5 year ladder vs Cash and 30 year barbell

Discussion of the Bond portion of the Permanent Portfolio

Moderator: Global Moderator

User avatar
buddtholomew
Executive Member
Executive Member
Posts: 2464
Joined: Fri May 21, 2010 4:16 pm

Re: 5 year ladder vs Cash and 30 year barbell

Post by buddtholomew » Fri Aug 11, 2017 12:54 pm

Doodle, I personally manage fixed income duration to a precise 5.62 (BND equivalent) using a combination of LTT's (TLT ~17.6) and a Savings account (0 duration, 1.15%). Controlling the amount of cash in or out of the savings account and updating effective duration in my spreadsheet weekly enables me to be as anal as I want >:D

Its simple, elegant and competitive to a 5-year treasury. I still hold LTT's and also hold more cash than most but it serves the purpose of lowering overall fixed income duration to more comfortable levels and helps with the SWAN factor too.
grapesofwrath
Associate Member
Associate Member
Posts: 46
Joined: Thu Jul 14, 2016 5:57 am

Re: 5 year ladder vs Cash and 30 year barbell

Post by grapesofwrath » Sat Aug 12, 2017 9:25 am

sophie wrote:How do you all use the ladder in your cash allocation?
I actually buy T-notes at auction every month - extra grief but that fine granularity insures the coupon payments are evenly distributed, rate fluctuations are well averaged, and a maturing rung is only a month away if I need.

To start in the first year buy 1,2,3 and 5 year notes (you could double the amount in 1 yr rung), then in second year wit the maturing 1 year notes buy the 3yr (to fill on the hole from previous year) and the 5 year notes, then the following years the intermediate rungs are full so just need to keep buying the 5yr with maturing rungs.
User avatar
sophie
Executive Member
Executive Member
Posts: 1959
Joined: Mon Apr 23, 2012 7:15 pm

Re: 5 year ladder vs Cash and 30 year barbell

Post by sophie » Sat Aug 12, 2017 10:12 am

grapesofwrath wrote:
sophie wrote:How do you all use the ladder in your cash allocation?
I actually buy T-notes at auction every month - extra grief but that fine granularity insures the coupon payments are evenly distributed, rate fluctuations are well averaged, and a maturing rung is only a month away if I need.

To start in the first year buy 1,2,3 and 5 year notes (you could double the amount in 1 yr rung), then in second year wit the maturing 1 year notes buy the 3yr (to fill on the hole from previous year) and the 5 year notes, then the following years the intermediate rungs are full so just need to keep buying the 5yr with maturing rungs.
So what happens if you suddenly need to access a large chunk of cash, e.g. due to rebalancing or to meet a major expense? Your ladder suddenly becomes an intermediate bond fund. Not the end of the world as if you need more cash I guess you'd sell bonds and take the gain/loss, but that's not ideal.

I like the idea of a ladder but just trying to get my head around this possible wrinkle.

Another issue with a ladder: who knows where rates are headed. I'm assuming that until the Fed calls it quits on interest rate increases, I should stick with short durations.
grapesofwrath
Associate Member
Associate Member
Posts: 46
Joined: Thu Jul 14, 2016 5:57 am

Re: 5 year ladder vs Cash and 30 year barbell

Post by grapesofwrath » Sat Aug 12, 2017 10:57 am

sophie wrote:Another issue with a ladder: who knows where rates are headed. I'm assuming that until the Fed calls it quits on interest rate increases, I should stick with short durations.
Exactly, since I don't where rates are going I will sit in the middle. I figure a 5(/7)yr ladder will keep track with inflation and its average maturity is short enough to track a moderate rate rise : eg. two or three 25 point rises a year. I could loose a couple percent, big deal. But I'm certainly not tempted to go to 20/30 years for only 1% extra at several times the vulnerability. So I don't hold long bonds. I wouldn't be able to sleep at night.

If stocks crashed I would be more than happy to feed the lower rungs into equities. Thats my dream. (and probably rates would come down then anyway). Alternatively, if rates and inflation improved at a healthy rate my alternative hope is real rates on TIPS improved I would start feeding buy some of those and get some rational/safe inflation protection. Basically my 5yr bond ladder is a holding pattern....

Rebalancing:
Coupons from the notes in my TD account just accumulate in 30 day bills or its 0% cash account (proper cash) and dividends from stock just go into (Vanguard) money market account. After while I will push accumulated cash to either equity and/or new bond rungs for rebalancing.
I'm not overly worried about "emergency cash" : I (currently) have an OK job, no mortgage/debt, decent insurance.
My coupon payments/dividends over a few months are OK. Anyway, whats the worst that would happen ? - I don't reinvest a few rungs (I have monthly granularity; I don't/won't/can't sell actual note because they purposely in TD to prevent me from doing this; which I might be tempted to do in a fund if I could see its value), better than having that pure cash sitting there indefinitely at half the interest waiting for disaster.
User avatar
buddtholomew
Executive Member
Executive Member
Posts: 2464
Joined: Fri May 21, 2010 4:16 pm

Re: 5 year ladder vs Cash and 30 year barbell

Post by buddtholomew » Sat Aug 12, 2017 11:03 am

grapesofwrath wrote:
sophie wrote:Another issue with a ladder: who knows where rates are headed. I'm assuming that until the Fed calls it quits on interest rate increases, I should stick with short durations.
Exactly, since I don't where rates are going I will sit in the middle. I figure a 5(/7)yr ladder will keep track with inflation and its average maturity is short enough to track a moderate rate rise : eg. two or three 25 point rises a year. I could loose a couple percent, big deal. But I'm certainly not tempted to go to 20/30 years for only 1% extra at several times the vulnerability. So I don't hold long bonds. I wouldn't be able to sleep at night.

If stocks crashed I would be more than happy to feed the lower rungs into equities. Thats my dream. (and probably rates would come down then anyway). Alternatively, if rates and inflation improved at a healthy rate my alternative hope is real rates on TIPS improved I would start feeding buy some of those and get some rational/safe inflation protection. Basically my 5yr bond ladder is a holding pattern....

Rebalancing:
Coupons from the notes in my TD account just accumulate in 30 day bills or its 0% cash account (proper cash) and dividends from stock just go into (Vanguard) money market account. After while I will push accumulated cash to either equity and/or new bond rungs for rebalancing.
I'm not overly worried about "emergency cash" : I (currently) have an OK job, no mortgage/debt, decent insurance.
My coupon payments/dividends over a few months are OK. Anyway, whats the worst that would happen ? - I pull out a few rungs, better than having that pure cash sitting there indefinitely at half the interest waiting for disaster.
If you're willing to give up LTT's why hold the PP at all?
Or maybe, you no longer wish to hold the PP.
grapesofwrath
Associate Member
Associate Member
Posts: 46
Joined: Thu Jul 14, 2016 5:57 am

Re: 5 year ladder vs Cash and 30 year barbell

Post by grapesofwrath » Sat Aug 12, 2017 12:29 pm

buddtholomew wrote:If you're willing to give up LTT's why hold the PP at all?
Or maybe, you no longer wish to hold the PP.
I'm not a strict adherent to the PP - never was, never will be. I hold the same three components : stocks, treasuries and gold, but not in the proportions advocated by PP. I like the fact that the PP has these three basic uncorrelated components for simple robust portfolio. I don't feel cash+long bonds give any real benefit over intermediate bonds. (Yes, bullet, barbell blah blah but not even the Fed knows which way rates will go or can't even influence them at the high end). As for gold I believe it can provide a useful diversifier as an uncorellated asset but am more comfortable with it at ~10%. I feel its PP weight at 25% is too heavily influenced by transition from time when gold was money to a decoupled fiat currency. Beyond not being uncorrellated I get some comfort gold could provide "insurance" of last resort (albeit unlikely) but am troubled that its "value" is not "tied" to a yield. (also the fact that it attracts so many weirdos doesn't help me ). I would be more aligned with what you call a "Desert Portfolio". That is where I am comfortable.
User avatar
buddtholomew
Executive Member
Executive Member
Posts: 2464
Joined: Fri May 21, 2010 4:16 pm

Re: 5 year ladder vs Cash and 30 year barbell

Post by buddtholomew » Sat Aug 12, 2017 12:37 pm

I can't fault you for feeling more comfortable with a conventional allocation. I hold both a BH and HB portfolio that blended together produces a 50/40/10 allocation.

It's interesting to watch how both portfolios perform daily and either the bullet or barbell approach are more similar than they are different.

Good luck.
User avatar
sophie
Executive Member
Executive Member
Posts: 1959
Joined: Mon Apr 23, 2012 7:15 pm

Re: 5 year ladder vs Cash and 30 year barbell

Post by sophie » Sat Aug 12, 2017 5:13 pm

I think Jack Bogle and Harry browne would have gotten along. I wonder if they ever met?

In regards to the proportion of gold in the PP...it's not arbitrary, it was based on a set of simulations run by Harry Browne. He doesn't report the results as far as I know, but describes the outcome in one of his books. Also, Tyler's portfolio charts supports at least a 20% gold allocation. Look at what happens in the 1970s - 10% or even 15% gold wasn't enough to sustain a portfolio through that time period. I know everyone wants to discount the 1970s, as if it couldn't happen again. Hopefully afros, disco, shag carpeting, and 1970s architecture won't ever come back, but I'm not as confident about the financial conditions.

10% is better than nothing and easier for most people to stomach, which I guess is the idea of the Desert Portfolio. Sustainable trumps optimal after all!
User avatar
vnatale
Executive Member
Executive Member
Posts: 9422
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: 5 year ladder vs Cash and 30 year barbell

Post by vnatale » Tue Jan 14, 2020 9:26 pm

MangoMan wrote:
Sat Aug 12, 2017 12:49 pm
buddtholomew wrote:BH and HB portfolio
Wow, I never noticed that this is kinda palindromic. I wonder if that is significant? :o
A GEM worthy of being resurrected!

Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
Post Reply