The 20 basis point per year rule-of-thumb
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The 20 basis point per year rule-of-thumb
Since there are several folks who post on these forums with a far better understanding of the bond market than I have I'm curious to hear your thoughts on the rule-of-thumb offered by Larry Swedroe that investors should generally look for an additional 20 basis points of yield for each additional year of duration in their bond holdings. I've seen that rule cited and discussed any number of times but don't know its basis (if there is one) - or whether any such notions make sense in our unprecedented negative-real-return Treasury bond world. But if they DID apply it looks like 7 years is the outer limit of the current sweet spot:
https://www.treasury.gov/resource-cente ... data=yield
EDIT: I found the post on Bogleheads where I first read about this rule of thumb. It's from 2013, which feels like about a hundred years ago given what's happened with interest rates since then:
https://www.bogleheads.org/forum/viewtopic.php?t=120617
https://www.treasury.gov/resource-cente ... data=yield
EDIT: I found the post on Bogleheads where I first read about this rule of thumb. It's from 2013, which feels like about a hundred years ago given what's happened with interest rates since then:
https://www.bogleheads.org/forum/viewtopic.php?t=120617
- Kriegsspiel
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Re: The 20 basis point per year rule-of-thumb
It sounds like a pretty easy way to stay away from inverted yield curves?
As to whether it's out of date, I've seen real estate investors talking about how the 1% rule (which used to be the 2% rule) has become outdated as well. It's tough to grasp though. Are all the rules still good, and we shouldn't be investing in things that don't meet them, or are the rules actually outdated. CUE KIERKEGAARD.
As to whether it's out of date, I've seen real estate investors talking about how the 1% rule (which used to be the 2% rule) has become outdated as well. It's tough to grasp though. Are all the rules still good, and we shouldn't be investing in things that don't meet them, or are the rules actually outdated. CUE KIERKEGAARD.
You there, Ephialtes. May you live forever.
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Re: The 20 basis point per year rule-of-thumb
Is this something that needs to be applied to the "Permanent Portfolio"?
It would have saved a lot of grief this year over long term treasuries.
I found this other post on bogleheads
https://www.bogleheads.org/forum/viewtopic.php?t=46704
The post mentioned Larry' Swedroe's 2006 book:
The Only Guide to a Winning Bond Strategy You'll ever Need
I expect it has a further explanation.
It would have saved a lot of grief this year over long term treasuries.
I found this other post on bogleheads
https://www.bogleheads.org/forum/viewtopic.php?t=46704
The post mentioned Larry' Swedroe's 2006 book:
The Only Guide to a Winning Bond Strategy You'll ever Need
I expect it has a further explanation.
Re: The 20 basis point per year rule-of-thumb
I agree it would've missed a lot of the grief, so far at least. But even in an inverted yield curve situation, doesn't the PP need the extra juice available from extended duration treasuries? Shortening duration over the last 10 years of investing would've led to lower returns overall up until the last 6-12 months (at least that would be my guess, without doing any backtesting). And let's not forget that ITT's have been losing money over the last 6-12 months too.whatchamacallit wrote: ↑Mon May 16, 2022 8:33 pm Is this something that needs to be applied to the "Permanent Portfolio"?
It would have saved a lot of grief this year over long term treasuries.
I found this other post on bogleheads
https://www.bogleheads.org/forum/viewtopic.php?t=46704
The post mentioned Larry' Swedroe's 2006 book:
The Only Guide to a Winning Bond Strategy You'll ever Need
I expect it has a further explanation.
Re: The 20 basis point per year rule-of-thumb
Historically it just hasn't made much difference to use the barbell vs. all (or mostly, with a bit of cash/STT's) ITT's but the ride has been much smoother. Different ball game now it seems to me, given interest rates. Continuing to hold 30 year Treasuries is a massive bet on convexity still working and those bonds saving the day in a market panic. But it's easy to forget that situations like we're in now, where stocks and Treasuries tank in unison (and LTT's do worst of all) are not at all uncommon. It's kind of like folks forget that there was bond market history before 2008.dockinGA wrote: ↑Tue May 17, 2022 4:18 amI agree it would've missed a lot of the grief, so far at least. But even in an inverted yield curve situation, doesn't the PP need the extra juice available from extended duration treasuries? Shortening duration over the last 10 years of investing would've led to lower returns overall up until the last 6-12 months (at least that would be my guess, without doing any backtesting). And let's not forget that ITT's have been losing money over the last 6-12 months too.whatchamacallit wrote: ↑Mon May 16, 2022 8:33 pm Is this something that needs to be applied to the "Permanent Portfolio"?
It would have saved a lot of grief this year over long term treasuries.
I found this other post on bogleheads
https://www.bogleheads.org/forum/viewtopic.php?t=46704
The post mentioned Larry' Swedroe's 2006 book:
The Only Guide to a Winning Bond Strategy You'll ever Need
I expect it has a further explanation.
https://www.portfoliovisualizer.com/bac ... tion5_2=25
Re: The 20 basis point per year rule-of-thumb
People should never focus on assets in a portfolio...they should focus on the portfolio...so let's do this which explains why it doesn't make much difference.
Duration (making numbers up)
LTTs 20
ITTs 10
Cash 0
25/25 = 50/50 for cash & bonds...20+0/2 = 10...voila...ITTs
Duration (making numbers up)
LTTs 20
ITTs 10
Cash 0
25/25 = 50/50 for cash & bonds...20+0/2 = 10...voila...ITTs
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Re: The 20 basis point per year rule-of-thumb
Initially I was wondering if this rule would save you from buying into long term treasuries when you shouldn't be but looking back at historical charts this doesn't look to be the case.
Some of the best times to have 30 year treasuries actually appear to be when the yield curve is flat with elevated rates just like we have now.
Some of the best times to have 30 year treasuries actually appear to be when the yield curve is flat with elevated rates just like we have now.
Re: The 20 basis point per year rule-of-thumb
Ideal duration for ITT’s is 5 years, not 10.Kbg wrote: ↑Tue May 17, 2022 2:52 pm People should never focus on assets in a portfolio...they should focus on the portfolio...so let's do this which explains why it doesn't make much difference.
Duration (making numbers up)
LTTs 20
ITTs 10
Cash 0
25/25 = 50/50 for cash & bonds...20+0/2 = 10...voila...ITTs
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Re: The 20 basis point per year rule-of-thumb
If you had to sell a huge chunk of your portfolio in 08-09, would you have been better off with LTTs
Re: The 20 basis point per year rule-of-thumb
That's a loaded question and most likely would depend on how and when one sold off assets.boglerdude wrote: ↑Tue May 17, 2022 4:23 pm If you had to sell a huge chunk of your portfolio in 08-09, would you have been better off with LTTs
But here's an interesting tidbit from PVisualizer using the monthly returns display
There is not a single month from Jan 08 to Dec 09 when an IEF portfolio did not have a larger monthly balance than a 50/50 TLT/CASHX portfolio and in most months an IEF only vs. a TLT only IEF had a larger balance. The only way you would not have done better in IEF is if your timing would have been to the month perfect on when you sold. Additionally, during the time period chosen there is not a single summary metric that IEF did not perform better on.
Thanks for asking this question as it caused me to dive into something I've never looked into or thought about looking into.
In short, for this period of time...the barbell trailed the bullet.
Actually...I did a TON of work analyzing ITTs vs. LTTs late last year and for me this issue is settled. ITTs are a better way to go.
Last edited by Kbg on Thu May 19, 2022 12:09 pm, edited 1 time in total.
Re: The 20 basis point per year rule-of-thumb
Fair enough, let's do some real numbers using VGLT and VGIT duration metrics.Kevin K. wrote: ↑Tue May 17, 2022 3:37 pmIdeal duration for ITT’s is 5 years, not 10.Kbg wrote: ↑Tue May 17, 2022 2:52 pm People should never focus on assets in a portfolio...they should focus on the portfolio...so let's do this which explains why it doesn't make much difference.
Duration (making numbers up)
LTTs 20
ITTs 10
Cash 0
25/25 = 50/50 for cash & bonds...20+0/2 = 10...voila...ITTs
18.6+0/2 = 9.3
VGIT 5.7
IEF 8.5
ITT's are a bit nebulous as you know running anywhere from 3-10 years.
Re: The 20 basis point per year rule-of-thumb
Kbg’s new post in response to this is excellent. I also suggest reading the Morningstar article I posted the link to in my “Bills, Bonds & Cash” post in this forum. LTT’s did slightly better than ITT’s in ‘08 and worse in every other market crash since 1926.boglerdude wrote: ↑Tue May 17, 2022 4:23 pm If you had to sell a huge chunk of your portfolio in 08-09, would you have been better off with LTTs
Regarding LTT’s as reliable portfolio saviors is right up there with thinking that gold’s an inflation hedge in the list of common PP articles of faith unsupported by facts.
Re: The 20 basis point per year rule-of-thumb
Slightly related to this question. How do you compare yields for bonds of different durations? The bloomberg site seems pretty clear, but it doesn't include all the available durations (such as 3 or 7 year). So just treasury direct for most recent auction results? Or the treasury.gov daily par yield curve?
https://www.bloomberg.com/markets/rates ... t-bonds/us
https://www.treasurydirect.gov/instit/a ... result.htm
https://home.treasury.gov/resource-cent ... nth=202205
(and based on the 20bp rule, it seems that either 2 year or 3 year is the sweet spot?)
https://www.bloomberg.com/markets/rates ... t-bonds/us
https://www.treasurydirect.gov/instit/a ... result.htm
https://home.treasury.gov/resource-cent ... nth=202205
(and based on the 20bp rule, it seems that either 2 year or 3 year is the sweet spot?)
1/n weirdo. US-TSM, US-SCV, Intl-SCV, LTT, STT, GLD (+ a little in MF)
Re: The 20 basis point per year rule-of-thumb
But how big is the difference? And does it overcome the fact that with a barbell approach, you have the added flexibility of using your emergency fund as part of the cash portion of the portfolio, as well as the possibility of adding I Bonds to juice portfolio returns during times like these? Just having a glance again at results in portfoliovisualizer, and on a portfolio level the differences look pretty smallKbg wrote: ↑Tue May 17, 2022 5:44 pmThat's a loaded question and most likely would depend on how and when one sold off assets.boglerdude wrote: ↑Tue May 17, 2022 4:23 pm If you had to sell a huge chunk of your portfolio in 08-09, would you have been better off with LTTs
But here's an interesting tidbit from PVisualizer using the monthly returns display
There is not a single month from Jan 08 to Dec 09 when an IEF portfolio did not have a larger monthly balance than a 50/50 TLT/CASHX portfolio and in most months an IEF only vs. a TLT only IEF had a larger balance. The only way you would not have done better in IEF is if your timing would have been to the month perfect on when you sold. Additionally, during the time period chosen there is not a single summary metric that IEF did not perform better on.
Thanks for asking this question as it caused me to dive into something I've never looked into or thought about looking into.
In short, for this period of time...the barbell trailed the bullet.
Actually...I did a TON of work analyzing ITTs vs. LTTs late last year and for me this issue is settled. ITTs are a better way to go.
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Re: The 20 basis point per year rule-of-thumb
Yeah, it seems like it could be a case of too many strategies.dockinGA wrote: ↑Tue May 17, 2022 4:18 amI agree it would've missed a lot of the grief, so far at least. But even in an inverted yield curve situation, doesn't the PP need the extra juice available from extended duration treasuries?whatchamacallit wrote: ↑Mon May 16, 2022 8:33 pm Is this something that needs to be applied to the "Permanent Portfolio"?
..https://www.bogleheads.org/forum/viewtopic.php?t=46704
…
…
Re: The 20 basis point per year rule-of-thumb
Could this be said about 95% of the discussions on all these forums after someone has set their Equities percentage of their portfolio?
(assuming the remining percentage isn't going to crypto)
1/n weirdo. US-TSM, US-SCV, Intl-SCV, LTT, STT, GLD (+ a little in MF)
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Re: The 20 basis point per year rule-of-thumb
I think their end point was to still do barbell but use intermediate instead of long.dockinGA wrote: ↑Sat May 21, 2022 6:00 am
But how big is the difference? And does it overcome the fact that with a barbell approach, you have the added flexibility of using your emergency fund as part of the cash portion of the portfolio, as well as the possibility of adding I Bonds to juice portfolio returns during times like these? Just having a glance again at results in portfoliovisualizer, and on a portfolio level the differences look pretty small
Re: The 20 basis point per year rule-of-thumb
I skimmed the book on the Internet Archive Open Library and I could only find a brief single paragraph explanation on page 201....I'd try to summarize it but I'm only learning about bonds and yield curves so I'm hesitant to say much since the concepts are new to me. Best to just go check it out.whatchamacallit wrote: ↑Mon May 16, 2022 8:33 pm The post mentioned Larry' Swedroe's 2006 book:
The Only Guide to a Winning Bond Strategy You'll ever Need
I expect it has a further explanation.
Roughly, he suggests 20bps for taxable bonds per year, (15 bps for muni). He also suggests a min weighted-average maturity of 3 years and max of 5 years. But these are very tentative suggestions, much closer to rules of thumb than hard recommendations.
https://archive.org/details/onlyguideto ... ew=theater
1/n weirdo. US-TSM, US-SCV, Intl-SCV, LTT, STT, GLD (+ a little in MF)
Re: The 20 basis point per year rule-of-thumb
For giggles, I took the US Treasury Yield info and imported the data into google sheets. I then added columns for the deltas between bonds and color coded it. (green for 20bp+, yellow for 10bp, red 0bp or less)
https://docs.google.com/spreadsheets/d/ ... sp=sharing
https://docs.google.com/spreadsheets/d/ ... sp=sharing
1/n weirdo. US-TSM, US-SCV, Intl-SCV, LTT, STT, GLD (+ a little in MF)