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Still recommending TIPS with the current unpleasantness?

Submitted by jim@jward.org on 21 November 2008 - 7:25pm

Larry, all, I'm curious to know whether you still recommend TIPS as an investment strategy, given the current potential for deflation or stagflation?

I'd put my IRA/SEP funds into a TIPS fund when I retired last year, but about ten days into the current mess I switched everything into a short term Treasurys fund after watching both the TIPS fund values and yields plummet...11% drop in fund price in the last 30 days, negative 7.76% YTD return. (I realize your advice is to invest directly, rather than through funds.)

If your answer is "yep, keep your money in TIPS, Mark," would it be best to ladder up over a relatively short period, out of the Treasurys, buying directly? Being relatively unsophisticated, I wonder how liquid TIPS holdings are for an individual who has the need to make regular withdrawals (sales) for living expenses.

I hope this line of questioning makes at least a modicum of sense.

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Submitted by Laurence Kotlikoff on 22 November 2008 - 11:20pm.
1

Hi Mark, Given their close to 3 percent real yields, I think TIPS are a very good and very safe investment, especially if you can hold them in a Roth so you don't get hit with taxes on their nominal interest payments. I would try to buy them directly, rather than count on some TIPS fund manager to do so. The manager may buy and sell at the wrong times. The whole idea of TIPS is to avoid investment risk. best, Larry

Submitted by john.isner@gmail.com on 22 February 2009 - 1:05pm.
2

I hold 100% TIPS in my IRA Rollover account. Last Oct/Nov the Real Yield Curve lifted significantly (see http://www.ustreas.gov/offices/domestic-finance/debt-management/interest...) and the market value of my portfolio dropped by 10%. Even though I plan to hold my TIPS to maturity, I lost sleep over this. Now most of the loss has been erased.

According to Brynjolfsson's book (which is frankly mostly over my head), TIPS market prices fluctuate with real yields. I am curious to understand what causes real yields to fluctuate and what might cause them to rise again in the future. Was it simply the freezing up of credit? And if so, why did it affect government bonds?

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