Another example of financial prescience, bad timing: I was convinced of the inevitability of inflation a few years ago, and moved our non-retirement bond holdings into TIPS (essentially inflation protected bonds) in May '05. TIPS are considered extremely conservative, and offer a lower rate of return than pretty much all other bonds, but I was sure that the inflation-indexed aspect would cause it to outperform.

Instead, it consistently lagged behind all other bond funds, sometimes even underperforming our money market fund. I wasn't losing anything, but I was missing out. The last straw was in Dec. '06, when it didn't even issue a quarterly dividend, which almost never happens. A month later, tired of its terrible performance, I exchanged our holdings into a different (GSE-free) bond fund.

Oops. The inflation index on which it was based started ticking up soon after. As of today, the one year returns on that same TIPS fund is 15.41%, which is crazy for something that's essentially no-risk. I had the right idea. Just bad timing.

The problem I think is that the inflation index doesn't include what was the primary conduit of inflation at the time - housing prices. It used rental prices instead, which were largely flat, while housing prices were going through the roof (a discrepancy that's a huge warning sign). So the indexes didn't reflect what was going on. It was reflected in precious metals, but that sector is highly speculative, so it's not a pure inflation hedge, and I was hesitant at the time to go there. I still wouldn't put our main savings there, but with my playground account, I've been long Kinross gold for a while and that's one move that's paid off.

Only Jibin read this.