My IRA has been sitting in cash since August. I put almost all of it back to work today.
August 26, 2010
Sold 1350 TIP @ 107.9001
I expect it to be a losing trade.
It was. TIP now trades at 107.61. That's 29 cents in my favor. I lost 86 cents in distributions though. Sitting in cash therefore cost me 57 cents per share overall. That works out to about 1/2 of 1 percent.
Now for the good news. The 30-Year TIPS bond yielded 1.59% on August 26, 2010. I was able to buy the 29 year TIPS bond today with a yield that was roughly 0.3% higher. Over the course of 30 years, that's about 9% more (0.3% x 29).
Although I lost some purchasing power on the move to cash, the ends justifies the means. I actually feel pretty lucky here. I was planning to wait until the 30-Year TIPS auction in February but this yield was just too tempting. I am very pleased with how this worked out.
97% of my IRA now sits in that one bond and I will be holding it until maturity. I do not want to be forced to ever sell this bond to someone else (a "greater fool" perhaps). I will therefore use the interest it generates over the years to buy TIPS that mature before my minimum required distributions kick in at age 70.
In theory, thanks to compound interest my IRA's purchasing power should grow by about 73% over the next 29 years.
1.019 ^ 29 = 1.73
I really don't care all that much what the market value of the bond does between now and then. The reason I don't care is that I don't intend to sell it to anyone else. I therefore don't care what others think it is worth. I know roughly what it is worth to me.
My IRA planning is now complete. I'm done.
As a side note, my IRA will never find its way back into the stock market. I will be rooting for the stock market though. The better this economy does the more likely that I will actually get paid. That said, I remain bearish long-term. I'm hardly swinging for the fences here.
If this one bond ultimately ends up being a losing trade for me, then I surely will not be alone. It will mean that the US defaulted on its debt and/or the currency completely fell apart. These are not trivial risks. I am simply trying to play the odds as I see them though. I am taking a risk here, but then again everyone is.
The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. - Alan Greenspan (1966)