5 year ladder vs Cash and 30 year barbell
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5 year ladder vs Cash and 30 year barbell
Im trying to do some upside / downside calculations on whether for capital preservation it makes more sense in the present environment to trade in my (25% - 30 year) / (25% - Cash) barbell style traditional permanent portfolio for a (50% - 5 year ladder). The yield difference between the 5 year and the 30 year is only 1% and I would like to start plotting what the upside vs downside potential for these two strategies would be in both rising and falling rate scenarios. Is there a calculator out there that is good to calculate yield vs price changes for various duration bonds?
Re: 5 year ladder vs Cash and 30 year barbell
doodle,doodle wrote:Im trying to do some upside / downside calculations on whether for capital preservation it makes more sense in the present environment to trade in my (25% - 30 year) / (25% - Cash) barbell style traditional permanent portfolio for a (50% - 5 year ladder). The yield difference between the 5 year and the 30 year is only 1% and I would like to start plotting what the upside vs downside potential for these two strategies would be in both rising and falling rate scenarios. Is there a calculator out there that is good to calculate yield vs price changes for various duration bonds?
How will you know for sure that rates will rise or fall?
-Don’t lock up your Cash-designated assets in intermediate/long-term securities.
Your first big chunk of Cash needs to be “Shallow Cash,” dedicated to regular expenses, an emergency fund, and rebalancing.
-Don’t chase yield with your PP Cash.
Banks will try to convince you that you can get a better yield investing with them. That offer always requires that you assume additional risk in safety, stability, or liquidity in your Cash. Don’t be fooled by the sales pitch and don’t take on additional risks with your Cash.
-Don’t overload your IRA with CDs or TIPS.
The tax-deferred space in your IRA is limited. Save that space for potentially higher yielding stocks and 30 year T bonds. Buying I bonds automatically creates new tax deferred space outside of IRAs. They also offer better tax treatment after you reach age 70 ½. You are planning on living that long, aren’t you?
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
Re: 5 year ladder vs Cash and 30 year barbell
I don't know for sure if rates will rise or fall but Im simply trying to ascertain the risk vs reward of switching to a 5 ladder should rates get much lower from here.
Re: 5 year ladder vs Cash and 30 year barbell
You may wish to do a search on Clive and bond ladder.
I remember he covered this in detail a few years back.
I remember he covered this in detail a few years back.
Re: 5 year ladder vs Cash and 30 year barbell
You might want to consider a second opinion on the benefits of the barbell strategy.
See:
Ryan Melvy, Stable Investing
“The combination of greater tax efficiency and liquidity make the barbell approach far superior to an intermediate bond fund. In fact, I can’t think of any compelling advantages to the intermediate funds. Perhaps they are easier to watch than the barbell for an undisciplined investor but for an investor who sees the bigger picture, barbells are the way to go.”
http://www.stableinvesting.com/2011/12/ ... rbell.html
See:
Ryan Melvy, Stable Investing
“The combination of greater tax efficiency and liquidity make the barbell approach far superior to an intermediate bond fund. In fact, I can’t think of any compelling advantages to the intermediate funds. Perhaps they are easier to watch than the barbell for an undisciplined investor but for an investor who sees the bigger picture, barbells are the way to go.”
http://www.stableinvesting.com/2011/12/ ... rbell.html
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
Re: 5 year ladder vs Cash and 30 year barbell
I think the motivation for doodle's post is the flattening of the yield curve:
Date 1 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 20 Yr 30 Yr
08/04/17 1.00 1.08 1.14 1.23 1.36 1.51 1.82 2.08 2.27 2.61 2.84
I really don't know what to do in this situation either. It's not much of a barbell if a 30 year bond gets you less than 0.6% extra interest over a 10 year bond - i.e. the extra 20 years gets you about what you get going from 1 month to 3 years. There's been flattened or even inverted curves before, but we've never discussed how to respond to it. PP simulations just rocket through these periods, so probably nothing disastrous will happen. But if I were in the market for long bonds right now, I'd give serious consideration to buying 10 years as long as this situation holds.
However - I wouldn't abandon the barbell structure. Having cash is just way too valuable to give up. The only modification I'd make is to shorten the maturities of the long bonds.
Date 1 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 20 Yr 30 Yr
08/04/17 1.00 1.08 1.14 1.23 1.36 1.51 1.82 2.08 2.27 2.61 2.84
I really don't know what to do in this situation either. It's not much of a barbell if a 30 year bond gets you less than 0.6% extra interest over a 10 year bond - i.e. the extra 20 years gets you about what you get going from 1 month to 3 years. There's been flattened or even inverted curves before, but we've never discussed how to respond to it. PP simulations just rocket through these periods, so probably nothing disastrous will happen. But if I were in the market for long bonds right now, I'd give serious consideration to buying 10 years as long as this situation holds.
However - I wouldn't abandon the barbell structure. Having cash is just way too valuable to give up. The only modification I'd make is to shorten the maturities of the long bonds.
- Mark Leavy
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Re: 5 year ladder vs Cash and 30 year barbell
I really appreciated this post Sophie. Thank you.
I rebalanced recently - and (not surprisingly) cashed in on some profits from equities. I refreshed my cash reserve. A very nice feeling. And... to lessen the tax blow, I have been debating on whether or not to do some tax loss harvesting by selling bonds and rebuying similar but different coupons. Your comments now have me thinking that it might make sense to sell 30's and buy 10's - as part of the process of registering the tax losses. Some serious thinking to do.
As always, thank you for your well thought out comments.
Mark
I rebalanced recently - and (not surprisingly) cashed in on some profits from equities. I refreshed my cash reserve. A very nice feeling. And... to lessen the tax blow, I have been debating on whether or not to do some tax loss harvesting by selling bonds and rebuying similar but different coupons. Your comments now have me thinking that it might make sense to sell 30's and buy 10's - as part of the process of registering the tax losses. Some serious thinking to do.
As always, thank you for your well thought out comments.
Mark
sophie wrote:I think the motivation for doodle's post is the flattening of the yield curve:
Date 1 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 20 Yr 30 Yr
08/04/17 1.00 1.08 1.14 1.23 1.36 1.51 1.82 2.08 2.27 2.61 2.84
I really don't know what to do in this situation either. It's not much of a barbell if a 30 year bond gets you less than 0.6% extra interest over a 10 year bond - i.e. the extra 20 years gets you about what you get going from 1 month to 3 years. There's been flattened or even inverted curves before, but we've never discussed how to respond to it. PP simulations just rocket through these periods, so probably nothing disastrous will happen. But if I were in the market for long bonds right now, I'd give serious consideration to buying 10 years as long as this situation holds.
However - I wouldn't abandon the barbell structure. Having cash is just way too valuable to give up. The only modification I'd make is to shorten the maturities of the long bonds.
Re: 5 year ladder vs Cash and 30 year barbell
Somewhere on this board a month or two ago I posted an analysis...and if one's assumption is that rates are going up using a bullet was a no brainer. After interest rates get higher then it makes sense to extend again...of course, good luck predicting interest rates.
The simple mechanics to remember...early in the cycle you get crushed if you are long and especially at the rates we are now. After a while interest rate increases do less damage and you get more compensated as the coupon size increases.
The simple mechanics to remember...early in the cycle you get crushed if you are long and especially at the rates we are now. After a while interest rate increases do less damage and you get more compensated as the coupon size increases.
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Re: 5 year ladder vs Cash and 30 year barbell
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
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)Desert wrote:More recently, Mr. Melvy has moved to a bogle 3-fund portfolio and holds TBM.
Re: 5 year ladder vs Cash and 30 year barbell
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.
So thanks to posters on this topic current and past.
Re: 5 year ladder vs Cash and 30 year barbell
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: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.
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
Would that not be $70 a year? Expense ratio of VGSH is 0.07 %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.
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.
Re: 5 year ladder vs Cash and 30 year barbell
Oops...I'm sure I meant another zero ![Wink ;)](./images/smilies/wink.gif)
![Wink ;)](./images/smilies/wink.gif)
Re: 5 year ladder vs Cash and 30 year barbell
doodle,doodle wrote:Is there a calculator out there that is good to calculate yield vs price changes for various duration bonds?
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.
Re: 5 year ladder vs Cash and 30 year barbell
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.
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.
Re: 5 year ladder vs Cash and 30 year barbell
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.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.
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.
Re: 5 year ladder vs Cash and 30 year barbell
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....................
Re: 5 year ladder vs Cash and 30 year barbell
@Lonestar: This statement is correct.Lonestar wrote:Or, start purchasing a 5yr maturity treasuries each year for 5 consecutive years.
Re: 5 year ladder vs Cash and 30 year barbell
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.mukramesh wrote:@Lonestar: This statement is correct.Lonestar wrote:Or, start purchasing a 5yr maturity treasuries each year for 5 consecutive years.
Re: 5 year ladder vs Cash and 30 year barbell
OK.......just classic "ladder building". I've been going with intermediate funds and ETF's but am very interested in a T bond or secondary CD ladder. guess I need to just jump in an start the process.
Re: 5 year ladder vs Cash and 30 year barbell
Lonestar, it sounds like you understand how to build the ladder, but the question is what average duration you really want. If you're trying to replace an intermediate fund, look up the duration of the fund for comparison. Your earlier example of the 1..10 ladder may be closer to what you need (or some less tedious version with fewer rungs spaced farther apart, like 3,6,9 or 2,4,6,8). The 1,2,3,4,5 ladder averages out to a shorter 2-3 year duration.
Re: 5 year ladder vs Cash and 30 year barbell
I'm not trying to replace an intermediate fund, I'm looking for additional ways to maintain fixed income at around a 5 year duration (probably using secondary market CD's). I'm currently using individual treasuries and CD's of various maturities. My objective is to try to get more organized with these so, all combined, will hit that 5 year duration and be in a ladder format.Mr Vacuum wrote:Lonestar, it sounds like you understand how to build the ladder, but the question is what average duration you really want. If you're trying to replace an intermediate fund, look up the duration of the fund for comparison. Your earlier example of the 1..10 ladder may be closer to what you need (or some less tedious version with fewer rungs spaced farther apart, like 3,6,9 or 2,4,6,8). The 1,2,3,4,5 ladder averages out to a shorter 2-3 year duration.
You mention the 3,6,9. Are you suggesting purchasing these maturities and actually holding to the maturity date? i.e. on maturity of the 3 year repurchasing a 9 year? If so, I could do the same with a 4,5,6.
Re: 5 year ladder vs Cash and 30 year barbell
How do you all use the ladder in your cash allocation? Whether for the PP, emergency fund, or other portfolio.
I figure that some portion of the cash allocation needs to be ready to be dipped into at any time. I'd be afraid of busting up a ladder by having to sell lower rungs early, leaving a suddenly longer duration holding. That could happen during a rebalance, or just because there's an emergency like you suddenly need a $20,000 home repair.
I have sort of a multi-tiered cash structure in mind:
Tier 1 - bank savings account
Tier 2 - T bills < 1 year, 1 year CDs, treasury money market
Tier 3 - 1-3 year treasuries typically held to maturity
Tier 4 - savings bonds, longer treasuries held to maturity, 5 year CDs
If tiers 1 and 2 are at least 1/3 of your cash holding, I think you're safe for rebalancing. A ladder could work for Tiers 3 and 4. That would be up to 2/3 of cash allocation, minus whatever you choose to put into savings bonds.
Thoughts?
I figure that some portion of the cash allocation needs to be ready to be dipped into at any time. I'd be afraid of busting up a ladder by having to sell lower rungs early, leaving a suddenly longer duration holding. That could happen during a rebalance, or just because there's an emergency like you suddenly need a $20,000 home repair.
I have sort of a multi-tiered cash structure in mind:
Tier 1 - bank savings account
Tier 2 - T bills < 1 year, 1 year CDs, treasury money market
Tier 3 - 1-3 year treasuries typically held to maturity
Tier 4 - savings bonds, longer treasuries held to maturity, 5 year CDs
If tiers 1 and 2 are at least 1/3 of your cash holding, I think you're safe for rebalancing. A ladder could work for Tiers 3 and 4. That would be up to 2/3 of cash allocation, minus whatever you choose to put into savings bonds.
Thoughts?
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Re: 5 year ladder vs Cash and 30 year barbell
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
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.
![Evil >:D](./images/smilies/evil.gif)
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.