Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Re: Vanguard TIPS fund...
Old 08-07-2006, 07:11 PM   #81
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: Vanguard TIPS fund...

Quote:
Originally Posted by 2B
The bottom line for funds is that you will continue to earn the same interest rate on the fund as when you bought it -- comparing it to your return on the original purchase price.* It will drift some but very slowly as compared with the true interest rate changes.
I see.* So, a bond fund will give the same yield forever based solely on the original price you paid.* *It has nothing to do with the average maturity of the fund, duration, or anything else.

To see the absurity of that idea, just look at ultra-short duration funds.* *Is the yield over time determined by the original yield and purchase price?* *No, not at all.* *And neither is it for longer term maturities.* *If the fund has an average maturity of 5 years, that means that after 5 years most of the bonds in the fund have been replaced, and the fund has completely adjusted to new market conditions.

I really don't know how to make this more clear without either simulating a fund or digging through the historical total returns of funds.* *Maybe one of us will tackle that project.*
__________________

__________________
wabmester is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: Vanguard TIPS fund...
Old 08-07-2006, 07:14 PM   #82
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,619
Re: Vanguard TIPS fund...

Quote:
Originally Posted by wab
I really don't know how to make this more clear without either simulating a fund or digging through the historical total returns of funds.* *Maybe one of us will tackle that project.*
This is a six-page summary of why I don't do bonds...
__________________

__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Re: Vanguard TIPS fund...
Old 08-07-2006, 07:28 PM   #83
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: Vanguard TIPS fund...

Quote:
Originally Posted by Nords
This is a six-page summary of why I don't do bonds...
Like I said earlier, bonds are child's play compared to stocks.* *Can anybody explain to me why stocks should always go up?*
__________________
wabmester is offline   Reply With Quote
Re: Vanguard TIPS fund...
Old 08-07-2006, 07:41 PM   #84
Thinks s/he gets paid by the post
2B's Avatar
 
Join Date: Mar 2006
Location: Houston
Posts: 4,330
Re: Vanguard TIPS fund...

Quote:
Originally Posted by wab
I see.* So, a bond fund will give the same yield forever based solely on the original price you paid.* *It has nothing to do with the average maturity of the fund, duration, or anything else.

To see the absurity of that idea, just look at ultra-short duration funds.* *Is the yield over time determined by the original yield and purchase price?* *No, not at all.* *And neither is it for longer term maturities.* *If the fund has an average maturity of 5 years, that means that after 5 years most of the bonds in the fund have been replaced, and the fund has completely adjusted to new market conditions.

I really don't know how to make this more clear without either simulating a fund or digging through the historical total returns of funds.* *Maybe one of us will tackle that project.*
Feel free to chase simulations but I won't bother.* If you had bought a bond fund at the top of the interest rate peak in the 1980's (19-20%) you would have enjoyed those yields for many, many years but (YES!) the yields would have slowly come down and you would eventually appoach the current day yields with a permanent loss in principle.* But, here we are talking a decade or more.* The alternate would be to have bought a bond fund in 1932 at less than 1%.* Eventually your yield would improve but your* capital gains would be pretty much entoubed over the decades.* Feel free to run every simulation you can find.* The shorter the maturity the faster it will approach (ie. money market funds with less than 7 days maturity). These don't have much capital gains opportunity so its never noticed. Some funds do play the "long" vs. "short" durations and increase their risk.
__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
2B is offline   Reply With Quote
Re: Vanguard TIPS fund...
Old 08-08-2006, 03:29 AM   #85
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,414
Re: Vanguard TIPS fund...

Quote:
Originally Posted by 2B
Unfortunately, you are never "guaranteed" that your total return (accumulated interest plus return of principle) will ever equal that of a fixed term bond or CD.* A fund may have a better return... If you buy a fund before a longterm drop in interest rates may have you getting twice the market return after my poor old CD matures.* Or the fund may have a worse return.... If interest rates go through the roof (remember 18%), you'll have to hold that fund until they fall again (assuming your saying "equal" means you are not comparing to my ability to role my principle into the higher interest rate).


mathkak107
not totaly true....duration is the amount a bond fund will rise or fall in responce to a 1% change in rates..a fund with a duration of 5 will rise or fall 5%...now that means if the nav is 10.00 a share at 5% then at 6% the nav is 9.50 but your interest rate unlike a conventional bond rises to 6%...you need to stay in the fund 5 years at the extra 1% to get your orig total return of 5% back.....dont forget with a conventional bond you never get all your principal back either...you can buy a bond higher than parr if its coupon rate is higher than it should be and get less than your orig investment at maturity.the difference is also made up by the higher rate...reinvesting dividends shortens the time you need to spend in the fund even more to get your orig deal back..
* * *unless you think inflation is going long term over 3.5% tips arent such a great deal....and thats over 3-1/2% using the gov't way of figuring it not realities
__________________
mathjak107 is offline   Reply With Quote
Re: Vanguard TIPS fund...
Old 08-08-2006, 05:57 PM   #86
Thinks s/he gets paid by the post
2B's Avatar
 
Join Date: Mar 2006
Location: Houston
Posts: 4,330
Re: Vanguard TIPS fund...

mathkak107,

I'm not totally sure what you are saying. I agree that if you buy a bond at a premium over par you won't get your original principle back at maturity. The financial impact is that you get a "return of principle" with your interest payments. The real bottom line is that at maturity you know what cash comes back to you.

As for how long it takes to get your original principle back in the face of rising interest rates, I think that is a different issue. You lose principle value (NAV) when rates rise. If you hold the fund long enough you get all of your money back. On the other hand, falling interest rates increase your NAV so a capital gain is possible or you could keep taking the higher interest rate and eventually give your capital gain back. So what?

Back to my original statement..... I buy fixed income for a known income stream and a known amount of principle at a specified future date.

If you are happy letting your NAV float and not knowing how much it will be worth at any time in the future, funds might be the right thing for you. I personally have found that I can create my own fixed income fund with a better yield then I can get with either Fidelity or Vanguard. Yes, I have transactions costs higher then they do but my management fees are zero!

I am done with this thread. Is anyone ready to bring up variable annuities again? I just got my FIL's checks from redeeming them "early." Regretably, I am not willing to incur the personal inconvenience that would result by my beating the SOB to death that sold him the annuity. At this point, I can only hope that God will include this in whatever future discussion will eventually happen.
__________________

__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
2B is offline   Reply With Quote
Reply

Tags
vanguard


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
TIPS vs. Vanguard TIPS Fund Cut-Throat FIRE and Money 16 08-15-2006 06:32 AM
Vanguard Precious Metals Fund ash FIRE and Money 13 05-20-2006 11:56 AM
Vanguard Fund Actions REWahoo FIRE and Money 1 04-20-2006 03:36 PM
Vanguard Dividend Appreciation Index Fund ats5g FIRE and Money 5 02-01-2006 07:37 PM
Vanguard Tips Fund - Kinda Scary in a Good Way !! Cut-Throat FIRE and Money 4 03-01-2004 11:35 AM

 

 
All times are GMT -6. The time now is 10:00 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.