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INFLATION-CUMMULATIVE INDEX
INFLATION-RATES OF CHANGE
TREASURY BILLS
Stability of principal value is the great virtue of
T-bills. But the price paid for this advantage is
the rate of return that is only marginally ahead
of inflation
The compound annual return from T-bills over
the 80-year period was 3.7% compared with
compound annual inflation of 3% over the
same period
What if the returns are adjusted for tax rate
Does it mean that T-bills are not worth
investing? Beware of money illusion while
investing in short term instruments
TREASURY BILLS
Period
Rate of
return
(average
annual)
Marginal
tax rate
Average
Inflation
rate
Effective
return
1979-1981
12.1%
30%
11.5
-3.5%
1982-1984
9.7%
30%
3.9
3.0%
TREASURY BILLS
Inflation may erode the purchasing power of
your money invested in short term instruments.
Example:
A widow aged 54 with 30-years of life
expectancy invests her money in 4% CD
interest rate. The amount available for
investment is Rs. 2500,000 With an average
inflation of 3% during the period how much her
wealth grow to at the end of the period if she
consumes the entire yearly interest income?
INFLATION RISK
COMPARATIVE BOND
PERFORMANCE
COMPARATIVE RETURNS
COMPARATIVE RETURNS
WHY PORTFOLIO
CUMULATIVE TOTAL
RETURN *
+29%
-47%
+34%
-22% **
/3 U.S. Stocks
TALMUD STRATEGY
/3 U.S. Bonds
/3 U.S. Stocks
+5% **
PORTFOLIO
One third allocated to fixed income
mitigates the volatility risk inherent in
two-thirds allocated to equity
investments.
Diversification across equity asset classes
with dissimilar patterns of returns mitigate
downside risk without resorting to
diversification into asset classes with
lower expected returns
Multiple-asset-class investing is a smart
strategy