Category Archives: Investments

I Bonds and TIPS Not Recommended

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I am not recommending the people purchase I Bonds and TIPS anymore. As I continued to study the reason behind inflation and the depth of the corruption of the people who benefit from it, I realized that investing in that system is not a good idea.

My original idea was to hold the government accountable by making them pay me when they print money, but I realized that this is a foolish idea because they also create dollars out of thin air and have no reason to be transparent or honest with me about how things are managed.

I have come to believe that the best way to protect yourself from inflation is to not be a part of the paper currency system at all. That includes not investing in bonds that are delimited in those currencies. That means that I can’t logically justify purchasing and holding I Bonds or TIPS.

Here’s some video clips from a video that helped me see the money world differently.

I am currently using and promoting the purchase of gold and silver to get out of the system that creates inflation and steals our money. I am a member of the United Precious Metals Association (UPMA) that provides solutions that help make it much easer to use gold and silver as money. Here’s one of their videos:

Here’s a good place to get gold and silver

How Inflation Protected Mutual Funds Fail to Protect (Part Two)

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Binoculars on a ledge in the sunIn part one of this series, I explained that, although mutual funds make good investments, they actually introduce new risks to a saver because they  expose shareholders to market forces.  I brought up the problem that happens in the bond market when interest rates seem too low for a bond.  In this article, I expand on interest rate risk.  I explain that a bond holder can choose to ignore it, but a mutual fund shareholder has no choice but to be exposed to it.

Interest Rate Risk: A Risk for Investors

There are two reasons why a bond’s interest rate might seem low in the future to investors in the bond market. One reason would be that the Federal Reserve has decided to raise interest rates significantly during the bond’s life. A five percent bond might have seemed like a great investment 10 years ago, but if your checking account is now paying five percent, it’s a sign that times have really changed. All bonds, including inflation protected bonds, are subject to this kind of “interest rate risk.” It’s not really a risk, though. It’s missing out on a better opportunity. Your money is still all there and it will all be returned to you at the bond’s maturity. You will have received all the promised interest at that time. The only difference is that you could have possibly invested in a different way and done better during that same period of time. Notice that this is an investment problem, not a savings issue. If you were trying to protect your savings, then a bond would still have been effective at insuring your money. That’s why I believe that interest rate risk is a risk to opportunity investors, not to savers.

Inflation Risk: A Problem for Everyone

The second reason why a bond’s interest rate might seem low to investors in the future, is if our money experiences a loss in purchasing power. If minimum wage goes up to $50 an hour, a $1000 bond isn’t going to seem as valuable to us when it matures as it did when minimum wage was $10 per hour. That’s why we protect our savings from inflation. Typical bonds cannot protect us against this. In fact, they are highly exposed to it. That’s why we want to use inflation protected bonds for our long term savings instead of typical bonds. With all of this as background, let’s consider a very strange marketplace. Let’s consider the inflation protected bond market.

The Inflation Protected Bond Market

As I mentioned before, because mutual fund managers trade bonds before they mature, bond mutual funds are exposed to the bond market. This same thing is true for mutual funds that hold inflation protected bonds inside of them, so let’s consider what causes the market price of an inflation-protected bond to change.

It turns out that one of the worst things you can do to an inflation protected bond is to expose it to the market. Trying to predict the future value of an inflation protected bond is complicated and the market prices change in complex ways. Inflation protected bonds are affected by the possibility of a rise in interest rates, just like other bonds, but they tend to be a place of safety for people seeking to protect themselves from the possibility of inflation. If it is perceived that inflation is going up more than interest rates, then prices may go up in this market. If interest rates go up while inflation drops, it could mean that prices drop considerably.

Another thing that can cause prices to drop is when there are a lot of people leaving the bond market which causes the value of existing bonds to drop. It is not unusual for bonds to be priced lower than it cost to buy them, even when they have a large inflation adjustment.

A True Story

At the time that I write this, inflation protected bond funds have not fully recovered from a drop that the market experienced in 2013.  What this means is that if you were to have purchased shares in an inflation protected bond fund in 2013, you would have failed to keep up with inflation.  This is a clear demonstration of the risk that you take when you put your savings into an inflation protected bond fund.  This is proof that it may not keep up with inflation for certain time periods.  The market probably will recover at some point in time.  The only problem is that we don’t know when that is. That’s what I call timing risk and that’s not a part of my savings protection strategy.

Protection from the Market

By simply choosing to buy your own bonds and hold them until maturity, you escape the wild prices changes in the bond market. With a “buy and hold” strategy, you can avoid the fear that comes from watching market prices suddenly drop. When you hold your bonds until they mature, you will always receive the amount you expect to receive, adjusted for inflation.

Focusing on the Right Thing

If you have a 401k or an investment account at a brokerage, you probably have noticed that their tracking software focuses on market prices. When you are a buy and hold savings investor, this can be very distracting and misleading. In order to focus on the right things, you must train yourself to not pay attention to market prices since they don’t mean anything to you. We shouldn’t be too excited when market prices are up and we should not be worried when they are down.

That’s one of the reasons that I decided to make software that tracks the real value of our long-term savings. By focusing on the maturity value and not the current price, it puts our minds at ease, knowing that we are still on the right track.

How Inflation Protected Mutual Funds Fail to Protect (Part One)

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Egg Balanced on ForksInflation protected bonds are a great way to protect your long-term savings and it’s easy assume that inflation protected mutual funds or ETFs are just as good, but that’s actually not the case.   There’s increased risk to savers who hold bonds in a mutual fund.  In this two part series, I explain some of the risks and why I don’t recommend using funds for this purpose.

The Benefits of Mutual Funds

Mutual funds are pretty convenient to an investor.  They are relatively easy to buy and sell and are managed by professionals.  They allow us to leave our investments in highly qualified hands.

Mutual funds are also very well advertised.  You can find out a lot about them because they are in almost everyone’s 401k. Mutual funds can be a win-win situation for the novice investor and the experienced money manager.  The problem with mutual funds and ETF’s is that they are inherently more risky than bonds because they have added exposure to market forces.

Preservation vs. Opportunity Investments

When we are saving, we intend to preserve our money for a specific point in time.  Mutual funds help us take advantage of investment opportunities, but they don’t commit to pay at a point in time.  We are able to pick a good management team and pay them to pick the best time to buy and sell stocks and bonds, but they don’t promise that our money will be there when we need it.

As I mentioned in the article: “Stressed about Savings? Divide and Conquer!”  it’s very helpful to divide your money into two separate parts before you start.  Mutual funds can be a valuable part of the opportunity side of your investing, but too risky for the preservation side.

The Safety of Bonds

Bonds have traditionally been a much better place to store money for long term savings.  That’s because bonds are loans with a due date.  When a bond matures, you get all your money back.  I discuss this at length in the article: “Why Bonds are Smart for Savings”

The danger bonds have is the possibility that your money won’t be paid back to you at all.  We do have to consider who we are loaning our money to.  Risky bonds are not good investments for savings either.  You can diversify them, but they are still not good preservation tools because you may not get all your money back when you need it.  Good quality bonds, however, can be seen as a good method of saving for the long term as long as they are adjusted for inflation. That’s because you have a reasonable commitment that you will be paid on time.  Mutual funds, on the other hand, don’t come with a commitment to pay anything.

Bond Funds

As safe as bonds are, you would think that putting bonds into a mutual fund or an ETF would produce the best of both worlds, but that’s not the case.  A surprisingly risky set of things happen when you put bonds into a fund.

When you invest in a bond fund, you are not owed anything anymore!  When you own a bond directly, the bond issuers legally owe you money on a specific date.  In a mutual fund, the bond issuers owe the fund money, but they don’t owe you anything directly.  This is very important to understand.  If you intend to insure your savings, then it’s better to choose a method of savings that provides you a direct guarantee.

You might be wondering why a bond fund would not be able to pass along the bond issuer’s guarantee.  There are some valid reasons.

Funds are Mutual, Bonds are Not

It’s important to understand that a bond fund is owned by a group of people.  This creates a problem for savers.  In order for a bond to preserve your money, you must hold that bond until it matures.  There is no money available until a bond matures, unless you are willing to sell the bond at the current market rate.  Funds, on the other hand, allow shareholders the ability to buy and sell at any time.  If all of the other shareholders had the same intentions as you, it might work well to use a bond mutual fund, but that isn’t the case at all.  There are some shareholders that may actually sell their shares before the bonds in the fund mature.  If enough people do that at the same time, it could force the managers to sell some of the bonds at a rate that is lower than what was paid for them.  As you patiently hold your shares, the value in the fund would go down because of what others decide to do.

Bond Market Exposure

What this tells us is that by putting a bond into a fund, it exposes the fund to the bond market which can be as unreliable as the stock market.  If the bonds are always held to maturity, they have no exposure to the bond market and there is nothing to worry about.  I have found that bond funds usually follow bond market prices, not bond maturity values.

Let’s consider some of the risks the bond market exposes an investor to.  Remember that the bond market is just a place to buy and sell loans that haven’t been paid back yet.  The market is subject to what buyers and sellers perceive about the future.  Since these loans are dependent on an interest rate,  investors are exposed to the potential that the bond’s interest rate will seem small in the future compared to newer bonds and other investments that become available.  Since investors want to hold loans with the largest payout, the loans with the lower interest rates would lose market value.  They could even lose enough value that they temporarily fall below the original principal.  If a fund manager is forced to sell at that point to pay a mutual fund shareholder, it deeply hurts the fund.  Since you own a share of that fund, it hurts you too.  When you buy a bond directly, you can hold the bond and ignore the market.

Click here to go on to part two…