Vanguard TIPS fund...

[cute fuzzy bunny]

Ok, what am I doing wrong here...

I look at the vanguard tips fund, look at the distributions. I see since 3/23/05, its had six dividends, one ST capital gain and one LT capital gain.

Dividends: .24, .01, .30, .11, .25, .02
ST capital gain: .01
LT capital gain: .01, .02

Price on 3/23/05 = 12.32

Price on 6/22/06 = 11.58

If I bought $50k worth on 3/23/05, I get 4058 shares. On 6/22/06 those are worth $46995.

Total distributions for 4058 shares from 3/23/05 to 6/22/06 is $4005

Net $51,002.

NAV obviously took a beating...but...

That doesnt seem right..stinking ~2% total return over 5 quarters? I'm not seeing that inflation adjustment anywhere in there in either the price or a distribution...what gives?

[haha]

Originally Posted by Cute Fuzzy Bunny

That doesnt seem right..stinking ~2% total return over 5 quarters?* I'm not seeing that inflation adjustment anywhere in there in either the price or a distribution...what gives?

Big climb in real interest rates, which caused lowered quotations on the underlying bonds.

Ha

[wabmester]

Originally Posted by Cute Fuzzy Bunny

Dividends: .24, .01, .30, .11, .25, .02

Price on 3/23/05 = 12.32

Total dividend = 0.93

0.93/12.32 = 7.55%

So, where's the problem?

The NAV is down because real rates went from about 2% to 2.5% over that timeframe.

[d]

ditto

[Nords]

Originally Posted by Cute Fuzzy Bunny

That doesnt seem right..stinking ~2% total return over 5 quarters?* I'm not seeing that inflation adjustment anywhere in there in either the price or a distribution...what gives?

You're looking at the wrong part of the picture.

Regardless of bond returns, you're supposed to be happy that your portfolio's volatility is lower!

[wabmester]

Originally Posted by Nords

Regardless of bond returns, you're supposed to be happy that your portfolio's volatility is lower!

Exactly. Bonds don't make you feel good until your stocks get cut in half.

[laurence]

Ah, so correct me if I'm wrong, but the 7.55% coupon is my "inflation protected return" and the current value being lower is not factored in. So you have to hold TIPS to maturity to have it be a truly "safe" investment, yes?

[wabmester]

Originally Posted by Laurence

Ah, so correct me if I'm wrong, but the 7.55% coupon is my "inflation protected return" and the current value being lower is not factored in.* So you have to hold TIPS to maturity to have it be a truly "safe" investment, yes?

For any bond (bond fund), you need to hold the bond (fund) till maturity (average maturity) if you want the original yield at the time of purchase.

[haha]

Originally Posted by Laurence

Ah, so correct me if I'm wrong, but the 7.55% coupon is my "inflation protected return" and the current value being lower is not factored in. *So you have to hold TIPS to maturity to have it be a truly "safe" investment, yes?

No, this is not correct at least with respect to a 7.55% coupon (There is no 7.55% coupon) It is easy to wind yourself around a pole trying to understand someone's explanation of TIPS, or to attempt to give someone an explanation. If you go to the Vanguard website and look at the Inflation protected fund data, they will give you the return that you would get if their were no changes in the coupon rates on new bonds being floated, or if existing bonds were not fluctuating up or down.

Going forward, that is what you can expect, holding real rates constant. (Which of course they will not be). It is true that the only way to avoid any capital account changes when you decide to liquidate is to buy the TIPS directly and let them mature, rather than in a fund.

This is always an issue with bond funds though since you re always re-investing it should more or less even out.

Ha

[Mwsinron]

Fidelity had an article similar about bonds lately. Guy stated your return after inflation would have been .7 %

[2B]

Now you see my argument on why to avoid bond funds.

Individual bonds will fluxuate in value with interest rates but on maturity they will return your original principle. It doesn't really matter unless you decide you have to sell your fund after a big run up in interest rates. Buying individual bonds also makes you work on ladders and timing maturity with known money-needing events.

[wabmester]

Originally Posted by 2B

Now you see my argument on why to avoid bond funds.

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.

[cute fuzzy bunny]

Hmmm...I did note that I saw the nav decline due to the effects of the rising rates.

What I cant find is the inflation adjustment...looking at the historical prices going back a year and a half, I dont see any bumps commensurate with the 'substantial cpi increase'.

Its not getting paid out in dividends. I'm not seeing any nav bumps. But I'll bet somewhere along the line you get a form that has you pay the taxes on that CPI adjustment...that I cant seem to find.

[wabmester]

Originally Posted by Cute Fuzzy Bunny

Its not getting paid out in dividends.

At the beginning of the period, the real yield was less than 2%.* Over 18 months, a 2% yield would give you about 3%.* *The dividends paid out were over 7.5%.* *Why don't you see the inflation adjustment in the dividends?

[cute fuzzy bunny]

It wasnt 18 months, I think it was only 15?

[wabmester]

Originally Posted by Cute Fuzzy Bunny

It wasnt 18 months, I think it was only 15?

OK, then you'd only expect a 2.5% real yield. But the fund paid 7.55% in dividends. The difference is the inflation adjustment, unless I'm really misunderstanding your question.

[cute fuzzy bunny]

I'm not getting 7.55%. Help me with the math here...maybe one of us will see where the other screwed up.

Barring that, you can do that argue-with-yourself thing you said you like...

[wabmester]

Originally Posted by Cute Fuzzy Bunny

I'm not getting 7.55%.* Help me with the math here...maybe one of us will see where the other screwed up.

The math is here.

Just add all the dividends, then divide the total by the initial fund price to get your yield over the period.

[cute fuzzy bunny]

I see your flaw. Oh, and the math problem.

You're doing 7.55% over 15 months. 6.04% annualized. Only 5.55% for this past calendar year.

Ibond folks are doing better than that and selling the frickin things. And they didnt lose 8% of their capital in the process!