The Bond Dream Room

[Kbg]

Perhaps, but today was .19% from the absolute 2012 low. These things are never definite with all the variables involved, but I'm happy. If we get to 2.5% on a 30 I'll just have to bite the bullet again. 

[buddtholomew]

Although I have the urge to reduce treasury exposure, I remind myself that these low yields are still relatively attractive to international investors. I do expect outflows if QE in Europe ignites a stock rally, but this only serves to make US treasuries more attractive for those looking for higher yielding FI investments.

[Reub]

Try not to think about this too much. If you can follow whatever bands you have chosen you will do better in the long run and sleep much more restfully.

[buddtholomew]

Great advice Reub. Just thinking out loud, no intention of adjusting any of the allocations. Thanks for the reminder.

[Lowe]

Bonds have had a great run, and I'm hoping to see them break 35%.  I got especially hopeful after news pf the Fed plans to put off raising the FFR, till June, but a re-balance out of bonds is still a long way off.

Like this time last year, it looks like the decline in equity might be short lived.  The year could end up looking a lot like the last, in which case I will be somewhat disappointed.  I'm not in the PP so that I can watch stocks give decent, steady returns.

[buddtholomew]

Bonds have had a great run, and I'm hoping to see them break 35%.  I got especially hopeful after news pf the Fed plans to put off raising the FFR, till June, but a re-balance out of bonds is still a long way off.

Like this time last year, it looks like the decline in equity might be short lived.  The year could end up looking a lot like the last, in which case I will be somewhat disappointed.  I'm not in the PP so that I can watch stocks give decent, steady returns.

Lowe, don't abandon the PP after one of the longest bull markets in equities the US has ever experienced. Consider adding equity to a VP if you feel you are missing out on this opportunity. As I've outlined before, my 401K is a 60/40 BH portfolio, so that portion of my assets has benefited from the rise in equities. It certainly helps mentally. Keep in mind that the PP is still handily beating the S&P500 YTD as well as the 60/40 allocation.

[dualstow]

A few years ago, the ten-year peformance of the S&P was pretty dismal. I think it was about zero.

[Lowe]

Bonds have had a great run, and I'm hoping to see them break 35%.  I got especially hopeful after news pf the Fed plans to put off raising the FFR, till June, but a re-balance out of bonds is still a long way off.

Like this time last year, it looks like the decline in equity might be short lived.  The year could end up looking a lot like the last, in which case I will be somewhat disappointed.  I'm not in the PP so that I can watch stocks give decent, steady returns.

Lowe, don't abandon the PP after one of the longest bull markets in equities the US has ever experienced. Consider adding equity to a VP if you feel you are missing out on this opportunity. As I've outlined before, my 401K is a 60/40 BH portfolio, so that portion of my assets has benefited from the rise in equities. It certainly helps mentally. Keep in mind that the PP is still handily beating the S&P500 YTD as well as the 60/40 allocation.

Yeah, I do that too.  40% US equity, 20% Foreign, and 40% Total Bond.  My 401k isn't very big, so it gives me only so much comfort.

I have no plans to abandon the PP for the bulk of my money, but I will be a lot happier with it once I get to see stocks treading water.  Here is to hoping Russia and Greece pulls the rest of Europe into a financial panic.  Maybe Obama can help.

[dualstow]

I have no plans to abandon the PP for the bulk of my money, but I will be a lot happier with it once I get to see stocks treading water.  Here is to hoping Russia and Greece pulls the rest of Europe into a financial panic.  Maybe Obama can help.

LOL, why would you want stocks to tread water?  Sure stocks don't always rise because things are fundamentally good, but thinking of the economy, I'd rather make money on stocks than on the other assets.

[Lowe]

Like I wrote previously, I didn't go into the PP because I thought stocks were the right choice.  The longer they appear to be the right choice, the more of a fool I think I am.  Maybe I shouldn't wish bad outcomes to other people, but frankly I do, because it's not about them.

[buddtholomew]

The PP generates its gains from prosperity and a rise in equities. The other assets are selected to buoy the portfolio when stocks decline. At least that is my view of the role they play in the portfolio.

I too enjoy watching the PP outperform when equities decline. Unfortunately, this may occur in conjunction with widespread job losses that could impact me as well. Its a catch-22, but at least my investmets will hopefully support my living expenses during this time.

[barrett]

A few years ago, the ten-year peformance of the S&P was pretty dismal. I think it was about zero.

Check out the bottom chart on this link:

http://www.advisorperspectives.com/dsho ... -Highs.php

It shows that real returns on the S&P even with dividends reinvested were in negative territory for 13 years. If you were unlucky enough own a NASDAQ index fund in 2000, you would still be way down in negative territory. This assumes no dollar cost averaging in and no asset diversification.

Incidentally, rolling real ten-year returns were also negative for a 60/40 stock/bond portfolio twice in the 1970s and again 1999-2008.

[dualstow]

Figures that that TLT would jump to 133 after I unload 10K worth of long bonds. I am the master of timing!
Bad timing. (Well, I was tired of watching my worse bonds dip below zero profit, and I need the $).

[buddtholomew]

Figures that that TLT would jump to 133 after I unload 10K worth of long bonds. I am the master of timing!
Bad timing. (Well, I was tired of watching my worse bonds dip below zero profit, and I need the $).

I chose last week to stop looking at investments, especially the PP. I was tired of tinkering and monitoring. What a relief to remove the shackles. The PP is my financial advisor and will notify me if action is required when a rebalancing band is triggered.

[sophie]

Who are you and what have you done with buddtholomew?

Good for you. It's healthier that way. I still check my finances once a month, and that's probably too often. But I do like to log into all my accounts about that often, and that's what the check is really for.

Dualstow, sorry about your bond timing, but just think how happy you'll be to get rid of that home equity loan.

[buddtholomew]

Not sure Sophie...
I relinquished control to a well constructed portfolio to manage my wealth.
I also realized that any timing moves to date usually had a small to negligible impact on overall returns.
I did TLH IAU in November 15, took the loss and purchased an equivalent amount of PHYS that same day. Sold a portion of SPY to rebalance to 25/17.5/17.5/40 last month.
Still 70/30 in retirement accounts under-performing PP by 1.5% YTD. Mostly attributed to a VG International fund up only .6%

[sophie]

"Relinquishing control" is a really interesting way to put it.

Count yourself lucky that the timing moves had a negligible impact. The couple of times I yielded to temptation and did something like that, I ended up losing out. I guess I'm a really crappy investor so I finally figured an automatic system is wiser than me.

[Kbg]

Rebalancing bands are timing and they implement the well thought out and well researched timing functions of buy low / sell high and risk control. Bands have proven to be a robust method in the literature. Much depends on asset volatility as to band sizes chosen but larger ones capture trends better and smaller ones reduce risk better. Either way they serve a useful function. If one can't avoid frequent tinkering then just set them small and tinker away knowing you are likely reducing risk while likely sacrificing some return...just don't do it randomly.

[jafs]

You could also just set them to re-balance every year.

In some ways that's the most "agnostic" approach - figuring we have no idea how things will do next year, regardless of how they've gone this year.

[dualstow]

I like both rebalancing bands and annual rebalancing, and I don't think of either as timing.
They might technically be timing, but I think of timing as, "It feels like the market is high and ready for a drop. Maybe I should sell."

[Kbg]

The literature is pretty clear...bands are better than annual. Really just think of it from a common sense viewpoint. In a flat year annual rebalancing does nothing useful and just adds cost. But if you are going to do annual, then pick May or October 1 for seasonal tendency reasons. Another potential rebalance is a clear and distinct abnormal spike...this assumes you've done your statistical homework to know what one is quantitatively. However, these are far less reliable particularly for gold.

All said and done, the best thing for "you" is to rebalance in a way that "you" can do with discipline and consistency via a set of pre-established rules. Seat of the pants rebalancing is highly likely to be both total return damaging and playing to a psychological need at exactly the wrong time for your account.

[MachineGhost]

The literature is pretty clear...bands are better than annual. Really just think of it from a common sense viewpoint. In a flat year annual rebalancing does nothing useful and just adds cost. But if you are going to do annual, then pick May or October 1 for seasonal tendency reasons. Another potential rebalance is a clear and distinct abnormal spike...this assumes you've done your statistical homework to know what one is quantitatively. However, these are far less reliable particularly for gold.

I've never seen any literature on bands that I can recall, so what was determined to be optimal? I haven't found much difference at P2T but clearly you can eek out a few bits more gain and reduce risk if you use 40/10 bands than annual rebalancing or 35/15. To me that is just exploiting the momentum effect. I wish I could backtest bands with a high level of confidence using risk parity, but I do not trust those homemade backtesters in R.

Bands really seem to be an area ripe for further exploration and experimentation, but no one seems interested because who does the PP that is a quant oriented? Almost no one. We're the Rodney Dangerfield of finance.

[Kbg]

MG,

There's definitely some out there. I've read it. I'll see if I can find a link or two. I would be surprised if band balancing wasn't better than annual with the PP. Regarding tweaking PP, I assume you've read the GestaultU stuff from a few years back. Verifying their work should be doable in AB now that it is capable of matrix operations to do the MVO analysis..my problem is A) I've long forgotten matrix Algebra and my AB custom backtest skills are about zero.

[MachineGhost]

MG,

There's definitely some out there. I've read it. I'll see if I can find a link or two. I would be surprised if band balancing wasn't better than annual with the PP. Regarding tweaking PP, I assume you've read the GestaultU stuff from a few years back. Verifying their work should be doable in AB now that it is capable of matrix operations to do the MVO analysis..my problem is A) I've long forgotten matrix Algebra and my AB custom backtest skills are about zero.

I haven't mentioned this in the Resort, but I did backtest dynamic naive risk parity in AB using a 12-month lookback period and annual rebalancing. It does outperform the regular PP a bit but is it worth all the complications over using 40/10 bands? I think programming it up to be dynamic correlated is only going to be a marginal improvement, if at all. As InsuranceGuy's research has shown, the momentum effect seems to overwhelm everything else, so I suspect that is what drives it rather than any risk parity.

We could also use some research in figuring out the ideal amount of bonds to always hedge the equity. Neither weight nor volatility seem to be a perfect match. My ideal is to completely neuter any losses. I have a hypothesis that it could be duration related.

[Kbg]

For my personal situation I am still in the asset growth phase of life so I'm more focused on growth and would (do) lever up. Today I've been messing around with portfolio analyzer using leveraged ETF risk parity. I'm going to do it more thoroughly tomorrow...it has been pretty interesting.

I still shake my head in awe at how well this particular simple mix of assets does in terms of risk/reward properties. I don't think it is particularly good for wealth building as a 1x, but that isn't a big issue to overcome.