Gyroscopic Investing

Does anyone hold TIPS (or UK IL Gilts).  If so, how can such a holding be reconciled with the PP?

TIPS cannot be reconciled with the PP.

TIPS may have a role in some investment strategies, but they don't have a role in the PP.

As craig has said before, buying TIPS is a bit like buying fire insurance from an arsonist, and would substantially reduce the safety offered by the PP.

If you are tempted to think of TIPS as a suitable substitute for gold, compare the ETFs TIP and GLD the last few years and see how you feel afterwards.

I think that TIPS are a sort of silly exercise in sovereign hubris (the tax treatment of TIPS in the U.S. if held in a taxable account is also terrible).

If you want something that is sort of TIPS-like, without all the downsides, consider I-bonds in the context of a PP, but only in the cash component.

It is my understanding that TIPS don't preform well in times of deflation or recession (or when these things are a concern), correct?  That is one of the main purposes of cash in the HBPP system is to have an asset class that will at least maintain it's purchasing power during those times.

Diversifying across many cash-like investments is about the best you can do.

How do you do this?

I´m thinking to divide my cash alocation between USD - Euros - Brazilian Reals and Uruguay Pesos, the major currencies that we use in my country. 

MediumTex wrote:TIPS may have a role in some investment strategies, but they don't have a role in the PP.

I agree.  TIPS simply do not provide enough "kick" in high inflationary times to offset losses in the balance of the portfolio (like gold does).  They don't provide enough "kick" in deflationary times to offset losses in the balance of the portfolio (like LT Nominal Bonds do).  And long-term TIPS are not a good cash substitute because they can be volatile.  And they clearly aren't stocks

But I have to say that TIPS have the potential to make a fine Variable Portfolio (or a component thereof), especially for someone approaching or in retirement.  They can provide a positive real rate of return in all of the economic environments that the PP is designed to address.  They protect against unexpected inflation and minimize part of the reinvestment risk faced by long-term nominal bond holders.

We can argue about CPI calculations, the government gaming the system, etc., but if that comes to pass then we would have more significant issues than whether the CPI books are cooked.  And since the nominal Treasury market is far larger than the TIPS market, I would guess that any government hanky-panky (and I'm not expecting any) would occur there.

TIPS are a "full faith and credit" product of the U.S. Treasury.  While they don't fit in the 4x25 matrix of the permanent portfolio, I am surprised by the generally cool reception they receive from PP advocates, especially when their portfolios are 50% in Treasury bonds.

And TIPS do have horrible tax treatment in taxable accounts.

As a UK investor for example, holding 25% 'cash' in such a ladder (UK gilts, cash deposits etc,), 25% in gold, 25% in a diverse range of foreign country stocks (by buying VEA for example) and US TLT (long dated treasury's), the total funds are better protected against a terminal loss arising from a hyperinflation event

So if I understand righ, its better mantain Cash only in my own currency (instead a basket of currencies) and diversify in the Stock portion?