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No. of Recommendations: 1
D40 wrote:
My purpose is to try to make some money, but also NOT TO LOSE money. I guess I just don't see how the bond index fund can do much better than the TIPS since interest rates can only go to ZERO and we ain't too far from there right now. If I bot a 30 year TIPS now, I'd get the 2.5% coupon guaranteed, and if I held to maturity I'd have no risk of deflation causing loss of principal. Am I missing something here?If I bot a 30 year TIPS now, I'd get the 2.5% coupon guaranteed, and if I held to maturity I'd have no risk of deflation causing loss of principal. Am I missing something here?

Is the deflation a typo?

Technically, interest rates can only go to zero. But deflation can go below zero (see Japan). During periods of deflation, if you put your cash under your bed in a box, it will be worth more at the end of the year by the amount of the deflation rate because you can buy more bread with the same dollar.

I think you're assuming too much that we are about to go into an inflationary cycle. We may and then again we may not; we may see a long and protracted deflationary period. Who knows? IMHO, you are doing "market timing" with your FI portfolio.

The purpose of my 25% (six years of living expenses) in FI is to serve as a buffer to smooth out my annual monthly income which is driven by selling 4% of the value of my stock portfolio and buying a new 2y CD with the procedes. I don't go further out than a 2y CD.

At the begining of the year, my 25% in FI looks like this:
8% in MMF
8% in 2y CDs maturing in 1 year
8% in 2y CDs maturing in 2 years

I still believe that using the above structure (2 years of living expenses in the MMF) keeps me protected from unexpected expenses AND more than keeps up with inflation (and if there's deflation I'm making serious money). But most of all, it serves as a great retirement income buffer by smoothing out my annual monthly draws.
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