Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Re: How should I invest my savings?
Old 07-10-2004, 11:41 AM   #41
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: How should I invest my savings?

FWIW, I don't think FIREcalc's modeling of TIPS is 100% accurate. TIPS will always return the original principal, even if deflation would have otherwise eroded the principal.

Also, the treasury just auctioned 10-year TIPS last week. The real yield was 2.02%. 20-years will be auctioned later this month. Personally, I see no reason to buy via a lower yielding Vanguard fund.
__________________

__________________
wabmester 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: How should I invest my savings?
Old 07-10-2004, 12:14 PM   #42
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: How should I invest my savings?

Some people feel highly compelled to create a mathematically organized structure around chaos. They'll twist, turn, change and ignore various bits and pieces to suit. Sort of like putting together a jig saw puzzle with a pair of scissors.

That having been said, tips are probably the best bond deal out there today. As mentioned in another thread, it seems almost all the other fixed income comes back to roughly 1%. At least you can get 2% with tips.

Certainly if conditions ever presented themselves that would allow buying new tips in the 4% or better range, I'd be all over them.

As far as eating down my portfolio and hoping I dont outlive it because I think I can predict the future of equities and dont like the way the tea leaves fell...well...I think I'll pass. Good asset allocation still seems prudent to me. Although that having been said, my holdings in US equities is only about 30% of my portfolio.
__________________

__________________
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: How should I invest my savings?
Old 07-10-2004, 12:42 PM   #43
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: How should I invest my savings?

I use the old pie chart based on my age - buy balanced index out the can - plan to take the SEC yield if/when I need the money. Shift asset allocation once every 10-15 yrs or so if I feel older and get around to it.

For putzing, I have my hobby stocks. Like fishing, camping, etc, it's a fun little hobby. Golf on the other hand - irritates, frustrates, reminds me of my lack of hand/eye coord. - so I avoid it entirely.

Investing can be stone simple (like VG Retirement Series) or like Wendy Wonk on page 125 of Four Pillars.
__________________
unclemick is offline   Reply With Quote
Re: How should I invest my savings?
Old 07-10-2004, 12:46 PM   #44
Full time employment: Posting here.
 
Join Date: Sep 2003
Posts: 902
Re: How should I invest my savings?

Quote:
Also, the treasury just auctioned 10-year TIPS last week. *The real yield was 2.02%. * 20-years will be auctioned later this month. * Personally, I see no reason to buy via a lower yielding Vanguard fund.
I agree wabmester. Plus, there's no way of knowing what the TIPS fund manager will do, or what that fund will yield in a few years. There's some additional security to be had by buying and holding to maturity. One can lock in a real return for 25+ years.

JWR, awhile back you said that long-term TIPS at 2.3% real yield to maturity would provide 4% plus inflation for 36.9 years assuming that you hold them to maturity and invest the balance at maturity in something that matches inflation (i.e., 0% real interest). Could you elaborate? FIRECalc comes up with something closer to 3.4%, and I think it assumes you can reinvest at 2.5%. I think wabmester may have a point about FIRECalc not handling TIPS precisely.
__________________
Bob_Smith is offline   Reply With Quote
Re: How should I invest my savings?
Old 07-10-2004, 01:40 PM   #45
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: How should I invest my savings?

Uh oh.

Now, while vanguards tips fund is inferior to 20 year tips sold today, wouldnt it "become better" as higher yielding tips are added when interest rates go up?

I could see locking in real tips held to maturity at higher rates. At 2% I'm hesitant to lock in when rates are headed up.

Or am I still not getting this?
__________________
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: How should I invest my savings?
Old 07-10-2004, 02:21 PM   #46
Recycles dryer sheets
 
Join Date: Apr 2004
Posts: 105
Re: How should I invest my savings?

1. It you have a cash equivalent that matches inflation exactly (i.e., at a zero percent real interest rate), you can safely withdraw 3.33% of the initial balance (plus inflation) every year for 30 years.

Would this indicate that with a tip at 2% you could withdraw & spend 5.33% and reinvest the inflation value ?


2. I am a nervous type, seems like a combination of TIPS, index and balanced funds are a good choice. Looking at Trowes Capitol Appreciation, Dodge & Cox balanced and OAkmark Eqty Inc.




__________________
bobbee25 is offline   Reply With Quote
Re: How should I invest my savings?
Old 07-10-2004, 03:24 PM   #47
Thinks s/he gets paid by the post
charlie's Avatar
 
Join Date: Mar 2004
Location: Dallas
Posts: 1,211
Re: How should I invest my savings?

Wab,

I checked the stats on Vanguard's TIPS fund and
found that 1) The avg coupon is 3.3%, 2) Yield to
maturity is 1.7%), 3) avg maturity is 10.7 years,
4) REAL yield is 1.6% and the expense ratio is 0.18%

How do you explain the discrepancy between the
TIPS fund at 1.6% real and new issues of 10 year
TIPS at 2.02%? You can blow off 0.18% due to the
expense ratio. Is the rest due to the lag in SEC
calculation? It would seem that an efficient market
would drive the NAV of the fund to compete with
new TIPS otherwise.

Cheers,

Charlie
__________________
charlie is offline   Reply With Quote
Re: How should I invest my savings?
Old 07-10-2004, 05:24 PM   #48
Full time employment: Posting here.
 
Join Date: Sep 2003
Posts: 902
Re: How should I invest my savings?

Quote:
I could see locking in real tips held to maturity at higher rates. *At 2% I'm hesitant to lock in when rates are headed up.
TH, the average real return on T-Bonds from 1926-2001 was +2.2%. But it was negative 1.2% from 1946-1965 and negative 4.2% from 1966-1981. That's a long stretch where inflation swamped yields. You might be able to squeeze out some additional real yield as rates rise, but maybe not. As inflation heats up it might stay ahead of rising rates keeping real yields down. All in all, I don't think a real yield of 2.5% is all that bad right now. I'm betting we won't see 3% for a long time, but who knows? I'm just going with my gut like everyone else.
__________________
Bob_Smith is offline   Reply With Quote
Re: How should I invest my savings?
Old 07-10-2004, 05:30 PM   #49
 
Posts: n/a
Re: How should I invest my savings?

I understand how TIPS work, but frankly don't understand why people are so enthralled. They still
have a lot of built in uncertainty IMHO.

John Galt
__________________
  Reply With Quote
Re: How should I invest my savings?
Old 07-10-2004, 08:02 PM   #50
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: How should I invest my savings?

Quote:
Now, while vanguards tips fund is inferior to 20 year tips sold today, wouldnt it "become better" as higher yielding tips are added when interest rates go up?
If yields go up, their NAV will go down, which makes it a wash (i.e., you basically get locked in to the effective yield at the time you buy if you hold for a period as long as the average maturity of the fund).

Of course, the yield changes somewhat as they buy replacements for maturing bonds and as they get new cash inflow.
__________________
wabmester is offline   Reply With Quote
Re: How should I invest my savings?
Old 07-10-2004, 08:07 PM   #51
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: How should I invest my savings?

Quote:
How do you explain the discrepancy between the
TIPS fund at 1.6% real and new issues of 10 year
TIPS at 2.02%? *You can blow off 0.18% due to the
expense ratio. *Is the rest due to the lag in SEC
calculation? *It would seem that an efficient market
would drive the NAV of the fund to compete with
new TIPS otherwise.
It's a mystery to me. The SEC Yield should be an average over the last 30 days less fees. The yield for the 10-year has been consistently over 2% for the last 30 days, so my only guess is that they took some capital losses over the last 30 days which pushed the yield down.

Market efficiency shouldn't have anything to do with the NAV of an open-ended bond fund like Vanguard's. I assume they just mark to market like any other bond holder would to calculate the NAV.
__________________
wabmester is offline   Reply With Quote
Re: How should I invest my savings?
Old 07-10-2004, 11:28 PM   #52
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: How should I invest my savings?

Would it have anything to do with the fact that they're buying new and selling older bonds, and as they buy more newer bonds (lower yielding) to handle inflows the yield goes down?
__________________
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: How should I invest my savings?
Old 07-10-2004, 11:34 PM   #53
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: How should I invest my savings?

Quote:
Quote:
Year 1 inflation is -10% (i.e., deflation). * Year 2 inflation is 10%. * Net inflation for the 2-year period is 0%.
NO -- It's NOT!!! :
Yeah, you're right, that's not the way to calculate net inflation, but I was hoping that would explain the FIREcalc results. * It doesn't.

So, here's another guess: *FIREcalc pays you at the end of the year, but it doesn't do the inflation adjustment for your withdrawl until the following year.

I think the result of this logic is that deflation can cause FIREcalc to withdraw more than the amount that it thinks your TIPS are yielding. * So, the 2-year failure example looks *this:

Year-1 inflation = -10%, Year-2 = +10%

Year 1: start with $100K, apply inflation adjustment to give you $90K, withdraw $50K, leaving you with $40K

Year 2: apply inflation adjustment to principal giving you $44K, apply previous year's inflation to withdrawal making it $45K, which leaves you $1000 in the hole, and FIREcalc says TIPS failed you.

So, I guess the moral of the story is either that you shouldn't handle your money the way FIREcalc does, or that FIREcalc has a misfeature, or that I'm completely off base.
__________________
wabmester is offline   Reply With Quote
Re: How should I invest my savings?
Old 07-10-2004, 11:48 PM   #54
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: How should I invest my savings?

Quote:
Would it have anything to do with the fact that they're buying new and selling older bonds, and as they buy more newer bonds (lower yielding) *to handle inflows the yield goes down?
I don't think so. Selling an old bond and buying a new one shouldn't change your yield. The market prices the old one to match the current yield.

However, if you have a net outflow from a fund, then they may have to sell bonds at a loss, which does get reflected in the SEC Yield.

As far as I know, net inflow/outflow and changes to a fund's portfolio are pretty opaque, which is one of the reasons I avoid bond funds. Especially in the case of treasuries, since you can buy new issues with no fees or mark-up.

The only service Vanguard is providing for their VIPSX fee is increased liquidity over individual bonds, which doesn't provide much value if you plan to hold to maturity.
__________________
wabmester is offline   Reply With Quote
Re: How should I invest my savings?
Old 07-11-2004, 06:20 AM   #55
 
Posts: n/a
Re: How should I invest my savings?

Quote:
Year 1 inflation is -10% (i.e., deflation). * Year 2 inflation is 10%. * Net inflation for the 2-year period is 0%.

Year 1: *you have $90K after inflation adjustment and you withdraw $45K, leaving $45K
Wab,

If you start off with a 100K and have deflation of 10%, at the end of the first year you have 110K of purchasing power - Don't you? Correct me if I'm wrong
__________________
  Reply With Quote
Re: How should I invest my savings?
Old 07-11-2004, 07:13 AM   #56
Thinks s/he gets paid by the post
 
Join Date: Mar 2004
Posts: 2,083
Re: How should I invest my savings?

I know it's investment 101

but

what is NAV, I'm sure it's not Norton Anti-Virus.

I searched the site but did not find a definition.

Thanks

MJ
__________________
I look to the present moment because that's where I live my life.
MJ is offline   Reply With Quote
Re: How should I invest my savings?
Old 07-11-2004, 08:00 AM   #57
Recycles dryer sheets
 
Join Date: Apr 2004
Posts: 105
Re: How should I invest my savings?

net asset value
__________________
bobbee25 is offline   Reply With Quote
Re: How should I invest my savings?
Old 07-11-2004, 08:11 AM   #58
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: How should I invest my savings?

Quote:
If you start off with a 100K and have deflation of 10%, at the end of the first year you have 110K *of purchasing power - Don't you? Correct me if I'm wrong
Not if you're invested in TIPS (and the example above is trying to explain FIREcalc's low success rate for TIPS).

TIPS are designed to maintain your purchasing power (plus a return on your investment), which means the government increases your principal in times of inflation and decreases it in times of deflation (but they give you a small bonus in that they won't decrease it below your original investment).
__________________
wabmester is offline   Reply With Quote
Re: How should I invest my savings?
Old 07-11-2004, 12:32 PM   #59
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: How should I invest my savings?

Ok, I looked at vanguards tips portfolio in the prospectus, and I think the reason why the yield is low hit me.

They're holding all 3.xx and even some 4.25% tips.

So given that these are older, higher interest rate bonds, then wouldnt the NAV of the fund have gone up a lot as these bonds became worth more as interest rates have declined? Yo...look...the nav of the fund HAS gone up a lot! More than 25% in the last few years in lockstep with interest rate drops.

So when the nav of the fund goes up against the static interest rate, then technically the "yield", which is a function of interest rate to nav, goes down.

So in my mind that makes buying this fund a very bad idea. You're buying a highly inflated NAV due to the high interest rate holdings, and as rates go up and these same offerings become available on the primary market, the nav must fall. The premium on the vanguard bond desk for these offerings is 25% and better. Theres that 25% again.

Hence when one can buy tips from treasurydirect in the 3.xx% range (presumably when rates go up another .75% or better), the value of these bonds will lower by 25% or more.

Of course, buying tips on the secondary market with interest rates in the 3.xx% range also would suffer a loss of 25% or more (back to "100" from the 125+ they're at now par value) once those higher rate offerings reappear. So unless you're planning on holding the tips you buy to maturity, its a bad time to buy either the fund or the real bonds.

Yes? I'm still figuring this bond stuff out.

Wheres Alec when you need him?
__________________
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: How should I invest my savings?
Old 07-11-2004, 12:51 PM   #60
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: How should I invest my savings?

The coupon rates in a bond portfolio are almost completely irrelevant. (However, they do affect duration. In this case, they will *lower* the impact of rising interest rates on the NAV a bit, which is a good thing.)

TH, you're basically saying that you don't want to buy TIPS because you're sure the real coupon rate will increase. This is much less clear to me. You have to ask yourself why the real rate was ever as high as 4%. IMHO, it's because TIPS were novel in 1998 and they required a "novelty premium" to convince buyers to pick them up.

I don't think we'll ever see coupons like that again, but it's something to wish for
__________________

__________________
wabmester 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
Automatic payments from a money market (savings) account a FIRE and Money 4 04-07-2007 01:14 PM
The Upside to Low Savings Rate? REWahoo FIRE and Money 0 03-29-2006 10:08 PM
Lowest Savings Rate Since 1933 Mountain_Mike FIRE and Money 15 01-31-2006 02:09 PM
Using Savings Bonds as Gap Filler Otto Thompson FIRE and Money 6 06-14-2004 06:50 PM
EE bonds to ??? cute fuzzy bunny FIRE and Money 1 12-24-2003 01:33 PM

 

 
All times are GMT -6. The time now is 10:40 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.