Re: All right, go%$!#@it, mea culpa & caveat.
OK, everyone, it's clear that I haven't spent my ER learning about bonds. My apologies to those who may have been misled by my second-hand info. Let me try to elucidate (or at least elaborate.)
Although I guess you can buy just about anything on the secondary market, I hesitate to pay the spread on a low-interest bond when you can accomplish the same goal from the originator. I know the secondary market helps build a bond ladder, but I'd work around it to accomplish the same objective at a lower cost (although perhaps over a longer time with more hassle). So I don't know squat about the secondary bond markets, as I ably demonstrated earlier. If I ever did buy a bond, I'd buy it from the cheapest source possible-- probably the issuer-- and hold it until maturity. But I still don't think you can buy your own TIPS for your own IRA. I think your custodian has to do that for you, of course with a fee. That one-time fee is lower than paying annual expense ratios, but the fee is still higher than doing it via Treasury Direct.
Here's what I was surprised to learn about I bond purchase limits at the Treasury Direct website (
http://www.publicdebt.treas.gov/sav/sbilimit.htm):
"You can purchase up to $30,000 worth of paper I Bonds in your name and Social Security Number each calendar year. In addition, you can purchase up to $30,000 in I Bonds through TreasuryDirect. In a co-ownership situation, the issue price of the I Bond applies toward the annual purchases of the co-owner whose name and Social Security Number appears on the bond. The purchase limit for I Bonds isn't affected by the purchases of Series EE Bonds. I Bonds purchased as gifts using your own Social Security Number (because you didn't know the recipient's) won't count towards your annual purchase limit; however, they will count towards the annual purchase limit of the gift recipient." So technically a married couple could acquire up to $120K I bonds in one year, more if you don't put the recipient's SSN on them.
I included a link to Bernstein's "Four Pillars" book with a comment about TIPS. There's no specific quote in that linked Chapter 1 regarding my opinion of Bernstein's evaluation of TIPS but here's a couple quotes from the book: "Some have recently argued that TIPS should also be considered riskless, in spite of their long maturities, because they are not negatively affected by inflation." "At a minimum, however, some commitment to TIPS in your sheltered account is probably not a bad idea." Those sure are a lot of qualifiers-- "some have argued", "in spite of", "some commitment", "probably not a bad idea"-- and they're a strong contrast to his writing in the rest of the book. I think that when Bernstein mentions TIPS, he does it as quickly as he can and he moves on. He certainly doesn't rave about them as he does his favorite stock categories and index funds. I didn't intend to imply that he doesn't like them-- I would have said that plainly. But I do believe that he favors other alternatives.
I agree that we all think we know what's going to happen to bonds & bond funds when interest rates start going back up. But I don't think we've raised rates from these 40-year lows under current market fluidity & volatility conditions, and certainly never with as much analysis capability & reaction speed as we currently have (which may or may not be a good thing). We've all seen what Greenspan & Snow & Rubin were able to do to the markets with poorly-timed remarks, and I'd hate to see the Fed overcompensate and lose control of inflation. When everyone can stampede for the trading exits at the same time with low transaction costs, like the LTCM squeeze, I suspect that the volatile swings in bond-fund NAVs and bond prices will be impressive. It'll be a blip on the long-term radar, sure, but it'll be a lot worse than the "last time" we did this. In other words, I'm essentially claiming that "this time it's really different". And I'm not joining the game.
I'd hold a bond to maturity, not a bond fund. But if I was going to hold a bond fund, I'd hold it for the duration. However Wab raises good points that would keep me from jumping into both bonds & bond funds. In addition, personally I can't stand paying mutual fund expenses-- bond fund expenses sound like the worst of a bad bunch. It's time for someone to do to bond expenses what Charles Schwab did for commissions and John Bogle did to stock-fund expenses.
So while many count on their bond income to supplement their other cash flows, we don't. We have a govt pension (with a COLA) supplemented by a 100% stock portfolio, so perhaps this approach isn't for everyone. We keep a two-year cash stash that's replenished from stock sales (at long-term cap gains rates), stock dividends, or stock mutual fund distributions. I've come to see the wisdom of Bernstein's SHORT-term bond philosophy on portfolio volatility, but I'm going to implement that with a ladder of five-year CDs. I think it's a lower-cost approach, it resolves a couple personal family issues, and it certainly gives the stock portfolio more recovery time from the worst that we've ever seen. Maybe Bernstein will discuss cash as a volatility-damper in his next book-- I hope so, because I think this is an exceptionally treacherous time for bonds. But again, I've demonstrated that I hold a lot of mistaken impressions in the bond area.