Real 3% (CPI plus 3% guaranteed)

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silario
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Real 3% (CPI plus 3% guaranteed)

Post by silario »

Hello
My wife has an opportunity to invest as part of her work retirement savings in an invest vehicle called Real 3%. It returns the CPI index plus 3%. This is a guaranteed return with no cost (subsidized by her employer).
I'm trying to figure out how to relate this invest product to her other offerings. She has fairly diversified options with regard to stock (domestic large/small cap, developed and emerging) and a couple of bond options JP emerging bond index plus and Barclay capital government credit index.
I want to include this Real 3% as part of her bond allocation but wanted thoughts on what percentage it should include.
She is in her early 40's but we are feeling fairly conservative and are investing about 60/40 stocks/bonds.
Thanks
randomguy
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Re: Real 3% (CPI plus 3% guaranteed)

Post by randomguy »

Sounds like a great investment but you would need to read the fine print (any limits on exchanging out) but my first thought is I would shove my whole bond AA in that. I don't like emerging bonds right now (risk is too high) and something like a 4.5% return for fixed income is pretty darn good these days when looking at US returns. You will miss outa bit when interest rates drop 1% but I think I would be willing to give that up to avoid the potential losses when the rates up a point or two.
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cheese_breath
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Re: Real 3% (CPI plus 3% guaranteed)

Post by cheese_breath »

A lot of people would 'kill' for that deal, especially if you are feeling fairly conservative. Some bond funds may do better right now, but whenever interest rates begin rising 3% + CPI should be hard to beat.
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Sheepdog
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Re: Real 3% (CPI plus 3% guaranteed)

Post by Sheepdog »

Like in 2000 when I Bonds were sold at 3 % and higher plus CPI and Mel was saying, "Back up the truck".
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saltycaper
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Re: Real 3% (CPI plus 3% guaranteed)

Post by saltycaper »

If I understood the investment and was comfortable that it was actually going to perform as advertised, CPI + 3, I would probably allocate half my bond portfolio to it. Fantastic inflation protection. However, as rare as deflation has been, comparatively speaking over the past 50 years, I would still hold some nominal bonds.

If the investment was very liquid and easy to move in and out of, I may substitute it for some of my CDs, savings, treasuries, etc. If it was not liquid, I would substitute it for other parts of my fixed income portfolio. Since this is a retirement portfolio, I suppose the latter is more relevant to you.
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Userdc
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Re: Real 3% (CPI plus 3% guaranteed)

Post by Userdc »

I'd probably put my entire asset allocation in to a government guaranteed real + 3%, it's just a fantastic return that has a pretty good chance of beating out a diversified stock/bond portfolio over the long term with zero volatility.

Obviously this is something quite different given you are relying on a private company for the guarantee. I'd do a lot of due diligence on how this arrangement works - are there underlying assets you will have recourse to if the company defaults, or or is this just a cheap source of equity capital for the company?
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Archie Sinclair
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Re: Real 3% (CPI plus 3% guaranteed)

Post by Archie Sinclair »

This sounds like it might be too good to be true.
john94549
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Re: Real 3% (CPI plus 3% guaranteed)

Post by john94549 »

My wife invested in a similar vehicle many, many years ago. It was called "Prime Plus" and sold through the investment arm of a very large, reputable bank. While it purported to offer a yield of "prime plus X%", the very, very, fine print essentially said the fund managers would "seek" to achieve such a yield by investing in senior secured loans tied to the prime.

When the economy tanked, so did those loans, and so did the fund. By then they had long since changed the name of the fund, and abandoned any pretense the fund would yield prime plus anything (or even prime). My wife cashed out and moved the funds to Vanguard.

This sounds like the same snake-oil, in a new bottle. Best to read that very, very, fine print in the prospectus.
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Dale_G
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Re: Real 3% (CPI plus 3% guaranteed)

Post by Dale_G »

Google shows that The World Bank offered a "Real 3%" option in its retirement plan - at least in 2011 - 2013.

From may 1, 2010 to April 30, 2011 the payout was 3% + 2.31% inflation adjustment. There are no other details.

Googling "Real 3%" provides additional hits, but I didn't look at them. It looks like a nice perk, probably guaranteed with other people's money.

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countmein
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Re: Real 3% (CPI plus 3% guaranteed)

Post by countmein »

If it's for real and guaranteed then clearly you'd be silly not to put 100% of your $ into it (not just the bond side).
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asset_chaos
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Re: Real 3% (CPI plus 3% guaranteed)

Post by asset_chaos »

I'd dig deeply into the question of who conjures this guarentee and how they do it.
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Re: Real 3% (CPI plus 3% guaranteed)

Post by Grt2bOutdoors »

asset_chaos wrote:I'd dig deeply into the question of who conjures this guarentee and how they do it.
With other peoples money - either via indirect taxes or outright confiscation. No private sector employer in their right mind would ever offer such a "guarantee", the attorneys would be all over them for the risks.
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dbr
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Re: Real 3% (CPI plus 3% guaranteed)

Post by dbr »

Grt2bOutdoors wrote:
asset_chaos wrote:I'd dig deeply into the question of who conjures this guarentee and how they do it.
With other peoples money - either via indirect taxes or outright confiscation. No private sector employer in their right mind would ever offer such a "guarantee", the attorneys would be all over them for the risks.
If this is legitimate and is actually a guarantee, then most certainly the result is subsidized from somewhere. The subsidy could be that in fact it is an employee benefit paid for from the earnings of the employer, or it is paid for by taxing some constituency. You can certainly look at this as a benefit of employment but it is not an investment.
staythecourse
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Re: Real 3% (CPI plus 3% guaranteed)

Post by staythecourse »

Archie Sinclair wrote:This sounds like it might be too good to be true.
I thought I posted on here last night about the same issue. I basically wrote, I am a firm believer that there are NO free lunches when it comes to investing. If TIPS and Ibonds are not providing anything close then there are extra risks one is taking to get to that return. If that risk comes up or not is a different story, but is HAS to be there. This seems more risky then putting your money into single company bond. Even worse is that single company is the one you work at.

Just something to think about.

Good luck.
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dbr
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Re: Real 3% (CPI plus 3% guaranteed)

Post by dbr »

staythecourse wrote:
Archie Sinclair wrote:This sounds like it might be too good to be true.
I thought I posted on here last night about the same issue. I basically wrote, I am a firm believer that there are NO free lunches when it comes to investing. If TIPS and Ibonds are not providing anything close then there are extra risks one is taking to get to that return. If that risk comes up or not is a different story, but is HAS to be there. This seems more risky then putting your money into single company bond. Even worse is that single company is the one you work at.

Just something to think about.

Good luck.
I think it is more likely this is a subsidized benefit than a scam investment. But we need to know who the employer is, who is offering the investment, and what all the language is around the deal. It could also be some sort of annuity that is being pitched that would not likely be a good idea.
staythecourse
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Re: Real 3% (CPI plus 3% guaranteed)

Post by staythecourse »

dbr wrote:I think it is more likely this is a subsidized benefit than a scam investment. But we need to know who the employer is, who is offering the investment, and what all the language is around the deal. It could also be some sort of annuity that is being pitched that would not likely be a good idea.
I agree. I didn't think it was a scam, but more of a complex financial instrument. All I know is there is some counterparty risk to be able to offer something that no one else is offering.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
dbr
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Re: Real 3% (CPI plus 3% guaranteed)

Post by dbr »

There is this: viewtopic.php?f=1&t=32086

It is the NY State example I was looking for in a another thread.
NoVa Lurker
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Re: Real 3% (CPI plus 3% guaranteed)

Post by NoVa Lurker »

OP, If you are asking about the World Bank retirement plan, the Real+3% option is simply a great deal. The World Bank pension plan is one of the best-funded plans in the world. It puts those funds into an expansive mix of investments. Due to its large size, it is able to negotiate good terms, which has historically enabled it to offer the Real+3%.

In the current low-interest-rate environment, there has been talk of moving to Real+[less than 3]%. Employees can always move funds from Real+3% (or whatever it is in the future) to one of the other options.

Under the current terms, the CPI calculation for the "Real" component has a floor of 0 (i.e., it cannot be negative), so even in a deflationary scenario, there is a guaranteed return of 3% nominal. Amazingly, the Real+3% option has NO fees.

Overall, the Real+3% is far superior to all other bond options in that pension plan. It may even make a rational planner decide to allocate more into bonds instead of stocks, although the stock mutual fund options are also extremely low-fee (e.g., just a couple of basis points for the US Vanguard funds). Those funds have returned better than Real+3% for the past five years, but obviously with much higher risk.

There are other institutions that have adopted this model, so if you are talking about a non-World Bank plan, you may want to look into it more.
curmudgeon
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Re: Real 3% (CPI plus 3% guaranteed)

Post by curmudgeon »

Quite a few years ago, my employer offered "Guaranteed Investment Contracts" in their 401K. These had a very nice fixed return at the time, and I jumped on it with about 40% of my 401K. After all, it was an insurance company who was guaranteeing these things, right? In hindsight, this turned out to be LBO funding, and the insurance company was in way over it's head. You can search on "executive life of california" to see some of the mess. I think I got about 80% of my money back within a year or two of the collapse, another 5% a few years later, and about 1% 15 years later.

As others have noted, look deep into the fine print and the resources of whoever is backing this. Then look deeper again before you commit. Most everyone would love to have that option if it was secure.
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Peter Foley
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Re: Real 3% (CPI plus 3% guaranteed)

Post by Peter Foley »

saltycaper wrote:
If I understood the investment and was comfortable that it was actually going to perform as advertised, CPI + 3, I would probably allocate half my bond portfolio to it. Fantastic inflation protection. However, as rare as deflation has been, comparatively speaking over the past 50 years, I would still hold some nominal bonds.
+1 As long as you are sure the assets are protected. Even if they are, I would prefer not to put all of my non equities allocation into one asset.
dave_m_
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Re: Real 3% (CPI plus 3% guaranteed)

Post by dave_m_ »

countmein wrote:If it's for real and guaranteed then clearly you'd be silly not to put 100% of your $ into it (not just the bond side).
I don't know that 100% is a wise decision, no matter the guarantee. It may be a fantastic deal, but there has to be some risk to it.
Topic Author
silario
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Re: Real 3% (CPI plus 3% guaranteed)

Post by silario »

Many thanks for all of the reponses. This gives me idea on how to proceed. This is the Real 3% being offered by the World Bank her employer. There are no administrative fees. Thanks.
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