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Vanguard Inflation Protected Securities
Old 01-25-2012, 06:41 PM   #1
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Vanguard Inflation Protected Securities

I see that Scott Burns (who used to write a financial column for the Dallas newspaper) recommends Vanguard Inflation Protected Securities as part of his Couch Potato investment portfolio. The returns look good for what I assume is a relatively secure investment. So, please school me on this fund. What is its down side? ...and upside?

Thanks in advance.

Bookman
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Old 01-25-2012, 07:20 PM   #2
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Like any other bond fund, the current market value is inflated by very low current interest rates. The last time I looked, the shorter bonds were yielding CPI + 0%.

So recent performance definitely is not a reliable indicator of future performance.
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Old 01-25-2012, 07:28 PM   #3
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So what I am missing? The reported average annual return is:

One Year Three Year Five Year Ten Year
13.24% 10.03% 7.63% 7.33%


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Old 01-25-2012, 07:51 PM   #4
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Originally Posted by bookman51
So what I am missing? The reported average annual return is:

One Year Three Year Five Year Ten Year
13.24% 10.03% 7.63% 7.33%

Bookman
A few years ago, there was this market fluctuation, and a lot of folks were selling anything they could get their hands on to raise liquid cash and meet those pesky margin calls. (Just ask the Duke brothers...)

The Vanguard TIPS fund took a huge whack in this process, bottoming out in November 2008. I remember that because that's when I bought it. You don't normally expect to see a 27% rise in the share price of a government bond fund over three years, but that's what I got. I would very much NOT expect to see further such gains. That is, I expect to see the fund price flat to falling slowly over the next few years. The fund price has been rising from folks piling into TIPS for safety (and naturally, driving the interest rates down).

The effective rate on TIPS auctions recently has actually gone negative, so I wouldn't expect to see much more in gains. The Fed spooked the bond market today with that talk of low interest rates til 2014, so all the various government securities factored that in, un-discounting the possibility of a rise in rates in the near term. I sure wouldn't expect to see a 10% rise from current levels in the TIPS fund price this year.
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Old 01-25-2012, 07:55 PM   #5
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What you're missing is that real yields have dropped from ~200bp to (50)bp. Those good historic returns you see reflect the capital appreciation associated with that drop in yield. To get the same performance going forward, we need yields to drop another 250 bp. Not likely. Perhaps impossible.
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Old 01-26-2012, 08:29 AM   #6
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Well, looks like I need to keep looking for something to put the money in that I now have in the Vanguard Money Market fund, which is getting zero interest. Loosing on inflation but I guess zero interest is better than a big loss in principal. Thanks much. Bookman
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Old 01-26-2012, 10:09 AM   #7
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The Vanguard TIPS fund took a huge whack in this process, bottoming out in November 2008. I remember that because that's when I bought it. You don't normally expect to see a 27% rise in the share price of a government bond fund over three years, but that's what I got.
Yeah, I deal with taxes and investments for my mom, and I was something of a hero to her when I had her load up on this fund in her Vanguard IRA in November 2008. I've considered selling at these levels but I really haven't found anything else I'd feel comfortable putting it. (She already has a combination of Wellington and Wellesley and I'm comfortable with her AA where it is now, roughly 30/70.)

I wish my market timing was as good with my own investments.
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Old 01-26-2012, 10:13 AM   #8
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Well, looks like I need to keep looking for something to put the money in that I now have in the Vanguard Money Market fund, which is getting zero interest. Loosing on inflation but I guess zero interest is better than a big loss in principal. Thanks much. Bookman
There are other options to keep up with inflation (more or less), but they all have their pitfalls (mostly in terms of short-term liquidity). You could buy a TIPS fund, but it never matures so you could lose principal when you sell. You could buy individual TIPS, but to secure the principal you would have to hold to maturity (and if you buy with a negative real yield, you might get less returned to you at maturity than you paid for it.

There's also I-bonds; though they have a zero real yield they would at least keep up with the CPI, but you generally can't redeem them for 6 months and you suffer a 3-month interest penalty if you redeem them within the first 5 years.
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Old 01-26-2012, 03:22 PM   #9
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bookman51,

Unfortunately, none of us seems to be able to consistently "time" or otherwise figure out the market(s). If Unclemick were here, he'd probably say "pssst, Wellesley".

I see nothing wrong with a small investment in the Vanguard Inflation Protected Securities fund. For all who think it "can't go up", you can probably find others who could explain how it could go up some more. I think the key thing to keep in mind is diversity. If you want to tweek your current asset allocation, by all means. I just wouldn't count on this fund to keep you even (or better) with inflation in the short run. Over time, it will probably do okay, though, who knows.

I like Scott Burns, but rarely follow his (or anyone else's) advice. He won't make up any losses for me, so I'm on my own - as are you. YMMV
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Old 01-27-2012, 06:33 AM   #10
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But what's wrong with "a big loss in principal"? So far, history shows you can always get it back.

Once you get past that a loss in principal is no big deal, the world of investing possibilities really opens up.

If you liked looking at inflation-protected securities, you may also like looking at GNMA funds.

However, one reason TIPS are recommended many times is that the TotalBondIndex fund does not include TIPS. So adding a separate TIPS fund is an added layer of diversification. Generally, though one should be looking at what did the worst over the previous year for investing ideas and not what did best. You know, the ol' reverstion-to-the-mean thing sometimes applies.
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Old 01-27-2012, 07:32 AM   #11
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But what's wrong with "a big loss in principal"? So far, history shows you can always get it back.

Once you get past that a loss in principal is no big deal, the world of investing possibilities really opens up.
Time does help, but the investor in the withdrawal phase that takes out during the "big loss" period won't get it back and might end up SOL...
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Old 01-27-2012, 08:09 AM   #12
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Our cost basis in VIPSX is $12.48 per share, with an average (cost weighted) holding period of 3.9 years. The dividend distributions for 2011 amounted to $0.567 per share. .567/12.48 = 4.54%. If we were in the withdrawal phase, we would have withdrawn the $0.567 per share and only reinvested the capital gains..
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Old 01-27-2012, 08:15 AM   #13
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Time does help, but the investor in the withdrawal phase that takes out during the "big loss" period won't get it back and might end up SOL...
...and the investor in the withdrawal phase that keeps losing buying power to inflation might end up SOL...

No easy answer, or this would have been settled long ago.

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Old 01-27-2012, 08:34 AM   #14
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So what is the combined wisdom of using a fund such as FIDELITY FLOATING RATE HIGH INCOME (FFRHX) that doesn't lock you into a fixed income? I'm using it as a large part of my bonds allocation, I know kinda cheating. It buys variable rate loans that will increase interest rates when then go up, but also has a default risk as these are not normally investment grade companies that use this type of credit.
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