Vanguard Tips Fund - Kinda Scary in a Good Way !!

I put a bunch of cash I had sitting on the sidelines into the Vanguard TIPS fund - VIPSX - for the non-volatile portion of my portfolio. I did this in early Feb. As of today I have already made a 2% return on my money in less than a month.

I was thinking this was going to be non-volatile investment. What am I missing here? The downside risk must be more than I was thinking it was!

[wabmester]

It's pretty much a zero-sum game. While the NAV has gone up, yields have come down. Take a look at the daily TIPS yield curve:

http://www.ustreas.gov/offices/domes...eal_yield.html

This tells me people are betting on imminently higher inflation.

[Telly]

I did this in early Feb. As of today I have already made a 2% return on my money in less than a month.

Don't scale that return out to a year! You got in on a recovery.

I got into VIPSX in May of last year. It had been going up and up before I got in, and that continued for a little bit. Then it slid negative, and has sawtoothed back and forth over the 0% return mark (relative to last May). It has finally inched back, and today my return over the period is 4%. And it is volatile.

[wabmester]

VIPSX is basically a long-term bond fund (avg maturity around 10 years). It's going to be sensitive to interest rate changes, but in recent years it looks less volatile than other long-term bond funds.

Here's a chart comparing VIPSX with VBLTX (LT index) over the last year:

http://finance.yahoo.com/q/bc?t=1y&s...=m&q=l&c=vipsx

You're about to see something new wrt TIPS: negative real yields. Everybody knows that short-term treasuries currently have a negative real yield, but you don't see it because they're quoted in terms of nominal yield.

Watch the YTM of the 1/07 TIPS as it matures. It's almost zero now, and will soon be quoted as a negative yield

[wabmester]

I don't know why this excites me so, but I just pulled up a quote on the 1/07 TIPS.

The yield-to-maturity is -0.255!

Somehow it just seems harder to swallow buying a bond with a quoted negative yield than it does losing money to inflation in a money market account. I guess it's the same psychology that makes paying $75/mo for a cell phone more palatable than losing the opportunity to save over $100K with the same money.