Thursday, June 4, 2009

Bought 7 Shares of TIP

Update: Oh great. This guy thinks if there's theoretically one type of Treasury bond that the government can default on, it's TIPS.

~~~


I have on ongoing deal with my buddy. (He's co-worker #1 from my prior post.) We joke that we so suck at sports betting and investments, that we'll tell each other about our next bet/investment. For example, if I give my bookie $100 for the Lakers to win the next game, I need to warn him. Based upon my horrendous track record of ALWAYS betting on the wrong horse, he'll just "know" that the Magic will win.

Similarly, if I buy a stock, I need to tell him so he can AVOID that investment since more likely than not, it'll sink like a rock. (Conversely, if I sell, he'll buy since it'll suddenly sky-rocket for no reason.)

I consider today's post as a sort of public service because I bought 7 shares of TIP in my Roth IRA for $101.47/share (ACB $717.29, including $7 trading fee) yesterday. And sure to form, I've already lost money since it's currently worth $708.75.) But I'm not really concerned about the actual value of this ETF. I bought it because it pays out a monthly dividend.... usually.

TIP is the ticker symbol for the iShares ETF "that seeks results that correspond generally to the price and yield performance of the inflation-protected sector of the United States Treasury market as defined by the Barclays Capital U.S. TIPS index. The fund invests at least 90% of the assets in the inflation-protected bonds of its underlying index and at least 95% if the assets in U.S. government bonds. It may also invest up to 10% of assets in U.S. government bonds not included in the underlying index. The fund invests up to 5% of assets in repurchase agreements collateralized by U.S. government obligations and in cash and cash equivalents."

In March 2008, I bought 3 shares of this ETF in my taxable account at $110.31 (ACB $331.23 since no trading fee incurred). Although the ETF value is down 8.2%, it's paid out $18.83 in dividends. This reduced my loss to -2.61%.

Since March 2008, the ETF paid dividends of anywhere between $.33/share to $.93/share. (Note: It didn't pay any dividends during November '08 to March '09, during the whole market crash turmoil, though.) Had I researched this ETF more carefully, I would NOT have purchased it in my taxable account since the monthly dividends make this a tax inefficient investment. So now I've purchased 7 more shares in my Roth.

I don't expect this ETF will be volatile nor do I think it will have much of a downside or an upside. I think it will continue to trade within the narrow price channel of where it is now ($99-$102/share).

So why did I buy it?

1. I'm obsessed with finding an income stream in retirement just in case Social Security goes BK. (I know, I know. Some of you have already commented that some form of Social Security may still be there when I'm over 60. But I'm just hedging my bets. And you know how bad my bets are!) If I accrue TIP and other high-dividend yielding funds in my Roth over the years, I may have some tax-free monthly income that I can supplement my 401k.

2. My spidey senses tell me that inflation is on its way. Maybe not this year and maybe not even next. My private student loan APR has already creeped upwards slightly (3.451% in January to 3.598% in March). The loan rate will be re-setting in July and I'm guessing it'll be higher. Owning TIPS (Treasury Inflation Protected Securities) is one way to hedge against inflation since it pays interest adjusted for inflation, similar to the I-Bond. Unlike purchasing TIPS directly from the Treasury, TIP may not be the perfect way to hedge against inflation, but this is the only way that I know of that I can own TIPS in my Scottrade Roth.

I ask you: Do you think inflation is on its way? What are you doing to protect yourself?

7 comments:

Miss M said...

The ETF is probably easier to purchase, the treasury is such a PITA! The only inflation hedge I have is the I-bonds, and maybe one of my mutual funds (natural resources sector fund). For tax considerations I have a tax free bond fund, I was starting to get walloped with my taxable investing. I just started it within the last year so I can't talk about long term performance, but I like that it's tax free at both the federal and state level (it's a CA bond fund). I'm sure the TIPS are a decent addition to your portfolio, they aren't very risky.

chacha said...

I do think inflation is on it's way - though, I'm not sure how fast and furious it'll be though with the deflationary pressures of a moderate-severe recession.

I think that the rising gas prices affect everything, regardless of the fed's inflation calculations that supposedly exclude it. It is part of everything we buy that isn't produced 100% locally. Nevermind that the fed rate is so low, inflation of some sort is inevitable. The question is when and how much.

paranoidasteroid said...

I agree, inflation is going to get bad. There's not much I can do since it's completely outside my control, so my main focus is to live within my means now so when prices go up I'm not suddenly unable to make ends meet.

Actually, inflation might not be the worst thing. I know how to cut back on spending, and then maybe my bank accounts will actually start to earn money again!

Ms. MoneyChat said...

you know, i have to admit that i don't really think about inflation. perhaps i should because it has the power to silently erode your wealth. if i do have any hedges against it, it's completely accidental.

444 said...

Shtinkykat walks on the wild side.
;oD

The Lost Goat said...

lolz on your update - If the government defaults on TIPS, these 7 shares will be the least of your problems.

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