Day9 wrote: ↑Fri Aug 16, 2019 12:06 pm
willthrill81 wrote: ↑Thu Aug 15, 2019 9:40 pm
Hector wrote: ↑Wed Aug 14, 2019 4:54 pm
jdilla1107 wrote: ↑Wed Aug 14, 2019 3:04 pm
Going shorter duration because of the yield curve is completely silly. You could make an equally viable argument that you should go longer duration. (The yield curve is "telling you" that short term rates are going to drop.)
The correct answer is to not pay any attention to it and make no moves based on it.
It depends on investor’s goal. If the goal is capital preservation in nominal terms, it makes sense to buy treasury bills.
If that was the goal, cash stuffed into a mattress would do the trick.
In all seriousness, I really don't know how preservation of nominal dollars could be a rational goal for an investor. Perhaps someone can help me understand that one. Creativity is not of one of my strong suits.
Good question. I suppose it would be someone whose circumstances are less sensitive to inflation as calculated the same way as TIPS. I looked at the basket of goods used in that CPI calculation and it is all reasonable stuff: housing costs, healthcare costs, food, clothing, heating oil, etc. But I just have to imagine of the 300 million people in the USA, some must be more sensitive, and some must be less sensitive than the average person to changes to the CPI index. So someone who is far on the "less sensitive" tail might prefer nominal bonds. I am curious what that person's budget would look like. Perhaps a high net worth individual whose basic necessity spending needs are a very low percentage of his yearly spending, and he gives a large amount of money to charity each year?
We have pretty solid evidence, imho, that the typical growth rate of retiree spending is lower than CPI.
One rule of thumb is that retirement spending tends to grow about 1% less than the annual rate of inflation. In other words, it declines in real terms. Probably not linearly so, but still...
Planning on such a path is difficult without knowing future CPI, obviously, but many investors may reasonably conclude that nominal bonds (or a nominal annuity) might play a reasonable part in an investment plan designed to meet such a spending trajectory.
A low withdrawal rate would be one indicator, as would a high equity allocation. An investor who expects Social Security and/or an inflation-linked pension to cover most of their retirement spending might rationally use nominal bonds in n their investment portfolio.
The existence of zero-coupon nominal bonds, but not zero-coupon TIPS, can tip the advantage toward nominal bonds for investors with little sensitivity to unexpected inflation volatility.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch