Help: Are (TIPS) inflation protected treasuries a good investment?

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rci2145's picture
rci2145
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Joined: Jan 3 2009
Posts: 24
Help: Are (TIPS) inflation protected treasuries a good investment?

I know there is a bond bubble and regular fixed principal bonds look like a bad idea right now, but what about TIPS?  If foreigners lose their taste (which the will) for U.S. debt, will the value of funds tracking the value of TIPS bonds go down? 

My Dad is thinking of putting most of his 401k into a Vanguard fund that tracks the value of them and we can't figure out if this is a good idea or not.  We see inflation coming but if nobody  want government debt, will the fund value go down?  If so, what else can he put his 401k money into if stocks and dollars are on their way down?

bearing01's picture
bearing01
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Joined: Sep 7 2008
Posts: 153
Re: Help: Are (TIPS) inflation protected treasuries a good ...

If you did the crash course then you would have learned about how the gov't creates fuzzy numbers when deriving the CPI and therefore their claim of inflation rate.  Hedonics and Substitution allow them to fudge the numbers.  Their fuzzy numbers will index the rate of return on the TIPS bonds.  So, don't expect the bond yield to truely track the real rate of inflation.  Right now the gov't numbers claim we have no inflation (in their definition of inflation).  However, my magazine subscription price just went up.  Prices on many new non-impaired goods or goods without surplus have not gone down in price, but rather gone up. 

I personally would avoid TIPS. I would avoid (and have been avoiding) all US treasuries right now.  But that's me.  I have 25 years before I retire.  My effort right now is to get out of the US dollar.  Buying US treasuries secures you into the dollar.

rci2145's picture
rci2145
Status: Member (Offline)
Joined: Jan 3 2009
Posts: 24
Re: Help: Are (TIPS) inflation protected treasuries a good ...

Thanks for your response.  I don't disagree with what you said.  But you can think of it this way, since the government manipulates CPI low, it has created a lower price for TIPS at the present time and hence, an artificially good deal.  So if you buy a fund now, it will be cheap since CPI has been going lower.

The real reason he is looking at TIPS is that in a 401k plan, there aren't many options.  Basically every investment he can put his money into is denominated in dollars.  He can put his money in a money market account, stocks, or bonds.  At least with TIPS, there should be some protection against inflation.  My question is, will TIPS fall regardless due to distaste for U.S. debt?  Also, if you can think of any other investment in a 401k that is safer than TIPS, let me know.

scepticus's picture
scepticus
Status: Silver Member (Offline)
Joined: Jan 16 2009
Posts: 129
Re: Help: Are (TIPS) inflation protected treasuries a good ...

Can you get a self-owned 401K? Here in the UK we call our 401K's 'pension plans'. In the UK you can get a sipp, which stands for 'self invested personal pension plan. Depending on the sipp provider, you can invest your retirement savings in any traded stock inlcuding ETFs, gold (via something like www.bullionvault.com), a vast range of managed funds and also in cash.

I'm sure you must have something similar in the US. What about this link:

http://www.401k-easy.com/investments/

In the UK all I had to do was to transfer my savings from my 'corporate scheme' into a self invested scheme. Now, I had to pay a penalty for withdrawing my funds, but it was not too much. The new freedom I have to make my own choices will be worthwhile.

However beware this transfer could take some time, during which you may be vulnerable to market movements or further weakening of the dollar.

Take this advice at your own risk of couse - I have no idea what the actual situation and regulations in the US are.

pinecarr's picture
pinecarr
Status: Diamond Member (Offline)
Joined: Apr 13 2008
Posts: 2236
Re: Help: Are (TIPS) inflation protected treasuries a good ...

bearing01, I have to agree with scepticus.  I would hate to see your dad make the same mistake a lot of us made, which was to get our retirement savings locked into US dollar-denominated assets.  I am locked into that kind of situation now, and even weigh the idea of quitting my job just to be able to get my retirement savings out of a dollar-based investment (which I don't have confidence in) to something else, like a gold or precious-metals based 401k.  I am really afraid I am going to watch years of my working life's retirement savings evaporate before my eyes as the dollar gets devalued by all the dollars being pumped into the system.  And by the loss of faith in our currency by those who buy our debt.  So please, see if you have other options open to you!

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