5 year ladder vs Cash and 30 year barbell

Discussion of the Bond portion of the Permanent Portfolio

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grapesofwrath
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Re: 5 year ladder vs Cash and 30 year barbell

Post by grapesofwrath » Sun Aug 06, 2017 7:10 am

I just hold a ladder of 5yr(7yr) T-Notes to maturity. This choice is in large part due to my behavioral reasons not the subtleties of barbell/bullet and tax. I would not have the stomach to watch the fluctuation of long term bonds and likely be inclined to panic. To me its like Goldilocks and the Three Bears - middle of the curve is 'just right'. I don't see the need for cash : the ladder yield and rung maturity (if fine enough) can cover that. Moreover I hold them with Treasury Direct so I'm not forced to watch daily rise/fall as in a brokerage account. Holding at TD makes them difficult to sell, and that is good for me. Also, I couldn't be bothered running around chasing yield of the day at weird little banks.
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Re: 5 year ladder vs Cash and 30 year barbell

Post by grapesofwrath » Sun Aug 06, 2017 7:49 am

Desert wrote:More recently, Mr. Melvy has moved to a bogle 3-fund portfolio and holds TBM.
Desert, Thats interesting. I wonder what caused his change of heart. In my mind the only really significant differences between the PP and 3-fund boglehead portfolio is gold and the two camps seem to hold opposite extreme views. (I've always struggled with gold and am light on it and just view it as a small uncorrelated diversifier and insurance of last resort)
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Kbg
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Re: 5 year ladder vs Cash and 30 year barbell

Post by Kbg » Sun Aug 06, 2017 8:09 am

Not really related but sorta...I'm fairly eclectic in my investing approaches using different investing/trading systems but earlier this year I decided I was not really paying much attention to the cash aspect of my holdings and decided to rectify that. Turns out it was one of the more complex things I've done in a while. Many good thoughts provided here on the board which were very helpful in developing my strategy. Treasury direct vs. an ETF was a significant decision point. To make it simple...is $700 annually worth it to pay Vanguard (VGSH) to manage a $100k portfolio of STTs...a good simple clarifying question.


So thanks to posters on this topic current and past.
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sophie
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Re: 5 year ladder vs Cash and 30 year barbell

Post by sophie » Sun Aug 06, 2017 9:27 am

Desert wrote:Regarding holding cash, I simply don't see the purpose because an intermediate treasury fund or ladder can be turned into cash very quickly. The taxable versus tax-deferred account space may influence the decision in some cases. My approach is to average out the entire duration to equate to an intermediate treasury fund of 5-7 years maturity, choosing the best options available to me, whether they're treasuries, CD's, savings accounts, I bonds, etc.
IT funds are not cash. You can turn any asset into cash on short notice, but at what cost? There is a huge advantage to holding cash, but it's not (directly) about the return:

1) It lets you include your emergency fund as part of the portfolio. With the usual TBM/IT fund or even a small-ish ladder, you need to keep a separate emergency fund. Which ends up making it look like your returns are better than they actually are, because you're not counting this de facto cash allocation.

2) Cash is dry powder that lets you take full advantage of market corrections via rebalancing (see Craig/MT's book about this).

3) If you are withdrawing from the portfolio, cash allows you to avoid having to sell assets that may have dropped in value. This of course is more likely to happen when you need to withdraw from the portfolio (cf what happened to a lot of people who lost jobs in 2008-2009).
Those same people will also tell you that you can't predict when you need to withdraw from the portfolio.

I'm interested in why Melvyr chose to switch to a 3 fund portfolio with TBM. It's certainly doing better than the PP right now, but not by THAT much - I hold one of those myself in a gold-unfriendly retirement account and I track its performance relative to the PP. Can post my return data if anyone's interested, although that would be just a real-life confirmation of Tyler's portfolio charts.
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Re: 5 year ladder vs Cash and 30 year barbell

Post by whatchamacallit » Sun Aug 06, 2017 2:06 pm

Kbg wrote:To make it simple...is $700 annually worth it to pay Vanguard (VGSH) to manage a $100k portfolio of STTs...a good simple clarifying question.
Would that not be $70 a year? Expense ratio of VGSH is 0.07 %
7% would be $7,000
0.7% would be $700
0.07% would be $70


$70 probably a good deal. I am not sure if there is a commission on the agency bonds this fund if you bought them directly.
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Kbg
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Re: 5 year ladder vs Cash and 30 year barbell

Post by Kbg » Sun Aug 06, 2017 2:09 pm

Oops...I'm sure I meant another zero ;)
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Re: 5 year ladder vs Cash and 30 year barbell

Post by barrett » Sun Aug 06, 2017 7:11 pm

doodle wrote:Is there a calculator out there that is good to calculate yield vs price changes for various duration bonds?
doodle,

Try this tool:

http://www.free-online-calculator-use.c ... calculator

I haven't used a calculator like this before but this one seems to work fairly well. Note that I am basing that conclusion on the fact that when I input numbers for bonds I actually own, the price comes out correct.

What it doesn't seem to take into account is total return including interest payments. It just allows you to calculate the price movement of a bond based on its par value, coupon rate, compounding interval, current interest rate and years to maturity. It doesn't seem to be able to accept a yield of 0% but you can input, for example .1% or .01, etc. You can even plug in negative numbers, just not zero for some reason.

It shows about what one would expect... not a very dramatic ride with five-year issues and huge swings with 30-years issues.

Note that it doesn't allow one to input actual duration but I believe it still works.

If anyone else has a better calculator they use, please share. Thanks.
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Re: 5 year ladder vs Cash and 30 year barbell

Post by doodle » Mon Aug 07, 2017 5:39 pm

Thanks! I'll give it a try. As far as holding cash, I don't see how 1 and 2 year bonds as they would be held in a five year ladder differ greatly from cash...

I can envision a scenario where 30 year rates dip below 2 percent in some market crash but at some point holding them makes increasingly less sense given the potential downside vs upside especially for someone trying to simply preserve capital.
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Re: 5 year ladder vs Cash and 30 year barbell

Post by barrett » Mon Aug 07, 2017 8:02 pm

doodle wrote:I can envision a scenario where 30 year rates dip below 2 percent in some market crash but at some point holding them makes increasingly less sense given the potential downside vs upside especially for someone trying to simply preserve capital.
I am struggling with this as well. On my 30-year bonds that mature 11/15/43, if the yield dropped to zero, that would give me a return of about 72% from the current rate of about 2.82% (convexity kicks in when rates gets super low). Some 30-year European debt got close to zero last year but I would think the odds of it happening here are rather low.

What I keep coming back to with bonds is that we know gold can increase seven-fold in value because we saw that in the 2000s. We know stocks can triple in price because we've seen that over the last eight years. From these levels bonds just don't have the necessary oomph to carry the portfolio in the same way that gold and stocks can. My understanding with the PP is that stocks bonds and gold are supposed to have similar volatility. From my three plus years invested this way, that seems to be the case. But from 2.8% most of the potential volatility would seem to be on the downside. Someone please point out the flaw in my thinking here!

I'd be curious to know what you come up with, doodle.
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Re: 5 year ladder vs Cash and 30 year barbell

Post by Lonestar » Thu Aug 10, 2017 12:14 pm

This may be a terribly elementary question, but how does one hold a ladder of intermediate term (5yr) treasury bonds? Looks like you would either have to have equal amounts in treasuries maturing in years 1 through ten to equate a 5yr duration. Or, start purchasing a 5yr maturity treasuries each year for 5 consecutive years. I'm sure I'm missing something here....................
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Re: 5 year ladder vs Cash and 30 year barbell

Post by mukramesh » Thu Aug 10, 2017 2:27 pm

Lonestar wrote:Or, start purchasing a 5yr maturity treasuries each year for 5 consecutive years.
@Lonestar: This statement is correct.
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Kbg
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Re: 5 year ladder vs Cash and 30 year barbell

Post by Kbg » Thu Aug 10, 2017 7:42 pm

mukramesh wrote:
Lonestar wrote:Or, start purchasing a 5yr maturity treasuries each year for 5 consecutive years.
@Lonestar: This statement is correct.
Or stagger with various lengths to start out (i.e. the 2 and 3 year notes and 52wk bill) until you can get into the 5/1yr rhythm.
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