TIPS Mutual Funds

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abuss368
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TIPS Mutual Funds

Post by abuss368 » Fri Dec 12, 2014 12:37 pm

Bogleheads,

In light of the inflation picture and prospects, and the challenging environment for TIPS funds over the past few years, what are your thoughts on this asset class? Are you considering staying the course, adding this asset class, or have you previously moved out of TIPS funds?

Any recent perspective is appreciated.
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Re: TIPS Mutual Funds

Post by feh » Fri Dec 12, 2014 1:25 pm

I'm adding them to my portfolio for the first time, because I'm getting ready to retire.

Don't try to time the market.

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Re: TIPS Mutual Funds

Post by placeholder » Fri Dec 12, 2014 1:43 pm

I don't have good access to them so I don't worry about it.

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Re: TIPS Mutual Funds

Post by livesoft » Fri Dec 12, 2014 1:48 pm

I'm staying the course. I don't own any now and do not intend to own any in the near future.
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Re: TIPS Mutual Funds

Post by cfs » Fri Dec 12, 2014 2:04 pm

Good question by our Shipmate Abuss368. I remember when a good number of experts recommended a 50/50 between Total Bond and TIPS, but that was then and this is now. I have none and plan to add none.
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Re: TIPS Mutual Funds

Post by Bracket » Fri Dec 12, 2014 2:29 pm

I'm sticking with my TIPS fund. (20% of my fixed income)

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Re: TIPS Mutual Funds

Post by feh » Fri Dec 12, 2014 2:31 pm

Bracket wrote:I'm sticking with my TIPS fund. (20% of my fixed income)
That's the percentage I'm heading for (I include I bonds in that percentage).

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Re: TIPS Mutual Funds

Post by White Coat Investor » Fri Dec 12, 2014 2:41 pm

10% of my portfolio, 40% of my fixed. Plan to stick with it for now.
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Re: TIPS Mutual Funds

Post by John151 » Fri Dec 12, 2014 2:44 pm

I have about twenty percent of my bond allocation in a TIPS fund. I have an additional thirty percent in I-Bonds, so about half of my bond allocation is in Treasury securities indexed to inflation. I'm comfortable with that, and I don't plan to make any changes in it.

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Re: TIPS Mutual Funds

Post by dbr » Fri Dec 12, 2014 2:46 pm

I don't know why a person who sees a reason to hold TIPS would not have that reason now as much as any other time. If you think the right response to low interest rates is to look for opportunities in CDs or to take more risk by adding more corporates, then some TIPS would have to go.

If one is looking for someone to say TIPS allocations should change with TIPS real yields, Larry Swedroe does have such a scheme in one of his older books. I think his newer books look at extending TIPS duration when real rates are high and shortening when they are low.

PS What I do personally has no reason to be a model for anyone else.

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Re: TIPS Mutual Funds

Post by nisiprius » Fri Dec 12, 2014 3:57 pm

I'm staying the course. About 40% of my fixed income is in individual TIPS bonds and I have no plans to change that.
abuss368 wrote:...In light of the inflation picture and prospects...
What "inflation picture and prospects?" I continue to be in the same place I've been for about six years now: I simply refuse to worry about inflation and deflation at the same time!

TIPS to me are very simple. I'm not in them to score points or to beat nominal bonds. I'm in there because they have the least uncertainty. If there is inflation I am happy because they track inflation. If there is deflation I'm happy because they are worth fewer dollars but I will need fewer dollars. If TIPS turn out not to be as good as nominal bonds for whatever reason, I will shrug and say "well, the people holding nominal bonds are being rewarded for taking a risk I'm not taking, and I don't think I had anyway to know which way it was going to turn out--and TIPS are good enough."
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Re: TIPS Mutual Funds

Post by Angst » Fri Dec 12, 2014 6:05 pm

abuss368 wrote:In light of the inflation picture and prospects, and the challenging environment for TIPS funds over the past few years, what are your thoughts on this asset class? Are you considering staying the course, adding this asset class, or have you previously moved out of TIPS funds?
I like to think my IPS and my adherence to it are unaffected by the short term picture and prospects. I'm human though and so I do think about this stuff, but I don't think I've actually done anything, except include a bit of EE savings bonds in my fixed income. If 20 year rates start hanging out at or above 3.5% I'll stop buying them. As far as TIPs go however, I don't own a fund but my limited annual purchases of individual TIPs are pretty much on autopilot. Short term prospects for inflation have been low for a while now. I have most of my "cash" in I bonds; recently I've used some of my previously purchased I bonds to re-balance Int'l equity; I'd like to own more I bonds with a fixed return component, but that little .2% didn't last very long, did it! :?

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Re: TIPS Mutual Funds

Post by gkaplan » Fri Dec 12, 2014 6:12 pm

My target is ten percent overall, twenty-five percent of my fixed income portfolio.
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Re: TIPS Mutual Funds

Post by elgob.bogle » Fri Dec 12, 2014 6:59 pm

I am "anxiously/nervously" awaiting the mid-January 2015 TIPS auction to purchase additional TIPS for my ladder.

elgob

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Re: TIPS Mutual Funds

Post by abuss368 » Sat Dec 13, 2014 11:39 am

Many great comments!

Thanks!
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Re: TIPS Mutual Funds

Post by SpringMan » Sat Dec 13, 2014 11:51 am

No TIPs funds here. I would be curious to know for those that hold a Vanguard TIPs fund, is it short term or otherwise? Short term TIPs fund is in many target retirement funds.
Best Wishes, SpringMan

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Re: TIPS Mutual Funds

Post by dbr » Sat Dec 13, 2014 1:44 pm

SpringMan wrote:No TIPs funds here. I would be curious to know for those that hold a Vanguard TIPs fund, is it short term or otherwise? Short term TIPs fund is in many target retirement funds.
Short term TIPS don't have much advantage over short term anything else. An advantage TIPS do have is the possibility of going longer with less risk than one would have going longer in nominal bonds. That canard that is out there about short TIPS being better because correlated with inflation is exactly that.

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Re: TIPS Mutual Funds

Post by tipswatcher » Sat Dec 13, 2014 2:17 pm

One thing to consider is that a broadly-invested TIPS fund is going to be more volatile that a Total Bond Fund, possibly a lot more volatile and way less diversified.

Vanguard's Total Bond Fund invests in 6,948 bonds, with an average duration of 5.7 years.

Vanguard's Inflation-Protected Bond fund invests in only 44 bonds (because that is the entire market for TIPS) and an average duration of 6.2 years.

So in the bond rout of 2013, Vanguard's Inflation-Protected Bond was down 8.92% and Vanguard Total Bond Market was down only 2.26%.

Of course, the TIPS fund out-performed Total Bond in earlier years.

I like Total Bond as my core bond fund, and I buy TIPS and hold them to maturity, and also I Bonds, to get my inflation protecttion.
Last edited by tipswatcher on Mon Dec 15, 2014 11:03 am, edited 1 time in total.
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Re: TIPS Mutual Funds

Post by sport » Sat Dec 13, 2014 2:23 pm

A related question: If you hold a Vanguard TIPS fund, do you hold the shorter fund, the longer fund, or some of each?
Jeff

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Re: TIPS Mutual Funds

Post by stevewolfe » Sat Dec 13, 2014 2:46 pm

We have a minimum of 20% of fixed income (12% of portfolio) allocated to inflation protected bonds. Presently, 100% of our inflation protected bonds are I-Bonds and we'll be adding to that in January, 2015 as we are a bit light at 10.7% of portfolio. We sold all of our Vanguard TIPS (VIPSX at the time) fund in February 2013. I consider our I-Bonds to be roughly the equivalent of Vanguard's Short Term TIPS fund, so we're not interested in additional exposure to that fund / duration.

That said, I am considering re-establishing our position in Vanguards TIPS fund (VAIPX) over the next year. I think the current break even inflation rate over 10 years is attractive to me with the 10 year US Treasury nominal at 2.10% yield and 10 year TIPS at 0.46% real = 1.64% break even rate (or 1.7% as currently reported by FRED).

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Re: TIPS Mutual Funds

Post by Taylor Larimore » Sat Dec 13, 2014 3:08 pm

jsl11 wrote:A related question: If you hold a Vanguard TIPS fund, do you hold the shorter fund, the longer fund, or some of each?
Jeff:

We moved our hodge-podge of securities from Merrill Lynch to Vanguard in 1986 and later filled-up our IRA with Total Bond Market. When Vanguard TIPS were introduce in 2000, at Mel's suggestion, we split our bond allocation 50/50 between TBM and TIPS (VIPSX). Later, when Short-Term TIPS were introduced by Vanguard two years ago, we exchanged VIPSX into the Shorter-Term TIPS (VTAPX) because we wanted less bond volatility in late Retirement.

We take our IRA RMDs (Required Minimum Distributions) from our TIPS fund. VTAPX now represents about 30% of our (2) bond funds.

I would not bother holding both long and short term TIPS. In the accumulation stage, I think VIPSX is probably the better choice. No one knows the future.

I don't spend much time worrying about bond funds. I believe ANY good quality, low-cost, diversified, short- or long-term bond fund will provide safety and income in a portfolio. In my opinion, searching for the ultimate bond fund is a waste of time in the very efficient bond market. Higher yield nearly always means higher risk. There is no "free lunch."

Best wishes.
Taylor
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Re: TIPS Mutual Funds

Post by gkaplan » Sat Dec 13, 2014 5:54 pm

SpringMan wrote:No TIPs funds here. I would be curious to know for those that hold a Vanguard TIPs fund, is it short term or otherwise? Short term TIPs fund is in many target retirement funds.
Otherwise.
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Re: TIPS Mutual Funds

Post by gkaplan » Sat Dec 13, 2014 5:54 pm

jsl11 wrote:A related question: If you hold a Vanguard TIPS fund, do you hold the shorter fund, the longer fund, or some of each?
Jeff

Longer fund.
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Re: TIPS Mutual Funds

Post by columbia » Sat Dec 13, 2014 7:02 pm

My impression is that a fair number of TIPS holders engage in market timing.

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Re: TIPS Mutual Funds

Post by investorguy1 » Sat Dec 13, 2014 7:07 pm

My long term expectations for TIPs returns is that they will do a little worse than other government bonds because they come with "insurance" i.e. return adjusted for inflation. I looked at the charts and saw that they performed a lot better than other government bonds for a long time. I decided not to go in at that point but thought they may be a good for diversification. After a few years I recently noticed they dropped 7%. So I added them into my bond mix.
Last edited by investorguy1 on Sat Dec 13, 2014 8:22 pm, edited 1 time in total.

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Re: TIPS Mutual Funds

Post by gkaplan » Sat Dec 13, 2014 7:28 pm

columbia wrote:My impression is that a fair number of TIPS holders engage in market timing.
How so?
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Re: TIPS Mutual Funds

Post by RetiredinKaty » Sat Dec 13, 2014 7:37 pm

I have just completed a transition of my fixed income to 50% of the intermediate TIPS fund and 50% of total bond. Right or wrong, I had an epiphany about TIPS when I read the Waring and Siegel proposed spending rule article that was mentioned on this forum. Most people did not care for the idea, but I thought what an interesting way to spend down a TIPS mutual fund - treat it like a virtual non-rolling TIPS ladder, annually recalculated. Even though the fund's NAV volatility is high (7%), my data mining suggests the consumption volatility (figured as a 10 to 30 year virtual ladder) is only about half that.

I don't think that TIPS are any longer a good investment for accumulators. The growth potential is lousy and they don't seem to play nice with stocks. I do think to old boys are right about having ample amounts of TIPS in retirement.

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Re: TIPS Mutual Funds

Post by rnitz » Sat Dec 13, 2014 7:56 pm

Investerguy wrote:My long term expectations for TIPs returns is that they will do a little worse than other government bonds because they come with "insurance" i.e. return adjusted for inflation. I looked at the charts and saw that they performed a lot better than other government bongs for a long time. I decided not to go in at that point but thought they may be a good for diversification. After a few years I recently noticed they dropped 7%. So I added them into my bond mix.
How can you say that - are you high?!

(silly joke aside - I agree with your comment. I found it persuasive that that the "insurance benefit" of TIPS would mean they might slightly underperform nominal Treasuries. But now I'm reconsidering - if even most Bogleheads prefer nominal treasuries over TIPS, perhaps the performance premium is in favor of TIPS rather than against it.)

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Re: TIPS Mutual Funds

Post by Angst » Sun Dec 14, 2014 12:29 am

columbia wrote:My impression is that a fair number of TIPS holders engage in market timing.
This seems a little odd to me. Actually, I might be inclined to say I have something of an impression that people engaged in market timing have been apt to avoid holding TIPs for the last few years, due both to low real rates as well as low inflation. Or is this actually the point you're making?

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Re: TIPS Mutual Funds

Post by Angst » Sun Dec 14, 2014 12:39 am

SpringMan wrote:No TIPs funds here. I would be curious to know for those that hold a Vanguard TIPs fund, is it short term or otherwise? Short term TIPs fund is in many target retirement funds.
jsl11 wrote:A related question: If you hold a Vanguard TIPS fund, do you hold the shorter fund, the longer fund, or some of each?
Jeff
I hold mostly longer term TIPs. I've been buying at auction annualy.

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Re: TIPS Mutual Funds

Post by beardsworth » Sun Dec 14, 2014 10:22 am

tipswatcher wrote:
So in the bond rout of 2013, Vanguard's Total Bond was down 8.92% and Vanguard Total Bond Market was down only 2.26%.
I haven't tried to match those percentage numbers to specific funds, but I assume that the first of these references should actually have been to Vanguard Inflation-Protected Securities (the intermediate/long-term TIPS fund) rather than a duplicate reference to Total Bond?

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Re: TIPS Mutual Funds

Post by SpringMan » Sun Dec 14, 2014 10:28 am

columbia wrote:My impression is that a fair number of TIPS holders engage in market timing.
I think you could come to that conclusion based on some of Larry Swedroe's posts. If I recall he has a formula for when TIPs are a good buy and when not so good.
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Re: TIPS Mutual Funds

Post by Orion » Sun Dec 14, 2014 1:06 pm

columbia wrote:My impression is that a fair number of TIPS holders engage in market timing.
I guess I would be one of those.

I'm thinking about selling a bunch of TIPS, not because I think TIPS are so "bad" now but rather due to heavily loading up on long TIPS in 2008 when the rates hit 3%. Now I have a bunch of highly appreciated TIPS and don't know what (if anything) to do with them. It's the classic market timing issue of having to be right twice.

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Re: TIPS Mutual Funds

Post by Doc » Sun Dec 14, 2014 1:16 pm

SpringMan wrote:
columbia wrote:My impression is that a fair number of TIPS holders engage in market timing.
I think you could come to that conclusion based on some of Larry Swedroe's posts. If I recall he has a formula for when TIPs are a good buy and when not so good.
His "formula" was for trading 10 yr TIPS vs. short term fixed income. The best argument for using TIPS is that they allow you to capture attractive longer term real rates without incurring additional inflation risk. I think of market timing as the attempt to sell at the high point and buy at the low point. I don't think duration shifting is in the same league.
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Re: TIPS Mutual Funds

Post by abuss368 » Sun Dec 14, 2014 8:27 pm

beardsworth wrote:
tipswatcher wrote:
So in the bond rout of 2013, Vanguard's Total Bond was down 8.92% and Vanguard Total Bond Market was down only 2.26%.
I haven't tried to match those percentage numbers to specific funds, but I assume that the first of these references should actually have been to Vanguard Inflation-Protected Securities (the intermediate/long-term TIPS fund) rather than a duplicate reference to Total Bond?
This is correct.
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Re: TIPS Mutual Funds

Post by corner559 » Sun Dec 14, 2014 8:38 pm

My fixed income assets are evenly divided between VG's Total Bond and VG's TIP fund.

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Re: TIPS Mutual Funds

Post by protagonist » Mon Dec 15, 2014 12:24 am

abuss368 wrote:Bogleheads,

In light of the inflation picture and prospects, and the challenging environment for TIPS funds over the past few years, what are your thoughts on this asset class? Are you considering staying the course, adding this asset class, or have you previously moved out of TIPS funds?

Any recent perspective is appreciated.
I sold my TIPS at a good profit a couple of years ago.

I have a bunch of Ally CDs at 2.4% maturing in January 2016. I think that will be perhaps a good time to re-evaluate based on TIPS yields at that time....I may get back into them if yields on 5 year and 10 year TIPS are up.

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Re: TIPS Mutual Funds

Post by archbish99 » Mon Dec 15, 2014 4:25 am

TIPS and nominals both price in the expectations of inflation. If inflation is lower than expected, nominals will outperform TIPS; if higher, then TIPS will outperform nominals. For the same reasons as indexing, I want to be indifferent to which of these happens, so I hold both in roughly-equal amounts.

In my own account (accumulating), I hold the intermediate fund. For my parents, half-and-half intermediate and short.
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Re: TIPS Mutual Funds

Post by #Cruncher » Mon Dec 15, 2014 8:03 am

archbish99 wrote:TIPS and nominals both price in the expectations of inflation.
It's only the yields of nominal bonds that incorporate the expected rise in the Consumer Price Index. Since TIPS yields are in terms of constant dollars, the expected rise in the CPI is irrelevant to them.
archbish99 wrote:If inflation is lower than expected, nominals will outperform TIPS; if higher, then TIPS will outperform nominals. ... I want to be indifferent to which of these happens, so I hold both in roughly-equal amounts.
I don't understand your logic, archbish. If I want to be indifferent to the future course of the CPI, I'd be entirely in TIPS since they guarantee a known pretax real return regardless of what the CPI does. If I put half into nominal Treasuries, I'm still vulnerable to the CPI rising more than expected -- just to a lesser extent than if I'd put 100% into nominals.

An analogy is investment grade and junk grade corporate bonds. If the economy is weak, the former will likely have the higher return; while if the economy is strong the latter will probably do better. However, if I want to be "indifferent" to the strength of the economy, I put all my corporate bond money into investment-grade and none into junk. I don't put equal amounts into both.

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Re: TIPS Mutual Funds

Post by archbish99 » Mon Dec 15, 2014 8:22 am

#Cruncher wrote:
archbish99 wrote:TIPS and nominals both price in the expectations of inflation.
It's only the yields of nominal bonds that incorporate the expected rise in the Consumer Price Index. Since TIPS yields are in terms of constant dollars, the expected rise in the CPI is irrelevant to them.
The behavior of the TIPS is independent of the CPI, but the price at which they are sold/bought has to include some notion of expected inflation. If current inflation expectations are 2% and this is priced into nominal Treasuries, but I can foresee that inflation will actually be 0.25%, I would buy the nominals in a heartbeat because there's an excess return due to the mistaken expectation. Likewise, if the actual inflation will be 5%, I would want to buy TIPS, because they will adjust for the unexpected inflation, while the nominals return only what was expected regardless of what actually happens. If I buy only one, then I could pick the "wrong" one.
#Cruncher wrote:
archbish99 wrote:If inflation is lower than expected, nominals will outperform TIPS; if higher, then TIPS will outperform nominals. ... I want to be indifferent to which of these happens, so I hold both in roughly-equal amounts.
I don't understand your logic, archbish. If I want to be indifferent to the future course of the CPI, I'd be entirely in TIPS since they guarantee a known pretax real return regardless of what the CPI does. If I put half into nominal Treasuries, I'm still vulnerable to the CPI rising more than expected -- just to a lesser extent than if I'd put 100% into nominals.

An analogy is investment grade and junk grade corporate bonds. If the economy is weak, the former will likely have the higher return; while if the economy is strong the latter will probably do better. However, if I want to be "indifferent" to the strength of the economy, I put all my corporate bond money into investment-grade and none into junk. I don't put equal amounts into both.
Indifferent in the sense of a known outcome, yes. I'm thinking more in the sense of having one side take advantage of either situation -- to take your "indifferent to the economy" example, we all invest in stocks (which benefit when the economy is doing well) and bonds (which benefit, or at least drop less, when the economy does poorly) for exactly that reason.
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Re: TIPS Mutual Funds

Post by Doc » Mon Dec 15, 2014 10:35 am

archbish99 wrote:#Cruncher wrote:
archbish99 wrote:
TIPS and nominals both price in the expectations of inflation.
It's only the yields of nominal bonds that incorporate the expected rise in the Consumer Price Index. Since TIPS yields are in terms of constant dollars, the expected rise in the CPI is irrelevant to them.

The behavior of the TIPS is independent of the CPI, but the price at which they are sold/bought has to include some notion of expected inflation. If current inflation expectations are 2% and this is priced into nominal Treasuries, but I can foresee that inflation will actually be 0.25%, I would buy the nominals in a heartbeat because there's an excess return due to the mistaken expectation. Likewise, if the actual inflation will be 5%, I would want to buy TIPS, because they will adjust for the unexpected inflation, while the nominals return only what was expected regardless of what actually happens. If I buy only one, then I could pick the "wrong" one.
Right, in general TIPS protect you from unexpected inflation but nominals protect you from unexpected deflation. However if you buy the TIPS when their inflation factor is ~1.0 as at an auction then TIPS also protect against unexpected deflation since they always redeem at par even if the inflation factor is <1.0 at maturity.
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Re: TIPS Mutual Funds

Post by garlandwhizzer » Mon Dec 15, 2014 12:21 pm

Safe assets which do relatively well in an inflationary environment certainly TIPS come to mind, that is if you're willing to sign on now in a low inflation environment for a long term slightly negative real inflation adjusted return and tax inefficiency. It's important to remember that depending on the maturity of your TIPS portfolio you are still subject to interest rate risk and principal loss in a rising rate environment if you cash out early.

One asset class that is rarely mentioned on this forum with respect to an inflationary hedge is money market funds. With essentially a zero duration they are immune to interest rate risk and principal loss. Typically as inflation heats up and rates rise, MM rates rise instantly as well. It may not be the best hedge against inflation but a well-chosen safe MM fund it is not a bad place to park fixed income money in a environment of rising rates and inflation, whether it be expected inflation or unexpected. If unexpected inflation occurs your entire MM position quickly reflects that unexpected rise with higher rates and you lose no principal value. I don't advocate buying yield-less MM funds now and holding them for years waiting for rising rates and inflation, but at the right time switching assets in that direction might be something to consider.

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Re: TIPS Mutual Funds

Post by Doc » Mon Dec 15, 2014 12:46 pm

garlandwhizzer wrote: One asset class that is rarely mentioned on this forum with respect to an inflationary hedge is money market funds. With essentially a zero duration they are immune to interest rate risk and principal loss.
Better is 4 wk Treasury bills. They are not quite giving them way yet but last week's went off at a price of 99.996889 for an equivalent coupon-issue of 0.041%. I'm going to buy a whole bunch tomorrow and get that fantastic inflation insurance - NOT. :moneybag
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