative and will battle inflation, but there maybe some re-writing of books when our current situation is over.

I guess that's slightly a ramble, but if I were in your shoes, I think I would take a bigger look at what your income would be over your estimated life expectancy using you current investments and taking a typical inflation rate into account. And also what sort of nest egg you would like to leave, as you will probably be depleting the pricipal as inflation eats away at things. If this is enough to get by, maybe there is no reason to be involved in the stock market. Plenty of online calculators to help with this.

I personally don't see a problem with cost averaging into the market these days, but wouldn't buy anything that I would see the need to sell on the 5+ year horizon.

As one of my old finance professors would say, risk and return will always be intrinsically realted.

Hi Roger. I agree with a lot you say. Like others who've posted here, my situation depends on whether a high rate of inflation lasts for several years. For now we can live fine on less than the interest we are making on our fixed rates and leave the principal untouched. When/if my real inflation rate exceeds our fixed rate return we still have expenditures that can be trimmed (if needed) before we consider eating into our pricipal.

No doubt there are better strategies than mine, but for now I can take a wait and see approach for the next 10 months as that's the earliest any of my funds become available for new/continued stategies.

Thanks for your comments

 

[socca]

Munis are getting hammered right now.

This article suggests that munis are a buy right now:

Bloomberg.com: Exclusive

I'm hoping these folks are right!

 

[freebird5825]

i'm already into TE munis. and I am just loving the dividend yields YTD.
i did a fund screener exercise on muni funds at M* today. average muni bond funds are down approx 9-10% YTD, so make sure it's a long term strategy.

 

[wolf]

"Fastfade".....I agree with "roger r"...his points and philosophy match mine. Everyone I talk to says I'm to consertive, but as mentioned earlier, sometimes it makes sense to "not follow the crowd" even though it seems illogical.