TIPS held to maturity as "bottom" of cash component?

Discussion of the Cash portion of the Permanent Portfolio

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fnord123
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Re: TIPS held to maturity as "bottom" of cash component?

Post by fnord123 » Sun Sep 15, 2013 9:07 am

I never implemented this, mostly because I found additional ways to buy I-Bonds (in child's name + in a living trust).

When my current high yielding (sad when ~3% is high yielding) CDs run out in 2015, which currently are the bottom of my cash component and have a similar role as TIPS were proposed in this thread, I may roll them into TIPS if the 5Y CD rate is still sub-3%.

Did anyone else try this btw?  Still seems to me a good strategy if the TIPS are held in tax-advantaged space.
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Re: TIPS held to maturity as "bottom" of cash component?

Post by modeljc » Sat Jan 11, 2014 12:14 pm

fnord123 wrote: I never implemented this, mostly because I found additional ways to buy I-Bonds (in child's name + in a living trust).

When my current high yielding (sad when ~3% is high yielding) CDs run out in 2015, which currently are the bottom of my cash component and have a similar role as TIPS were proposed in this thread, I may roll them into TIPS if the 5Y CD rate is still sub-3%.

Did anyone else try this btw?  Still seems to me a good strategy if the TIPS are held in tax-advantaged space.
Bill Gates is buying WIW and WIA.  It current yield is 3.6% and sells at a 15% discount.  I got some at year end for $11.20 for a VP.  It has a duration of 7 years.  When you consider that inflation has averaged at 4.2% for 40 years this looks OK when you consider the long 30 year Treasury is at 3.8%.

The tax treatment is better as it is a closed end fund.
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Re: TIPS held to maturity as "bottom" of cash component?

Post by fnord123 » Sat Jan 11, 2014 1:47 pm

WIW and WIA both invest up to 40% of their funds in non-US gov't stuff.  WIW even invests in stuff that is below investment grade.  As such, these seem to be more appropriate for the VP than the PP.
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Re: TIPS held to maturity as "bottom" of cash component?

Post by modeljc » Sat Jan 11, 2014 2:39 pm

fnord123 wrote: WIW and WIA both invest up to 40% of their funds in non-US gov't stuff.  WIW even invests in stuff that is below investment grade.  As such, these seem to be more appropriate for the VP than the PP.
My site says 77% is in US tips.  Yes I bought it for the VP.
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Re: TIPS held to maturity as "bottom" of cash component?

Post by vnatale » Fri Mar 06, 2020 6:32 pm

MediumTex wrote:
Fri Jan 28, 2011 11:28 am
Adam1226 wrote: Medium Tex--

Can you expand a bit as to why you like I-bonds?

Thanks,
Adam
1. Total deferral of taxes on interest until redemption (up to 30 years)

2. Zero interest rate risk

3. Zero prinicipal risk

4. Full faith and credit of U.S. government

5. Complete liquidity (redeem at the bank on the corner any time you want)

What's not to like?

Exhibit A of what I just wrote about.

Zero mention of if you are transforming an existing portfolio of any significant amount into a Permanent Portfolio the I Bonds portion of it would be tiny. Not so with TIPS.

Vinny
"I only regret that I have but one lap to give to my cats."
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Re: TIPS held to maturity as "bottom" of cash component?

Post by vnatale » Fri Mar 06, 2020 6:53 pm

Austen Heller wrote:
Sun Sep 15, 2013 2:47 am
fnord123 wrote: Current I-Bonds have a non-inflation component of 0%, which stinks.  This contrasts with a 1.75% component on some TIPS with no principal risk if held to maturity, plus greater upside than I-Bonds due to principal indexing that TIPS provide.  These are non-trivial differences.
I was considering holding some long-dated TIPS as part of the CASH component of the PP, when I came across this old thread.  The majority of the thread had been hijacked into an I-bond discussion, but I'm wondering: did the OP or anyone else ever enact this strategy?

Today (Sept 2013), I-bonds still have a 0% fixed rate, and 30-year TIPS are now yielding around 1.5% Real.  Seems like long TIPS deserve serious consideration.  Of course, you would be best served to hold the individual TIPS to maturity, and do so in a tax-advantaged account such as a Roth IRA, but as long as you can meet these criteria, the long TIPS seem like the way to go.  If anyone is considering this, and would like to buy as cheaply as possible (no commissions or bid/ask spreads), the next Treasury auction takes place in the middle of October.

William Bernstein discusses the benefits of long-dated TIPS in his pamphlet "Ages of the Investor" - highly recommended!  TIPS are specifically recommended as a component of a LMP - Liability Matching Portfolio, a way to make sure you are able to meet your obligations as retirement approaches.
A William Bernstein / TIPS mention!!!

Vinny
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Re: TIPS held to maturity as "bottom" of cash component?

Post by jhogue » Sun Mar 08, 2020 11:46 am

Vinny,

TIPS have terrible tax treatment. I-bonds are tax deferred.

TIPS go negative in a deflation. I-bonds do not.

Now is a great time to start building your Deep Cash I-bond ladder. I-bonds currently yield 2.22%, easily beating everything from a 3 month T-bill to a 30 year T-bond.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: TIPS held to maturity as "bottom" of cash component?

Post by vnatale » Sun Mar 08, 2020 6:11 pm

jhogue wrote:
Sun Mar 08, 2020 11:46 am
Vinny,

TIPS have terrible tax treatment. I-bonds are tax deferred.

TIPS go negative in a deflation. I-bonds do not.

Now is a great time to start building your Deep Cash I-bond ladder. I-bonds currently yield 2.22%, easily beating everything from a 3 month T-bill to a 30 year T-bond.
Except for the MAJOR caveat that I-Bonds have a severe annual purchase limitation. As a single person without any trusts that leaves a maximum purchase of $15,000 of them during 2020?

TIPS in a retirement account solve the not tax deferred problem.

One would have to assess what are the probabilities of deflation. And, IF deflation, would not the TIPS still have retained their purchasing power from original purchase?

My bottom line need and reason for purchasing them is safety being paramount with return being a low priority.

Vinny
"I only regret that I have but one lap to give to my cats."
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Re: TIPS held to maturity as "bottom" of cash component?

Post by jhogue » Sun Mar 08, 2020 6:51 pm

Vinny,

1. You are correct that one of the limitations of I-bonds is that they have annual limits. Therefore, building an I-bond ladder is part of a long-term strategy to follow for a number of years.That's why we call it "Deep Cash."

2. If you put TIPS in a tax deferred account to shield them from exposure to annual taxes on their interest, they will squeeze out that much space that might be used to tax defer another asset. I-bonds are always tax deferred and therefore expand the amount of tax deferred space in your overall portfolio. That is always a good thing, but even more important once you retire and can no longer add to your tax deferred account with regular income. I-bonds are also not subject to Required Minimum Distributions, while TIPS held in a tax deferred account are subject to RMDs when you reach 70 1/2 (age 72 with the passage of the SECURE Act).

3. TIPS are not guaranteed to retain their principal value in a Japan-like deflation. They can--and have--dropped into negative territory from time to time. On the other hand, the principal of I-bonds is backed by the full faith and credit of the US Treasury.

I-bonds won't make your rich, but they will make you feel secure.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: TIPS held to maturity as "bottom" of cash component?

Post by vnatale » Mon Apr 20, 2020 6:39 pm

Lone Wolf wrote:
Fri Jan 28, 2011 1:26 pm
Adam1226 wrote: I have read on them, and I think I understand how they work.  The thing is, I can't really figure out how the fixed rate is determined.  
I also have no idea how the fixed rate is determined.  For all I know, it may be arbitrary.  Really makes me curious, especially with it sitting at 0% fixed rate right now.

One thing I like about I-bonds is that you get some real inflation protection (as their rates are indexed to CPI-U.)  T-bills of course also "slightly" compensate you for inflation via their interest rate but typically with a rate lower than the I-bond composite rate.  Plus, you pay taxes on the interest from t-bills while I-bond taxes can be deferred for 30 years.  So with t-bills I think you really do get a bit of a bad deal on your cash when inflation comes because you must pay the government tax money on the inflation it has caused.  (I find this very annoying.)

The variable rate is based on the CPI-U (which from what I understand includes food and energy but not health care.)  This tends to put I-bond rates at rates that are competitive with slightly longer-term treasury securities but without the interest rate risk.

They have the following disadvantages:
1. Setting up a TreasuryDirect account involves some rigmarole.
2. They have an irritating $5,000 per year limit from TreasuryDirect, plus an additional $5,000 per year limit as paper bonds.
3. When you walk into the bank and ask to purchase them, the teller may look at you like you have two heads.  Apparently nobody really bothers to buy these things except the occasional granny.  So it's just Lone Wolf and the grannies rockin' the I-bonds.  (Speaking only for my local branch -- it sounds like MT has been buying these for years!)
4. They cannot be traded on the secondary market.  You can either cash them in or hold on to them.
5. You must hold on to them for five years to avoid having to forfeit any interest.

I'm afraid that MT might be right that they'll try to discontinue them.  The ever-shrinking limits kind of hint at that.  Me and the grannies will get together and have a good cry when that happens.
Over 9+ years later.....NOT YET!

Vinny
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