TIPS again

[smooch]

I thought I read a few days ago here that this is a good time to buy TIPS, but I have searched and can't find that thread. We have targeted 10% of our portfolio for TIPS. We have the Vanguard TIPS fund and we need to add 15K more to get up to our targeted allocation. It's in an IRA and we don't plan to use it for a few more years. Should we put it in now or would we be better off with a CD?

 

[Gone4Good]

Money that you might need in "a few more years" sounds more like a CD investment than a TIPS investment. The current duration of the Vanguard Inflation Protected Securities fund is 6.2 years, which is the amount of time you probably want to commit to it. However, I do think that at current rates TIPS make sense to diversify a long-term bond portfolio.

 

[saluki9]

Money that you might need in "a few more years" sounds more like a CD investment than a TIPS investment. The current duration of the Vanguard Inflation Protected Securities fund is 6.2 years, which is the amount of time you probably want to commit to it. However, I do think that at current rates TIPS make sense to diversify a long-term bond portfolio.

Are you sure you aren't talking about maturity instead of duration?

The Avg maturity of the fund is 10.3 years, the duration (sensitivity to interest rates) is in the low 6's

 

[brewer12345]

Um, he said duration was in the low 6's. What's the problem?

 

[saluki9]

Um, he said duration was in the low 6's. What's the problem?

Because from the sound of it he was refering to duration matching with his time horizon.

The duration (or avg maturity for that matter) in the fund will remain constant whether his holding period is 6 years or 6 months.

 

[cute fuzzy bunny]

Wouldnt touch 'em unless they paid 3%, but would start buying them at 3.5%.

Unless you're sure the CPI is headed up, in which case you'll buy them regardless.

 

[brewer12345]

Wouldnt touch 'em unless they paid 3%, but would start buying them at 3.5%.

Unless you're sure the CPI is headed up, in which case you'll buy them regardless.

Hmmm, I don't find the current TIPS yield quite high enough to load the boat, but it isn't unattractive. I find current real rates attractive enough to have an ~8% position in ISM.

If CPI continues to remain elevated, TIPS will be a much better shelter from the storm than nominal treasuries. If CPI falls, you will likely see the entire bond market rally as it anticipates the Fed stopping or even cutting rates. In that scenario, TIPS will rally, too.

At this point, I like TIPS a lot better than the 10 year nominal treasury.

 

[cute fuzzy bunny]

Remember where I'm coming from...you have to provide risk adjusted returns that are better than 100% equities to attract my interest, and given that I have no intention of selling any of my fund shares for a good 20+ years and I dont care about volatility, my risk adjustment is pretty benign.

Now if CPI was anywhere near "real" for me as a measure of inflation, then I'd seriously consider TIPS. Paying 2.5% plus my personal rate of inflation, which is in the 6%+ range...that'd be a bit of a decent deal.

But I guess if CPI> than your personal rate of inflation, you're concerned about volatility and market risk, and you think the CPI is headed sharply north, then they're worth a look.

 

[brewer12345]

But I guess if CPI> than your personal rate of inflation, you're concerned about volatility and market risk, and you think the CPI is headed sharply north, then they're worth a look.

Yeah, yeah, you hate the Bureau of Labor Statistics, we know.

I just think TIPS and similar will offer some of the best risk-adjusted returns in the immediate future.

 

[cute fuzzy bunny]

Yeah, yeah, you hate the Bureau of Labor Statistics, we know.

I never said that. I said that my personal rate of inflation is not the same as the CPI and further, unless your budget mix matches the CPI-U budget mix, its not the same for you either. Each investor needs to know their personal rate of inflation before they'll know if TIPS will provide a real return, better than real return, or in my case, a negative real return.

I just think TIPS and similar will offer some of the best risk-adjusted returns in the immediate future.

Maybe so, but each investor needs to weigh their risks to get that 'risk adjusted' piece correct. Since volatility doesnt bother me a bit and my investing horizon is measured in decades, I'm not looking at a lot of risk.