Maximum Bond Upside

[buddtholomew]

Does that mean you are abandoning the plan?

[MachineGhost]

Does that mean you are abandoning the plan?

My feeling is I'll wait until either a bounce or a breakdown happens and then reasses the state of the assets. Tight Money could be right around the corner in which case all three assets are gonna bleed like a stuck pig. After today's bad earnings on AA, T-Bonds may recover enough.

I did change one thing. I'm lump-summing the entire month at once instead of by week. Hence my incerased caution.

[dualstow]

After today's bad earnings on AA,

Off-topic: I had a limit order in to sell my Alcoa that I put in just the day before. It did not trigger (it was not a stop loss), so I felt that 10% drop. Should have just sold it all at market last week.

[dutchtraffic]

You americans have nothing to complain still
The euro version of TLT (https://www.ishares.com/nl/particuliere ... tf-de-fund) is yielding 0.35% .....

I am not fully invested yet and i need to invest quite a lot of euros......do i have the balls to buy long bonds at 0.35% ........ *vomit*

[ochotona]

You americans have nothing to complain still
The euro version of TLT (https://www.ishares.com/nl/particuliere ... tf-de-fund) is yielding 0.35% .....

I am not fully invested yet and i need to invest quite a lot of euros......do i have the balls to buy long bonds at 0.35% ........ *vomit*

I sympathize with you, that's quite a tough situation. I hope we don't get to 0.35% long bonds over here.

[ochotona]

TLO below 200 day moving average. Long term rates in the USA headed higher,

[dualstow]

You americans have nothing to complain still

I agree completely.

[MachineGhost]

You americans have nothing to complain still
The euro version of TLT (https://www.ishares.com/nl/particuliere ... tf-de-fund) is yielding 0.35% .....

I am not fully invested yet and i need to invest quite a lot of euros......do i have the balls to buy long bonds at 0.35% ........ *vomit*

You're not in bonds for the yield, but capital gains.

[ppbob]

You americans have nothing to complain still
The euro version of TLT (https://www.ishares.com/nl/particuliere ... tf-de-fund) is yielding 0.35% .....

I am not fully invested yet and i need to invest quite a lot of euros......do i have the balls to buy long bonds at 0.35% ........ *vomit*

Is there any way for you to buy US government bonds? One argument I have read is that you might lose due to currency fluctuations. But the euro would have to appreciate a huge amount against the dollar to make up the difference in rates. And with all due respect, I think that given the political situation in Europe with Merkel's open doors Muslim immigrant policy the chances are the euro will lose ground against the dollar.

edit: I concede that the US political situation is not great but the last go around with Billary in the 90's shows that they are crooks but at least somewhat pragmatic. Unlike Merkel whose policy makes no sense to me.

[buddtholomew]

This may not be the appropriate thread, but I have often wondered how best to hedge a rising dollar as it clearly impacts US denominated investments like gold and oil.

I appreciate that a rising dollar enables me to purchase more abroad, but is it worthwhile to hedge with UUP or other? Is currency fluctuation a wash over time?

[dutchtraffic]

You americans have nothing to complain still
The euro version of TLT (https://www.ishares.com/nl/particuliere ... tf-de-fund) is yielding 0.35% .....

I am not fully invested yet and i need to invest quite a lot of euros......do i have the balls to buy long bonds at 0.35% ........ *vomit*

You're not in bonds for the yield, but capital gains.

Yes, but the lower the yield, the less potential capital gains left.

[buddtholomew]

You americans have nothing to complain still
The euro version of TLT (https://www.ishares.com/nl/particuliere ... tf-de-fund) is yielding 0.35% .....

I am not fully invested yet and i need to invest quite a lot of euros......do i have the balls to buy long bonds at 0.35% ........ *vomit*

You're not in bonds for the yield, but capital gains.

Yes, but the lower the yield, the less potential capital gains left.

Rates can and have gone negative.
Capital gains are not capped when bonds reach zero.

[dutchtraffic]

You're not in bonds for the yield, but capital gains.

Yes, but the lower the yield, the less potential capital gains left.

Rates can and have gone negative.
Capital gains are not capped when bonds reach zero.

Sure, It's just not very likely to see rates at -8%....

[buddtholomew]

Yes, but the lower the yield, the less potential capital gains left.

Rates can and have gone negative.
Capital gains are not capped when bonds reach zero.

Sure, It's just not very likely to see rates at -8%....

Nor at +8%, but I share your concern as well.

[MachineGhost]

Yes, but the lower the yield, the less potential capital gains left.

That is false. It's called convexity. Look it up.

[ochotona]

Thirty year T-bond yields are up about 0.7% since end of September. Makes we wonder if we're on a long term path back to normalcy. I am a buyer if we get north of 4%, I have Treasuries already, but not long term. Interesting times.

[curlew]

Yes, but the lower the yield, the less potential capital gains left.

That is false. It's called convexity. Look it up.

From the wiki..... The part where it says "Then it is easy to see" is a hoot.

[tarentola]

I have a dilemma a bit like duchtraffic's earlier on in the thread.

I am in Euroland and have a Euro PP and a VP, as well as a high-yield portfolio. Now that I am retired, I have finally accepted that I am not good at speculation. I want to abandon the VP and include its contents in the PP where possible. (The HY port does all right, mainly because I don't trade it!).

Including the VP contents in the PP has essentially meant shoehorning Emerging Market and Japan ETFs and some sector ETFs (Health and Tech) into the PP share allocation, and adding cash. I think this remains a reasonable non-US PP, as the allocation within the share compartment is now Europe 57%, EM 14%, Japan 14%, Health and Tech 15%. I have exposure to the US in the HY shares, so I won't add any US shares here for the moment.

The resulting PP is now 26-18-30-26% shares-long bonds-gold-cash. It is within rebalance limits, but I would like to maintain a straight 4x25 PP, so should add some bonds to the 18%. However, as discussed in this thread, this does not seem like a good time to buy bonds, particularly long bonds. So I would be grateful for opinions on how and when to go about topping up the bonds. For example:
- do nothing until a rebalancing band is hit
- buy bonds but not long bonds: intermediate bonds for example, to reduce duration and risk
- grit teeth and buy long bonds anyway in normal PP fashion
- do a partial top-up, using intermediate or long bonds
- wait for the Fed announcement on interest rates next week and buy bonds when the smoke has cleared
- or other suggestion?

A high-yield portfolio (31% of total) and a permanent portfolio (57%) and a savings account (12%) are perhaps not such a bad combination. But the HY portfolio could be cut in half in the next market crash. After (re)reading extensively on this forum and elsewhere, I aim to slowly incorporate all my investments including the HY shares and the cash savings account into the PP, but that is perhaps a subject for another thread.

[tarentola]

Long bonds in the PP worked very well in recent years in countering market dips. I am still reluctant to add to my long bonds at the moment because of the risk of rising rates.

I did a comparison of two PPs in Portfolio Visualizer, a conventional PP with long bonds and another with intermediate bonds replacing long bonds, 5/25% rebalancing. To my surprise, there was little difference between them, and the difference depended on the period examined. For 1972-2016, the long bond version wins by a small margin. CAGRs and MaxDDs are virtually identical with differences of a fraction of a percent. For 1972-1990, the intermediate bond version wins, again by a small margin. In recent years, the long bond version performs better, beating the intermediate version's CAGR by about half a percentage point in 2000-2016.

So although I understand the theory that long bond volatility is a counterbalance to stock and gold volatility, I conclude that in practice, intermediate bonds have historically worked just as well. So why be exposed to the interest rate risk of long bonds if they provide no consistent extra return? Or is there something I am not getting here?

(PP with long bonds and 5/25% rebal 1972-2016: CAGR 8.55%, MaxDD -13.40%. Intermediate bonds 8.32% and -12.95%. Inflation-adjusted. Sharpe 0.51 in both cases.)

[ochotona]

I noticed this also.

[barrett]

I did a comparison of two PPs in Portfolio Visualizer, a conventional PP with long bonds and another with intermediate bonds replacing long bonds, 5/25% rebalancing. To my surprise, there was little difference between them, and the difference depended on the period examined. For 1972-2016, the long bond version wins by a small margin. CAGRs and MaxDDs are virtually identical with differences of a fraction of a percent. For 1972-1990, the intermediate bond version wins, again by a small margin. In recent years, the long bond version performs better, beating the intermediate version's CAGR by about half a percentage point in 2000-2016.

This is the common "bullet vs. barbell" debate. Both seem to work OK if you are just looking at CAGR, but I believe that the cash portion of the barbell offers certain advantages. For example, if you include all your assets in your PP and you have a cash position of 25% (or whatever), that portion can be tapped for significant expenses without necessarily throwing off the whole mix by too much. With the bullet approach, you would likely be selling off some intermediate bonds (possibly at an inopportune time) if you wanted to take a largish chunk out for living, college, home repair expenses, etc.

If you have a separate emergency fund outside of your PP, this probably wouldn't be much of an issue.

Lastly, in a severe stock drawdown like 2008, having a bunch of cash allows one to rebalance and buy some cheaper shares fairly easily. Just food for thought. The intermediate approach might be good if the volatility of 30-year treasuries stresses you out. Being less stressed out has value as well. Investing shouldn't always be about maximizing CAGR.

[tarentola]

This is the common "bullet vs. barbell" debate. Both seem to work OK if you are just looking at CAGR, but I believe that the cash portion of the barbell offers certain advantages. For example, if you include all your assets in your PP and you have a cash position of 25% (or whatever), that portion can be tapped for significant expenses without necessarily throwing off the whole mix by too much. With the bullet approach, you would likely be selling off some intermediate bonds (possibly at an inopportune time) if you wanted to take a largish chunk out for living, college, home repair expenses, etc.

Thanks for the reply barrett, but this is not bullet v barbell. It is simply 25% LTTs v 25% MTTs. The portfolios I tested were both 25x4, and I simply replaced the 25% LTTs with 25% MTTs. I agree with you about the advantages of the cash portion.

Post by ochotona » Thu Dec 08, 2016 11:42 am
I noticed this also.

ochatona: did you take any action, or just hang on to your LTTs?

[dualstow]

{recacted}- I am still reluctant to add to my long bonds at the moment because of the risk of rising rates.

I did a comparison of two PPs in Portfolio Visualizer,
..., and the difference depended on the period examined
...
So although I understand the theory that long bond volatility is a counterbalance to stock and gold volatility, I conclude that in practice, intermediate bonds have historically worked just as well. So why be exposed to the interest rate risk of long bonds if they provide no consistent extra return?

Interesting. I don't have advice, but I thought Harry's idea was that intermediate bonds just don't have the volatility that 30-year ones do to make up for huge stock crashes. Maybe that's not true. I don't know, and I don't use Portfolio Visualizer.

I'm a bit stuck in recency bias, because having started in 2010, I don't know if I would still be with the pp if it weren't for my skyrocketing long bonds. (Yes, a lot of that profit has evaporated since the US election. And, it was a loss before that, before my best bonds were up 40%).

You said you've got a Euro pp. What specifically did you use when testing intermediate bonds? By the way, are we talking ten-years? At bogleheads, some consider five-year notes to be intermediate, too. Did European bonds generally perform the same from 2000-2016 as their American treasury counterparts? (Not a rhetorical question. I really don't know).

I'll continue to buy long bonds, but I am also reluctant to add any new ones until they're down to 15% of my pp.

[barrett]

Thanks for the reply barrett, but this is not bullet v barbell. It is simply 25% LTTs v 25% MTTs. The portfolios I tested were both 25x4, and I simply replaced the 25% LTTs with 25% MTTs. I agree with you about the advantages of the cash portion.

Sorry for the ramble, tarentola. I ran just calculations on peaktotrough.com and there does seem to be a considerable bump from using LTTs. Using the time period 1/1/75 though yesterday, I get a 7.78 CAGR with 10-year treasuries and a 8.21 CAGR with 30-year treasuries. That .43 difference doesn't sound like a lot but one would have ended up with 18% more money using the LTTs.

Just looking at numbers from 1/1/2000, the long bonds gave an overall bump to the portfolio of about 11%.

[tarentola]

dualstow

Yes, the European long bonds also performed well recently as in the US. My Euro long bond ETF (MTF.PA from Lyxor) is still showing a 25% profit despite being 12% off its recent high.

In Europe we don't have the same range of analytical tools for Euro ETFs and funds, so all my backtests refer to US investments. In Portfolio Visualizer, I simply took their category Intermediate Treasuries, for which PV uses the Vanguard ITT fund VFITX which is 5.6 years' duration. There is also a 10y Treasuries (duration 8.9y) category in PV, which not surprisingly gives results virtually identical to the ITT.