Sunday, August 14, 2011

The Sarcasm Report v.124

August 14, 2011
Investing in nervous times

What should you be investing in? One investment to consider for a small part of your portfolio is Treasury Inflation-Protected Securities, known as TIPS, in which the principle is adjusted to the Consumer Price Index. (Pimco uses TIPS in many of its portfolios.) These are issued for terms of five, 10 and 20 years. However, if you purchase them through a mutual fund, you do not have to be concerned about maturities. This investment will protect both your principal and interest from inflation.

Here are the claims of the article.

1. These are nervous times.
2. You should consider investing a small part of your portfolio in TIPS.
3. TIPS will protect both your principal and interest from inflation.

I get it. If TIPS offer protection, then protect modestly.

Be wary of putting too much in TIPS though. You don't want to "protect" more than a "small part" of your portfolio.


I'm experiencing financial advice déjà vu!

August 13, 2011
Dollar Death $piral: Subjective Invective v.7

I get it. If stocks are overvalued, invest modestly.

...

Invest modestly, but be wary of putting too much in the market because there is a good chance it will fall.




Disclosure: This is not investment advice. For what it is worth, a large part of my portfolio is permanently sitting in TIPS and none of my portfolio is invested in stocks. That's been true since 2004. No complaints so far.

That said, TIPS do not offer the risk free protection that the first article claims. TIPS would NOT protect against inflation if we hyperinflate. First, there's a lag between the inflation we see in every day life and when it finally trickles into TIPS appreciation. Second, serious inflation implies serious taxation of the inflationary gains.

2 comments:

getyourselfconnected said...

Bernanke just gave away that deflation is the threat, TIPS looking good.

Stagflationary Mark said...

GYSC,

Here is a post I did on the TIP message board that sums up my thinking.

Re: If we're entering a deflationary period...

There are two forces at play right now due to slowing real growth.

1. Low real growth tends to lead to low real yields. TIPS prices go up as real yields fall. TIPS are therefore performing well.

2. Low real growth tends to lead to lower inflation. TIPS prices go down as inflation goes down. TIPS should therefore be performing poorly.

Right now #1 is winning. The most important reason I own long-term TIPS is because I fear low long-term real growth. Inflation/deflation is just a side show to me by comparison.

Investors were rewarded owning TIPS as the dotcom bubble popped in 2000. Rates were much higher before the pop than they are now. Locking them in was a good thing.

Investors were rewarded owning TIPS as the housing bubble popped (assuming they did not sell during the initial deflationary panic). Rates were much higher before the pop than they are now. Locking them in was a good thing.

If you can tell me that things are about to pop yet again then I wouldn't want to sell my long-term TIPS. While there might be some short-term deflationary pain again, I think it would eventually be offset by even lower long-term real growth expectations.

Another explanation for what we are seeing might be that the market doesn't expect the same level of deflation we saw when oil crashed from the extreme of $145 to the extreme of $30. The average of $145 and $30 is $88. That's pretty much the price of oil right now. Maybe $88 is a relatively fair price, all things considered. Who knows?

Just opinions of course.