bostonbubble.com

[GenXer]

No, you didn't argue for gold - this came from an old discussion. Same goes for housing being a 'hedge' against inflation. Bad terminology. Use 'total return', and we'll speak the same language.

The problem with all illiquid investments is exactly that - illiquidity. Locking your money for 20 years is not exactly my best way of safeguarding principal. What if you have to sell early? Reminds me of the "I can sell my house whenever I need to " discussion.

If you really study bond returns, you will see exactly what my point is. You are assuming a one shot deal investment. It is not. You continuously put your money into such a bond (hopefully in a tax sheltered account). Now may not be the best of times, but that's market timing, and you can always dollar cost average. I think we are drawn into semantics here. Just think total return. A bond will beat inflation over the long term (or at least the one with the lowest volatility to withstand any type of stress). Liquidity is key here. Being locked into any investment over a couple of years is a bad idea. Since CPI is cooked, you can check that TIP returns do not beat the return of other types of bonds with similar maturities.

[admin]

[GenXer]

Ok, I grant you the volatility part. But here's a bombshell for you. Chances are, you can get the same returns buying CDs. I think this is easy to check. And you only have to buy maximum 5 year-long ones (and maybe you can even match the TIPs returns with a 3 year). Yes, taxes, but a 5-year will make up for it with more gains. This is easy to check. This is why I totally avoid locking your money up for longer than a 2 year CD (or 3 year if you really must).

Yes, in a retirement account this may make sense (nice of you to have a brokerage). It is true that bonds will be more volatile than bona-fide TIPs. But my argument is that you don't get anything by investing in a government cooked security (same as I-bonds). While historical returns are no argument, you are locking in your money for 20 years on a hunch that inflation will go up 10-20%. If only it was 100% sure bet! Thats a pretty risky bet to make. I stand by CDs.

And by the way, if you want to sell your TIPs early, you are indeed subjected to volatility.

[john p]

Guys, do you think we are going into a period of Growth or not? Will we get wage inflation?

This is the difference between stagflation and inflation.

I think if it is stagflation then you're worried about the declining dollar and if it is inflation you're worried about not being in the right vehicle during the upswing.

I have a feel that GenXer is talking dollar cost averaging because he sees growth and Admin is worried about the weakening US Dollar. Total guess...

[admin]

[GenXer]

Sames as TIPs for beating inflation. Its a crap shot, this is why I never try. I always go for total return (your ENTIRE portfolio). Why worry about a tiny part? Worry about your most important part. The biggest problem with your investment approach is that you want GROWTH in your retirement account, and TIPs aint it. You want a balanced portfolio with a relatively safe component (treasuries). You want to be able to rebalance (if you believe in the concept - I don't), but more importantly, you want something that moves opposite of stocks that can provide some growth when stocks are down. What are TIPs yielding right now? 1%? Intermediate treasuries are at 2.3%. An index bond fund is at 3.3%. More risky? Yes. But more inline with the growth part of a pre-tax portfolio. Its as if you were to invest in CDs in a taxable account (bad idea).

[GenXer]

Check out TIPs vs 5 year CDs. I think you may be pleasantly surprised. I used to have the data for 25 or so years. It could be a good lesson. The future will probably not repeat the past, but this at least will show that giving up liquidity and growth for ephemeral 'inflation' gain is not a good idea.

[GenXer]

Remember John_p, I don't predict

Whatever happens, happens. I'm in the market for a 2 year CD right now without opening new accounts. Rate is around 2% for existing issues. Lots of people bought almost the entire inventory of new issues.

Just like admin I believe in higher interest rates/inflation in the future, but there isn't much I'm doing about it. Actually, the only thing I'm doing is NOT committing over a period longer than 2 years. This may last 2 years or 5 years or 10 years, nobody knows (this = '0' inflation). Inflation is huge right now - this is why stocks are doing so well.

Cash is king. Its quite OK to keep a lot of it if you can afford it. Don't fall for arguments about inflation. Sometimes the solutions to 'inflation' issue are downright worse than having the cash around, so have to be vigilant.

I know a school that believes in TIPs. But this is a purely academic argument, and most people don't buy it. The argument is that all you ever need is TIPs and nothing else. I guess this was true if the rate was set by the market, but we all know how this goes.

[john p]

Inflation or Stagflation?

[GenXer]

Take your pick. Look at the track record of anybody making predictions. Cover all bases. But not without a good plan. I know plenty of people for whom diversification means putting a small amount into most funds offered in our 401k plans. If you are worried about a return on $10k over the next 20 years in a CD you are wasting your time. I worry about a return on $1M over 20 years (or the bulk of your portfolio). If you are doing 10% right, that still leaves the other 90%.

Nassim Taleb invests 90% into treasuries (not TIPs) and the rest in a highly leveraged out of the money options which are usually severely undervalued. He bleeds slowly (mostly because the options expire unexercised), but once in a while he makes a killing. I guess this works if you have a few mil saved in treasuries

But if you don't, back to (post modern) portfolio theory.

[john p]

I think the order of magnitude that we're talking here is the money for the down payment upwards of $70k to $100k, and I'd guess that buyers on the fence want to protect that because they have a short time horizon for buying and where is that safe place? I'm guessing that you see that to be CD's. Are you afraid of the tax-man doing anything unforseen in any of these likely vehicles? Also, because the economy is global and there are clear winners and losers, the old portfolio theory makes sense to some degree, but how about a portfolio of Index Funds? I wouldn't be surprised if this $8K down payment doesn't do the trick that they change the rules so people can take out more money from their 401k's for down payments. The Government can make whatever rules they want...

[admin]

[balor123]

If you're saving for a downpayment, then you really need like $150k+. 20% of $500k, the price of a starter home in a nice neighborhood, is $100k. Add in some buffer for fees and moving expenses and you're up to about $110k. Then consider that you need to keep reserves afterwards. If you're buying a $500k house, then maybe you make $125k (4x) so you need $50 - $75k reserves. So we're looking at a range of $150k - $200k. If you're one of those people making $150k - $250k, as it seems this board has a lot of, then these numbers will be even higher.

I understand how for these people these numbers are comfortable I just don't understand how for even 33% of the Greater Boston population (~1 million) these numbers are reachable even with stretching. They're big numbers! That's, what maybe 10-15 years of savings for someone making $100k, assuming they have no other debt? What also boggles my mind is that all these people are able to figure out how to save this money. You can stuff it into a single bank account now but a few years ago you had to spread it around due to FDIC limits. Then there's the zero interest rates. I can't imagine that most buyers are chasing reward checking accounts (which have big limits too).

Based on my observations from masslandrecords.com, it seems that people still, even today, aren't putting this kind of money aside. That explains how they're still buying these houses. Next question is, why do they think this is a good idea? I guess the average American is either less informed or has a greater tolerance for risk or sense of entitlement.

[balor123]

For the record, I'm sitting in a combination of reward checking accounts and online savings accounts right now. Using Dedham @ 3% for $50k right now but going to move to Danvers for 4%. Just moved to Capital One Savings through Costco for ~2% for the rest. So with that averaging 3%. How does that compare with i-bonds and TIPS? Also, Capital One has fantastic transfer times and limits. Link that with brokerage like Fidelity or Vanguard for fast access to money market funds if they start yielding more.

[admin]