Okay, I can understand that, but... aren't bonds supposed to be less volatile than stocks and aren't treasuries the most secure of all bonds because they're backed by the U.S. government? If they are as volatile as stocks, why own them when the upside isn't nearly as good as with stock funds? I guess I just don't understand the underlying principles with bonds. I thought that the principal invested in treasuries would not fluctuate as much as these are doing. I only have 20% of my portfolio there and that's the only bonds I own. To diversify my portfolio, is TIPS the best place to  have the bond portion? Does anyone have a better recommendation. I have roughly 1 million in tax advantaged accounts. This is split 38% U.S. total market, 37% total international market, 20% TIPS, and 5% Energy Index. I am 11 years from retirement. I know concensus says as I move closer to retirement to have more caution, but every time I've ever put money in a bond fund, I loose money. I'm interested in any thoughts anyone has on this; the TIPs, the allocation, anything at all.

Bonds tend to be less volatile than stocks over the long term.  For example, during the past 5 year the annualized standard deviation of the monthly return of the Vanguard TIPS fund has been 5.79% while that of the Vanguard Total Stock Market Index fund has been 9.66%.

If you think that the recent 3% decrease in the price of 10-year TIPS has been bad, just hope that the market yield to maturity does not increase to about the average for TIPS for about the past 5 years.  That would result in about another 3% decrease in the price.

If your tax advantaged accounts have a brokerage option, consider buying 10-year TIPS at the next auction in mid-July.  Except for the TIPS fund in the fund-of-funds in my 401(k), the TIPS in my portfolio were bought at action, and I plan to hold them until maturity.  Because I don't plan to sell before maturity, I don't worry the current market price.  At maturity, I will get the CPI-U indexed principal value.

Tortoise, if you are looking for a vehicle which provides you protects the purchasing power of your money, I would suggest you go to the Morningstar "Tool" tab and the "Compare funds" tool.   Punch in the tickers: 1) of your Vanguard Tips fund (VIPSX, I believe) and a couple other funds, 2) PCRDX.  then select the "Performance" view which shows returns over the past 1, 3, and 5 years.

Draw your own conclusions about which vehicle really protects against price changes in food, fuel and other costs of living.

Would also recommend you google "hedonic adjustments" -- these are adjustment which the Govt uses to reduce the CPI number -- and hence size of the "inflation adjustment" credited to your TIPs.      You can also use plain, common sense:  energy, food, healthcare, lodging  -- these costs comprise the great bulk of consumer purchases. All are up sharply since 2000. Yet the CPI continually shows low single-digit increases.    TIPs holders are not being fairly compensated for their capital.

"Inflation-protection bonds" are there to protect the issuer (the Govt) from high costs of borrowing brought about by inflation.  THe investors are NOT protected.

All JMO.

Good luck. 

 

"Inflation-protection bonds" are there to protect the issuer (the Govt) from high costs of borrowing brought about by inflation.  THe investors are NOT protected."

 At least with US Treasuries/TIPS you are getting the psychic income of the country being indebted to you because it cannot live within its means!

tortoise:

I have recently moved money into the Vanguard TIPS fund. After reading what I can find on TIPS, it was my understanding that the principal value invested would increase when inflation was up and could decrease in times of deflation. I've been in for less than a month, deflation is certainly not happening, but I'm down 6000 bucks. I obviously missed something. Can someone please explain how this works? I know that the "inflation adjustment" is made every 6 months, but I need to understand how the principal can go down that much, in that short a time. I've always been totally invested in stock and never been much on bonds, but as I get closer to retirement I thought moving a portion of my IRA into bonds would be smart. It's not looking too smart right now.

If you bought in early March, you bought high during the "flight to quality" when everyone freaked out about the safety of investments and scrambled to get treasuries.  Not a good time to buy, IMO.

There really is something to this market timing thing despite what the diehards claim (even when it comes to bonds).  If you engage in your "asset allocation rebalancing" as the diehards call it when the particular asset class is overvalued, you can get burned no matter what the asset class is (even bonds).

http://www.bloomberg.com/

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?pid=

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Bond Investors Turn Bearish Amid Commodity Inflation (Update1)

By Daniel Kruger

April 16 (Bloomberg) -- Government bonds will decline in the Americas, Asia and Europe over the next six months as record prices for everything from oil to rice spark faster inflation, a survey of Bloomberg users showed.

Treasuries, German bunds, Brazilian notes and Hong Kong bonds may depreciate as yields increase, according to the monthly Bloomberg Professional Global Confidence Index, which questioned 5,905 users from Rio de Janeiro to Frankfurt to Los Angeles. Users in Switzerland, the only ones to forecast last month a rise in 10-year yields, became even more bearish.

 
Content removed for violation of Terms of Use (Copyright Content) - M*_Casey

Thank you all. I think I understand a bit better now. So, what do you put money in to balance your portfolio against principal loss? Are bonds still the answer? I used to think that the bond and stock market moved in opposite directions. What I'm seeing is that bonds frequently move down at the same time stocks do, just not nessarily as wide on the swings. Are bonds still the best bet to assure safety of principal? What about at retirement, when you need to move more to safety and income, still bonds?

tortoise:

Thank you all. I think I understand a bit better now. So, what do you put money in to balance your portfolio against principal loss? Are bonds still the answer? I used to think that the bond and stock market moved in opposite directions. What I'm seeing is that bonds frequently move down at the same time stocks do, just not nessarily as wide on the swings. Are bonds still the best bet to assure safety of principal? What about at retirement, when you need to move more to safety and income, still bonds?

Laddered CDs can be good options, but I wouldn't get into them now.  At some point interest rates will rise and then a laddered CD may make sense

Munis in a taxable account are worth looking into depending on your tax rate.

Money market funds for your emergency funds is usually the best option.

Tortise, bond funds have two components. One is price flucuation and the other is yield. The price does change daily, that is the NAV.. Vipsx and other tips funds have performed fantastically over the last 1 plus year. So buying recently had you buying high, so to speak. the reason I would guess you lose when you buy bonds is that you see a good past performance and then buy.. I would simply diversify my bond holdings into short term bond funds which have very little price movement but less yield. and cd's and money markets along with a general intermediate bond index fopr the fixed portion of your portfolio. Also I would suggest only about 20% of your bond holdings be in TIPS. Don't be concerned by shorter marker movements. Richard

Tortise, also short term bond funds have less corrolation with the stock market.They provide more safety in nav  movement.

Here is a good article on Bill Miller's thoughts on how overvalued treasuries are.  He is a good guy to listen to when it comes to bonds.

http://www.reuters.com/article/bondsNews/idUSN0442004820080404