Gyroscopic Investing

If I had infinite space in my SEP IRA, I could see a pretty strong argument for a 100 percent long-dated TIPS portfolio. I wouldn't make any money, but I wouldn't lose much either, assuming official CPI statistics track actual inflation.

In taxable accounts, however, TIPS are a lot less attractive, due to taxation of phantom income. And so TIPS are no magic bullet.

I invest in TIPS in all of my retirement accounts, but that is only about 8 percent of my portfolio. How should I adjust PP to account for those? For example, since TIPS do well in times of inflation and gold also does well in times of inflation, should I take the 8 percent out of the 25 percent portion allocated to gold? Or, since TIPS have a slightly negative real return, guaranteed, are they more akin to cash?

Do any of you hold TIPS and if so how much?

StinkyToes wrote: ↑Wed Apr 08, 2020 10:04 am If I had infinite space in my SEP IRA, I could see a pretty strong argument for a 100 percent long-dated TIPS portfolio. You won't make any money, but you won't lose much either, assuming official CPI statistics track actual inflation.

In taxable accounts, however, TIPS are a lot less attractive, due to taxation of phantom income. And so TIPS are no magic bullet.

I invest in TIPS in all of my retirement accounts, but that is only about 8 percent of my portfolio. How should I adjust PP to account for those? For example, since TIPS do well in times of inflation and gold also does well in times of inflation, should I take the 8 percent out of the 25 percent portion allocated to gold? Or, since TIPS have a slightly negative real return, guaranteed, are they more akin to cash?

Do any of you hold TIPS and if so how much?

I've asked about them here. I've read about them here. They are NOT popular here. iBonds will definitely be suggested as THE alternative even though you cannot today buy them in the quantities that you can buy TIPS.

That said in the next few days I shall be asking for advice here regarding buying the maximum amount of iBonds I can for 2020. I've not yet filed my 2019 tax return and I'm assuming I have to make some more payments towards those 2019 taxes so that I can generate a $10,000 refund to use to purchase the maximum iBonds via that method?

Vinny

Where do TIPS fit into the PP?

They don't.
Gold does the job that TIPS would do, or so goes the general consensus.
Maybe in your vp? ADDED: I used to hold some there, briefly. Got rid of them all.

I would just account for the TIPS in my VP if I wanted to own them. Don't worry about fitting them into the PP.

yankees60 wrote: ↑Wed Apr 08, 2020 10:12 am

StinkyToes wrote: ↑Wed Apr 08, 2020 10:04 am If I had infinite space in my SEP IRA, I could see a pretty strong argument for a 100 percent long-dated TIPS portfolio. You won't make any money, but you won't lose much either, assuming official CPI statistics track actual inflation.

In taxable accounts, however, TIPS are a lot less attractive, due to taxation of phantom income. And so TIPS are no magic bullet.

I invest in TIPS in all of my retirement accounts, but that is only about 8 percent of my portfolio. How should I adjust PP to account for those? For example, since TIPS do well in times of inflation and gold also does well in times of inflation, should I take the 8 percent out of the 25 percent portion allocated to gold? Or, since TIPS have a slightly negative real return, guaranteed, are they more akin to cash?

Do any of you hold TIPS and if so how much?

I've asked about them here. I've read about them here. They are NOT popular here.

Vinny

I'm having a hard time wrapping my head around this. Let us assume for the sake of simplicity that the TIPS pays a real interest rate of 0. (The actual interest rate as market close yesterday for the 30-year TIPS was -0.06 percent but if we assume zero it will make the discussion simpler.) Let us also assume that we are talking about a tax-deferred accounts, so taxation of phantom income is not an issue.

If I have a choice between $1000 cash and $1000 in a zero-yielding TIPS in my tax-deferred account it seems to me that the TIPS is the superior investment. Here is why: If there is inflation, I will get back your original investment and will be compensated for the inflation. The real return of the TIPS is unequivocally higher than the real return of the cash. If there is deflation, I will get back my original investment. (See https://www.treasurydirect.gov/indiv/re ... #deflation). In this case, cash and TIPS would have the same return.

In short, under the assumptions I've described above, there is no scenario in which cash is superior to a TIPS but there are scenarios (inflation rate greater than zero) when TIPS outperform cash.

I admit it gets a little more complicated for a negative-yielding TIPS but at the moment, we are close enough to zero that this isn't really an issue.

So why would anyone ever prefer cash to a TIPS?

StinkyToes wrote: ↑Wed Apr 08, 2020 1:16 pm So why would anyone ever prefer cash to a TIPS?

Because a nominal bond always pays more in interest than TIPS of the same maturity.

Everything has a tradeoff. The tradeoff with TIPS is that they pay lower interest rates compared to nominal bonds. That difference in rates represents the anticipated inflation that the market expects per year over the length of the bond.

Since nobody knows the future, it's actually a crapshoot whether TIPS will make more money than nominal bonds even including inflation. As long as inflation is less than the difference in interest rates, you still would have been better off with a nominal bond. But if inflation outpaces the delta, TIPS are a good deal. Long story short, investing in TIPS is really just a speculative bet that the market is currently underestimating future inflation.

That may be useful for some people, but the Permanent Portfolio already has the possibility covered in two other ways. Gold for sudden inflation, and T-bills for gradual inflation.

While they aren't TIPS, ibonds could make sense for part of the cash portion.

i dont care for tips ... they may follow the cpi which is just a price change index through out the 1500 mini economies that make us up , but it is not linked at all to your personal cost of living .

geaux saints wrote: ↑Wed Apr 08, 2020 7:41 pm While they aren't TIPS, ibonds could make sense for part of the cash portion.

Emphasis on "part".

Over a NUMBER of years (if just starting) you can build up an investment in iBond.

However, if you have a good sized portfolio with a lot of cash investment to make now, iBonds are extremely limited.

Vinny