Question for Melveyr

[Smith1776]

I think Budd sold his gold. I remember him feeling relieved by the sale. Not sure if he held onto his bonds.

Budd was an interesting character. Most people who hate the PP or whatever portfolio just make an adjustment and move on.

He was an odd case where he seemed so displeased with the PP (especially gold), but couldn't help but hold assets he hated and continued posting on this forum. Why stay? Why not just move on if this whole community and its philosophy upsets you so much? Why bother going through all the drama of asking to be banned?

Strange.

[buddtholomew]

Hello All, I’ve been visiting the board regularly and have now had a chance to invest during a full cycle with a newfound appreciation for the PP.

On Friday 03-20 I was 35/15/15/35 stocks/gold/bonds/cash and as of today am 45/15/0/40 after selling TLT at an AVG price of 160 (purchase price 92). I offset losses in SCV (IJS) and put the proceeds in SPY and IAU on 03-23.

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.

My 401K was 70/30 but recently moved to 80/20 after buying stocks all the way down. The unrealized losses were unbelievable, but now the portfolio is recovering to mid 2019 levels after the recent run up.

I was also laid off in April with the company ultimately closing in the next couple of months. At this point I am adjusting to early retirement.

[dualstow]

Sorry to hear about the layoff. You've got a better cushion than most, but that sucks.
Hope you're in good spirits.

[mathjak107]

welcome back bud....

[buddtholomew]

Thanks DS and MJ!

[Mark Leavy]

welcome back bud....

Thumbs up.

[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.

[mathjak107]

100% in ief vs 50% in Tlt and 50% cash has the Tlt barbell with about 20% more oomph when called upon to run with the ball ... that can be a big shift in power ... duration works out close but the fear greed and perception with long term treasuries can be much greater

[buddtholomew]

Thanks Mark!

I managed duration with the barbell approach to 5.6 years and have experience adjusting LTT’s/Cash to achieve the desired balance. I also tracked this composition against Total Bond Market ETF for many years and the returns were roughly equivalent on a daily basis. I cannot speak to what happened in March 2020 as I stopped tracking duration after selling the bonds, but I suspect as MJ highlighted the barbell has outperformed during this recent crisis. Does someone have the numbers handy to compare the approaches and validate the 20% figure attributed to greed/fear?

I do feel naked without LTT coverage and deflation protection PM.

[mathjak107]

The last 3 months has seen a 2% difference between ief and a split of tlt/ cash.... 10% vs 12% for the Tlt mix ...that is 20%

[dualstow]

that is 20%

hmm?

[vnatale]

that is 20%

hmm?

12% is 20% more than 10%.

Vinny

[buddtholomew]

The last 3 months has seen a 2% difference between ief and a split of tlt/ cash.... 10% vs 12% for the Tlt mix ...that is 20%

A 2% difference during a 35% SP500 decline is leaps and bounds over holding 100% cash (assuming bond capital appreciation). Seems like a reasonable alternative for those adverse to the LTT/STT combination and for someone like me who has recently sold their entire batch of TLT.

[pmward]

FWIW, outside of just the downturn... this is the comparison chart I track for 1 year returns for the major bond classes. TLT is killing everything. TLT out performed everything on the planet over the last year, gold and bitcoin are the only assets that are even close. This is the value of having long bonds during a liquidity squeeze. Who knows whether or not we are out of the liquidity crisis woods yet?

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[dualstow]

that is 20%

hmm?

12% is 20% more than 10%.

Ok. That’s how I read it at first, but he started out saying a 2% difference. So how can it be both?
If a 10% dividend got a raise to 12%, I’d say it was a 20% raise.
Comparing two returns...aw, I guess it’s the same damn thing. Never mind.
Thank you.

[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!