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Re: Vanguard TIPS fund...
Old 08-02-2006, 09:56 PM   #21
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Re: Vanguard TIPS fund...

I didnt receive anything...I dont own it. Was just looking at it and pondering. Its taken enough of a beating that it fell onto my "I have 50k and nothing to do with it, what should I look at?" radar.

Looking at the CPI-U for the 12 months ending in june, I should be seeing 7.something% total return for the 12 month period. Which would jibe with ibonds paying 6.7% plus the extra percent or so that tips pay over ibonds, minus the ER for the fund.

Not 5.55%.

Weird.
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Re: Vanguard TIPS fund...
Old 08-02-2006, 10:01 PM   #22
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Re: Vanguard TIPS fund...

OK, I'm starting to understand why this topic is so confusing to so many people.

Let's start with i-bonds.* *That 6.7% you've heard about was an annualized yield based on a single 6-month CPI-U calculation.* *The second half of the year, that went down to an annualized yield of 2.4% or somesuch.* *Put them both together, and you get 4%+ for the year.* *That would be 1.1% real + about 3%+ CPI-U for the year.

YoY, CPI-U has gone up about 4.5%.* * But the TIPS (and i-bond) dividends are only paid every six months, so you get whatever it is for that 6-month period (regardless of what YoY inflation is today).

Basically, it all comes out in the wash.* *TIPS will pay about 1% more annually than i-bonds if held to maturity.
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Re: Vanguard TIPS fund...
Old 08-02-2006, 10:09 PM   #23
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Re: Vanguard TIPS fund...

You just nailed what i'm saying. How are we missing or are we in agreement?

if year on year cpu is 4.5% and the fund paid out about 6% paid out as a dividend over that time period, then the yield for this fund is actually 1.5%, not the 2.3% reported (which I *know* is a 30 day sec yield). I dont have the historic dividend rate for the fund, but I'm pretty sure it was higher than 1.5% a year ago.

Seems we're missing a bit somewhere, somehow.

No matter. Not something I want to buy. Crappy yields AND loss of capital. Some ballast and protection from inflation :
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Re: Vanguard TIPS fund...
Old 08-02-2006, 10:17 PM   #24
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Re: Vanguard TIPS fund...

d00d, you're picking a YoY increase in CPI over some arbitrary period.* *TIPS pay dividends over specific 6-month periods, so those are the periods you need to look at.

Let's work backwards.* *If the TIPS fund yielded 5.5% and had a real yield of 2%, that means the CPI-U went up 3.5% over that period.

If you buy a TIPS bond directly, you're guaranteed to get whatever the real yield is (currently about 2.5%) + whatever CPI-U changes each year (currently about 4.5%).

If you buy a TIPS fund, you get essentially the same thing less 0.2% or whatever the ER is.

Capital gains and losses are irrelevent unless you sell while the fund is up/down.* *When the NAV goes down, your dividend goes up, so your total return over time is the same as your initial expectations as long as you hold long enough.* That's how bonds work.
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Re: Vanguard TIPS fund...
Old 08-02-2006, 10:56 PM   #25
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Re: Vanguard TIPS fund...

Quote:
Originally Posted by wab
Just showing you that the inflation adjustment is paid via dividends.
This part is puzzling to me. Where does the fund get the cash to pay out these inflation adjustment dividends? The underlying TIPS do not pay out the inflation adjustments.

Are they buying and selling enough to monetize the principle adjustment?

Ha
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Re: Vanguard TIPS fund...
Old 08-02-2006, 11:12 PM   #26
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Re: Vanguard TIPS fund...

Quote:
Originally Posted by HaHa
This part is puzzling to me. Where does the fund get the cash to pay out these inflation adjustment dividends? The underlying TIPS do not pay out the inflation adjustments.

Are they buying and selling enough to monetize the principle adjustment?
They probably own 1000's of bonds, and I'd guess that some number of their bonds are maturing each day. They have the flexibility to pay out of this pool of maturing bonds, or buy/sell as needed to handle distributions. Given that they pay a capital gains distribution, you know they're selling some of them.
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Re: Vanguard TIPS fund...
Old 08-03-2006, 12:00 AM   #27
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Re: Vanguard TIPS fund...

Quote:
Originally Posted by wab
They probably own 1000's of bonds, and I'd guess that some number of their bonds are maturing each day.* *They have the flexibility to pay out of this pool of maturing bonds, or buy/sell as needed to handle distributions.* *Given that they pay a capital gains distribution, you know they're selling some of them.
I guessed it was something like this. It seems unwieldy, but I guess people want the cash now.

Along this same line, I have a question about I-bonds. It seems that I-bonds are not a very good choice for a retired person, since as I understand it at least they have to be sold to get at the money.

Ha
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Re: Vanguard TIPS fund...
Old 08-03-2006, 12:07 AM   #28
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Re: Vanguard TIPS fund...

Quote:
Originally Posted by HaHa
Along this same line, I have a question about I-bonds. It seems that I-bonds are not a very good choice for a retired person, since as I understand it at least they have to be sold to get at the money.
Right, savings bonds don't throw off income. You have to redeem them to get the accrued interest. The only benefits to i-bonds are that they are guaranteed to never lose principal, and you can get tax-free interest if you use them for education.
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Re: Vanguard TIPS fund...
Old 08-03-2006, 04:34 AM   #29
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Re: Vanguard TIPS fund...

Bunny is feeling (vicariously) my pain. I did 'the right thing' and diversified by buying into some bond ETFs including TIPS. The picture at the moment is grim.

But wab has done a good job of explaining the mechanics in bits 'n' pieces.

I tend to visualize it thusly: it's like interest rates are waves, continuously ebbing and flowing. The bond fund is also purchasing continuously and selling continuously. The bond fund/ETF price on the market is also a wave, but somewhat out of synch with the interest rate wave because in part it is reacting to current economic factors, in part to future (anticipated, but unknowable) factors, plus the history/value of the bond holdings in the fund which are still giving off their interest at older (better/worse) rates.

So to look at even a six-month segment for a bond fund, as wab said, kinda doesn't make sense. "Your total return over time is the same as your initial expectations as long as you hold long enough"

I expect to just sit put, collect whatever interest the interest gods give me, and if I ever consider selling, try to catch a bit of the upside of the valuation 'wave' though if I stick by my asset allocation guns I will keep it forever. I don't intend to fiddle with it.

I'll pay the .2% to let someone else do the buying and selling over time and for the fact that I'm buying into the aggregate of a bunch of different maturities. It's a personal choice of just not wanting the hassle of an extra Treasury Direct account (plus I was put off by another discussion here which indicated TD didn't credit interest immediately.. I'll go back and look.. maybe I interpreted that incorrectly).

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Re: Vanguard TIPS fund...
Old 08-03-2006, 04:51 AM   #30
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Re: Vanguard TIPS fund...

Quote:
Originally Posted by wab
I don't.* *Could you explain it to me?

Let's use an example.* * I have a 10-year treasury bond in one hand.* *In the other hand, I have a treasury bond fund with an average maturity of 10 years.* *I buy them both on the same day, and they both have a 5% yield at the time I buy them.

Let's ignore ER and reinvesting interest for simplicity.

How will the bond fund's NAV fluctuation differ from my bond's value on a daily basis?

How will the total return differ after 10 years?

Edit: in case it wasn't clear, it's a semi-serious question.* *I know that as long as durations are similar, they should fluctuate similarly with interest rate changes.* *I *think* that if the fund has enough bonds and is replacing them with new bonds at a reasonable frequency over time, the total return should be the same for the two cases, but I've never really proven that to myself.
At the risk of restarting another battle.....

Individucal bonds and bond funds will both yield about the same on any given day although individual bonds avoid the management fees.* They will both fluctuate in value with changes in interest rates.*

The big difference is that if I buy an individual bond with a 7 year maturity I will get the principle back in 7 years.* If you buy a bond fund with an average maturity of 7 years, you will get the NAV when you redeem in 7 years.

I time fixed income to mature when I expect to need the cash.* When I buy one, I am also predicting when I will want the principle back.* Since I expect to need money to live on, it's not a big stretch.* It's not an exact science but if interest rates go through the roof I still know that in 2013 (or whenever) I get my $1000 back even though the bond (and an equivalent fund) drop in value now.

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Re: Vanguard TIPS fund...
Old 08-03-2006, 08:51 AM   #31
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Re: Vanguard TIPS fund...

Quote:
Originally Posted by Cute Fuzzy Bunny


Seems we're missing a bit somewhere, somehow.

No matter. Not something I want to buy. Crappy yields AND loss of capital. Some ballast and protection from inflation :
1. The fund in question has a duration of 6.0, and you're suprised that the NAV has dipped considering that the nominal 5 year treasury has gone from 2.75% to 5% in the last 18 months? What's the suprise in that?

2. You're getting a 2.3% real return right now if you hold this fund for long periods. To look at an intermediate term bond fund right after a rise in rates and say it's crap is pretty silly. As a TIPS investor I am buying the fund for the 2.3% real return and expecting major changes in NAV during my holding period. These will equal out over time. Don't expect the fund to do any more than that.




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Re: Vanguard TIPS fund...
Old 08-03-2006, 11:36 AM   #32
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Re: Vanguard TIPS fund...

Quote:
Originally Posted by 2B
The big difference is that if I buy an individual bond with a 7 year maturity I will get the principle back in 7 years.* If you buy a bond fund with an average maturity of 7 years, you will get the NAV when you redeem in 7 years.
True, but I think some people have a somewhat irrational fear of NAV drops in bond funds.* *Some people seem to think that a bond fund NAV drops in response to "investor sentiment" or fund outflows or somesuch.

It should be reassuring to understand a few things about bond funds:

1) The NAV changes are mechanical.* *The fund simply marks their bonds to market each day.* *The NAV change is strictly a function of duration and market rate changes.

2) When the NAV drops, that means interest rates have gone up.* *The fund is continually replacing bonds as they mature, so they are buying new bonds at higher yields after a NAV drop.* *Those new bonds will increase dividends paid out by the fund.

3) Bonds are all about "total return."* *If you hold a bond till maturity, you get a predictable total return.* *If you hold a fund long enough, you'll get that same total return.

Personally, I'm having trouble getting a handle on "long enough."* *But I think it's 2 X duration.* *IIRC, duration is defined as the point when you'll have received 1/2 the total return of a bond, so it makes sense that if you hold a fund for 2 x duration, you're guaranteed to get the same total return as a directly-held bond independent of the fund's NAV at the end of the period.
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Re: Vanguard TIPS fund...
Old 08-03-2006, 11:43 AM   #33
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Re: Vanguard TIPS fund...

Scott Burns had this intetestiong TIPS-related article a few days ago. I'm a Vanguard TIPS investor but I am not sure that I agree with his anti-mutual fund comment. Maybe I just do not fully comprehand how TIPS impacts on the distribution phase which I have not arrived at yet.

http://www.dallasnews.com/sharedcont...1.18028c8.html

This is where inflation-protected securities, purchased as individual securities, have a unique role in our portfolios. While we may invest in inflation-protected mutual funds while we are accumulating money, we are better served by individual securities when we are older and distributing money.

A TIPS investment can provide assurance that $1,000 of purchasing power today will be $1,000 of purchasing power at maturity – even if the security matures with a nominal value of $1,500. Treasury yields and historical inflation data.
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Re: Vanguard TIPS fund...
Old 08-03-2006, 12:07 PM   #34
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Re: Vanguard TIPS fund...

Quote:
Originally Posted by wab
d00d, you're picking a YoY increase in CPI over some arbitrary period. TIPS pay dividends over specific 6-month periods, so those are the periods you need to look at.
Hmm, I have a 1 year period, I have the cpi-u for that one year period, and I have the dividends for that same one year period.
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Re: Vanguard TIPS fund...
Old 08-03-2006, 12:26 PM   #35
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Re: Vanguard TIPS fund...

Quote:
Originally Posted by Cute Fuzzy Bunny
Hmm, I have a 1 year period, I have the cpi-u for that one year period, and I have the dividends for that same one year period.
Tell me the specific one-year period you're using for the CPI change.* *And compare that to the specific period used by the treasury to determine their inflation adjustments.

I believe the TIPS adjustments are made in January and July, but dates may differ for different issues.* *And I'm not sure how the adjustment dates relate to the CPI calculation dates, but I'll see if I can look it up.
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Re: Vanguard TIPS fund...
Old 08-03-2006, 01:29 PM   #36
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Re: Vanguard TIPS fund...

Good job guys. You have cemented my belief that TIPS funds aren't worth it -- too complicated.
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Re: Vanguard TIPS fund...
Old 08-03-2006, 01:32 PM   #37
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Re: Vanguard TIPS fund...

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Good job guys.* You have cemented my belief that TIPS funds aren't worth it -- too complicated.
If you think TIPS are complicated, let's talk about stocks!

Good rule of thumb: never invest in anything you don't understand.
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Re: Vanguard TIPS fund...
Old 08-03-2006, 01:42 PM   #38
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Re: Vanguard TIPS fund...

Quote:
Originally Posted by wab
If you think TIPS are complicated, let's talk about stocks!

Good rule of thumb: never invest in anything you don't understand.
Yeah, but don't forget, no need to understand stocks. just go with the Jeremy flow, buy an index and live forever after in hog heaven.

Ha
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Re: Vanguard TIPS fund...
Old 08-03-2006, 01:50 PM   #39
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Re: Vanguard TIPS fund...

Quote:
Originally Posted by ladelfina
I did 'the right thing' and diversified by buying into some bond ETFs including TIPS.
Frank Armstrong says it could also be called "diworsification".

Bonds tend to reduce portfolio volatility. If you're buying them for any other reason, especially when rising interest rates are hammering bond funds, then you're probably not going to be happy with them. Even the holders of individual bonds have to decide if the dividend is worth "missing out" on the higher yield of shorter-term CDs or MMs...
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Re: Vanguard TIPS fund...
Old 08-03-2006, 01:52 PM   #40
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Re: Vanguard TIPS fund...

Quote:
Originally Posted by HaHa
Yeah, but don't forget, no need to understand stocks. just go with the Jeremy flow, buy an index and live forever after in hog heaven.
I thought pigs get slaughtered
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