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Losing Money with TIPS Fund ?
Old 04-10-2009, 01:15 PM   #1
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Losing Money with TIPS Fund ?

My portfolio, like many others, contains fixed income securities to reduce volitility. Since I'm now ER and taking distributions, I don't want to be forced to sell assets while they are down; as can happen with an all-equities portfolio.
The problem is, I notice that the Vanguard Inflation Protected fund VIPSX had a significant decline during the last year. Sure, it's going back up now but was down about 12% at one point. Looking at the Vanguard Intermediate Treasury and Long Term Treasury funds; they were quite close to VIPSX during the good years but performed much better during this last year.

CD's and individual bonds (with all the caveats) can be laddered so you should never need to sell during a down period, but there seems to be no way to really avoid that with a fund.

My questions are:
Why did VIPSX or other TIPS funds decline during the previous year
and
Is there any way to avoid that volitility without buying individual bonds (again, with lots of caveats) or CD's?
and
Can someone graph the results of a 5 year CD ladder over the last 10, 5, 3, and 1 years; to make a comparison with the Vanguard funds?

Finally, we are probably coming to the end of a long period of declining inflation. The next ten years may not be like the last ten. You are welcome to comment on how these investments will perform if inflation starts up again, but remember that higher inflation is merely a possibility, not a guarantee.
Thanks!
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Old 04-10-2009, 01:43 PM   #2
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There is quite a lot of discussions of TIPS over on the bogleheads forum with many knowledgable folks making contributions. A currently active thread is this one: Bogleheads :: View topic - Is it a good time to buy TIPS?

Apparently, TIPS go down if there is deflation or suspicion of of deflation. They also go down if prevailing interest rates go up, just like other bonds that are marked to market and bond funds. TIPS also go down if there are better investments for one's money. In short, TIPS act pretty much like other bonds.
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Old 04-10-2009, 02:36 PM   #3
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tips are funny creatures, they drop when interest rates rise which is typically in rising inflation... while the kicker part is inflation linked the core part drops with rising interest rates just like any other bond... they also drop in perception of deflation where the threat of the linked part is under pressure of dropping. conventional bonds soar under threat of deflation...

they work best in times like we had before the big debalcle... very very moderate inflation... i think anyone who thinks these are a substitute for gold in very high inflation is going to be in for a rude surprise as they drop like rocks in value as newly issued tips have higher core rates
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Old 04-11-2009, 09:39 PM   #4
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The question on whether or not TIPS will keep up with a commodity in inflation is a tough one to answer, but if I understand you correctly you appear to be wrong on one element. I'm referencing "the core part drops with rising interest rates just like any other bond". I believe you mean the "coupon rate" and in an rising interest environment new coupon rates goes down which means that your TIPS appreciate. But in a rising interest rate environment new bond interest rates go up, so your current bonds depreciate. Across the board TIPS have an inverse curve to regular bonds.

To answer the OP's question. Your TIPS haven't been doing well because we have been in a little bit deflation. That is why recently regular bonds have soared. In a 9 -18 months the opposite will happen. Your TIPS will start doing well, and the regular bonds will start getting their a$$'s handed to them. I'm not factoring in the risk premium on Corporate bonds, but if you take interest rate minus default rate that should bring it about right, aka risk premium.
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Old 04-12-2009, 03:42 AM   #5
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huh? tips drop in price when interest rates rise just like regular bonds do ... any tips you dont hold to maturity are ...worth less ... your older tips depriciate not appreciate as newly issued tips have higher coupon rate then yours does. yours have to depriciate to offset the higher coupon the newer bonds pay... so tips funds for sure depriciate in rising rate enviornments...... tip funds dont perform well in deflation and they dont perform that great in rising inflation if rising rates accompany it...theres only a small window i see them performing well in

http://www.mentoradvisers.com/cmsfil...JournalTom.pdf
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Old 04-12-2009, 04:23 AM   #6
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Bogleheads :: View topic - TIPS Mutual Funds vs Inflation is another thread with this explanation:

Quote:
Originally Posted by tfb
Real yield went from 1.5% to 2.1%, up 0.6%. Duration 7 years. 4.2% capital loss. Dec. 2008 - Dec. 2007 inflation = 0%. Interest income 1.5%.

-4.2% + 0% + 1.5% = -2.7%

Actual fund total return -2.85%. Not too far off.
He left out the expense ratio of VIPSX which subtracts another 0.20% from the return. This makes tfb's number even closer to the actual fund total return.
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Old 04-12-2009, 08:04 AM   #7
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Jim also asked about anyone having info on how a 5 year CD ladder might compare over time to a bond fund. I am interested in this also. I definitely want a ladder to be part of our allocation for it's capital preservation ability, but not sure to what extent. Anyone have some input?! Thanks, Bill

PS - over on Bob's financial website, Bob recommends in chapter 4 using a ladder for all of one's bond allocation.

http://bobsfiles.home.att.net/retireCH.html
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Old 04-12-2009, 08:35 AM   #8
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a bond ladder is a bet rates will drop.... a cd ladder a bet rates will rise... there are no easy answeres..they serve opposite bets
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Old 04-12-2009, 09:11 AM   #9
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How so, mathjak? A CD is just a non-marketable bullet bond with a fixed coupon.

Are you assuming the ladders themselves are formed differently?
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Old 04-12-2009, 10:45 AM   #10
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Quote:
Originally Posted by mathjak107 View Post
a bond ladder is a bet rates will drop.... a cd ladder a bet rates will rise... there are no easy answeres..they serve opposite bets
Did you mean bond FUND?
I understand the difference from a "market (interest rate) timing" perspective, but what about if you day-in, day-out stick with one or the other?
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Old 04-12-2009, 10:50 AM   #11
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Quote:
Originally Posted by Maurice View Post
How so, mathjak? A CD is just a non-marketable bullet bond with a fixed coupon.

Are you assuming the ladders themselves are formed differently?
Presumably the CD ladder is a bet on rising rates because if they rise you can cash them in, pay the modest surrender penalty and go get a better yield. Cannot do that with bonds.

I suspect we have 2 or 3 years of relatively low interest rates ahead of us. The recovery will take a while and rates will be slow to rise. The curve may well steepen once the govt stops buying long treasuries to keep rates down, but shorter rates will probably stay low.
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Old 04-12-2009, 02:29 PM   #12
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Mathjak your are clearly wrong. As inflation rises(or the threat of inflation) the demand for inflation protection increases. That drives new coupon rates lower. Under your logic, I could wait until inflation was 10% and then get a coupon rate of 5%. How does that make any sense at all. A basic understanding of how market forces work, clearly makes your argument dumb. As inflation rises(or the threat) people WANT MORE TIPS which drives down the new coupon rates. As inflation subsides/deflation("") comes people WANT LESS TIPS and so coupon rates go up. The very reason that people are anticipating inflation is the reason why currently the coupon rates on TIPS are on the decline.
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Old 04-12-2009, 02:32 PM   #13
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As inflation is realized the coupon rates on new TIPS with approach 0. Like the massive deflation caused treasuries to approach 0 in the 4th quarter of 08, at that time TIPS coupon rates were at almost an all time high of 3-3.5%--depending on the amount of years(people were anticipating a lot of deflation).
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Old 04-12-2009, 02:36 PM   #14
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Mathjak you are also wrong about the CD latter vs. bond latter. They are both a bet on deflation as they both lock in fixed interest. In the event inflation occurs and interest rates rise both a CD and a bond will become devalued in a rising interest rate environment.
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Old 04-12-2009, 02:39 PM   #15
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"Presumably the CD ladder is a bet on rising rates because if they rise you can cash them in, pay the modest surrender penalty and go get a better yield. Cannot do that with bonds."
That still isn't a bet on inflation though. At best that means you have more liquidity than the bond to deal with inflation/rising interest rates.
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Old 04-13-2009, 03:17 AM   #16
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the typical cd ladder of 1-5 years will allow you to renew each year at a higher rate if rates rise ... a bond ladder is able to p/u capital gains as well if rates drop and are realized gains.... both wont do very well in inflationary times .


ooops i stand corrected on the tips , i was thinkING of the i-bond structure which has 2 parts.. a core rate and an inflation kicker
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Old 04-13-2009, 04:36 AM   #17
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There you go.

No biggie.
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Old 04-13-2009, 03:10 PM   #18
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Well, I didn't bite on either..Wether I'm better off? Who knows..I'm just simple early retired Blue Collar guy in this Game..

1. CD's for Short term needed $ until they Go above 7% ( like they did back in early 2000 and got 7.8% on 5 yr one's )
2. Tips are No different than stocks..and subject to, too much Market Sentiment..just look at 06' and 08' vs the other yrs.. like a Yo Yo..
3. If you want to make the most on bonds? You have to be 'Flexible" every yr.. or Just own the traditional ones ( GNMA,Treas, AA Corp. Like VBLTX) and let the chips fall were they may and not figure on more than 6% out of them..
4. Last yr it was Short and LT Treas + GNMA + VBLTX and this yr IS FFRHX till it Hits +10% and then sell it, VFSTX and GNMA.. and wait and see what Corp. are rising to the surface..

Then again, I gave some of my $ to a Bond Fund Specialist Firm ( some were understudies of Pimoco..) and just follow their Lead for the past few yrs and That's been doing very well.. So it's not all of my "expertise"....LOL

To me, bonds are more complex than Equity Mutual Funds..but so is figuring out how to use these new fangled computers..
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