Bogleheads

[ttcbj]

I have money in both Vanguard's treasury and prime MM funds. I intend to use it in the next few years, and my primary goal is that it not lose value in real terms.

Historically, I had always heard that MM funds were inflation-safe investments. The logic went that if inflation rises, the fed must raise short term interest rates. When short term rates increase, so do MM rates, with at most a 30-60 day lag.

However, suppose that inflation increases, but the fed just leaves rates low. In that case, my inflation protection doesn't seem to work. Is that correct? In trusting that MM funds are inflation safe, am I implicitly trusting that the fed will make tamping down inflation its highest priority?

If so, does anyone have an non-speculative, liquid suggestions for where to put the money (no gold, no timberland or real estate)?

Thanks!

[mvm]

There are periods in which money market funds keep up with inflation,but over the long term, they don't. That's the risk with money market funds - loss to inflation.

You'll need to go out further on the yield curve (if you want bonds) to keep up with inflation, generally intermediate term bonds and treasuries.

Or stocks.

Or..if you want absolute safety: TIPS. TIPS keep up with inflation - but they may not "beat" inflation.

[Robinhood]

I believe over a reasonable time period, say several years, a good money market fund will return ~inflation minus their expense ratio. This assumes the fund stays in "safe" investments and doesn't get caught holding risky assets such as the financial derivatives a few were using to juice their returns recently. Like all fixed income vehicles, costs are a major factor in determining returns.

[PiperWarrior]

How about I bonds?

You also have to think about tax regardless of where you put your money.

[nisiprius]

Money market funds are perfectly liquid, maintain a NAV of $1 per share, and yields change slowly and gradually, so what's the problem?

The CPI is published every month. The yield of a money market fund is published, I dunno, every week?

Seems easy enough to keep money in a money market account and keep an eye on the numbers and not bother about doing anything until the actual moment when inflation exceeds the money market fund's yield... if that ever happens.

And keep in mind, if we're talking about (say) $100,000, let's say inflation runs 4% and the money market fund drops to where it's only paying 3.8%, you're talking about a small, continuous, slow loss: about $17 a month.

It's not as if the money market were going to crash suddenly and take half your savings with it.

You say you're going to use that money in the next few years, so I bonds are no good for you. I love TIPS but they're no good for you, they'll fluctuate in value if you redeem them before maturity. TIPS funds, ditto only more so. I hold a $10,000 TIPS that at one point had a market value of about $8,000 and currently has a market value of about $11,000. Not what you want for money you're going to use over "the next few years."

"If so, does anyone have an non-speculative, liquid suggestions for where to put the money (no gold, no timberland or real estate)?"

The efficient market applies here. Any investments that have about the same characteristics as a money market fund (safety, liquidity, nonvolatility, etc.) are going to have about the same yield as a money market fund.

I think you're trying to optimize something that's not worth fussing about. Use the money market fund. If inflation hits and the real return becomes negative, cross that bridge when you come to it. Shrug and take the small hit.
_________________
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

[Trying2blazy]

I have been worried about the same issue.

Our downpayment money was sitting in Treasury money market but now that we have decided we won't be buying a house for the next 3-5 years, I decided to begin to unload it into TSM, TMB and FTSE ex USA. You are supposed to have a minimum 5 yr horizon on these accounts but I am willing to take that risk because we could always rent for another year or two if we need to recoup losses.

In fact, one honest realtor told me recently that he thinks inflation will catch the bottom of the real estate plunge.

Best of luck.

[jh]

...

[Tramper Al]

I like I-Bonds for this, though the purchase limits may thwart you. I was able to buy through TD up to the old limits about 2 weeks ago, but you are probably running out of time to do this.

I don't see TIPS volatility as much of a problem, though, if you match up your time horizon correctly. If you can buy TIPS maturing in 1-, 2-, 3-years or whatever efficiently on the secondary market, that should work for you. Of course, real yields are very low, but you will get your inflation adjustment and this seems to be the primary concern.

[BigD53]

Wait a cotton pickin minute!

You mean to tell me, all I need to keep up with inflation, is to stash my cash in the super-safe Prime Money Market fund?

I'll drink to that!

If all I need is Prime, then why all the flurry of discussions about those fancy waazoo Tips?

[retired at 48]

To: ttcbj, and aothers

Suggest view charts showing MMF yields vs. inflation in the 1970's. My experience was MMF kept up, hitting yields of about 13%.

My mother said "OH! I sure love those Fidelity MMF's at 13%"... I couldn't convince her the concept of duration and needing some longer term bonds. Several seniors were very disappointed they lost these favorable rates when inflation subsided.

retired at 48

[EmergDoc]

My understanding is that MMFs keep up with inflation (or perhaps beat it by 0.5%/year) BEFORE taxes, not after. I guess if you're in the 10% bracket that isn't as much an issue. If you're paying 35 or 40% plus....then you're forced to use a tax-exempt MMF which may not best inflation. Taxes, Inflation, and Expenses....the real enemies of the long-term investor. Don't underestimate any of them.
_________________
1) Invest you must 2) Time is your friend 3) Impulse is your enemy
4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

[BigD53]

My father speaks of those beautiful CD rates back in the 70's. He was in CD Hog Heaven!

Retired at 48, and EmergDoc, and others, here's a dumb question: Can you please explain further on what exactly causes inflation?

If the economy is slowing, with a possible recession ahead, factories are reducing production, businesses are experiencing difficult times, and companies possibly laying off people, why does the price of products go up?

If my store is not selling much, wouldn't I be better off lowering prices to attrack more business and more customers? I don't understand why prices go up, during a downturn in the economy. Seems like it should be just the opposite. Do prices/inflation always increase during an economic downturn? That doesn't make any sense to me.

I have noticed a jump in food prices. My Dodger Dog combo seems to cost about a buck-fifty more.

[retired at 48]

[BigD53]

Thank you retired-at-48. I understand some of what you said. But a lot of it is over my head, especially the "money supply" thing.

I had better stick to what I know best:
a) simple Target Retirement Funds
b) Baseball!

For "a", you invest and forget. And for "b", you throw the ball, you hit the ball, and you catch the ball.

Thanks again.
BigD

[gkaplan]

Sandy Koufax > Don Drysdale.
_________________
Gordon

[craigr]

[not2late]

Would love to hear some insight on 2 observations I see in chart. I'm not a smart person...don't have historical financial knowledge and have not read books or studied these matters . Please give insight but try to keep it so most of us can follow.

1. What is wrong with looking at this long term graph and concluding that inflation over the last 25-35 yrs has not been as severe as the average for any or most same periods and too much emphasis is placed on inflation in todays world of discussion???

2. Is it wrong to also assume , based on this historical data (chart) , that recessions/slowdowns/bad times are occurring less frequently and/ or less severe as similar time frames.

What am I not seeing?????

[Apprentice_941]

[retired at 48]

[BigD53]

craigr, Thanks very much for the chart and the detailed explanation. Truthfully, I'm still having a hard time understanding this.

"Governments can print money to pay off their debts."

Dumb question #1: If that's the case, then why don't they print enough to pay off ALL the debt? Why keep trillions of debt on the books?

"If you aren't generating enough money from tax revenue you can simply print off the shortfall. The markets will adjust to this new supply of money by raising their prices."

Dumb question#2, 3, 4: How does the "Market" know when they are printing new money, injecting a new supply? How does the Treasury introduce the newly printed money? And why raise taxes if they can just fire up the printing press and print new dollars?

I seriously did not realzie how complicated and confusing economics can be. This kinda reaffirms my feelings that investing in the stock and bond market is just one big game, sort of like a crap shoot. Is the Fed being honest about the inflation figures? Managing the Interest rates correctly? Being truthful about the national debt? The trade deficit? The ongoing mortgage/credit mess? Social Security? Taxes?

I don't want to turn this into a political discussion. And perhaps I shouldn't even try and understand it! I'll just continue to put my faith and trust in the likes of Mr Bogle and Vanguard, Mr Larimore, Mr Lindauer, and Messrs Ferri and Swedroe. Men who I respect and admire and are light-years ahead of me in knowledge, education and experience.

I believe that they, and all the other great contibutors in this forum (and this discussion) will not steer us "regular Joe's" wrong. Thanks again for your time and help.

BigD

[craigr]

[craigr]

[yeel]

[kpanghmc]

[craigr]

[retired at 48]

[Jack]

[BigD53]

"The system is certainly built on a house of cards, but nobody knows when it will finally give up the ghost."

Prime Money Market is looking very good right now! Or should I stock up on gas, beans, bread, and shotgun shells?

craigr and retired/48, this is a great discussion and learning experience. Thank you. I hope it continues and more join in.

BigD

[Otto]

[EmergDoc]

[market timer]

Re: who inflation hits hardest

Unexpected inflation harms holders of nominal assets. A long-dated bond is the obvious example, but cash is devalued as well. If oil spikes to $200/barrel overnight, your MM fund is not going to preserve yesterday's buying power.

Regarding whether inflation harms the rich more or the poor, it depends on whether you consider the present value of future wages a nominal or a real asset. Wages typically rise with inflation, though they have not in the last few years. Wealthy investors in real assets will not fare as poorly as wealthy bond owners.

This is an interesting thread. I'd be curious to see what craigr's anti-inflation portfolio looks like. Lots of commodities, gold, and short term bonds?

[craigr]

[craigr]

[retired at 48]

[market timer]

[Otto]

[astroturf]

[craigr]

[Otto]

[BigD53]

[nisiprius]

Returning to the original poster's topic, Ibbotson's "Stocks, Bonds, Bills and Inflation" doesn't track money markets as such, but does track short-term treasury bills, whose behavior is probably similar.

All numbers shown are from Ibbotson, include reinvested dividends, and are in real dollars (i.e. corrected for inflation).

From 1925 to 2004, $10,000 invested in short-term treasury bills, with dividends reinvested, and corrected for inflation, would have grown to $16,800, an average annual real return of 0.67%.

The curve is not as smooth as you'd like, but isn't bad. The closest thing to a "bear market" in treasury bills appears to be 1943-1948, during which Treasury bills lost 34%, or 6.1% per year, almost entirely due to inflation; in nominal terms they actually yielded a total of 2.3% cumulatively over that period.

Another decline occurred from 1973 to 1980, an 11% decline over 7 years, or 1.66% per year.

The rest of the curve is level or smooth upward.

In other words, they've been pretty save and have mostly on the average yielded a tiny real return.

Another important observation, which is visible in the curve being "smooth," is that unlike stocks T-bill rates have a strong serial correlation. Ibbotson says that over 1926 to 2004, there was an 0.67 correlation coefficient between the real return of T-bills in consecutive years. This means that, again, unlike stocks, you really can spot a trend and take rational action.
_________________
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

[astroturf]

A good summary of the performance of several asset classes relative to inflation since 1925 can be found here.

[BigD53]

Oops, now I'm back to stocks for inflation fighting?

Thanks for the chart and info, astroturf.

[Ria Rhodes]

Good information everyone about Prime Money Market, Vanguard Treasury, and how inflation figures into return.

Off Topic comment - I remember hearing stories from old timers about how an entire neighborhood/community was uprooted from their homes in the Chavez Ravine area to build Dodger Stadium and adjoined parking lot. I sat in the stadium during the Tommy Lasorda years, and believe me, I thought about it even though I was enjoying the atmosphere at the time. I have a soft spot for the original Brooklyn Dodger fans, a few who I met when living in New York. I've visited Cooperstown, NY and the hometown of Vanguard (used to live in NYS/NYC/PA), so I've kinda done the trip around the bases as they say.

Best to all wherever you call home.

[retired at 48]