Ray Dalio on Bonds

[Kbg]

Completely agree...and I do very much like a basic tenet of the PP and HB...we can’t predict the future. All we can do is evaluate risk vs. reward which is easy to do with bonds and cash, factor in our personal circumstances and make a choice. As an older guy I think dialing down duration makes the most sense, but if I was 25 it probably doesn’t matter as you simply want max return and can ride the cycle and invest new savings at higher interest rates which will work out fine over the long haul.

[Kevin K.]

This has turned into an exceptionally high-quality thread thanks to you guys!

I'm not ready to "go there" yet but I can see why Jonathan Clements just split his bond allocation into half short-term Treasuries half short-term TIPS. Of course he's anything but a PP'er, with ~33% bonds and everything else in small cap and value tilted fully internationally-diversified equity index funds. But I can see the wisdom of just giving up on yield from bonds and treating them as ballast. The Fed certainly wants us to do just that.

[Kbg]

Yeah, it’s tough out there. This circumstance was not in HBs historical data set guaranteed. Not even the Great Depression saw what we have going on now.

The allocation you refer to is pretty clear in its assumptions.

Interest rates going up, US large cap too expensive. If those are your assumptions, it makes sense.

I personally don’t believe in a small cap value premium at all. However, it’s clear from the evidence large cap tech and small cap value swap outperformance periods. A simple index or etf ratio plotted on stockcharts dot com will tell you if a move is underway along those lines.

[ahhrunforthehills]

To be honest, I definitely can't drink alcohol in this economic environment.

My logic says to not gamble and distance myself from LTT for long-term safety.

BUT...

I look at charts like this that show how many people are betting that rates have nowhere to go but up, and the contrarian in me would bet the farm that rates will continue to defy the masses once I had a couple shots in me:

https://hedgopia.com/wp-content/uploads ... /TYX-2.png

The lending standards are just ridiculously tight right now. It makes me wonder how can rates possibly go up short-term?

Other fun eye-candy... look at the short-positions against the Nasdaq recently:

https://hedgopia.com/wp-content/uploads ... /NDX-2.png

The markets are definitely not boring (despite what my wife says)!

[Hal]

This is a really good discussion.
It brings to mind a paragraph out of the Intelligent Investor.

[mathjak107]

My sub for long term treasuries is split between floating rate short term loans in The etf FLOT

VTIPS SHORT TERM TIPS


DBC COMMODITIES INDEX


The rest of the portfolio is 25% equities, ultra short term bonds 1-3 year treasuries, total bond and a high income fund with


250k in gold Gld riding shotgun

[Kevin K.]

OK it looks like we have a solution to the LTT interest rate problem. It pays 3% and comes with a free order of egg rolls and possibly a novel virus.

https://www.cnbc.com/2020/09/25/china-i ... -2021.html

[mathjak107]

so we still have the conflict between the ray dalio all weather portfolio which made no changes and is not only 40% long term treasuries but also 15% intermediate treasuries for a whopping 55% in bonds vs the fact bridgewater dumped TLT AND DALIO SEES NO POINT IN OWNING LONG TERM BONDS or even the 10 year ..

talk about investing confusion . you think either bridgewater or dalio would have changed the all weather.

i did a little instant x-ray this morning .

breaking out the two portfolio's i run and assigning the gold position to only the smaller inflation model i show the smaller inflation oriented model

is:

28% equities .

21% bonds split between vtip and flot

13% dbc commodities

38% gold gld .

on the other hand the larger conventional model is .

24 % equities

25% ultra short bond fund

17 % 1-3 year treasury fund

17% a total bond fund

17% high yield type fund .

so i have the smaller inflation weighted portfolio flying fighter cover over the larger conventional model since 50% of the smaller portfolio is in powerful inflaion weighted assets .

[Kbg]

Not sure where I read this but my guess is it’s true...you don’t charge the fees they do with what is in Tony Robinson’s book.

[Kevin K.]

The issue there is conflating the All Weather Portfolio, which is the name for a Bridgewater hedge fund that constantly changes it's allocation, with the All Seasons Portfolio, which is what Robinson calls the retail investor set-in-and-forget-it portfolio he came up with after talking with Dalio.

Adam at Movement Capital has a good short piece that echoes you comments Mathjak107 about how boneheaded it is to call a portfolio that doesn't defend against inflation "All Weather:"

https://movement.capital/history-of-tip ... onds-work/

Anyway both of your allocations sound great to me - better than the All Seasons and unlike the All Weather something that a retail investor has access to and can implement. Thanks for sharing your approach.

[ahhrunforthehills]

so we still have the conflict between the ray dalio all weather portfolio which made no changes and is not only 40% long term treasuries but also 15% intermediate treasuries for a whopping 55% in bonds vs the fact bridgewater dumped TLT AND DALIO SEES NO POINT IN OWNING LONG TERM BONDS or even the 10 year ..

talk about investing confusion . you think either bridgewater or dalio would have changed the all weather.

i did a little instant x-ray this morning .

breaking out the two portfolio's i run and assigning the gold position to only the smaller inflation model i show the smaller inflation oriented model

is:

28% equities .

21% bonds split between vtip and flot

13% dbc commodities

38% gold gld .

on the other hand the larger conventional model is .

24 % equities

25% ultra short bond fund

17 % 1-3 year treasury fund

17% a total bond fund

17% high yield type fund .

so i have the smaller inflation weighted portfolio flying fighter cover over the larger conventional model since 50% of the smaller portfolio is in powerful inflaion weighted assets .

I apologize if you already mentioned this, but what ratio do you have allocated between these 2 portfolio allocations? Are you 50%/50% in each allocation?

[mathjak107]

I am one third inflation model Two thirds conventional. Also have lots of cash going in all the time

[ahhrunforthehills]

I am one third inflation model Two thirds conventional. Also have lots of cash going in all the time

Do these totals look about right?

25% Equities
17% Gold/Commodities
58% Fixed Income

based off of:

25.33% Equities
12.67% Gold
4.33% Commodities
16.67% Ultra Short Bond Fund
11.33% 1-3 Year Treasury Fund
11.33% Total Bond Fund
11.33% High Yield Type Fund
3.50% FLOT
3.50% VTIP

[mathjak107]

I am one third inflation model Two thirds conventional. Also have lots of cash going in all the time

Do these totals look about right?

25% Equities
17% Gold/Commodities
58% Fixed Income

based off of:

25.33% Equities
12.67% Gold
4.33% Commodities
16.67% Ultra Short Bond Fund
11.33% 1-3 Year Treasury Fund
11.33% Total Bond Fund
11.33% High Yield Type Fund
3.50% FLOT
3.50% VTIP

Yes .most of the bonds are only slightly interest rate sensitive.

[modeljc]

I am one third inflation model Two thirds conventional. Also have lots of cash going in all the time

Do these totals look about right?

25% Equities
17% Gold/Commodities
58% Fixed Income

based off of:

25.33% Equities
12.67% Gold
4.33% Commodities
16.67% Ultra Short Bond Fund
11.33% 1-3 Year Treasury Fund
11.33% Total Bond Fund
11.33% High Yield Type Fund
3.50% FLOT
3.50% VTIP

Who manages this for you and how much do you need to invest and what are the fees on something that yields maybe 2.0%?
Yes .most of the bonds are only slightly interest rate sensitive.

[Kevin K.]

My only question would be why go out to 8.5 years in duration for Total Bond Market or even 3 for ST Treasury funds now? Good article on the latter today:

https://seekingalpha.com/article/437625 ... m=referral

Seems like iBonds, online bank CDs if they're worth the hassle to you, Vanguard Treasury MM if you have access and meet the 50K minimum and some decent-sized slices of FLOT and BSV are about the best options. I guess VTIP makes sense too but it's hard for me to get excited about a fund with a -1.32% negative nominal yield (yet I know it has performed decently with the inflation adjustment added in).

Looks like "take your risk on the equity [and commodity] side" is potentially now good advice even for PP'ers.

[mathjak107]

I am one third inflation model Two thirds conventional. Also have lots of cash going in all the time

Do these totals look about right?

25% Equities
17% Gold/Commodities
58% Fixed Income

based off of:

25.33% Equities
12.67% Gold
4.33% Commodities
16.67% Ultra Short Bond Fund
11.33% 1-3 Year Treasury Fund
11.33% Total Bond Fund
11.33% High Yield Type Fund
3.50% FLOT
3.50% VTIP

Who manages this for you and how much do you need to invest and what are the fees on something that yields maybe 2.0%?
Yes .most of the bonds are only slightly interest rate sensitive.

I manage it. As far as total bond it really counts on appreciation if rates go lower. But it is a lot less sensitive to rates than long term treasuries are Especially because it to is part of a barbell

If rates rise and inflation kicks up then that is where the other portfolio shines.

The yields include any expenses in them

[AdamA]

Here's a link to a thread from this site from 10 years ago.

Has anything really changed?

viewtopic.php?f=3&t=1096&p=11740&hilit= ... all#p11740

[Kevin K.]

Here's a link to a thread from this site from 10 years ago.

Has anything really changed?

viewtopic.php?f=3&t=1096&p=11740&hilit= ... all#p11740

Well, kinda. We'd kill for the rates folks here were bitching about in 2011:

https://www.macrotrends.net/2521/30-yea ... ield-chart

[AdamA]

Here's a link to a thread from this site from 10 years ago.

Has anything really changed?

viewtopic.php?f=3&t=1096&p=11740&hilit= ... all#p11740

Well, kinda. We'd kill for the rates folks here were bitching about in 2011:

https://www.macrotrends.net/2521/30-yea ... ield-chart

10 years from now we might be saying we'd kill for today's rates.

[ahhrunforthehills]

Here's a link to a thread from this site from 10 years ago.

Has anything really changed?

viewtopic.php?f=3&t=1096&p=11740&hilit= ... all#p11740

Ugh. Let’s try this again...

Would you pay the same amount of money for hurricane insurance in Florida as you would in Michigan?

[mathjak107]

As a retiree I have to be very careful about the odds of things playing out .....especially because unlike equities,
interest rate cycles can run decades if the cycle turns and is not a speed bump in the road like we had the last 40 years ...

A barbell for me at near zero rates is the longest being an intermediate term bond fund and the shortest cash instruments and ultra short bond funds .....

25% equities in a down turn is really not horrible and historically gold and stocks seems to work as well as long term bonds and stocks.
I think a lot of pp users are debating continuing with Lt bonds at this point as pretty much Harry never anticipated this situation of zero rates .....days are very painful when gold ,stocks and long term treasuries go down. A trend up in bond rates would inflict a lot of damage users never expected to see with the pp

[AdamA]

A trend up in bond rates would inflict a lot of damage users never expected to see with the pp

Why?

[Kbg]

Well at least historically both bonds and stocks become correlated and go down as interest rates are rising...so 50% of your PP is not going to be doing well. Gold, who knows. It may help, it may not help. So that leaves cash.

All of this is also somewhat influenced by how interest rates go up...so hard to say/predict.

Studying 73-82 is instructive, take out gold's truly meteoric rise from the equation and it's all around ugly for the PP (and pretty much anything else).

[AdamA]

Well at least historically both bonds and stocks become correlated and go down as interest rates are rising...so 50% of your PP is not going to be doing well. Gold, who knows. It may help, it may not help. So that leaves cash.

All of this is also somewhat influenced by how interest rates go up...so hard to say/predict.

Studying 73-82 is instructive, take out gold's truly meteoric rise from the equation and it's all around ugly for the PP (and pretty much anything else).

I would not be surprised if 20 years from now we are looking back at this period of time and saying, "take out LTT's truly meteoric rise from the equation and it was all around ugly for the PP (and pretty much anything else).


There is still upside here.

If rising rates were a foregone conclusion the way everyone thinks they are, wouldn't it already be baked in to bond prices/rates?