What's your very high-level strategy?

[pb4uski]

You are right... I remember reading somewhere that the minimum coupon is 0%.... and obviously, if the coupon is zero and one pays more than par then the real yield has to be negative.

	Inflation	2.00%
	Coupon rate	0.00%
	Effective yield	2.01%
n	Principal	Cash Flow	Proof – PV
0.0	100,000.00	-100,000.00	100,000.00
0.5	101,000.00	0.00	0.00
1.0	102,010.00	0.00	0.00
1.5	103,030.10	0.00	0.00
2.0	104,060.40	0.00	0.00
2.5	105,101.01	0.00	0.00
3.0	106,152.02	0.00	0.00
3.5	107,213.54	0.00	0.00
4.0	108,285.67	0.00	0.00
4.5	109,368.53	0.00	0.00
5.0	110,462.21	0.00	0.00
5.5	111,566.83	0.00	0.00
6.0	112,682.50	0.00	0.00
6.5	113,809.33	0.00	0.00
7.0	114,947.42	0.00	0.00
7.5	116,096.90	0.00	0.00
8.0	117,257.86	0.00	0.00
8.5	118,430.44	0.00	0.00
9.0	119,614.75	0.00	0.00
9.5	120,810.90	0.00	0.00
10.0	122,019.00	0.00	0.00
10.5	123,239.19	0.00	0.00
11.0	124,471.59	0.00	0.00
11.5	125,716.30	0.00	0.00
12.0	126,973.46	0.00	0.00
12.5	128,243.20	0.00	0.00
13.0	129,525.63	0.00	0.00
13.5	130,820.89	0.00	0.00
14.0	132,129.10	0.00	0.00
14.5	133,450.39	0.00	0.00
15.0	134,784.89	0.00	0.00
15.5	136,132.74	0.00	0.00
16.0	137,494.07	0.00	0.00
16.5	138,869.01	0.00	0.00
17.0	140,257.70	0.00	0.00
17.5	141,660.28	0.00	0.00
18.0	143,076.88	0.00	0.00
18.5	144,507.65	0.00	0.00
19.0	145,952.72	0.00	0.00
19.5	147,412.25	0.00	0.00
20.0	148,886.37	148,886.37	100,000.00

 

[OldShooter]

I think that's still not it. Try plugging in 1/8% coupon per the links in my post, zero inflation, and fiddle the purchase price to produce negative .5%. That's in the ballpark of current real-world I think. Then use that purchase rice/initial negative cash flow with the 1/8% coupon paying on $100K face value as it inflates (not on purchase price) and 2% inflation.

 

[pb4uski]

Like this?:

	Inflation	0.00%
	Coupon rate	0.13%
	Effective yield	-0.49%
n	Principal	Cash Flow	Proof – PV
0.0	100,000.00	-113,000.00	113,000.00
0.5	100,000.00	62.50	62.65
1.0	100,000.00	62.50	62.81
1.5	100,000.00	62.50	62.96
2.0	100,000.00	62.50	63.12
2.5	100,000.00	62.50	63.28
3.0	100,000.00	62.50	63.43
3.5	100,000.00	62.50	63.59
4.0	100,000.00	62.50	63.75
4.5	100,000.00	62.50	63.90
5.0	100,000.00	62.50	64.06
5.5	100,000.00	62.50	64.22
6.0	100,000.00	62.50	64.38
6.5	100,000.00	62.50	64.54
7.0	100,000.00	62.50	64.70
7.5	100,000.00	62.50	64.86
8.0	100,000.00	62.50	65.02
8.5	100,000.00	62.50	65.18
9.0	100,000.00	62.50	65.34
9.5	100,000.00	62.50	65.50
10.0	100,000.00	62.50	65.66
10.5	100,000.00	62.50	65.82
11.0	100,000.00	62.50	65.99
11.5	100,000.00	62.50	66.15
12.0	100,000.00	62.50	66.31
12.5	100,000.00	62.50	66.48
13.0	100,000.00	62.50	66.64
13.5	100,000.00	62.50	66.80
14.0	100,000.00	62.50	66.97
14.5	100,000.00	62.50	67.13
15.0	100,000.00	62.50	67.30
15.5	100,000.00	62.50	67.47
16.0	100,000.00	62.50	67.63
16.5	100,000.00	62.50	67.80
17.0	100,000.00	62.50	67.97
17.5	100,000.00	62.50	68.14
18.0	100,000.00	62.50	68.30
18.5	100,000.00	62.50	68.47
19.0	100,000.00	62.50	68.64
19.5	100,000.00	62.50	68.81
20.0	100,000.00	100,062.50	110,438.25

 

[OldShooter]

Like this?

Yeah. So $113K is your starting negative cash flow. Using 2% inflation the principal value of the asset will be $101K at the end of month six, apply the 1/16% interest to $101K to get your interest payment, and so on. Positive cash flow at the end of year 20 is the interest payment plus the inflation adjusted value of the $100K face value.

At least I think that's right and I'm pretty sure it will show that this supposedly-negative bond is not a negative YTM at all in a real-world scenario.

Is 2% real world? YMMV.

 

[Out-to-Lunch]

All that said, I have never seen a post from anyone on this board who has anything like 100% of his/her fixed income tranche in TIPS as we do.

I am north of 40%, for reasons similar to your reasoning.

 

[Ready-4-ER-at-14]

Right now strategy is a pyramid scheme. (as in Egyptian not Ponzi lol)
This is early retirement with one of two ss turned on.

Most of the mass is in the base and stable. This is cash, fixed income, short term annuities. I consider SS to be part of the base that is exposed to the elements and could weather away to some point.
Next level is index funds, ETFs,
Annuities single premium immediate fixed in different companies (better value when we bought than now)
Then stock extremely large cap dividend paying
Then stock small cap dividend paying
Finally options (right now into call spreads) bought with stock dividends

 

[pb4uski]

I guess that my current strategy is a bit Goldilocks... some to cold, some to hot and some just right.

Cold is mostly ballast-y FDIC insured CDs (55%), middle is investment grade preferred stocks (20%) which provide dependable income but have some modest price volatility and hot is equities (25%, though most of the equity money is currently temporarily parked in cash).

 

[Spanky]

You are new here...right?

My very high level strategy is to stay healthy, alive and be retired. Everything else is small stuff.

+1. To much focus and energy on wealth while ignoring other important matters, i.e., health, friendship and family, in life is not prudent.

 

[tizod]

I would not recommend bond funds right now, and would be moving out of them. Individual bonds yes. But funds will have declining NAV as the bonds mature and roll into lower and lower returns. Net effect is not good. If you want the security of bonds, I think you need to pick and buy the bond and hold or trade as required (sometimes the trade can equal the payouts without awaiting maturity).

 

[Spanky]

35% QQQ
35% SPY
20% GLD
10% Cash

All in 401k and IRA.

57 years old, anticipating retirement in a year or so.

Pretty aggressive near retirement?

 

[pb4uski]

I would not recommend bond funds right now, and would be moving out of them. Individual bonds yes. But funds will have declining NAV as the bonds mature and roll into lower and lower returns. Net effect is not good. If you want the security of bonds, I think you need to pick and buy the bond and hold or trade as required (sometimes the trade can equal the payouts without awaiting maturity).

I agree with the recommendation, but the reasoning is flawed. Bond fund/ETF NAVs will NOT decline as bonds mature and get rolled into lower yielding bonds.

Let's say the fund distributes all interest and a 6% bond matures at $1,000... they just reinvest the maturity proceeds of $1,000 in another bond... now that new bond might be at 3% because interest rates have declined.

Either way, the NAV is the same... what declines is the distribution yield of the fund and higher yielding bonds bought long ago get replaced with lower yielding bonds as a result of the decline in interest rates.

Above is assuming that interest rate are steady... if interest rate increase then NAV will decline and vice versa because of the impact of changes in interest rates on bond held by the fund. And since with rates so low and the Fed on record as not keen to take rates negative then it is more likely that rates will stay steady or increase than decline.

 

[tizod]

@pb4uski. Yes, I was trying to keep it simple. But I used poor words. As the net yields decline the fund goes down, and well...its not a good investment right now.

 

[OldShooter]

OK, so I didn't entice @pb4 into doing all my work for me. I finally suspended my inclination towards sloth and did it myself, looking into how TIPS behave in various inflationary environments when they start with a negative YTM.

No surprise, really, the YTM of a TIPS held 20 years will be the average inflation rate over that period plus the (negative) yield at purchase time.

Here are some sample runs starting at a negative yield of 0.5%:
Inflation 0, YTM -.5
Inflation 2% (Fed Target), YTM +1.5
Inflation 3.11 (US historical average), YTM +2.61%
Inflation 2.2% (~US 30 year average), YTM +1.7%
Inflation 4.2% (~US 40 year average), YTM +3.7%

So basically almost any real-world inflation rate will wipe the negative sign off the kind of negative TIPS YTMs that we have been seeing. More than you wanted to know: https://www.federalreserve.gov/econ...of-common-inflation-expectations-20200902.htm

If someone would like to see and check the spreadsheet or try other holding periods, PM me with an email address and I'll be glad to send it along.

 

[Running_Man]

OK, so I didn't entice @pb4 into doing all my work for me. I finally suspended my inclination towards sloth and did it myself, looking into how TIPS behave in various inflationary environments when they start with a negative YTM.

No surprise, really, the YTM of a TIPS held 20 years will be the average inflation rate over that period plus the (negative) yield at purchase time.

Here are some sample runs starting at a negative yield of 0.5%:
Inflation 0, YTM -.5
Inflation 2% (Fed Target), YTM +1.5
Inflation 3.11 (US historical average), YTM +2.61%
Inflation 2.2% (~US 30 year average), YTM +1.7%
Inflation 4.2% (~US 40 year average), YTM +3.7%

So basically almost any real-world inflation rate will wipe the negative sign off the kind of negative TIPS YTMs that we have been seeing. More than you wanted to know: https://www.federalreserve.gov/econ...of-common-inflation-expectations-20200902.htm

If someone would like to see and check the spreadsheet or try other holding periods, PM me with an email address and I'll be glad to send it along.

Yes you are guaranteed to not earn an inflation adjusted return, you will earn at present 1/2 percent less than inflation on those investments. Over a 20 year period won't a 100K investment be worth 90K in today's dollars? This does not seem like a particularly good investment, but does provide long term ammunition, although if interest rates rose rapidly the market price of these securities would probably fall (think of if bonds went back to 2 or 3 percent annually over inflation rate, a "normal return" making the ammunition worth probably less than the 90% of terminal value. I think if the TIPS rate were to return to 2% over inflation a 20 year 1/2% negative tip would fall 45% in value.

 

[Out-to-Lunch]

Over a 20 year period won't a 100K investment be worth 90K in today's dollars? This does not seem like a particularly good investment,

Well, good compared to what? Today's 20-year nominal Treasuries are yielding ~1.4% (nominal). If inflation hits the Fed target of 2%, that yield is just about the same YTM as for TIPS. The thing is, neither you nor I know what inflation will turn out to be over the next 20 years.

 

[pb4uski]

I dunno. I realize that as things might ultimately turnout that some of my investments might yield less than inflation, but I'm not keen on locking into a 0.5% negative real return from the get-go.

 

[Out-to-Lunch]

I dunno. I realize that as things might ultimately turnout that some of my investments might yield less than inflation, but I'm not keen on locking into a 0.5% negative real return from the get-go.

Well, yup! You pays your money, and you takes your chances! Same as it ever wuz.

 

[PoorOldCountryBoy]

In the public interest, keep in mind 20-30 year bonds will lose money due to the interest rate math and dollar depreciation. For retirement cash flow holding short to mid term bonds (up to about 7 years) will get you the cash flow you need short term. The rest should be in income producing stocks and some sort of inflation hedge. Note that decent operating companies are an inflation hedge long term as they can raise prices, but their earnings multiples can collapse with high inflation.



Welcome OP, sorry you had a bad exchange to start with. There are some nice people on this site, hope you stay with it. Best of luck!

 

[pjigar]

Yes, I am at zero TIPS... but I'm guessing that there are many here in the same position.

IIRC when we had high inflation in the 1980s the Fed didn't really have an inflation mandate, or certainly not a specific inflation target like it does now.

Most recently, negative real yields have turned me off... but if real returns ever become even modestly positive, then I may be interested. My current composite portfolio income yield is a tad over 3% compared to the Fed's 2% inflation target.

I have zero TIPS as well, I don't like to trade returns for safety. I want both! Yes, stocks will not correlate inflation blips instantaneously but overall they will beat inflation by a large margin. My take is to have an extra capital cushion to weather the inflation blips when using the equities. Other tool we are using (not for everyone) is direct real estate investments. RE will also beat inflation (overall, no blip protection) as long as you have positive cashflow. My hope is that RE and equities will have some negative correlation and smooth out some of the inflation blips.

But all in all, there is no free lunch. Do what makes you comfortable but don't hold cash when it comes to inflation.