Do you trust TIPS and I-bonds to protect you from inflation?

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tc101
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Do you trust TIPS and I-bonds to protect you from inflation?

Post by tc101 »

Do you trust TIPS and I-bonds to protect you from inflation? I have some doubts. Several reasons for my doubts:

1. I have a general mistrust of government and how they calculate the inflation figure.

2. I think taxes may eat up the inflation protection.

3. I think that the things I need, like health care, may increase in price faster than general inflation.

What do you think? How comfortable are you with the inflation protection?
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stratton
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Post by stratton »

I didn't hear any complaints when CPI-U was running above various other inflation indexes during the last recession in 2001-2002.

Paul
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Post by cato »

As I mentioned in another thread, the incorporation of owner equivalent rent (30% of CPI), made inflation look lower than it was during the housing boom and will now make it look worse than it really is during the bust.

Indeed, the gain in the CPIs Housing component (i.e. owner equivalent rent + other costs) for the last quarter of '07 was the largest in years. That hardly reflects the fact that the housing market suffered a virtually unprecedented national drop during that time.

http://www.bls.gov/news.release/cpi.nr0.htm

Put that all together and securities that incorporate the CPI may turn out to be a good deal going forward....



-cato
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Post by Index Fan »

I'm fairly comfortable with it. If the government significantly fudges the inflation rate, it will be found out and there would be repercussions. I own TIPS in a tax-deferred setting so I'm alright tax-wise. I don't like how the government limited annual sales of I-bonds, though.
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Post by tc101 »

I guess I'm more paranoid than most people here. That is good to know. Maybe they will keep up with inflation.

What about the Vanguard TIPS fund? Is it just as safe as buying individual TIPS and I-bonds so far as inflation goes?
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Post by DRiP Guy »

Firstly a disclaimer -- I don't own either right now.


That said, I simply think they:
a) are better than a mattress, and,
b) the government has been cooking the books on the CPI for a long while now.

So I think it will be something less than my own personal inflation rate, but good enuff for Kentucky windage when I do bring them in to the portfolio.
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Mel Lindauer
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I Bonds and TIPS

Post by Mel Lindauer »

As others have pointed out, they might not be perfect for your own personal rate of inflation, but they're good enough for me (I own loads of both), considering the other available options.

Apparently others feel the same way, since they sure want to buy my older TIPS, and have bid them up in the secondary market. And, I'm sure if there were a secondary market for my truckload of 3.0%, 3.3%, 3.4% and 3.6% real yield I Bonds, they'd no doubt be worth a fortune!

Regards,

Mel
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not a perfect hedge

Post by hollowcave2 »

Your concerns are valid, certainly, but you will still get much protection if unexpected inflation appears. These instruments are not a perfect hedge, but they may be better than many other choices.

Steve
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Post by fishnskiguy »

I'm 100% with Mel on TIPS and I-bonds. We bought a bunch of 10 year TIPS in July of '06 and have seen 14% appreciation since then on top of the semi-annual interest payment.

More importantly, TIPS seem almost perfectly uncorrelated with the stock market.

And Mel's right about those older I-bonds as well. I'll bet our 3% real I-bonds would be worth double what we paid for them if we could sell them in a secondary market. :D

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Post by ajbibi »

Surely the main point is this: If the govt might cook the books, people become less willing to buy TIPS and rates rise. What matters is that the TIPS are traded in an open market. If there were more confidence in them, the rates would be lower still. So long as you believe the market is roughly efficient, there's not much point to worrying about some inflation tracking error at the margin because uncertainty about this is built into the prices paid for these TIPS.
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Post by Chip »

I'm pretty certain they won't keep up with my personal rate of inflation, because I buy a different "basket" than the CPI is figured on.

But that's okay, as I don't think there's anything out there that will come closer. So I have about 2/3 of my fixed income in individual TIPS and TIP.

If anyone wants to suggest a low cost way to hedge against health care, tax, travel & wine costs, I'm all ears.
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Post by Mel Lindauer »

Chip wrote:If anyone wants to suggest a low cost way to hedge against health care, tax, travel & wine costs, I'm all ears.
Buy the hopsital, become king and abolish the tax system, buy a travel agency (they go for free or on the cheap), and buy the liquor store! They you're covered! :D

Regards,

Mel
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Re: Do you trust TIPS and I-bonds to protect you from inflat

Post by jeffyscott »

tc101 wrote:Do you trust TIPS and I-bonds to protect you from inflation?
I expect some protection from inflation, meaning the returns will have a pretty strong correlation with my personal rate of inflation. I do not expect there to be a perfect alignment of the returns with whatever my personal infaltion rate is...nor do I think it is reasonable to expect that.

(Of course, right now I am not expecting much from them as I have sold VIPSX and only have a tiny amount of lucrative 3%+ I-bonds.)
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
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Re: Do you trust TIPS and I-bonds to protect you from inflat

Post by nisiprius »

jeffyscott wrote:
tc101 wrote:Do you trust TIPS and I-bonds to protect you from inflation?
1) No, because only about 27% of my assets are in TIPS and I bonds.

2) However, sure I expect the TIPS and I-bonds to protect that portion of my assets against inflation, and earn a small real return.

The most likely scenario in which they would cease to work is that the Treasury stops issuing them. They would mature, I'd redeem them having suffered no harm, but I'd have no way to roll them over and extend the protection into the future.

At the moment, I don't think the CPI-U (or the CPI-W index) is seriously cooked, for two reasons. First, the way in which they are calculated is totally transparent. Second, there are at least two huge and powerful organizations, the labor unions and AARP, whose constituents have a very strong interest in the accuracy of these statistics. If the Bureau of Labor Statistics tried to cook them, the unions AARP might not be able to stop them but they would sure raise a stink about it. The fact that they are not complaining is good evidence that the statistics are OK now.

Again, if the BLS started cooking the statistics, TIPS and I bonds would become useless from that point on. But because their calculations are transparent, everyone would know about it... and up to that point holders, including me, would have suffered very little harm.

3) If I sound strident about it, it's because I just don't understand where the anti-TIPS rhetoric keeps coming from. Obviously, if you want to speculate in TIPS and trade back and forth between TIPS and other kinds of assets, in hopes of getting the maximum possible return, then TIPS may not always be the best choice, and who knows what the right times to trade are.

If you want to invest in something, and the purpose of the investment is to keep up with inflation and earn a small real return, then why make things complicated?

Particularly when a portfolio of nothing but TIPS and I bonds alone will support the proverbial "safe withdrawal rate" of 4%-initially-then-COLAed for thirty years, provided that the real yield is above 1.3%.
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.
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Dick Cheney trusts TIPS...

Post by nisiprius »

...or did, as recently as last summer, anyway, as least to the extent of a few million dollars, according to this article.
(it's impossible to be more precise because the disclosure form lists holdings within ranges)... the couple had between $2 million and $10 million in Vanguard Inflation-Protected Securities fund
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.
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Post by AzRunner »

The problem that TIPS share along with all other investments, but it is more noticeable with fixed income, is that the marginal tax rate is based on nominal returns, not real. Therefore, even if TIPS provide excellent tracking to one's own inflation rate, after tax you are still likely to fall behind.

That's why they need to be coupled with equities. Also, from a diversification perspective I still plan to hold a percent of my fixed income in short term and intermediate term high quality bonds. Right now my fixed income is about 25% TIPS (bought at auction with the intention to hold until maturity). With the low real rate presently being offered in the market I haven't bought any new TIPS in the last few months.

Just as an after thought, how about the Diehards that were holding out for a 3% coupon on TIPS this summer. Now all the real rates are sub 2%. You just do not know where the market is going from one day to the next. Maybe it will be a very long time before we see 2.5% again. Who knows.

Norm
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Mel Lindauer
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TIPS and I Bonds

Post by Mel Lindauer »

What's nice about the I Bonds (especially those oldies but goodies) is that the fixed rate is good for up to 30 years. That means you don't have to worry about constantly reinvesting the proceeds at possibly lower rates, as you might have to do with shorter-term maturity vehicles.

Regards,

Mel
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Re: TIPS and I Bonds

Post by sport »

Mel Lindauer wrote:What's nice about the I Bonds (especially those oldies but goodies) is that the fixed rate is good for up to 30 years. That means you don't have to worry about constantly reinvesting the proceeds at possibly lower rates, as you might have to do with shorter-term maturity vehicles.

Regards,

Mel
Mel,
The 30 year feature is especially good for those of retirement age (or older). It means that they don't ever have to worry about reinvesting the proceeds, considering their life expectency.

Regards,

Jeff
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Re: TIPS and I Bonds

Post by Mel Lindauer »

jsl11 wrote:
Mel Lindauer wrote:What's nice about the I Bonds (especially those oldies but goodies) is that the fixed rate is good for up to 30 years. That means you don't have to worry about constantly reinvesting the proceeds at possibly lower rates, as you might have to do with shorter-term maturity vehicles.

Regards,

Mel
Mel,
The 30 year feature is especially good for those of retirement age (or older). It means that they don't ever have to worry about reinvesting the proceeds, considering their life expectency.

Regards,

Jeff
The 30-year I Bonds also offer possible tax-bracket shifting, by allowing investors in high tax brackets to continue the tax-deferral I Bonds offer until they're in a lower tax bracket.

Regards,

Mel
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