DINKS Buy Inflation Linked Bonds

by Dual Income No Kids on May 20, 2009 · 0 comments

Hi All,

Just a quick update. Today I pulled the trigger and bought about $3,300 of Vanguards Inflation Protected Securities Fund (VIPSX). Essentially VIPSX is Vanguard’s mutual fund that invests in inflation protected bonds. The fund holds about 20 billion in US treasury and agency products. Of these, the fund’s policy is to maintain 80% in inflation linked issues.

Its very conservative. Nearly 98% of the fund is invested in Treasury and US federal agency bonds at an average yield of 2.1%.

So, why would someone in their mid thirties invest in such an ultra-conservative fund? According to standard models, 30 somethings should be taking more risk. So why something so conservative. Well, several reasons:

1) Possible Future Inflation: It’s foolish to make predictions about the future, but persons interested in building wealth are at least obligated to try. Inflation is generally caused by the supply of money increasing faster than economic growth rates. All forecasts say that job losses will continue until the end of the year (Fed Res). These same forecasts also say that next year will likely be sluggish. Similarly, interest rates will probably remain low to stimulate the economy. So, this looks like a good combination for at least some inflation in the future. With this cash I’m not necesarily trying to build wealth as much as preserve it.

Also, the notion that some modest inflation is a good way out for the Federal deficit is coming into intellectual vogue (Bloomberg). That kind of thinking makes me want to run for the hills.

2) Diversification: Most of our money is in stocks and real estate (here). If there is anything the last nine months should have taught investors – its the importance of diversity. So, some bond holdings would help to spread things around a bit.

3) Capital protection: There has been a massive flight to less risky assets over the past few months, especially among high net worth investors (CG). Since VIPSX is invested in treasury bonds, its significantly less risky than other types of funds.

In contrast, the overall S&P 500 lost 40% last year. Since economics tends to run in cycles, it seems that the chances of losing money this year in the overall market are good. Who wants to run that kind of risk?

Good luck investing all. As always, please don’t hesitate to leave a comment or drop us a note!

-James

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