Originally Posted by clifp
Of course this begs the question of where do you put the money now, since the bond market isn't favorable, and cash pays absolutely nothing. I guess CD's despite the pathetic rates unless you are willing to up your AA.
I earn 1% on cash and can still get 2.25% in CDs. Nothing great, but risk to my principal is zero with these. The 30-yr TIPS I sold promise 0.86% real and carry considerable risk to my principal. In fact, held to maturity, I'm guaranteed a 29% depreciation in price.
Let's say I'm targeting 2% real (just for laughs) on my original $1,000 investment, and let's assume that inflation comes in at current market expectations. For simplicity we'll assume that I'll be able to reinvest at 2.25% nominal forever. Lots of assumptions, I know, but my downside risk to each of these assumptions is pretty small. If rates rise, I can break my CD at minimal cost. If my reinvestment rate is lower, inflation is probably lower too, which makes my primary goal of not outliving my money easier to achieve.
With these assumptions in palce, I can sell the $1,410 TIPS I own, plunk that money in CDs, and basically draw 2% real for 21 years before my principal drops below the inflation adjusted value of my original investment ($1,000). Said another way, I can hit my target rate, with minimal risk, for 21 years while I wait for interest rates to rise again. (If rates fall to zero after my CD matures, I still have another 6 years - 11 in total - before I start consuming my original investment. If inflation spikes, interest rates will too, and I'll be out of my CDs.)
Considering my view that negative real rates are not something that can be sustained in the long-term, I'm pretty confident that I'll have far better reinvestment opportunitites at some point over the next decade or two. That's my 'gamble' anyway.
Edit to Add: The above, of course, assumes only one investment alternative: CDs. Currently I'm earning >4% real on a professionally manged rental property. There are larger, and different, risks to investing here. But the spread is large, it's a currently unloved asset class, and is one possible alternative that more than meets my return objectives.