POLL: How did you overcome the fear of tracking error?

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Henryinroad
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Re: POLL: How did you overcome the fear of tracking error?

Post by Henryinroad » Sun Aug 16, 2020 7:50 am

Tyler wrote:
Fri Aug 14, 2020 10:27 pm
Henryinroad wrote:
Fri Aug 14, 2020 9:59 pm
The problem is, what happened in the past wont necessarily happen in future. The backtesting result you and I see on the computer screen does not take sth in account: negative interest rate
That's only partially true. If you look at real rates rather than nominal rates, the low rates today are not that unusual and negative real rates have been much deeper in the past than they are now.


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In fact negative real rates are one of the situations where gold tends to shine. So I'd argue that the PP is better prepared for this situation than almost any traditional portfolio of stocks and bonds.

Along that line, one way to overcome the fear of a portfolio is to appreciate the strength of the team over the daily performance of any one player. A well-built portfolio expects the worst and thrives in adversity.
Hi Tyler, want to say I just came across your web many members mentioned and have huge respect to your web that puts everything together, like, in explaining the convexity concept of bond. Its truly nice to have an objective point of view instead of one-sided argument in favor or against TLT.

Though I have one question:
1) For longer duration bonds, once the interest rate is getting lower and negative , their values can appreciate at a much greater pace, and act as a nice protection to the portfolio.

But one concern raised by some investors like Ray Dalio is more about how low the yield could go, here's the extract of the article from https://www.bridgewater.com/grappling-with-the-new-reality-of-zero-bond-yields-virtually-everywhere:

While one can’t say for sure how low yields could go, the obvious limitation is that at a certain level, cash hoarding becomes a more attractive alternative. Given the frictions between the central bank policy rate and the rates facing other borrowers and lenders (we would guess around -1%), policy rates would be unlikely to trigger a move to cash in most countries. Below that point, it becomes less clear. And at least for now, central bankers across the world have expressed growing hesitancy about further use of negative rates as a policy tool, in particular focusing on the potential adverse effects for the banking system, which could weaken the efficacy of such policies.

My confused thought:

If the yield still haven't reached -1% and -1% is the lowest bottom yield can go:
We could still expect to see an asymmetrical potential reward (biased towards the upside) in TLT, and its worth holding some to hedge against risk of further interest reduction.

However, if the yield already reached the -1% and -1% is the lowest bottom yield can go:
It bascially means all potential reward are fully exhausted, and TLT basically couldn't have any asymmetrical potential rewards?

What are your point of view with regard to the lowest limit of the yield?

2) Aside from GOLD, do you think TIPs are good diversifiers we could consider as inflation-hedge assets?
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mathjak107
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Re: POLL: How did you overcome the fear of tracking error?

Post by mathjak107 » Sun Aug 16, 2020 10:12 am

the cpi is really not reflective of anyone's lifestyle . it merely checks the temperature of the economy over the 1500 mini economies that we consist of .

it is a price index and not a cost of living index which takes in a whole lot more in factors .

nominal rates are much more meaningful since a 4% interest rate ina 5% cpi is not going to be reflective as negative for everyone .


for the last 5 years we had quite a bit drop in our lives even though the cpi didn't so we have not taken our first inflation raise yet in retirement 5 years later .

so the effect of nominal rates can be a lot different than real returns on our lives
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Re: POLL: How did you overcome the fear of tracking error?

Post by glennds » Sun Aug 16, 2020 1:19 pm

mathjak107 wrote:
Sun Aug 16, 2020 10:12 am
the cpi is really not reflective of anyone's lifestyle . it merely checks the temperature of the economy over the 1500 mini economies that we consist of .

it is a price index and not a cost of living index which takes in a whole lot more in factors .

nominal rates are much more meaningful since a 4% interest rate ina 5% cpi is not going to be reflective as negative for everyone .


for the last 5 years we had quite a bit drop in our lives even though the cpi didn't so we have not taken our first inflation raise yet in retirement 5 years later .

so the effect of nominal rates can be a lot different than real returns on our lives
So then based on that logic, the calculation of a real return is highly personal?

I can see what you're saying in terms of consumer spending. But I would say that there has been a meaningful amount of asset price inflation in terms of what your dollar can buy. I'm thinking about property, rent, travel, even cars whether leased or owned.
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Re: POLL: How did you overcome the fear of tracking error?

Post by mathjak107 » Sun Aug 16, 2020 2:05 pm

a cost of living index is unique to us ...

a cost of living index takes in to consideration the price change , plus how many times we buy it . which is a huge factor . we all buy things different amounts of time .

plus we have to adjust for 'quality too. higher priced goods tend to see bigger price increases but last a lot longer .

i spent 1k in 1993 on a north face shell , ski pants and liner ... i am still wearing them decades later .

plus we all tend to sub out of class where as a price index can't .


if i cant get the ice cream i like on sale i will buy a jar of grape fruit instead .

so a cost of living index is different than just price changes on goods and services we dont use much of .

seniors tend to see a lot less inflation than those raising a family .

we tend to spend as seniors in a smile shape when you have discretionary spending . we spend more in the early go go years , less in the slow go years , until health care ramps up in the no go years . what we no longer buy and do , tends to offset price increases in what we continue to do and buy .
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Re: POLL: How did you overcome the fear of tracking error?

Post by Kriegsspiel » Sun Aug 16, 2020 4:10 pm

glennds wrote:
Sun Aug 16, 2020 1:19 pm
So then based on that logic, the calculation of a real return is highly personal?

I can see what you're saying in terms of consumer spending. But I would say that there has been a meaningful amount of asset price inflation in terms of what your dollar can buy. I'm thinking about property, rent, travel, even cars whether leased or owned.
We can all use the same returns calculations to see what asset did better at what time, but I think mathjak has made the point before that the returns we individually get are going to be different too. Like, when the big gold decline happened back in 2013, I wasn't personally affected too much because I just didn't own that much gold.

I think CPIs are the same deal. Due to technological advances, more efficient commerce, and personally becoming more skillful/mindful in buying things over the years, I am getting some things for cheaper than I used to.
  • I looked at the pricing at my old apartment complex in Texas, and it's gone up 128% in the 6 years since I lived there. I'm now living in a house with a garage and a yard for less expense than that apartment 6 years ago.
  • My internet connection costs the same as it did back then but it's far faster now.
  • Food costs have been pretty stable for me. I have price records of my protein powder that I'd gotten off Amazon for the past 10 years, and the price is basically unchanged (I got a years supply of the same stuff from Costco for 61% of what I'd been buying it for).
  • I bought beds and mattresses for about 1/3 of what I spent about 8 years ago. Different materials and mattress type, I don't know if they even existed back then.
  • Gasoline has been crazy-cheap, as we all know
  • The quality of the used car market is ever-increasing, and the prices are still pretty low (although from what I've read, the Cash For Clunkers program was artificially propping up the cost of used cars for most of my adult life).
  • I hadn't played any computer games more recent than 2005 or so, so I got a fairly cheap computer, and I've picked up a few older games on sale. Riding years behind the technology wave lets you save lots of money.
  • I did the same thing with smartphones, using old iPhones for years while the technology advanced by leaps and bounds. My "budget phone" Moto G6 still feels absurdly amazing to me.
One thing that is currently much more expensive is ammunition. I bought a lot of it when it was cheaper, and I'm rationing my range time while prices are this high. If I was choosing to expose myself to the areas that have seen high inflation (like rent/real estate in a lot of cities or college tuition) I might be a little miffed about it, but the information on how to extract more value out of your money is still freely available to everybody.
I hated all the things I had toiled for under the sun, because I must leave them to the one who comes after me. Who knows whether that person will be wise or foolish? Yet they will have control over all the fruit of my toil into which I have poured my effort and skill under the sun. . . Nothing is better for a man than to eat and drink and enjoy his work.
- Ecclesiastes
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Re: POLL: How did you overcome the fear of tracking error?

Post by glennds » Sun Aug 16, 2020 6:03 pm

mathjak107 wrote:
Sun Aug 16, 2020 2:05 pm
a cost of living index is unique to us ...


seniors tend to see a lot less inflation than those raising a family .

You've got that right. If I were single and frugal it would be a different story. But with two kids, helping them with first cars, college in the not too distant future, weddings, it sounds like inflation is a different matter for me than it is for you. I think time horizon is a factor too. Depending on how far away the future is and the unknowns.....
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Re: POLL: How did you overcome the fear of tracking error?

Post by ppnewbie » Sun Aug 16, 2020 7:46 pm

It’s tough - if I were to start right now. I am not sure I would buy in. One of my investment thesis is to buy things that are cheap. Right now nothing in the PP is cheap. It’s the opposite - very expensive.
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Re: POLL: How did you overcome the fear of tracking error?

Post by vnatale » Sun Aug 16, 2020 8:36 pm

Kriegsspiel wrote:
Sun Aug 16, 2020 4:10 pm

[*]I hadn't played any computer games more recent than 2005 or so, so I got a fairly cheap computer, and I've picked up a few older games on sale. Riding years behind the technology wave lets you save lots of money.
[*]I did the same thing with smartphones, using old iPhones for years while the technology advanced by leaps and bounds. My "budget phone" Moto G6 still feels absurdly amazing to me.
[/list]

Totally agree with buying older technology. Also, applies to books where you can buy them so cheaply when they are old and used.

And, we use the same phone! I got mine to use with GoogleFi. What motivated you to buy that particular phone?

Vinny
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Re: POLL: How did you overcome the fear of tracking error?

Post by vnatale » Sun Aug 16, 2020 8:38 pm

ppnewbie wrote:
Sun Aug 16, 2020 7:46 pm
It’s tough - if I were to start right now. I am not sure I would buy in. One of my investment thesis is to buy things that are cheap. Right now nothing in the PP is cheap. It’s the opposite - very expensive.

It definitely does pose a dilemma to your excellent investment thesis.

Vinny
"I only regret that I have but one lap to give to my cats."
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Re: POLL: How did you overcome the fear of tracking error?

Post by Kriegsspiel » Sun Aug 16, 2020 8:58 pm

vnatale wrote:
Sun Aug 16, 2020 8:36 pm
Also, applies to books where you can buy them so cheaply when they are old and used.
I've probably only bought 2 or 3 books in the past 7 years or so. I've done most of my reading for $1.50 in late charges at the public library, as Will Hunting would say.
And, we use the same phone! I got mine to use with GoogleFi. What motivated you to buy that particular phone?
I was trying to find the cheapest Android phone with a good camera, decent battery life, a small amount of storage, and a middling to decent processor. It was pretty easy to disregard the phones with extraneous features I wasn't planning on taking advantage of, and the G6 had a better camera than the other ones I was looking at. The battery can last like 3 days with my normal use, I'm not even close to using up the 32GB of storage, and the processor exceeds my needs too. I could have bought a cheaper phone, but the G6 was much better for only a few dollars more.
I hated all the things I had toiled for under the sun, because I must leave them to the one who comes after me. Who knows whether that person will be wise or foolish? Yet they will have control over all the fruit of my toil into which I have poured my effort and skill under the sun. . . Nothing is better for a man than to eat and drink and enjoy his work.
- Ecclesiastes
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Re: POLL: How did you overcome the fear of tracking error?

Post by Tyler » Mon Aug 17, 2020 11:20 pm

Henryinroad wrote:
Sun Aug 16, 2020 7:50 am
Though I have one question:
1) For longer duration bonds, once the interest rate is getting lower and negative , their values can appreciate at a much greater pace, and act as a nice protection to the portfolio.

But one concern raised by some investors like Ray Dalio is more about how low the yield could go...

What are your point of view with regard to the lowest limit of the yield?

2) Aside from GOLD, do you think TIPs are good diversifiers we could consider as inflation-hedge assets?
I think the idea that people will eventually look elsewhere if yields get too low is a legit observation. But I'd argue that's exactly what gold is for. So by holding both bonds and gold you prepare yourself for all outcomes. The best portfolios don't fold in adversity -- they thrive in it.

I think TIPS are good inflation hedges by definition, although I also think they're overrated because the tradeoff is accepting even lower yields than on nominal bonds. And personally, I think the most underrated inflation hedge is good old TBills.
Mechanical engineer, history buff, treasure manager... totally not Ben Gates
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Re: POLL: How did you overcome the fear of tracking error?

Post by mathjak107 » Tue Aug 18, 2020 5:01 am

t-bills had negative real returns during the high inflation periods right up until inflation fell ... i would say in order to be a high inflation hedge you need positive real returns when called upon . big difference in being an inflation hedge vs a high or hyper inflation hedge .


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