Inflation protected securities
Today was a big day to the downside for equities and normally in this situation I would put up a whole slew of charts showing all the technical levels that are violated. However, today I do not have the time for that and it is not too hard to figure out that all the charts of the indices are very broken. I did, however, make a trade in my Roth IRA and I want to talk about that.
I’ve been waiting for a selloff in bonds and it looks like the TNX may have peaked. Intermediate term and long term treasury bond funds seemed to have cracked the 200 MA but inflation protected securities have not. I’m betting on a bounce off of the 200. A big part of my Roth IRA is parked in cash yielding about 2% and I want to put some of it to use. I want to park my money in longer term, higher yielding bonds, but I do not like the inflation risk with conventional long bonds. Inflation protected securities seem to be a nice compromise. I am not saying that inflation protected securities is a great place to park your cash; I am saying that this decision was based purely on portfolio allocation and it just so happened that today seemed to be a good entry point. Sure, inflation protected securities may continue downward, but given the potential for upside as well as my current portfolio allocation, I am willing to give it a shot.
If you want to buy a mutual fund that buys inflation protected securities, consider the following:
1. For a bond fund, given that the average return of about 4-6% per year, costs really matter. Vanguard’s fund, VIPSX, has an expense ratio of 0.20%. Fidelity’s FINPX has an expense ratio of 0.45% and T Rowe Price’s PRIPX has an expense ratio of 0.50%.
2. Do not buy inflation protected securities outside of a tax advantaged account such as a IRA or a 401k. The tax code governing inflation protected securities is extremely unfavorable as well as complex. Don’t get burned by the tax and don’t waste your time reading the tax code.
3. Inflation protected securities are really a joke. The bond coupon for a inflation protected security is lower than that of a conventional bond, but the principal that interest is paid on increases at the rate of inflation determined by the CPI. But here’s the thing…everyone knows the CPI is understated. If the government wanted to rip you off as well as all the social security beneficiaries (and they are already doing that) they will just understate inflation through the CPI. Whatever you do, you probably will not beat inflation, but then again, it sure beats getting a 30% haircut in equities or getting burned by harder by inflation risk when holding a long term conventional bond.
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