Quote of the day

Loading Quotes...

Bodie on TIPS

Some time back, I wrote a book review on my main site for Zvi Bodie’s “Worry Free Investing”. I’ve recently been drawn into an online conversation asking about this author’s strategy of investing all of one’s portfolio in TIPS (Treasury-Inflation Protected Securities).
When Professor Bodie wrote his book, TIPS had a real rate of 3% (TIPS have two components – they are tied to the CPI and will rise in value tied to that rate, and also have a ‘real yield’ which is adjusted every 6 months.) and the spreadsheet he offers advises a saving rate of 21% with an eye toward replacing 70% of one’s pre-retirement income using TIPS. Now, as we move to the present, we find TIPS sporting a real yield of 1.2% which, when entered in Bodie’s spreadsheet, now councils us to save at a rate of 34%! As I state in my book review, this hardly seems ‘worry-free’ to me, as someone who was on the plan at 21% now needs to bump his savings by over 50% or miss his target retirement goals by as much.
I also need to mention that the entire return is taxable. If one is in the 25% bracket, 1.05% of that total 4.2% is lost to taxes and leaves a real return of only .15%. To be fair, he does state that these securities be held in tax-favored accounts. I find it curious that in a recent Business Week interview Prof. Bodie maintains his TIPS focus, although he does suggest an S&P call strategy which presumably will juice yields a bit. Such a strategy is not for the feint of heart.
I sent him a question, through his Worry Free Investing Site, I don’t know if he monitors the blog there, or will offer a reply.
As an alternative to this strategy, I’d offer DVY, the iShares Dow Select Dividend ETF which currently yields near 3.7%. That dividend is taxed at favorable rates, 0% if you are in the 10% or 15% bracket and 15% if higher. So 3.15% worst case. I have every reason to believe the stocks in this ETF will keep up with inflation, and for this strategy, that’s all we are asking of it.

  • eric January 31, 2008, 12:00 pm

    “I have every reason to believe the stocks in this ETF will keep up with inflation”

    Really!? Please visit for a rude awakening:


    Expect the yield on DVY to spike before falling as earnings drop and stock prices follow.

    An on the topic of inflation: as someone who buys groceries, gasoline, and medical services, I’m sure you’re already aware of the irrelevance of CPI.

    JOE, I understand you are trying to provide basic advice to basic LT investors. But these are “interesting” times as the Chinese proverb cautions.

Leave a Comment