best investment with goal of purchasing power preservation.

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dred pirate
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best investment with goal of purchasing power preservation.

Post by dred pirate »

If your goal is purchasing power preservation (basically keep up with inflation) but you are willing to take a little risk, a rough estimate of saying 8 our of 10 years you will make money. What are the best investment vehicles? FWIW I am 24% federal tax bracket and 5.25% state tax.

Basically if you have a chunk of money that you may want to access in 5+ years, so don't want to have it sit in a high yield savings (this is NOT an emergency fund, but saving up for a possible big purchase)

1. ibonds? Guaranteed to keep up with inflation (less after taxes), but guaranteed. The current rates are historically high, so I would expect that to keep up, but we are maxed for 2022. So after this, I would want a second option

2. Bond fund? Which specific type of fund? Total bond? short term government?

3. Treasuries? Guaranteed, but I don't think the rate will keep up with inflation historically?

4. Would you go stocks? S&P 500? This might be a tad more risk that I am thinking

5. Something else?

Cheers

DP
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arcticpineapplecorp.
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Re: best investment with goal of purchasing power preservation.

Post by arcticpineapplecorp. »

dred pirate wrote: Sat May 21, 2022 4:14 pm If your goal is purchasing power preservation (basically keep up with inflation) but you are willing to take a little risk, a rough estimate of saying 8 our of 10 years you will make money.
i think aside from ibonds which are risk free, you have to take some risk if you want to keep up with inflation.

retirees who wish to preserve their purchasing power (keep up with inflation) but have the possibility of doing a little better, find themselves either with a target date retirement income fund which is 30/70 stock/bond up to 60/40 or anywhere in between. More risk more returns, but nothing guaranteed. Of course if this taxable, you don't want an all in one fund like target date or balanced fund, but just hold the funds separately or just one stock and one bond fund (total stock and total bond, in the percentages you want).

I wrote down the following (believe I read it in Mike Piper's "Investing Made Simple": there's been a 6.8% possibility of a negative return with stocks even over a 10 year period and a 84.9% probability of stocks beating bonds, which means if bonds beat stocks over your hypothetical 10 year period, you'd have wanted to have held bonds. 50/50 means you will be right half the time.

https://www.capitalgroup.com/individual ... tters.html
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AerialWombat
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Re: best investment with goal of purchasing power preservation.

Post by AerialWombat »

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Last edited by AerialWombat on Mon May 23, 2022 2:40 am, edited 1 time in total.
This post is a work of fiction. Any similarity to real financial advice is purely coincidental.
bridge2benefits
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Re: best investment with goal of purchasing power preservation.

Post by bridge2benefits »

dred pirate wrote: Sat May 21, 2022 4:14 pm 1. ibonds? Guaranteed to keep up with inflation (less after taxes), but guaranteed. The current rates are historically high, so I would expect that to keep up, but we are maxed for 2022. So after this, I would want a second option
If you like I Bonds, you might also consider TIPS. Many people buy TIPS funds, but my preference is duration matched individual TIPS, to eliminate interest rate risk. Those of us who participated in the recent 10 year TIPS auction will receive a yield of .23% plus future inflation. There are no limits on the amount of TIPS one can purchase.
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dred pirate
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Re: best investment with goal of purchasing power preservation.

Post by dred pirate »

thanks all - I do the target date in my retirement funds - I have just found it hard to decide how to allocate the funds that I may or may not use in the 5 year time period. I am normally not risk averse for the long term, but this is money I will likely use to for home remodel or new purchase, so keeping the purchasing power is what is important to me, more than growing, and willing to sacrifice some gains for safety in this particular lump sump.

I will read more about TIPS. Also might consider the 30/70 AA.

thanks again
martincmartin
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Re: best investment with goal of purchasing power preservation.

Post by martincmartin »

Just curious, why is your goal purchasing power preservation? Why isn't your goal e.g. minimizing the chance of running out of money in retirement.

For many people, the best investment with the goal of purchasing power preservation will increase the chance of them having to eat cat food at the end of their retirement. Given the choice between:

1. an investment which minimizes the chance of running out of money over 30 years, but where balances sometimes temporarily decline significantly in nominal terms, let alone inflation adjusted, and

2. an investment which preserves purchasing power, but has a significantly higher chance of running out of money in retirement

which would you choose?
martincmartin
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Re: best investment with goal of purchasing power preservation.

Post by martincmartin »

TIPS will tell you exactly how much you have to spend now to guarantee a certain purchasing power in the future, before taxes. If you know all your future expenses, and if they grow at exactly the CPI, and you know how long you will live, you can use this create what's called a Liability Matching Portfolio, i.e. a portfolio that, every year, gives you exactly the purchasing power you need in that year.

Of course, those conditions are unrealistic, so that seems to me more like a thought experiment. But some people advocate for it, e.g. if you can bend your expenses to match whatever money you get from your LMP.

However, this won't preserve your current purchasing power. To get a TIPS that pays $1 in 10 years, adjusted for inflation, you need to pay more than $1 now. However, it does tell you how much money you need to have today in order to have guaranteed purchasing power in the future. So e.g. if you're still working, it can tell you whether you have enough money to retire.
dbr
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Re: best investment with goal of purchasing power preservation.

Post by dbr »

dred pirate wrote: Sun May 22, 2022 9:26 am thanks all - I do the target date in my retirement funds - I have just found it hard to decide how to allocate the funds that I may or may not use in the 5 year time period. I am normally not risk averse for the long term, but this is money I will likely use to for home remodel or new purchase, so keeping the purchasing power is what is important to me, more than growing, and willing to sacrifice some gains for safety in this particular lump sump.

I will read more about TIPS. Also might consider the 30/70 AA.

thanks again
If you want to be sure of the real value in that short a time investing anything in stocks is a bad idea. If you know when you want the money you can come close with a 5 year TIPS now at -.08% loss per year. If you want the money anytime between now and 5 years there probably isn't an investment you can make that meets your criterion as buying TIPS closer to maturity and rolling them forward if you don't use them might not get you a non-negative real yield. You could invest in the five year TIPS and take your lumps if you have to sell.

I bonds won't work because unless you are only talking about a couple or few tens of thousands of dollars it is too late to buy enough to also use them in 1-5 years.

An alternative is to just invest all your money in whatever asset allocation suits and then plan on taking out what you can when the time comes. How much you really want and the need to maintain purchasing power for spending you can't even identify exactly may be that necessary. How large a fraction of your assets this is makes a difference.

It is easy for a person to paint themselves into a corner with overspecified requirements for what you are trying to do.
Kookaburra
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Re: best investment with goal of purchasing power preservation.

Post by Kookaburra »

AerialWombat wrote: Sat May 21, 2022 11:58 pm The only thing I ask of my portfolio is that it more or less keep up with inflation.
This is the current reality even for us younger folks. Tough times for sure.
AerialWombat wrote: Sat May 21, 2022 11:58 pm It’s not exciting to be in the conservative AA club. I don’t have much to contribute to conversations here, and I don’t get to participate in the soaring and falling threads.
All is not lost. As of late, you could have participated in the "bonds are in free fall" thread. We're having lots of fun there!
Topic Author
dred pirate
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Re: best investment with goal of purchasing power preservation.

Post by dred pirate »

dbr wrote: Sun May 22, 2022 9:47 am
dred pirate wrote: Sun May 22, 2022 9:26 am thanks all - I do the target date in my retirement funds - I have just found it hard to decide how to allocate the funds that I may or may not use in the 5 year time period. I am normally not risk averse for the long term, but this is money I will likely use to for home remodel or new purchase, so keeping the purchasing power is what is important to me, more than growing, and willing to sacrifice some gains for safety in this particular lump sump.

I will read more about TIPS. Also might consider the 30/70 AA.

thanks again
If you want to be sure of the real value in that short a time investing anything in stocks is a bad idea. If you know when you want the money you can come close with a 5 year TIPS now at -.08% loss per year. If you want the money anytime between now and 5 years there probably isn't an investment you can make that meets your criterion as buying TIPS closer to maturity and rolling them forward if you don't use them might not get you a non-negative real yield. You could invest in the five year TIPS and take your lumps if you have to sell.

I bonds won't work because unless you are only talking about a couple or few tens of thousands of dollars it is too late to buy enough to also use them in 1-5 years.

An alternative is to just invest all your money in whatever asset allocation suits and then plan on taking out what you can when the time comes. How much you really want and the need to maintain purchasing power for spending you can't even identify exactly may be that necessary. How large a fraction of your assets this is makes a difference.

It is easy for a person to paint themselves into a corner with overspecified requirements for what you are trying to do.
I get what you are saying, ibonds (up to the max) are probably my best bet. Just sort of looking at something between a e-fund, and my retirement funds. If that makes sense.

I was looking at the TIPS mutual funds:
https://investor.vanguard.com/mutual-fu ... file/VIPSX
I get these are not the same as buying the TIPS directly, but why did they have such a drop in value in 2013 and 2022. Do they operate like a bond fund (interest rate increase causes the value of the bond to drop)?

second question - if I buy TIPS from treasury direct, is the lowest maturity you can buy 5 years? Or can you buy those that expire in 1-3 years? If not, do you have to buy on the secondary market? (any primer for how to do that?)
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Eagle33
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Post by Eagle33 »

To answer your 2nd question - TIPS are issued in terms of 5, 10, and 30 years. Treasury Inflation-Protected Securities (TIPS)
IDpilot
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Re: best investment with goal of purchasing power preservation.

Post by IDpilot »

dred pirate wrote: Sun May 22, 2022 2:01 pm I was looking at the TIPS mutual funds:
https://investor.vanguard.com/mutual-fu ... file/VIPSX
I get these are not the same as buying the TIPS directly, but why did they have such a drop in value in 2013 and 2022. Do they operate like a bond fund (interest rate increase causes the value of the bond to drop)?
Yes, they operate like a bond fund because they are a bond fund. Just like any other bond fund VIPSX has interest rate risk. The average duration of VIPSX is about seven years making it an intermediate term fund.
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