This thread is a follow-up to my thread on investing for my dad's possible long-term health care needs. viewtopic.php?t=437659. Thanks to everyone who replied.
I have decided to invest 25% in equities, 15% in a money market, (about two years of expenses), and the remaining 60% in short-term treasuries.
I have two questions about the short-term treasuries. I am considering VTIP (Vanguard's short-term TIPS index) and VGSH (Vanguard's short-term treasury index).
Question 1. While reading more deeply about both, I learned about the inflation breakeven rate. I understand that it is the nominal yield of a specific treasury (e.g., 5 year) minus the yield of the TIPS of equal duration. Does this same math apply for funds like VTIP and VGSH?
As of this morning, the two funds had the following 30-day SEC yield:
VGSH: 4.26%
VTIP: 2.60%
Is the inflation breakeven rate 1.66% (4.26 - 2.60)? Both funds have similar average duration and average maturity:
VGSH: 1.9 year duration, 2.0 year maturity
VTIP: 2.5 year duration, 2.6 year maturity
Does this mean that if inflation 1.66% or higher over at least two years that VTIP should have the equal or better overall return?
Question 2. For treasuries, it seems some people are comfortable holding mostly TIPS but others prefer to have a 50/50 mix of TIPS and nominal treasuries, whether mutual funds or treasury bills.
Is the idea of (say) 50% nominal treasuries in combination with TIPS simply to hedge against the possibility that inflation will be lower than the breakeven inflation rate?
At this point, for my dad, I'm leaning towards all VTIP for the treasuries. I think the protection against inflation is more valuable to me than earning slightly more if inflation is very low over the next several years. I want to be sure I am not missing something that I also need to think about before making the final investment decisions.
Thank you everyone.
3cat
I have decided to invest 25% in equities, 15% in a money market, (about two years of expenses), and the remaining 60% in short-term treasuries.
I have two questions about the short-term treasuries. I am considering VTIP (Vanguard's short-term TIPS index) and VGSH (Vanguard's short-term treasury index).
Question 1. While reading more deeply about both, I learned about the inflation breakeven rate. I understand that it is the nominal yield of a specific treasury (e.g., 5 year) minus the yield of the TIPS of equal duration. Does this same math apply for funds like VTIP and VGSH?
As of this morning, the two funds had the following 30-day SEC yield:
VGSH: 4.26%
VTIP: 2.60%
Is the inflation breakeven rate 1.66% (4.26 - 2.60)? Both funds have similar average duration and average maturity:
VGSH: 1.9 year duration, 2.0 year maturity
VTIP: 2.5 year duration, 2.6 year maturity
Does this mean that if inflation 1.66% or higher over at least two years that VTIP should have the equal or better overall return?
Question 2. For treasuries, it seems some people are comfortable holding mostly TIPS but others prefer to have a 50/50 mix of TIPS and nominal treasuries, whether mutual funds or treasury bills.
Is the idea of (say) 50% nominal treasuries in combination with TIPS simply to hedge against the possibility that inflation will be lower than the breakeven inflation rate?
At this point, for my dad, I'm leaning towards all VTIP for the treasuries. I think the protection against inflation is more valuable to me than earning slightly more if inflation is very low over the next several years. I want to be sure I am not missing something that I also need to think about before making the final investment decisions.
Thank you everyone.
3cat
Statistics: Posted by 3cat — Wed Aug 21, 2024 7:30 am — Replies 8 — Views 339