Complacency and ignorance is a wicked combination. Take my decision to invest in Treasury Inflation Protected bonds, or TIPS as they're called. Sounds very simple-- a bond that will protect your investment if inflation rises. Like most things, however, the devil is in the details.
In a recent article Charles Farrell discusses some of the not so nice fine points of TIPS. First, the rise in the value of the bond because of a rise in the CPI may not offset the decrease in the bond because of a rise in interest rates. Next, the increase in the value of the bond due to a CPI increase is taxable though you don't actually receive the money until the bond matures. My investment in the iShares Barclays TIPS Bond Fund (TIP) ETF is held in a taxable account. Mr Farrell also points out that the TIPS interest rate is too low to be of much help to retirees looking for cash to live on.
TIP had a nice two year run right up until the time I bought in October 2010. Are they selling off now in anticipation of rising interest rates? Are investors considering the possibility that the government is purposefully underestimating inflation making TIPS less attractive? For more of this flavor, read the comments following Mr Farrell's article. Partly because of Mr Farrell's article, but mostly to cut my losses and reduce exposure to TIPS, I sold the ETF TIP today and took a 4% loss give or take. I still own TIPS via the Vanguard mutual fund VIPSX.
5 comments:
I have considered TIPS from time to time; however, I cannot get past the fact that the gov't lies about the inflation rate, to its advantage. Gov't officials talk about the need to reduce future social security benefits, benefits (they call it an entitlement) paid for by a 14.4% tax on the incomes of the recipients. Ridiculous and outrageous, social security benefits are already being reduced every year by 1-2% due to the understated CPI that cost of living increases are based on.
JCarroll
J-- Thanks for your perspective. I'm reminded of some words to live by I read recently: "The only thing you really own is what you can hide."
enid. In re-reading my prior comment and your response, I probably came across a little harsh or negative or perhaps even judgmental. I apologize for that; it was not intended.
I enjoy reading your about your investment philosophy (a look over your shoulder, so to speak), your real-life reports on your successes and not-successes, and look forward to your comments.
The quote is intriguing. Could you provide the source; I'd like to content the content in which it was made.
Thank you,
JCarroll
That last sentence does not make sense. I'd like to see the context in which the quote came from is a better way to express my thought.
Thanks,
JCarroll
J- I ran across it within the past month but I'll never be able to find it. The message I took away was that when it comes to assets, in dire circumstances, all can be lost or taken from you. Houses get foreclosed. Pay off the mortgage and you could still be taxed out of home ownership. Money in banks can be lost. Gold in safety deposit boxes can be confiscated. Company stock can become worthless overnight and bond defaults are not that rare. But something of value whose location only you know about-- that's pretty safe. A rational for "under the matress" thinking I found interesting.
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