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Sunday, November 20, 2011

My first ETF purchase

My emergency cash reserve is too conservative. Given the inflation rate vs interest rate, the indirect loss of purchase power is unacceptable. http://www.bls.gov/news.release/cpi.nr0.htm

I split the cash reserve into 2 parts. The first part remains in an easy to access checking account with ACH transfer setup to quick access. The second part will go to my investment account. I plan to purchase SCHP. The ETF based on U.S. TIPS (Treasury Inflation Protected Securities).

Here are some interesting articles:
1) ETF vs actual bonds: http://explorebonds.com/tips-mutual-fund-vs-individual-tips-bonds
2) perspective on last 3 month of bond activity: http://seekingalpha.com/article/296138-the-changing-landscape-for-treasury-securities-and-inflationary-expectations

Why from Schwab? They have the lowest expense ratio:
IPE       SPDR Barclays Capital TIPS                    0.18%
LTPZ PIMCO 15+ Year US TIPS Index ETF 0.20%
SCHP Schwab U.S. TIPS ETF                            0.14%
STIP iShares Barclays 0-5 Year TIPS Bond 0.20%
STPZ PIMCO 1-5 Year US TIPS Index ETF 0.20%
TDTF FlexShares iBoxx 5Yr Target Dur TIPS ETF 0.23%
TDTT FlexShares iBoxx 3Yr Target Dur TIPS ETF 0.23%
TIP    iShares Barclays TIPS Bond                       0.20%
TIPZ PIMCO Broad U.S. TIPS Index ETF 0.20%

Why this might be a good decision...
1) Split emergency cash into 2 parts offers a better compromise between accessibility and protection
2) ETFs are easy to trade so I still have good access to the fund in case of emergency. 
3) TIPS offers a better protection against inflation and still conservative
4) Good diversification strategy. I don't have anything like this in my portfolio. This move would increase the diversity of my assets.  

Why this might be a bad decision...
1) This is an unexplored area for me. My first ETF purchase and first TIPS purchase. I don't have any sense on the tax implication or what kind of risk i'm taking on. This is the risk of the unknown rather than any specific or actual risk. 
2) Why not other ETF or bond? Why not gold or any other the investment options? My decision to investigate ETF and TIPS is predicated on my fear of inflation. In a sense my decision was already pre-made based on my fears. So am I really making the best possible decision? This is risk of sub-optimal decision.
3) Is this a part of herd thinking? Recent ramp up in the bond and treasury market seems to indicate that everyone is thinking along the same lines. Am I running of risk of entering the market at a particularly bad time and destined see the value crash right after purchase?

These questions always goes to the core of the blog...
I am the sum of my decisions and the intended and unintended consequence of the decisions







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