Bonds and the PP -- still make sense?

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PPQuest
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Bonds and the PP -- still make sense?

Post by PPQuest » Thu Aug 20, 2020 12:48 pm

I've been a reader of the posts here for some time, but my first time posting. Thanks to all of you who have been active. I've learned a lot from reading.

I've had my portfolio in a PP allocation for 5-10 years now. (to be fair I've always been a little heavy cash).

I love the balance, low volatility and steady returns that the PP has offered historically. I fully embrace the "no one knows the future" reality of markets, and the built in counter- balance that the PP offers has allowed me to sleep great.

But our current market has made me seriously wondering about what makes sense, and whether certain aspects of the PP still work. I've taken some actions (very anti-PP) recently, and find myself thinking through them, and what comes next.


Bonds:

I just liquidated my whole Bond fund holding. Why? I did the math on the massive increase in value of those holdings over the last six months and realized that if I sold I could see all my original investment, plus an exponential ROI. I then compared that to the return I'd see holding onto those bonds long-term with their now minimal interest rate (value aside). So I sold, and locked in a huge upside for that portion of my portfolio.

Could the value of bonds keep going up? Of course, and I could see myself regretting that I missed the next jump higher of value. But I also recognized that the "jump up" is meaningless if I never sell. Taking full advantage of a historic jump up like we've seen is absolutely anti-PP. And I fully realize that it's just a manifestation of the temptation to try to time the market . . . but the upside was huge, and I was able to lock it in. Whatever comes next will come with that profit locked in.

But this leads me to my questions about long term bonds in general. It seems we've lost the stock/bond counter-balance reality (stocks up, bonds down . . .). Seems everything's gone haywire with the traditional balancing that the PP is based on. Although certainly to the benefit of those of us who owned those PP assets.

But will bonds continue to work they way they have? And even if they do in terms of value, with the minuscule interest rate they offer how do you view the "all the risk and none of the reward" exposure? Do bonds serve the same purpose in the PP portfolio if they offer no income, or potentially negative income? Once that happens isn't it just a play on their value? And if that's the case, you have to rely on their ability to counter-balance stocks right?



Re balancing:

PP would say “re balance once a year” because the theory is if one asset is up (say stocks) then the alternating asset should be down (say bonds or gold). You sell some of what’s up and then use the proceeds to buy more of what’s down. That continues to re balance your risk and exposure and allows you to take advantage of selling high and buying low. Love that.

The problem:

Stocks are at historic highs.
Bonds are at historic highs (with historic low yields)
Gold is at historic highs.

I sell at a high and buy at a high. Hmmmm, how does that maximize ROI? How does that re balancing help? And if I don't sell, if I don't re balance, I fail to benefit from the historic highs in these assets.

My thought is to take this as a period where I side-stepped the PP temporarily to lock in some profits. And now I wait and start to buy back in to the asset classes as they individually dip. Or maybe I've just missed the boat on the next jump higher.

I know PP purists will find a load of problems with my thinking here:

I'm acting like I can predict the future.
I'm trying to time the market.
I'm rejecting the balancing opportunities that the PP is designed to provide.
Cash is great . . .except it earns nothing.

Not trying to outsmart the system (actually I guess that's exactly what I'm trying to do), but having serious questions about whether the PP system is really designed for the incredible number of norm shattering issues we're dealing with. It's worked miraculously well this year, but I wonder if that's purely by accident.

Love to hear your thoughts, questions or observations.

Thanks
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Re: Bonds and the PP -- still make sense?

Post by mathjak107 » Thu Aug 20, 2020 2:30 pm

every asset has been at historic highs and you know what ? so what .... these highs are tomorrows lows .

how do we value gold ? for all we know it is only back to where it was about a decade ago ...


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Re: Bonds and the PP -- still make sense?

Post by PPQuest » Thu Aug 20, 2020 4:14 pm

Very true mathjak107. It's a losers game to try to pick the top or bottom. That's part of what I love about about the PP and the theory that the assets counter-balance. Do you think bonds are still playing that role?
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Re: Bonds and the PP -- still make sense?

Post by Fredmong » Thu Aug 20, 2020 4:24 pm

When I feel like timing the market, I simply rebalance. In March 2020, my bond allocation was at 28-29% in an account where I use tighter 20/30 bands since commissions are lower. Bonds had rallied so much that I felt like selling it all. Instead I simply trimmed it and reinvested it in the lagging asset which was equities at the time even though it felt horrible investing in equities in March. Needless to say, it turned out alright.
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Re: Bonds and the PP -- still make sense?

Post by whatchamacallit » Thu Aug 20, 2020 8:50 pm

It sounds like your biggest concern is long bonds.

I can't stomach them either and have moved to a intermediate term approach using treasury direct and FDIC products.

Rewards checking account.
5 to 10 year CDs
EE bonds

I think EE bonds are the best risk adjusted purchase going right now out of any of the assets.


Otherwise, it does seem like gold has the most potential right now. Lots of liquidity being created and it isn't that much over the 2011 high.
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Re: Bonds and the PP -- still make sense?

Post by johnnywitt » Tue Sep 08, 2020 3:42 pm

Uh... and how long have they been calling for an end to the Bond Bull. Seriously, if you read, or listen to HB, he addresses this issue many times with regard to all asset classes in the portfolio, "it only offers protection as a package".He also said if you leave anything out you're simply speculating. I agree though that LTT are looking scary right now- hell, it appears EVERYTHING is in a giant bubble right now except cash, which is "trash" right now according to Dalio, who I suspect got a lot of his risk parity ideas from HB.
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Re: Bonds and the PP -- still make sense?

Post by Kevin K. » Wed Sep 09, 2020 10:19 am

I've been thinking about this a lot too.

Here's a thread I started on this topic over on Bogleheads that uses as it's starting point the decision on the part of well-known finance writer Jonathan Clements to go to an all STT/short TIPs "barbell" with his own bond alloction:

https://www.bogleheads.org/forum/viewto ... 0&t=324886

Another angle: according to one poster on B'heads: "Larry Swedroe, in his book "The Only Guide to a Winning Bond Strategy You'll Ever Need", says that you can use rule of thumb that every year increase on duration must be compensated by at least 0.2 percent increase in yield? That way currently the only US Treasury bonds you should hold would be 0-1 year treasury (basically cash). Or CDs."

As I recall Ray Dalio/Bridgewater are still holding a slice of LTT's hoping for one more panicked bounce like we had earlier this year before exiting them altogether, but their focus is on loading up on gold, TIPs and things like Chinese government bonds paying a real return.

As for the current state of Treasuries (and how dubious their benefit as ballast is likely to be going forward) I think this short piece tells the tale:

https://movement.capital/the-bond-offer-you-can-refuse/
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Re: Bonds and the PP -- still make sense?

Post by Xan » Wed Sep 09, 2020 10:27 am

If LTTs are such a bad deal, why do they get snapped up?

Kevin, your last link is interesting, and it basically says that bonds may not outperform cash, and historically they often don't. Well, I have cash on the other half of my barbell.

It also says that we should expect an annualized return over the next 10 years of around 2-3% on our LTTs. Is that really bad enough to drop a leg from the PP?

I'm not saying you're wrong. I really don't know. This discussion is invaluable.
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Re: Bonds and the PP -- still make sense?

Post by modeljc » Wed Sep 09, 2020 1:04 pm

Xan wrote:
Wed Sep 09, 2020 10:27 am
If LTTs are such a bad deal, why do they get snapped up?

Kevin, your last link is interesting, and it basically says that bonds may not outperform cash, and historically they often don't. Well, I have cash on the other half of my barbell.

It also says that we should expect an annualized return over the next 10 years of around 2-3% on our LTTs. Is that really bad enough to drop a leg from the PP?

I'm not saying you're wrong. I really don't know. This discussion is invaluable.
I'm staying with TLT for 15% of my total funds. If they were to equal 17% I plan to trim them back to 15%. But it hard to think I would have 35% in LTTs and sleep at night. I remember Paul Volker and Long rates above 15% in 80's. But this is a recent decision. I have been happy for the ride to 1.4% but see more risk than reward. Please don't follow me as I'm often wrong.
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Re: Bonds and the PP -- still make sense?

Post by modeljc » Wed Sep 09, 2020 2:26 pm

modeljc wrote:
Wed Sep 09, 2020 1:04 pm
Xan wrote:
Wed Sep 09, 2020 10:27 am
If LTTs are such a bad deal, why do they get snapped up?

Kevin, your last link is interesting, and it basically says that bonds may not outperform cash, and historically they often don't. Well, I have cash on the other half of my barbell.

It also says that we should expect an annualized return over the next 10 years of around 2-3% on our LTTs. Is that really bad enough to drop a leg from the PP?

I'm not saying you're wrong. I really don't know. This discussion is invaluable.
I'm staying with TLT for 15% of my total funds. If they were to equal 17% I plan to trim them back to 15%. But it hard to think I would have 35% in LTTs and sleep at night. I remember Paul Volker and Long rates above 15% in 80's. But this is a recent decision. I have been happy for the ride to 1.4% but see more risk than reward. Please don't follow me as I'm often wrong.
Forgot to say i'm OK with 35% cash and 15% long bonds.
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Re: Bonds and the PP -- still make sense?

Post by Kevin K. » Wed Sep 09, 2020 2:42 pm

modeljc wrote:
Wed Sep 09, 2020 1:04 pm
Xan wrote:
Wed Sep 09, 2020 10:27 am
If LTTs are such a bad deal, why do they get snapped up?

Kevin, your last link is interesting, and it basically says that bonds may not outperform cash, and historically they often don't. Well, I have cash on the other half of my barbell.

It also says that we should expect an annualized return over the next 10 years of around 2-3% on our LTTs. Is that really bad enough to drop a leg from the PP?

I'm not saying you're wrong. I really don't know. This discussion is invaluable.
I'm staying with TLT for 15% of my total funds. If they were to equal 17% I plan to trim them back to 15%. But it hard to think I would have 35% in LTTs and sleep at night. I remember Paul Volker and Long rates above 15% in 80's. But this is a recent decision. I have been happy for the ride to 1.4% but see more risk than reward. Please don't follow me as I'm often wrong.
There's a very long thread on how much in LTT's on Bogleheads that was started by an FA who is clearly a bond market expert:

https://www.bogleheads.org/forum/viewto ... 0&t=287627

Some of the discussion is beyond my pay grade but well within the purview of many who post on these forums.

I haven't come to any conclusions myself but if say that the LTT's and the STT's that many if not most PP'ers use are both bonds then first 20% in LTT's would = 10% of the total PP in them, with the rest presumably in T-bills these days given that there's no meaningful reward and plenty of risk for going out to 1-3 year bonds.
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Re: Bonds and the PP -- still make sense?

Post by Tortoise » Wed Sep 09, 2020 3:14 pm

Xan wrote:
Wed Sep 09, 2020 10:27 am
If LTTs are such a bad deal, why do they get snapped up?
Presumably because one of the entities snapping them up (or planning to) is the Fed, and they are doing so not because it’s a good deal for them, but because it helps keep long-term rates low for government borrowing.

https://www.reuters.com/article/us-usa- ... SKBN25R0GY
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Re: Bonds and the PP -- still make sense?

Post by ahhrunforthehills » Wed Sep 09, 2020 3:20 pm

modeljc wrote:
Wed Sep 09, 2020 1:04 pm
Xan wrote:
Wed Sep 09, 2020 10:27 am
If LTTs are such a bad deal, why do they get snapped up?

Kevin, your last link is interesting, and it basically says that bonds may not outperform cash, and historically they often don't. Well, I have cash on the other half of my barbell.

It also says that we should expect an annualized return over the next 10 years of around 2-3% on our LTTs. Is that really bad enough to drop a leg from the PP?

I'm not saying you're wrong. I really don't know. This discussion is invaluable.
I'm staying with TLT for 15% of my total funds. If they were to equal 17% I plan to trim them back to 15%. But it hard to think I would have 35% in LTTs and sleep at night. I remember Paul Volker and Long rates above 15% in 80's. But this is a recent decision. I have been happy for the ride to 1.4% but see more risk than reward. Please don't follow me as I'm often wrong.
Out of curiosity, where are you keeping the rest of the TLT money? In cash or spread out among everything else?
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Re: Bonds and the PP -- still make sense?

Post by Kbg » Wed Sep 09, 2020 3:21 pm

Tortoise wrote:
Wed Sep 09, 2020 3:14 pm
Xan wrote:
Wed Sep 09, 2020 10:27 am
If LTTs are such a bad deal, why do they get snapped up?
Presumably because one of the entities snapping them up (or planning to) is the Fed, and they are doing so not because it’s a good deal for them, but because it helps keep long-term rates low for government borrowing.

https://www.reuters.com/article/us-usa- ... SKBN25R0GY
They've already publicly stated they are going to "manage the curve." Normally this impacts 0-10 year bonds as traditionally that is where it is most effectively done...but hey, they are pretty much willing to buy anything so it's definitely a strong possibility they are buying LTTs as well.
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Re: Bonds and the PP -- still make sense?

Post by mathjak107 » Wed Sep 09, 2020 3:51 pm

I cut Tlt down a lot ...way to much risk with the feds only means of really boosting things being via spending ....I may put it back in the insight income model ......made nice gains but I think they may be headed for a nasty time coming up
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Re: Bonds and the PP -- still make sense?

Post by modeljc » Wed Sep 09, 2020 4:42 pm

ahhrunforthehills wrote:
Wed Sep 09, 2020 3:20 pm
modeljc wrote:
Wed Sep 09, 2020 1:04 pm
Xan wrote:
Wed Sep 09, 2020 10:27 am
If LTTs are such a bad deal, why do they get snapped up?

Kevin, your last link is interesting, and it basically says that bonds may not outperform cash, and historically they often don't. Well, I have cash on the other half of my barbell.

It also says that we should expect an annualized return over the next 10 years of around 2-3% on our LTTs. Is that really bad enough to drop a leg from the PP?

I'm not saying you're wrong. I really don't know. This discussion is invaluable.
I'm staying with TLT for 15% of my total funds. If they were to equal 17% I plan to trim them back to 15%. But it hard to think I would have 35% in LTTs and sleep at night. I remember Paul Volker and Long rates above 15% in 80's. But this is a recent decision. I have been happy for the ride to 1.4% but see more risk than reward. Please don't follow me as I'm often wrong.
Out of curiosity, where are you keeping the rest of the TLT money? In cash or spread out among everything else?
spread out some. overweight stocks cash and gold.
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Re: Bonds and the PP -- still make sense?

Post by Matthew19 » Fri Sep 11, 2020 11:21 am

I hate LTT, but you’ve gotta go all in on the PP for it to work.

What I’ve done is to take the other side, creating a variable portfolio with some extra silver/gold in it. The PP is untouched.
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Re: Bonds and the PP -- still make sense?

Post by Smith1776 » Fri Sep 11, 2020 1:15 pm

Question for those dumping long-term bonds.

What is the portfolio policy or plan for when you’d get back into them?

I am reminded of this very relevant quote from John Bogle.
It is quite difficult enough to make even one timing decision correctly. But you have to be right twice, for the act of, say, getting out of the market implies the act of getting in later, and at a more favorable level. But when, pray? You’ll have to tell me. And if the odds of making the right decision are, because of costs, even less than 50/50, the odds of making two right decisions are even less than one out of four. And the odds of making, say a dozen correct decisions over, say three years, hardly excessive for a strategy that is based on market timing, seems doomed to failure—one out of 4,096, even when we exclude the negative impact of the portfolio transaction costs entailed in the implementation of all those decisions.
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Re: Bonds and the PP -- still make sense?

Post by Kevin K. » Fri Sep 11, 2020 2:36 pm

Smith1776 wrote:
Fri Sep 11, 2020 1:15 pm
Question for those dumping long-term bonds.

What is the portfolio policy or plan for when you’d get back into them?

I am reminded of this very relevant quote from John Bogle.
It is quite difficult enough to make even one timing decision correctly. But you have to be right twice, for the act of, say, getting out of the market implies the act of getting in later, and at a more favorable level. But when, pray? You’ll have to tell me. And if the odds of making the right decision are, because of costs, even less than 50/50, the odds of making two right decisions are even less than one out of four. And the odds of making, say a dozen correct decisions over, say three years, hardly excessive for a strategy that is based on market timing, seems doomed to failure—one out of 4,096, even when we exclude the negative impact of the portfolio transaction costs entailed in the implementation of all those decisions.
It's a great Bogle quote that has exactly nothing to do with the bond market (and Bogle preferred Total Bond Market to Treasuries and would've had nothing but contempt for the PP anyway).

Of course what he says, which is about trying to time the stock market, makes sense. As for bonds, the obvious answer to your question is you get back into longer maturities when you are rewarded for doing so. And it clearly doesn't have to be a black and white situation. Xan's strategy of paring back the LTT's to 15% or so and moving the rest into T-bills or STT's is another way of acknowledging that LTT's are volatile as nitroglycerin now and deserve to be treated accordingly. 30 year Treasuries paying 1.43% are not something I can see dedicating 25% of my nest egg to - and not something I think Harry Browne would have invested in at all.
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Re: Bonds and the PP -- still make sense?

Post by Xan » Fri Sep 11, 2020 2:44 pm

I can't take any credit for that plan; that was somebody else's. My theory was that it might make sense if you believe LTTs are range-bound to frequently do a "mini-rebalance" between cash and LTTs. It was demonstrated that doing so was of limited value.
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Re: Bonds and the PP -- still make sense?

Post by Smith1776 » Fri Sep 11, 2020 2:51 pm

Yeah I'm not convinced that the LTT trade is as simple or as valuation-based as some are making it out to be. Nor do I think it's a lead pipe cinch.

My impression is that many of these plans being suggested are quite a bit more about capricious than is being let on. It's not like high LTT valuations are happening in isolation either. Stocks are near all time highs, gold is near all time highs, and cash yields even less than LTTs. Given that background I still think that staying the course with pure the PP presents are perfectly practical path.
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Re: Bonds and the PP -- still make sense?

Post by Xan » Fri Sep 11, 2020 3:02 pm

Smith1776 wrote:
Fri Sep 11, 2020 2:51 pm
Yeah I'm not convinced that the LTT trade is as simple or as valuation-based as some are making it out to be. Nor do I think it's a lead pipe cinch.

My impression is that many of these plans being suggested are quite a bit more about capricious than is being let on. It's not like high LTT valuations are happening in isolation either. Stocks are near all time highs, gold is near all time highs, and cash yields even less than LTTs. Given that background I still think that staying the course with pure the PP presents are perfectly practical path.
I'm holding course for now as well with the normal LTT allocation. So far, anyway!
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Re: Bonds and the PP -- still make sense?

Post by Tortoise » Fri Sep 11, 2020 3:20 pm

Xan wrote:
Fri Sep 11, 2020 3:02 pm
I'm holding course for now as well with the normal LTT allocation. So far, anyway!
Ditto.
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Re: Bonds and the PP -- still make sense?

Post by Kriegsspiel » Fri Sep 11, 2020 4:14 pm

I'm planning on rebalancing my PP when it's time, even with LTTs. My relatively short time allocating assets has taught me I can't predict the future for shit.
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Re: Bonds and the PP -- still make sense?

Post by Smith1776 » Fri Sep 11, 2020 4:22 pm

Interesting to hear that others are sticking with the canonical 25% LTT allocation as well. I am as aware as anyone of groupthink, so hopefully we do not descend into that kind of Knuckleheadism here.

Be that as it may, my overall impression of tactical shifts and modifications based on "surefire" prevailing sentiment usually ends up being a mirage. My overall experience and readings of capital markets history lead me to believe that when everyone "knows" something is going to happen, it somehow doesn't. Like trying to grasp and make a fist around water, it's highly elusive.

Tactical shifts also make one vulnerable to behavioural mistakes as one abandons a mechanistic approach. "Crap, my LTT valuation for buying back in bought at a new top. Better double down. I know this is a surefire bet." It's a slippery slope that starts to sound a lot like the gambler at the casino doubling down to get back to even before telling himself he'll quit.

Yes, I agree LTTs look super expensive, but my investment instinct is leading me to think that tinkering is not likely to lead to a good long-term outcome.

There's a reason why recently dead people ended up being the highest performing investment clients in that Fidelity study. By being dead you're guaranteed to not tinker and make bets.
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