TIPS for cash component?
Posted: Thu Aug 05, 2010 11:05 pm
Title says it. Why (or why not) use TIPS as the cash component?
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TIPS are supposed to protect against inflation. In PP this is taken care of by gold. Cash should to some extent save your portfolio when everything else goes down, so TIPS won't be a good choice in this case. Remember 2008? TIPS posted about -10% losses. I wouldn't feel safe replacing cash portion of my PP with a bond instrument that carries both interest rate risk and "inflation calculation" risk.SmallPotatoes wrote: Title says it. Why (or why not) use TIPS as the cash component?
I know some people prefer MM funds to bank accounts, but given miserable yields I prefer to keep cash in high-yield accounts in bank or a credit union (my Alliant CU pays 1.5%). I also max out my HSA which pays 5% tax-free (yes, you read it right - 5%). After age 65 HSA may be used for any purposes - like traditional IRA.SmallPotatoes wrote: Thanks for the reminder. I do see that TIPS are a less-than-ideal method of holding cash. I'll probably just keep my MM at ING for now… maybe look at more I Bonds.
MediumTex wrote: With TIPS you have principal risk and thus they are unsuitable for the cash piece, IMHO.
As I have written many times before, though, ibonds are a terrific TIPS-like instrument and are perfect for the cash piece.
Ibonds also give you great tax benefits (no tax until redemption), while TIPS give you terrible tax treatment (potential tax on gains you haven't actually received).Otto wrote:MediumTex wrote: With TIPS you have principal risk and thus they are unsuitable for the cash piece, IMHO.
As I have written many times before, though, ibonds are a terrific TIPS-like instrument and are perfect for the cash piece.
So is the key difference between them that TIPS have principal risk while I-bonds do not?
TIPS are a horrible deal for a taxable investor. The more inflation you have, the more money you have to pay in taxes on the inflation adjustments.MediumTex wrote:Ibonds also give you great tax benefits (no tax until redemption), while TIPS give you terrible tax treatment (potential tax on gains you haven't actually received).Otto wrote:MediumTex wrote: With TIPS you have principal risk and thus they are unsuitable for the cash piece, IMHO.
As I have written many times before, though, ibonds are a terrific TIPS-like instrument and are perfect for the cash piece.
So is the key difference between them that TIPS have principal risk while I-bonds do not?
I would start off by going to your local bank branch and buying a few paper bonds in smaller denominations (perhaps a few $100s).foglifter wrote: I've never dealt with I Bonds and since many of you recommend them I got intrigued. Looks like current yield is 1.74%, which is not that bad.
Can someone outline the best way to buy them - TreasuryDirect, my brokerage account etc.? Is it easy to sell them if I need cash?
I do not believe they are taxable at the state level.foglifter wrote: Thanks for a good input, MediumTex. Do you know if the interest payments from I bonds are taxable at the state level?
MediumTex, that is very interesting, are you saying instead of SHY for the cash portion we hold PRPFX/EDV 90/10? It would be nice if you can break down the holdings of the assets you are referring to. Also, is there a chart that one can look at see the progression of the Ibonds? This is an area I need to educate myself in .I view the PRPFX/EDV 90/10 strategy and the ibonds in the PP cash portion to be the two best ideas I have come up with in the whole PP discussion.
No, I believe PRPFX/EDV 90/10 was his idea for the whole PP. It's a good choice for those who wants it as simple as possible.LNGTERMER wrote:MediumTex, that is very interesting, are you saying instead of SHY for the cash portion we hold PRPFX/EDV 90/10?I view the PRPFX/EDV 90/10 strategy and the ibonds in the PP cash portion to be the two best ideas I have come up with in the whole PP discussion.
I'm not sure if I bonds have tickers... maybe you could just treat it as a MM fund - with a share price of $1.LNGTERMER wrote: Thanks foglifter, so in this case I am assuming you would still rebalance if the bands go off sync. How about a ticker for and I bond?
Ibonds are not traded and do not fluctuate in value.foglifter wrote:I'm not sure if I bonds have tickers... maybe you could just treat it as a MM fund - with a share price of $1.LNGTERMER wrote: Thanks foglifter, so in this case I am assuming you would still rebalance if the bands go off sync. How about a ticker for and I bond?
This is very simple, but what is your rational for 10% EDV? Why not just use PRPFX as is?PRPFX/EDV 90/10
PRPFX does not provide you with the LT treasury exposure that HB recommended. EDV helps fill this gap and causes PRPFX to simulate the HB PP performance more closely.LNGTERMER wrote: Thanks,This is very simple, but what is your rational for 10% EDV? Why not just use PRPFX as is?PRPFX/EDV 90/10
MediumTex wrote:PRPFX does not provide you with the LT treasury exposure that HB recommended. EDV helps fill this gap and causes PRPFX to simulate the HB PP performance more closely.LNGTERMER wrote: Thanks,This is very simple, but what is your rational for 10% EDV? Why not just use PRPFX as is?PRPFX/EDV 90/10
There are some charts over on the bogleheads board showing how EDV dampens the volatility of PRPFX.
It sounds simple, but a lot of thought (and trial and error) went into it.
Hey, MT: What about 90/10 PRPFX + A 30-year bond ladder?
The bond ladder probably doesn't give you enough volatility for purposes of this strategy.SmallPotatoes wrote: Hey, MT: What about 90/10 PRPFX + A 30-year bond ladder?