I'm still not getting it...

[AlmostDone]

TIPS - I just can't seem to figure them out. The following is from the Vanguard TIPS fund:

"The yield quoted is the real yield, or the yield before adjusting for inflation. The actual yield on the Vanguard Inflation Protected Securities Fund will be a combination of the real yield and an inflation adjustment".

So the yield quoted is 2.34%. I read the above to say that this would be added to the inflation rate, which I'm sure is a positive number - let's say 2%. Adding these two numbers would give us 4.34%. I would expect this to be the actual yield. So why was the 1 year return 0.43%?

 

[wabmester]

bond returns = yield + cap gain/loss.

cap gain / loss is a function of duration + changes in interest rates.

TIPS were hit by a double-whammy last year. Deflation in the last half hit yields. Real rates went from about 2% to 2.5%, which led to capital losses.

 

[Jarhead*]

bond returns = yield + cap gain/loss.

cap gain / loss is a function of duration + changes in interest rates.

TIPS were hit by a double-whammy last year. Deflation in the last half hit yields. Real rates went from about 2% to 2.5%, which led to capital losses.

Wab: You beat me to it. I bought tips a couple years ago. (Half, bond fund with Vanguard and half with Fidelity). First years return about 2.5, and
this years about .40.

O.K. by me, as I'm not concerned about the low inflation we've been
accustomed to for the last 20 years or so.

If it really hits the fan, they'll be a welcome addition. (Much like having flood ins.)

 

[clifp]

Wab: You beat me to it. I bought tips a couple years ago. (Half, bond fund with Vanguard and half with Fidelity). First years return about 2.5, and
this years about .40.

O.K. by me, as I'm not concerned about the low inflation we've been
accustomed to for the last 20 years or so.

If it really hits the fan, they'll be a welcome addition. (Much like having flood ins.)

I just checked on the performance of my two TIP bonds. The total return for the 2009 3.875 coupon was 2.8%, for the 2011 3.5% coupon the total return was 2.2%. Now my bonds are obviously shorter duration than the average maturity of bond funds. However, that is a pretty significant difference in performance between owning individual bonds and a bond fund.

A ten year ladder of TIPS bond can be constructed for $100,000 at minimal cost and you can avoid even the low expense of VIPSX

 

[samclem]

A ten year ladder of TIPS bond can be constructed for $100,000 at minimal cost and you can avoid even the low expense of VIPSX

More importantly (IMO), you'll know exactly what the real return will be in advance, market forces have no impact. If you own a bond fund or sell individual bonds before maturity, the price you get is subject to market price fluctuation, which can be significant (esp for longer-maturity bonds).

 

[ats5g]

More importantly (IMO), you'll know exactly what the real return will be in advance, market forces have no impact. If you own a bond fund or sell individual bonds before maturity, the price you get is subject to market price fluctuation, which can be significant (esp for longer-maturity bonds).

That's not entirely true. You still have to reinvest all those TIPS real coupons into TIPS bonds at future unknown real TIPS yields.

modified to add: my statement appears to be "not entirely true" either. You know exactly what you'll get if you hold the bond to its duration.

 

[simple girl]

So why would anyone choose to hold bond funds vs. individual bonds?

 

[Cut-Throat]

So why would anyone choose to hold bond funds vs. individual bonds?

Simple - Simple Girl

It's simple

 

[audreyh1]

It's simple and easy to rebalance.

Some of us don't care about holding to maturity.

Audrey

 

[cute fuzzy bunny]

A lot more diversity, and if you hold the fund long enough the capital gains thing doesnt matter.

Not like you'd catch me dead with one.

 

[mickeyd]

As I recall, when Vanguard first notified the world that there would be no December 2006 dividend there was a firestorm of complaints over at the diehards forum (also here, I believe). This just demonstrates that many investors are involved with funds that they really do not understand and they are probably invested in the TIPS fund because of an article, blog or similar reading that they made without fully understanding why it was considered a good idea in the first place. It seems that they did not understand that inflation is not a one way street, though it is a busy street.

I would have been quite confused if they would have paid a dividend in December as I was expecting a similar action from the TIPS fund. As most of my investments are in equities, I considered it a good thing that inflation took a brief vacation.

I wonder how many investors who consider themselves to be somewhat savvy, will be complaining when REITs drop? Maybe the same folks...

 

[cute fuzzy bunny]

I couldnt find the value in reits at the end of 2005 when I cashed out. I really cant fathom it at the 1/07 levels.

Last time I had the same feeling was when the nasdaq hit 4000 and I thought THAT was ridiculous...but I held on until 1/1 to push the capital gains hit out another tax year and watched them go to 5000. Really ridiculous.

Funny thing is, people might be disappointed with and hopping out of inflation protected stuff a little early. Anyone who has read any of my "invisible inflation" posts (and agrees with them) might see that we're tightening a rubber band (product quality, quantity, service, support, etc) that might be about as tight as its going to get. Once you've made the thing so cheap that nobody wants it anymore, you have to spend to buy back your reputation. Take a look at Home Depot and Sony for good examples.

Between the end of "cost cutting" as an option, an increase in minimum wages, and a likely uptick in conflict in the oil producing regions...a higher than expected rate of inflation over the next few years is quite plausible.

Which might mean not only good returns (for fixed income anyhow) but some nice capital gains as everyone piles back in.

Stick with the line of thinking that you should be looking hard at what nobody else wants, providing the reason they dont want it is irrational and short thinking...and getting the hell out of stuff that you cant find the valuation support for but everyone loves...and you might do well.

 

[AlmostDone]

So - stay in TIPS, don't get into REITS (right now).

 

[HFWR]

Find a portfolio (Coffeehouse, Couch Potato, etc...) and allocation that makes you feel warm 'n' fuzzy. Rebalance every 1-2 years. Drink beer...

 

[rmark]

Ummm, beer.

 

[mickeyd]

don't get into REITS (right now).

Well, if your asset allocation indicates that REITs are what you should have, why wait to add them? There is no real way to time any long term market, even REITs. How will you know, in the future, when it is "time" to buy them?

I'm adding to my REITs that are in my Roth IRA each month because I don't think that I have enough in that area of my portfolio. I'll know in about 30 years if this is a good or bad idea.

 

[cute fuzzy bunny]

Mickey -

While I generally agree with you, I think when this topic has come up before there has often been an "unless the market is drunk" qualifier.

For example, buying into the nasdaq at 4000-5000 probably wasnt going to be a good idea. Buying into REITS right now when even staunch supporters cant explain the valuations might be bad too.

But then again I launched my reits last year and they've kept going up.

What was that old quote? "I made all my money by selling too soon"? Beats the crap out of selling too late.

Methinks theres a "buying too late" adjunct to this rule.

 

[Cut-Throat]

Jarhead sold me his Reits in early in 2004.

Luckily I had commited myself to the asset class and knew I was not smart enough to time the market. I have re-balanced most all of my original investment out of that asset class as of this year.

Thanks Jarhead!

 

[Jarhead*]

Jarhead sold me his Reits in early in 2004.

Luckily I had commited myself to the asset class and knew I was not smart enough to time the market. I have re-balanced most all of my original investment out of that asset class as of this year.

Thanks Jarhead!

Cutthroat: That reminds me of the old advice stating "Never gamble with
your friends". I never agreed with that! So, friend, glad it worked out for you.

Actually, I only sold you half, and since that time I took another half off
the middle of last year.

They are stubborn, aren't they?

 

[cute fuzzy bunny]

I'm not talking about market timing. I'm talking about looking at something, laying a valuation on it and coming up so hugely off the mark that you even Karl Rove cant come up with a plausible explanation.

Technology stocks did that when they hit nasdaq 4000 and nobody could place a value on them...5000 was way over the top.

Reits did that before the past years 35% run up. Even then the diehard reit investors were having a tough time explaining why they were valued where they were.

At these prices and incredibly weak yields, they arent where I'd put my money and if I held any, I'd seriously consider rebalancing a whole lot out of the asset class and into something else...almost anything else.

I mean, come ON...an adjusted yield of 3% on real estate? The warning klaxon blew itself out and can barely muster an "ahhhooooooooogah!"

 

[Eagle43]

Well,
You guys scared me, so I looked at my Vanguard REIT Index about 2 minutes ago. This fund is up 4.57% since 1 January. And, it made a heck of a lot of money last year. I've been in it for 3 years. I'm thinking of moving all the fund's profit into Wellesley but just can't pull the trigger. Next look will be end of the month, but if it keeps rising, what's a retired non-speculator, non-market timer to do? Lock in the profit, but when?

 

[Jarhead*]

Well,
You guys scared me, so I looked at my Vanguard REIT Index about 2 minutes ago. This fund is up 4.57% since 1 January. And, it made a heck of a lot of money last year. I've been in it for 3 years. I'm thinking of moving all the fund's profit into Wellesley but just can't pull the trigger. Next look will be end of the month, but if it keeps rising, what's a retired non-speculator, non-market timer to do? Lock in the profit, but when?

Eagle43: Here's what I'd do. (Scratch that, you probably read my post)

Vanguard Reits total return from 00: 35%, 9%, 6%, 35%, 30%, 12%, 34%, and as you stated up 4 plus already this year.

Do ya feel lucky? (I mean real lucky)

 

[audreyh1]

Next look will be end of the month, but if it keeps rising, what's a retired non-speculator, non-market timer to do? Lock in the profit, but when?

What was the original % of your investment into REIT funds? Just trim it back to the original %, and then don't worry about it.

Audrey

 

[cute fuzzy bunny]

Not bad advice audrey. Jarheads point is also well advised.