Riskless at Age 104

A few weeks ago, I indulged my inner financial engineer and bought a small amount of the 30-year TIPS at the annual February auction.

When it matures on February 15, 2053, I’ll be 104 years old. The American Academy of Actuaries and Society of Actuaries’ Longevity Illustrator tells me that the odds of either me or my spouse reaching that age are about 3%.

From the perspective of short-term risk, this security is not for the faint of heart; several days during the past year saw daily price changes in the longest TIPS of 4%. Furthermore, in bad states of the world, TIPS are notoriously illiquid; had the 30-year bond been available in 2008, it would have suffered a peak-to-trough price fall of nearly a third, as the yield, as judged by the extant 20-year bond, would have peaked at about 3.3%. (And, while in retrospect, long TIPS were a mouth-watering opportunity, at that moment there were far better bargains in equities.)

It’s a near certainty that my brand spanking new bond will suffer similar gyrations on the way to its maturity, at which point it will have become riskless in terms of real consumption, which is all any rational investor should care about.

A TIPS is risky in the short term and riskless in the long run, which is precisely the opposite of, and complementary to, a T-bill, which is riskless in the short term but, because of reinvestment rate volatility, risky in the long run.

As Buffett famously said, “Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”