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JudyS

Tips?

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Scotty --

In a recent post you mentioned "..TIPS are on sale right now..." This is embarrassing, and I do know a lot of things (how to evaluate a stock fund, how to tell if you are getting ripped off in your 401(k), how to keep "sugar ants" out of your kitchen, and how to pick the best garden slug in a slug race, for instance) but I do not "get" bonds other than buying a generic index fund. I have read Swedroe's Winning Bond Strategy, slept with it, carried it around in my car, and cussed at it, but still don't get it....

 

So Scotty, help me! How do you KNOW when TIPS are ON SALE? I need to know!!

 

JudyS

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Scotty --

In a recent post you mentioned "..TIPS are on sale right now..." This is embarrassing, and I do know a lot of things (how to evaluate a stock fund, how to tell if you are getting ripped off in your 401(k), how to keep "sugar ants" out of your kitchen, and how to pick the best garden slug in a slug race, for instance) but I do not "get" bonds other than buying a generic index fund. I have read Swedroe's Winning Bond Strategy, slept with it, carried it around in my car, and cussed at it, but still don't get it....

 

So Scotty, help me! How do you KNOW when TIPS are ON SALE? I need to know!!

 

JudyS

 

Hi Judy,

That must be exciting to watch a slug race. :>)

 

Best Wishes,

Joe

 

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Scotty --

In a recent post you mentioned "..TIPS are on sale right now..." This is embarrassing, and I do know a lot of things (how to evaluate a stock fund, how to tell if you are getting ripped off in your 401(k), how to keep "sugar ants" out of your kitchen, and how to pick the best garden slug in a slug race, for instance) but I do not "get" bonds other than buying a generic index fund. I have read Swedroe's Winning Bond Strategy, slept with it, carried it around in my car, and cussed at it, but still don't get it....

 

So Scotty, help me! How do you KNOW when TIPS are ON SALE? I need to know!!

 

JudyS

 

Hi Judy,

That must be exciting to watch a slug race. :>)

 

Best Wishes,

Joe

 

 

 

 

 

 

Scotty --

In a recent post you mentioned "..TIPS are on sale right now..." This is embarrassing, and I do know a lot of things (how to evaluate a stock fund, how to tell if you are getting ripped off in your 401(k), how to keep "sugar ants" out of your kitchen, and how to pick the best garden slug in a slug race, for instance) but I do not "get" bonds other than buying a generic index fund. I have read Swedroe's Winning Bond Strategy, slept with it, carried it around in my car, and cussed at it, but still don't get it....

 

So Scotty, help me! How do you KNOW when TIPS are ON SALE? I need to know!!

 

JudyS

 

Hi Judy,

That must be exciting to watch a slug race. :>)

 

Best Wishes,

Joe

 

 

 

 

 

 

 

Tony --

 

I am familiar with the bankrate.com site, but not familiar enough to find TIPS compared to other bond types, I guess..... What am I STILL missing?

 

And Joe, watching slug races is only exciting if you happen to have the leopard slug.

 

JudyS

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Hi Judy,

 

"How do you know when TIPS are on sale?"

 

Let me first say that anything on sale can soon be on clearance, my point being that I can't predict any market, interest rate or real rates. Having said that, TIPS are starting to look too good to pass up for at least a portion of your fixed income portfolio. How did I reach that conclusion? First, in March of this year the five year TIPS (yes, I know the name has officially changed, but I'd rather just keep this simple) was yielding .01%. This means that your return after inflation would be .01% - effectively no real return (real return is your return after inflation, nominal is your return before inflation). As you can imagine, this didn't seem like a great buy - of course at that time people were screaming about commodity prices and $200 a barrel oil and thought there would be a lot of inflation - because of this a lot of people (or institutions) bought TIPS, pushing the price up and the yield down to basically nothing.

 

Six months later the market has changed its mind, a flight to quality has led to even a sell off of perfect quality treasury bonds (but not plain vanilla) called TIPS. In addition, perhaps some aren't expecting a lot of inflation going forward (commodity bubble burst) and thus the yields have steadily been rising - closing Friday in the 3.5% range for the 5 and 7 year issues. This is a real return after inflation. The same treasury bonds closed at 2.64% and 3.09% respectively - these bonds only receive the yield you see - TIPS get the yield plus whatever inflation does.

 

Two government issued bonds with the same credit quality - one yielding 3.52% plus whatever inflation does, the other yielding 3.09%......which would you buy? I'm betting we'll have inflation, not deflation over the next seven years, but even if we don't we beat the straight treasury bond.

 

TIPS yields have been in the 4% range previously and they could conceivably go there again, of course, they could go the other way. If one assumes, as Bill Gross does, that our government will inflate our way out of the current mess we are in then perhaps inflation will run high at 4% - your yield during this period would average 7.52% - a return that is historically associated with a portfolio of close to 60% stock. Yet with the individual bond there is zero risk to principal. If inflation is under-control and at say 2%.......you're getting 5.52% nominal return........still pretty good considering other alternatives.

 

Are TIPS a steal? Who knows, depends on future inflation, should they be included as part of your portfolio? I think a well diversified portfolio should now include them. Can they get cheaper (meaning fall in price, rise in yield)? Sure. This means short term losses, but if you don't sell, you'll be fine.

 

Compared to six months ago and compared to recent history, TIPS look on sale....could they go on clearance? Perhaps. If they do, buy more.

 

ScottyD

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Hi Judy

 

I'm glad Scotty tried to answer your question. I am still trying to understand bond funds .

 

Really though the best advice is just to have some TIPs in your portfolio regardless of the circumstances since none of us can truly know when they are on sale. Thats market timing. WE can only guess

 

 

Last weak I thought the stock market hit bottom but its still sinking which proves the bottom can not be predicted.

 

The only think I know is that I don't like being almost 50% down.

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