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woodjom
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Just an IT Professional playing the Stock Market to bolster retirement portfolio. Current Portfolio: DHI, RSO, SO, NLY Play Money-Folio: N/A
  • Where 1+1 = 3, Financially Speaking 0 comments
    Dec 10, 2012 6:06 PM

    After doing some research to help diversify my portfolio, started reading about Treasury Bonds. I know, they are currently less popular than Satan, from the protestant bible.

    That being said, its still a consideration for future investing, even though right now they are currently devalued to the point of "WHY THE H*LL would i even think about it!".

    Why you should be thinking about them, Now?
    Well for one they have a 0% Fixed Rate & a .88% Inflation Rate (effective rate of: 1.76%), which got me thinking if a 0 flat rate & a less than 1% inflation rate can produce just under 2%, what combination of Flat + Inflation would produce 3% [ref: Composite Earning Rate]

    So is the run down of the math they use for calculating the effective roll over payments for a Treasury I-Bond:

    Target Effective Rate:
    F - Fixed Rate
    I - Inflation Rate
    ER - Effective Rate


    ER = F+(2*I)+(F*I)


    Which lead me to design a reverse algorithm given two constants (using same letter definitions) which I'm sure NO ONE HAS EVER DONE :)

    Target Inflation Rate:
    - based on ideal Fixed Rate + Target Effective Rate
    F = KNOWN, ER = KNOWN
    I = ?


    I = (ER - F)/(2 + F)


    Target Fixed Rate:
    - based on ideal Inflation Rate + Target Effective Rate
    I = KNOWN, ER = KNOWN
    F = ?


    F = (ER - 2I)/(1 + I)


    The rule of 72 for investing, pretty much states that 3% is the realistic sweet spot for investing. Some will argue 4% but 3% is more realistic and a minimum return rate for profitability and growth.

    While doing my research i found that the Fixed rate [F] bounces between 0-3% and Inflation Rate [I] bounces between 0-3%, as well. Although neither of them are tied to each other statistically speaking (since 1998), Fixed rate has been dropping since 1998 (bottoming out in 2010) while Inflation rate has gone up and down with a 4-6 cycle rotation.

    Now to the title of this article, "Where 1+1 = 3". Knowing i want to get at least a 3% return [ER] on my Treasury Bond, what Fixed Rate [F] + Inflation Rate [I] would i need to obtain this rate of return (or reinvestment, for I-bond). The answer surprisingly is F=1% & I=1% [although I is actually .9900].

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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