Vanguard TIPS fund...

[cute fuzzy bunny]

Originally Posted by TromboneAl

Good job guys. You have cemented my belief that TIPS funds aren't worth it -- too complicated.

Its EASY Al!

First you take a bond. Then you take away part of the interest payment and replace it with a calculation based on tens of thousands of bits of information collected by the government, parsed in a manner than most people cant understand, and modelled on a fictitious lifestyle that probably isnt yours. In fact, its definitely not YOURS, since you're not working and not living in an urban area.

Then, you take that part of the income (the made up part) and you pay taxes on it, but you dont actually get it for 20 years.

Then, because some people dont wanna hold individual bonds, you buy a bunch of them into a fund, sell shares of the fund, charge people for doing that for you, and in return they pay you a part of the made up return thats being taxed.

The ideal outcome of all of this is that while you're paying the taxes, trying to figure out where the hell your money is and where its going, you dont notice that you're also losing 8% on your principal.

And all that keeps your mind off of watching the S&P500 go up, realizing you have a bunch of money, and spending it recklessly.

[2B]

Originally Posted by wab

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.

NO NO NO NO NO

Well yes, you were right about saying that if you hold a bond till maturity you get a predictable total return. BUT If you hold a fund you will always be a slave interest rates and the NAV it imparts.

[wabmester]

Originally Posted by Cute Fuzzy Bunny

Then, you take that part of the income (the made up part) and you pay taxes on it, but you dont actually get it for 20 years.

d00d, what is this Jihad you're on? You've seen that the Vanguard TIPS fund pays out the inflation adjustment as dividends.

In another thread, you say that your wonderful high-yield junk bond fund yielded 8%, but you neglect to mention that it dropped 6% in NAV over that time.

TIPS simply remove the inflation risk from nominal treasury bonds. Nothing more, nothing less. Get over that hairball of yours.

[wabmester]

Originally Posted by 2B

NO NO NO NO NO

Well yes, you were right about saying that if you hold a bond till maturity you get a predictable total return.* BUT* If you hold a fund you will always be a slave interest rates and the NAV it imparts.

When the fund's NAV goes down, that means interest rates have gone up. Higher coupons offset the decline in NAV. Always. That's how bonds work.

[cute fuzzy bunny]

Originally Posted by wab

d00d, what is this Jihad you're on? You've seen that the Vanguard TIPS fund pays out the inflation adjustment as dividends.

No jihad, but no we didnt find all the money, we're about a percent short of what it looks like is expected. I'm sure theres a reason, but I dont really need to know what it is. This fell off my list of stuff to look at buying. Easy.

In another thread, you say that your wonderful high-yield junk bond fund yielded 8%, but you neglect to mention that it dropped 6% in NAV over that time.

Ah, no it didnt! Its actually down about 4.5% in the time I've owned it. And my net gain beats the crap out of 2%.

You like that hand grenades and horseshoes kind of close-enough, hmm?

TIPS simply remove the inflation risk from nominal treasury bonds. Nothing more, nothing less. Get over that hairball of yours.

Actually it doesnt do that either, it pays the CPI-U rate and a very limited additional coupon. To the extent that CPI-U equals your personal rate of inflation, your statement would be true.

But we all know that already, right?

[wabmester]

Originally Posted by Cute Fuzzy Bunny

Ah, no it didnt!* Its actually down about 4.5% in the time I've owned it.* And my net gain beats the crap out of 2%.

Vanguard says their high-yield bond fund returned 2.87% over 1 year. Is that the one you're talking about? The one that beat the crap out of 2%? You took a lot more risk for that 0.87% difference.

[cute fuzzy bunny]

I guess we'll just keep talking about different time frames, eh?

Nevermind...you're right...crappy returns are good and its a great idea to buy and own lots of bonds in a rising rate environment

In the time I've owned it, the nav is down about 2500 net, and its paid out roughly $13,400 in dividends.

Really, really sucks.

[haha]

I kind of enjoy this argument. But actually, Wab, as a wabbit hunter you can't seem to create the edge formerly supplied by Squeegee or whatever he is called now.

Ha

[cute fuzzy bunny]

SG had nothin', but I love him like a brother anyhow...

[wabmester]

Sorry, I'm too lazy to figure it for 15 months.

Vanguard says their TIPS fund returned 1.99% over the last year.

Vanguard says their junk-bond fund returned 2.87% over the last year.

Frankly, I was hoping this thread would clarify how this stuff worked for people, but that clearly wasn't your intent.

As far as CPI-U vs personal inflation -- you know that's irrelevant. * TIPS need to be compared to nominal bonds. * Nominal bonds don't care about your personal rate of inflation either.

[2B]

Originally Posted by wab

When the fund's NAV goes down, that means interest rates have gone up.* *Higher coupons offset the decline in NAV.* *Always.* *That's how bonds work.

At a certain point I must just say "do the math."

YES!* When NAV goes down the apparent interest rate goes up but you are still getting the old interest rate on your invested capital.* After decades maybe your NAV/interest rate will achieve equilibrium with buying the original bonds with a maturity date but I'd hate to bet on it.

I personally buy fixed income so I know I will get a certain amount of (fixed) income every month and get a certain cash payment back in a certain time frame.* A bond fund is pretty dependable at giving you the pretty close to fixed income but the value at any point in time in the future depends on the current interest rate.

There is a certain amount of interest rate speculation present when you buy a bond mutual fund.

[wabmester]

Originally Posted by 2B

At a certain point I must just say "do the math."

Here's an explanation of duration, including the math:

Duration

Note that the duration tells you two things:

1) How sensitive the bond is to interest rate changes

2) When you'll get half the total return of the bond

As I've said, I *think* this puts the upper bound on how long you need to hold a fund at 2 X duration before you're guaranteed the same total return you'd get by holding a bond.

Anyway, I'm sure you'll agree that it's not an unbounded problem. You never have to wait forever.

[cute fuzzy bunny]

Originally Posted by wab

Frankly, I was hoping this thread would clarify how this stuff worked for people, but that clearly wasn't your intent.

It was absolutely my intent. It was clear to me that its hard to figure out exact returns (and we still havent), its a complex product and after re-re-review its still not something I want to own.

What did you think my intent was and can you point to what I said that made you think that way?

As far as CPI-U vs personal inflation -- you know that's irrelevant. TIPS need to be compared to nominal bonds. Nominal bonds don't care about your personal rate of inflation either.

Ah....no. You said tips removes the inflation risk from treasuries. It only does that if the owners PRI is the same as the CPI-U. Since mine is not even close, it does no such thing for me.

[wabmester]

Originally Posted by Cute Fuzzy Bunny

What did you think my intent was and can you point to what I said that made you think that way?

Heh.* Let's see.* You asked:

I'm not seeing that inflation adjustment anywhere in there in either the price or a distribution...what gives?

So, I showed you it was in the dividend.* *You ignored.* *I showed you again.* You said "off by 1%".* *I showed you why.* *Three times.* You said "I'm sure theres a reason, but I dont really need to know what it is."* *And then there was this little rant:

Rant!

In other words, just a hunch.*

Ah....no.* You said tips removes the inflation risk from treasuries.* It only does that if the owners PRI is the same as the CPI-U.* Since mine is not even close, it does no such thing for me.

Let me walk you through this.* *Nominal treasuries have an interest rate that includes the market's estimate of inflation, right?* * TIPS give you a real return + CPI-U.* *They remove the market's estimate of inflation.* *See?* *Sometimes the nominal treasury market is right about inflation.* *Sometimes its wrong.* *Sometimes waaay wrong.* *TIPS removes the risk of the market being wrong.

Neither market gives a damn about your personal rate of inflation.

[haha]

Could you guys please explain how this interacts dynamically with the question of whether to pay your mortgage before you retire?*

Ha

[sgeeeee]

Originally Posted by HaHa

Could you guys please explain how this interacts dynamically with the question of whether to pay your mortgage before you retire?*

Ha

I could do that, Ha, but I'm afraid I would be accused of having to be right.

[ladelfina]

Frank Armstrong says it could also be called "diworsification".

Thanks, Nords.. I am feeling splendidly deworsified!! I drank the asset allocation Kool-Aid, going from 99% stocks, 1% int'l. bonds to 85%/15% (not counting some cash). I am at peace now. I know I am buying into a stable income stream and though I mentioned the temporary drop in value I am not really concerned about it. What's done is done and this will just be another buy & hold forever position. For me it's just to have something a little better than cash that won't go up & down 10-20% at a time. I guess it's 'crappy' but it was either that or buy more stocks!!!*

[Tadpole]

I got interested to look at my own VIPSX Roth. Over the past 2 1/2 years I have made monthly contributions totalling about $9500. In that time redeposits have totalled about $500. The holding is currently worth about $9500. Is this just a short term holding type effect or is buying this fund on dollar cost averaging a bad idea?