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Even dull TIPS can take a wild ride
But Herbst cautions investors against chasing this year's return in TIPS. It's not likely to happen again.
"The past year has been the most extraordinary that I have ever seen in my life," Herbst said.
The point of all this is that even a seemingly benign investment like TIPS can take investors on a wild and unexpected ride.
Who would have guessed that the widows, orphans and elderly were having such exciting times?
So far, hindsight is treating my one trade for the year rather kindly. I sold at $105.401. It now trades at $104.55. It paid $0.20801 in distributions that I did not receive. Overall, cash has therefore outperformed it by 64 cents per share.
Some might scoff (and do) at 0.6% worth of pain avoidance in a world that's reset the bar on pain (housing prices are down about 30%) and pleasure (the S&P 500 is up about 67% from the bottom). I look at it this way though. If I could avoid 0.6% pain every other month then I could avoid a 66% loss over 30 years. I would only dream of being that lucky.
0.994^(30*6) = 0.34
Behold the power of compounding.
Thursday: Unemployment Claims, PPI, Fed Chair Powell
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[image: Mortgage Rates] Note: Mortgage rates are from MortgageNewsDaily.com
and are for top tier scenarios.
Thursday:
• At 8:30 AM ET, The *initial weekly ...
6 hours ago
9 comments:
I'm sitting here, unemotionally, waiting for my sell stop on TIP to tell me to get out.
But it just won't do it. Not yet anyway.
The abrupt move down in late Oct. didn't do it and the 195 day MA is still trending up.
All this aside, just exactly how much of a one day drop is possible on this etf? Honestly, if one believes that we will not have any more Lehman Bros. events then what is worst case scenario for one day drops on this 1.5M average shares traded per day issue?
G.H.,
I don't think there's much risk of a one day drop much bigger than today's. I think the main risk comes from just more of the same as the upward momentum continues to ease.
Down 0.6% since I got out is roughly 0.1% per week. I could easily still be wrong. It might just be noise.
I offered quite a few reasons why real yields might rise though. My personal take was more deflation. There are plenty to choose from all camps though, be it bearish or bullish, deflationist or inflationist.
The bullish dotcom bubble saw high real yields on TIPS. So did the recent bearish deflationary crash.
If inflation does continue to creep in, the Fed must eventually counter with high real yields to stop it. It's game over if they don't. It's game over anyway, but the winning bet has been the one based on pretending and extending.
Clarity and Valuation
http://www.hussmanfunds.com/wmc/wmc091221.htm
"What produces strong risk-adjusted returns over a complete market cycle is to accept more risk, on average, when the return per unit of risk is likely to be strong, and avoid risk, on average, when the return per unit of risk is likely to be weak."
TIPS have had a great year. Now that the real yield is down to just 0.3% on the 5-Year TIPS there just isn't all that much return per unit of risk left. All things being equal, the risk-adjusted return is now negative (after taxes).
That's true of cash too of course, but that's almost always true of cash. I'd rather risk losing a few percent waiting for a decent opportunity, than locking in poor opportunity. 5 years is a long time. Things can change in ways none of us can predict.
I will be buying the 10-Year TIPS through the auction in January though. 1.3% or so is good enough. Unlike TIP, I'll have decent deflation protection over the life of the bond. (TIP can deflate since it has been re-inflated and those inflationary gains could therefore permanently vanish if we slide into Japan's ongoing deflationary mess.)
Trade Type: SELL
Security Symbol: TIP
Quantity: 649
Price: $104.23
~2.5% gain in 4 months. That will suffice for me. $1600.00 will fill the propane tank and burn a few NY Strips with a little left over.
G.H.,
It would take roughly 35 years to get 2.5% at today's 0.07% yield on 3 Month Treasuries.
You fought the law, and the law lost!
http://www.youtube.com/watch?v=_TOVkiBE2r4
You had a "green day". :)
"You fought the law, and the law lost!"
There may be another battle looming on the horizon of trend tracking and sell stopping.
The dollar might be next, and I'm watching UUP.
Something I forgot to mention...
I had a portion of my sister's IRA in VIPSX on 09/09/09. I sold this position on 12/11 netting a tidy 3% mark.
She has this blog partly to thank for seeing her Roth beat the pants off cash in said interval. I sold her's much sooner than I typically would my own but it turned out much better for her.
G.H.,
My take on it is that the dollar is at least a well-known evil. It's been analyzed to death.
As an fan of H.P. Lovecraft, I believe that the unknown evils are potentially much more dangerous.
Right or wrong, my nest egg is therefore sitting entirely in US well-known evils (dollars), lol.
G.H.,
You are the second to thank me for trading ideas this week. I cannot accept your thanks though. That was all your decision.
The reason I can't accept your thanks is that I'd be a hypocrite to accept your thanks if the trade works out well for you if I also didn't accept a good beating if hindsight says it doesn't.
The odds of me accepting a beating are very low. I'm no hypocrite if I can help it, but I am a coward. I will run! Hahaha! :)
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