I have charted two funds based on their adjusted close (adjusted for dividends and splits). The chart shows the growth since January, 2004.
TIP is a bond fund made up of treasury inflation protected securities. They are considered to be among the safest bond investments in America as they are fully backed by the US Government and have inflation protection (tied to the CPI). It is therefore not a fund designed to make you rich. The primary risk in this fund is interest rate risk since the fund holds long-term bonds. Changes in real interest rates (rates adjusted for inflation) change the value of those underlying bonds. That adds volatility as seen in the chart.
SWYSX is a high yield bond fund. The primary risk in this fund is/was the bonds themselves (low credit quality). There is little interest rate risk since the fund holds short-term bonds. Changes in interest rates do not create much volatility. Note the lack of volatility in the chart.
Clearly volatility and risk are not necessarily the same thing. I suggest that one fund was offering the Illusion of Prosperity and one was offering the Illusion of Risk. For what it is worth, since 2006 I've been increasingly embracing the Illusion of Risk (TIP).
May 3, 2004
Buffett's Wit and Wisdom
TIPS [Treasury Inflation Protected Securities] are not a bad investment for people worried about inflation heating up, which we're seeing signs of.
Some seem to think TIPS are overvalued now.
With TIPS Like These, Investors Need Advice
The bidding frenzy has sent TIPS prices soaring. The bonds have become wildly overvalued and now offer a terrible long-term bet.
Just how wildly overvalued could they be? If a 15% total return (~3.2% average annual return before inflation) over the past four and a half years truly represents an investment bubble, then our country is in seriously deep trouble (which it may be anyway).
This is not investment advice so please do not take it as such.
MAB pointed SWYSX out to me in the comments.
See Also:
TIPS Investors "Need" Advice Apparently
Source Data:
Yahoo: Historical TIPS
Yahoo: Historical SWYSX
Good to see you rested and back to your typical (I hesitate to say 'normal') self. ;-)
ReplyDeleteWith this post you hit on something I first noticed a last year with the Bear Sterns hedge fund implosions. They were interviewing some sad retiree that had lost it all in one of those funds. He was commenting how the steady 1%/month made him think he was in a safe, risk-free investment. He had NO IDEA!
I think he showed a fundamental mis-understanding of investing I'm sure many, many people have. People equate volatility with risk. The two are often coincident, especially so with stock investing. *BUT* lack of one does not mean lack of the other.
Indeed especially with fixed income, low volatility and high returns should have people running for the exits: if it's too good to be true...
Among others I blame the piss-poor financial planning/investment industry. Most people have no idea what they are doing investing. All they know is that which the mutual fund industry has propagandized them with.
Stag,
ReplyDeleteSWYSX is NOT a hi-yield bond fund.
The investment seeks high current income with minimal changes in share price. The fund primarily invests in investment-grade bonds. It may invest in bonds from diverse market sectors based on changing economic, market, industry and issuer conditions. The fund may invest to 25% of assets in below investment-grade bonds that are rated, at the time of investment, at least B by at least one nationally recognized statistical rating organization (NRSRO) or are the unrated equivalent as determined by the investment adviser. It maintains an average portfolio duration of one year or less.
You really have to be careful investing these days. After fees and taxes, most lose ground to inflation. With today's higher inflation and lower interest rates the situation is even worse.
Allanf,
ReplyDeleteSWYSX never yielded 1%/mo. More like 1/2%/year over Schwab's money market fund, SWVXX.
It turns out that AAA mortgages were not AAA. The mutual fund industry is a disgrace as is all of wall street. But much of the blame lies with the fed as they are the sponsors of the inflation. Negative real interest rates cause enormous economic distortions. Inflation benefits the minority at the expense of the majority.
I realize SWYSX wasn't 1%/month like the Bear Stearns pair. My point was a lot of funds were using low volatility to hide high risk.
ReplyDeleteCertainly Bear's were an extreme, but Schwab was appealing to the same set of investor motivation and mis-conceptions.
AllanF,
ReplyDeleteWith this post you hit on something I first noticed a last year with the Bear Sterns hedge fund implosions. They were interviewing some sad retiree that had lost it all in one of those funds. He was commenting how the steady 1%/month made him think he was in a safe, risk-free investment. He had NO IDEA!
He was dabbling in the black arts. That often "spells" trouble. Get it? Spells? Mwuhahaha! I am fully rested. It really doesn't seem to help. ;)
From 2007:
U.S. Credit Crisis Adds to Gloom in Norway
http://www.nytimes.com/2007/12/02/world/europe/02norway.html?ei=5090&en=6448670bae90818f&ex=1354338000&partner=rssuserland&emc=rss&pagewanted=all
Above all, the residents want to know how their close-knit community of 18,000 could have mortgaged its future — built on the revenue from a hydroelectric plant on a nearby fjord — by dabbling in what many view as the black arts of investment bankers in distant places.
MAB,
...The fund may invest to 25% of assets in below investment-grade bonds...
I should have said "higher yield" fund, hence the "YIELDPLUS" part of the name.
You are also right that it was not intended to be a high yield fund. The risk was certainly there but it sure as heck lacked the reward.
As an analogy, they proclaimed to add a cup of garbage to the quart of wine to stretch the value, but it seems they also skimped on the quality of the wine itself. Imagine that. What kind of bar are they running anyway?
A trip down memory lane...
September 9, 2007
Bond Investors vs. Frankenstein's Monster
http://illusionofprosperity.blogspot.com/2007/09/bond-investors-vs-frankensteins-monster.html
Using hindsight, there was ample warning to get out of investments such as SWYSX (as seen in the SWYSX chart). Perhaps it takes more than humor and sarcasm to get peoples' attention.
Here is a brief list of very unpopular TV show ideas.
Sane Money
Slow Money
Kudlow nor Company
Illusion of Prosperity
Stag,
ReplyDeleteUsing hindsight, there was ample warning to get out of investments such as SWYSX
Sure. Absolutely. Lots of warning for the average mom or pop investor trying to eek out a small return and maintain principle. You just had to know more about the economy and credit markets than the chairman of the Federal Reserve (as your above post shows). Our course hindsight is always handy too.
MAB,
ReplyDeleteYou just had to know more about the economy and credit markets than the chairman of the Federal Reserve (as your above post shows).
No joke!
I would alther that slightly though. You had to know more than Bernanke was saying but not necessarily more than what Bernanke was thinking. I'm reminded that his bond money was sitting in safe Canadian Treasury Bonds.
Why we find nothing wrong with OUR Fed Chairman investing HIS money in Canadian Treasuries instead of our own is another question entirely though. Talk about conflict of interest.
http://illusionofprosperity.blogspot.com/2007/10/canadian-dollar.html
Stag,
ReplyDeleteThe laugh is on us (as in U.S.) all. Sadly, a plot of the U.S. dollar looks eerily similar to SWYSX.
Maybe we all need to get more Loonie(s). Just like Bernanke.
The laugh is on us (as in U.S.) all. Sadly, a plot of the U.S. dollar looks eerily similar to SWYSX.
ReplyDeleteYeah, picture the foreign investor in SWYSX. Got hit by both charts simultaneously (not that US investors didn't too).
Investors would have done better investing in WYSIWYG (What You See Is What You Get).
It seems SWYSX was actually a combination of WYSYHYG (What You See You Hope You Get) and WYGIWYG (What You Get Is What You Get).
http://en.wikipedia.org/wiki/WYSIWYG