Question for Melveyr

[mathjak107]

it is no different than people getting mixed up when it comes to banks ... they go how can banks survive paying you 1% and loaning it out at 3-4% in mortgages .... well banks are making 300-400% profit not 2 to 3% profit ....

if one fund returns 10% ytd and another 12% ytd the return differs by 2% , the difference between 10 and 12% percentage wise is 20%

[pmward]

TLT and shortly thereafter Gold buoyed the portfolio during the recent decline (very thankful) and provided me with the willpower to increase equity allocation to 45% today. Still have internal strife over whether LTT’s should have a role in my portfolio moving forward.

I think for those that are afraid of TLT, an option maybe worth considering is a either a barbell of cash and IEF (7-10 year treasuries), or a 3 way of cash, IEI (3-7 year treasuries) and TLT. That would reduce average duration without completely punting all deflation protection. It would probably be better than just sticking too straight cash which is currently a fixed expense.

This is what I have been doing, but after seeing pmward's chart, I'm not so sure it's a great plan. I guess that would depend on which way interest rates are going. It's like using a GB instead of a PP; you give up some protection for more appreciation.

In the active trading community there is a saying that goes something to the effect of "keep your trades anchored to your timeframe". A big mistake most active traders do is trade on a different timeframe than their desired timeframe. They may want to be an intermediate term trader with a holding time of months to years, but instead of looking primarily at weekly charts, they look primarily at daily or intraday charts... and those movements that should be nothing but noise on their timeframe instead start instilling fear and greed and they start trading out of their timeframe. This is always a mistake, and it has burned me in the past.

Now the PP is not an active strategy at all, but the same concept applies. When you have a buy and rebalance portfolio your timeframe is life. Over the course of a lifetime long bonds will out perform intermediates. But in shorter timeframes that is not always the case. There can be multi-year periods where long bonds underperform cash. For someone who's timeframe is in months, it makes no sense to hold long bonds when they are going down. But, for someone with a buy and rebalance portfolio, it makes no sense to move away from long bonds. The forced buying low during the pullbacks is the very magic that makes these portfolios perform so well. If you remove the rebalancing forced buying low and selling high you neuter the portfolio.

Now, that said, if someone holding a PP is losing sleep at night over long bonds, by all means go to intermediate. Your own inner psychology is more important than money. But I would make that a permanent swap not just a "I'm going to hide in intermediates until I feel comfortable again". Bonds have had quite a run... but they also have a lot of momentum right now. Who's to say the run is over with? It's possible bonds could top and finally start that long awaited bear market. But it is also possible that they continue to prove everyone wrong for another decade or more, especially if the Fed continues buying them.

[buddtholomew]

I have seen backtests where ITT’s outperform LTT’s in the portfolio during certain economic climates and even in a falling rate environment have similar returns.

Just so I am clear, does this mean 50% ITT or still 25% ITT’s + 25% Cash. I am trying to compare 50% ITT to 25% LTT + Cash and not just replacing LTT’s with ITT’s (although this is certainly an option too).

[pmward]

When you have a buy and rebalance portfolio your timeframe is life. Over the course of a lifetime long bonds will out perform intermediates. But in shorter timeframes that is not always the case. There can be multi-year periods where long bonds underperform cash. For someone who's timeframe is in months, it makes no sense to hold long bonds when they are going down. But, for someone with a buy and rebalance portfolio, it makes no sense to move away from long bonds. The forced buying low during the pullbacks is the very magic that makes these portfolios perform so well. If you remove the rebalancing forced buying low and selling high you neuter the portfolio.

Except that it isn't when you are retired or close to retirement. I just turned 60 and am semi-retired (maybe fully now thanks to COVID) so I have a shorter time frame even if it is still 'life'.

If you've won the game, don't need the extra return, and are worried about it, then it is fine to trade longs for intermediates. It may not actually be "safer" on the whole, but it may emotionally feel safer, and in the grand scheme it will at least be safe enough. Trading a little unneeded return for the psychological feeling of safety can be a good tradeoff. Like I mentioned above, if someone does this I would probably recommend it being a permanent change, not a change with the intention of going back to long in the future when they feel safer.

I have seen some posts that ITT’s outperform LTT’s in the portfolio during certain economic climates. Just so I am clear, does this mean 50% ITT or still 25% ITT’s + 25% Cash. I am trying to compare 50% ITT to 25% LTT + Cash and not just replacing LTT’s with ITT’s.

I probably didn't clarify enough, I was referring to trading intermediate for long bonds but keeping cash. So either 50/50 intermediate/cash or 33/33/33 cash/intermediate/long.

Long term the difference between a 50/50 long/cash and 100% intermediates is not that big of a difference. Holding 50% in bills with an average duration of 3 months and 50% in ~25 year long bonds is about a 12 year average duration. Intermediates are about an 8.5 year average duration. They are very similar. Long/short gives you a bit extra firepower in a crisis, as mathjak mentioned, and the liquidity of cash. Going from barbell to intermediates is more of an exercise in mental gymnastics than it is a fundamental shift in the balance of the portfolio. Investing is a mental game though, so if going from a barbell to 100% intermediates makes you more likely to comply with the rules of your portfolio, then by all means, that's as good of a reason as any to make the switch.

[buddtholomew]

Exchanged 15% Cash allocation to LTT’s and am now 40/15/15/30 with a 5.6 year duration. I no longer feel naked and afraid

[mathjak107]

I too want the fighter cover and have over 1 million in the pp right now .....I have a lot more in my insight model but with all this uncertainty there is something to be said for the pp

[dualstow]

Per the two posts above, I unofficially dub budd and mathjak pp pentiti.
Hooray!