Letters to the Editor
To the Editors:
“An Investor’s Guide to Inflation-Protected Securities” by Annette Thau, in the May 2007 AAII Journal, is an excellent review of TIPS and Series I Savings Bonds. It highlights some important aspects of these securities that are not immediately obvious; however, there are several points that either were not made, or were not made clearly.
The Treasury Direct program cannot be used to purchase Treasury Inflation-Protected Securities (TIPS) for an IRA or other retirement account. This could make TIPS-based mutual funds the most attractive option for investing small amounts (a few thousand dollars at a time) in TIPS for a retirement account. Otherwise a brokerage account is required, and the up-front commissions can be a significant fraction of the transaction (e.g., $25 to $50 per purchase). If you have a brokerage account that charges very low (or no) fees for Treasury auction transactions, or you are buying bonds in larger amounts, then buying and holding individual securities to maturity is likely the better option.
While I Bonds have the advantages described, their interest rate, at least recently, has been consistently lower (by about 1%) than that of TIPS sold at auction. This should be taken into account when weighing the relative merits of the different securities.
While mention is made of the paper form of I Bonds, it is not made clear that these are mainly purchased through banks. Paper I Bonds are convenient for purchasing small denominations for children, as gifts, etc. Considering the volatility problems associated with TIPS-based mutual funds, it would seem logical that target-maturity funds of TIPS, which would have little or no price-fluctuation risk if held to the liquidation of the fund, would be a popular product for retirement accounts and Education Savings Accounts. However, I do not know of any such funds that are offered at
To the Editors:
The Offbeat Offerings column, “Brokered Certificates of Deposit,” by Cara Scatizzi in the May 2007 issue was very informative. However, it neglected to warn readers of possible tax implications. Nine years ago I bought a brokered CD paying 7% or 7.5% interest that was called OID (original issue discount) on my 1099. I never received this yearly OID as cash or credit on my statements, yet I had to pay taxes yearly for eight years until maturity. At maturity, I got my original investment back, but nothing else. To recoup my yearly OID losses, I had to declare a loss on my tax return. Please warn unsuspecting investors against this type of CD.
To the Editors:
I have a couple comments regarding “The Presidential Term: Is the Third Year the Charm?” in the June 2007 Briefly Noted column.
It may be a new adventure for ordained fundamentalists to learn about the four-year presidential cycle, but those of us who employ technical analysis have known about the importance of this cycle for many years.
The well-known “Stock Trader’s Almanac,” written and published annually by Yale Hirsch and Jeffrey Hirsch, has long included the presidential election/stock market cycle, beginning in 1833, among its reviews.
The pre-election year dominates, followed in turn by the election year, mid-term year and post-election year. All add up to more positives than negatives every year, on average, with pre-election year returns proving to be significantly better than post-election year returns.
While there is quite a bit of variability from year to year, superior pre-election year returns have been more frequent and consistent than returns in the other years, with double-digit returns dominating since 1948.
My old Colby and Myers book, “The Encyclopedia of Technical Market Indicators,” published back in 1988, has three pages devoted to the presidential election cycle.
Published studies have shown that, for example, investing for the two-year period before the election, then switching to Treasury bills during the remaining two years produced much better returns than the buy-and-hold strategy.