No. of Recommendations: 18
A few random comments
The comments that there is no point opting for the extra protection offered by TIPS mystifiy me...plain bonds are certificates of confiscation, sometimes.
If inflation rises, you can be more or less wiped out. Check the real total return on 10- or long-bonds in the inflationary years. Why take that risk if there is absolutely no advantage in doing so?
I agree that nobody knows what inflation will be. That is precisely the reason NOT to place a huge wager on it remaining low, which is what buying nominal return bonds entails.
From a portfolio construction point of view, inflation protected bonds are as different from ordinary nominal bonds as equities are from nominal bonds.
I agree that 2% real yield on TIPS sure is a whole lot better than it was for a long time.
But in the OP's situation, still earning and some years from even beginning retirement, I don't really see the point in his/her buying TIPS at this juncture.
On the assumption that the person already has some decent amount of savings, that maybe-TIPS money (the marginal saved dollar, the last one which will get spent) won't be needed for many many years.
Over that kind of longer time frame, the rate of return matters. Would you rather have a real total return on it of 7% or 2%?
For one or two years, or a few, a very humdrum 2% real rate of return on your money is no big deal. But for 15-40 years, I would care a lot.
TIPS can be a nice way to park money that you know you will need at a specific time in future in a way that you know with absolute certainty the ultimate buying power, if you have that situation for any reason. But parked money doesn't earn much.
I'm mostly and equities-and-cash person. The only situation I might see myself doing some real return bonds is if the market seemed pretty toppy and I wanted to liquidate some of my overpriced equities in favour of a ladder for maybe 2-4 years of expenses. Right now I simply have an above-average allocation to cash: the potential advantage to TIPS over cash is in proportion to the time frame I expect to hold it, times the likely upper bound on the amount of inflation likely to occur in that time frame, times the apparent yield difference. None of those seems large at the moment--I'm cool with 4.83% on my cash deposits at Interactive Brokers.
My assessment is that US monetary inflation is probably largely under control in the next couple of years. I check the New York Fed's "UIG", which is now under 3%. That's the fraction of inflation that seems to be best explained by economy-wide constant effects, after separating out product- and service-specific fluctuations.
Jim
