PP bonds or ladder... direct lay-over

[ochotona]

When I examine the traditional PP ST + LT Treasury configuration, versus a Treasury ladder (equal parts ST, Intermediate Term, 10 year, and Long Term), they look the same on Portfoliovisualizer.com. But the latter bond sub-portfolio is psychologically easier to own, you don't feel like you're taking as huge a bet on rates.

[craigr]

The Cash/LT bond split is easy for most people to pull off. Not a lot of maintenance in an already intimidating market where they are asked to buy bonds directly which many people have never done.

I think as you go up the scale in terms of bond laddering mechanics the complexity increases of course, but also the time the investor spends mucking around with things which can cause unintended consequences like timing the bond market, etc.

I find it's easier to just keep things simple and mess around with the portfolio as little as possible. So for me, it's cash and simple direct LT bond purchases all the way.

[ochotona]

Portfolio 1: 50% LT Treasuries, 50% ST Treasuries
Portfolio 2: 100% 10 year Treasury
Portfolio 3: 25% ST Treasuries, 25% Intermediate Treasuries, 25% 10 year Treasury, 25% LT Treasuries
Portfolio 4: 100% Intermediate Term Treasuries

Personally, it's easier for me to own #3 vs. #1, but in the end, it doesn't really matter.

[img width=800]http://i779.photobucket.com/albums/yy76 ... nfj0ma.png[/img]

Portfolio 4 results (BEST OF THE FOUR, ACTUALLY)

CAGR  7.44%
STD DEV  6.71%
BEST YEAR  28.77%
WORST YEAR  -4.33%
MAXDD  -4.33%
SHARPE  0.40
SORTINO  0.90

[ochotona]

Even Total Bond Market doesn't differ much from those four examples.  I'm pretty much settling in on Intermediate Treasuries, but I'd be willing to use some TBM if I had to.

Half Intermediate Treasuries and half TBM sounds pretty good. Just no Emerging Market bonds or High Yield bonds!

[barrett]

Personally, it's easier for me to own #3 vs. #1, but in the end, it doesn't really matter.

I think "ease of ownership" means a great deal when you are talking about maybe not obsessing over how volatile an asset is. It's true that the PP aims to capture the benefits of volatility but why build something into a portfolio that makes the majority of investors squirm if there is no consistent advantage to it? There seem to only be a few posters on here who are so zen with the PP that they don't even bother to check their balances.

This is a good find, ocho. And, at least to me, this doesn't seem difficult to maintain. It requires a few more transactions but it's really just maintenance that could be done once a year.

I'm pretty sure HB considered an extended period of low rates but actually sucking it up and purchasing 30-year bonds when they yield 2.5% is really hard in practice, at least for most humans. I always ponder at what level would I get the hell out of 30-years bonds because there is so much more interest-rate risk when yields are low. Spreading maturities out over the yield curve might make holding the FI portion of the PP mentally easier.

[mathjak107]

that is a point i keep repeating .  every strategy at some point reaches it's waterloo . some just take longer than others .  i think the pp needed to reach a point where yields on bonds became so low , interest on cash non existent to 1% and gold being nothing more then dead weight to reach that point .

in my opinion the assets went from helping each other as each could develop strong trends to getting in the way of each others tepid performance stalling each others feeble attempt  out . 

while pp users love to go back and look at charts of what was the fact is today that may be like driving and looking in the rear view mirror with any older investment strategy as these times never existed before .

we never had zero interest rates and such high stock valuations together and the return to normal may be many many years away or not in some of our lifetimes .  it took 40 years to get here .

so what do i think the new strategy's will be ?

i think conventional investing with more insurance type products mixed in  with your own investing will become more popular . dead body's are far more predictable for basing income on then markets and rates may be by themselves going forward.

especially because since 2000 volatility is higher.  a 60/40 sees much higher , frequent swings than pre 2000 and that makes folks uncomfortable as the swings in dollars get bigger .

those in even 50/50 mixes are seeing far wider swings then they signed on for so i believe both tempering volatility and maintaining a certain base cash flow to the investment model will become more popular through the use of insurance products .

unconventional times may take unconventional investing methods .

i would be lying if i said i wasn't nervous about my own retirement as day 1 i retired in to this down turn .  the swings in dollars are insane . i saw a 100k swing in 10 minutes the day we dipped 1000 points .


so more and more i think researchers are nailing it and our own more conservative models with insurance products may end up being the best route to take .

put a model together that plays nice together so they do not get in each others way and set that income base with insurance products , maybe even laddered spia's to improve outcomes when market and rates do not co-operate .

[mathjak107]

the good news is more and more research in integrated strategy's are being done today then ever before .  folks want less volatility and more guarantees so that is where research efforts are being devoted.

already many of the study's have turned my head around from being a hater of any and all annuity products to realizing they are as different as can be , many are so low cost in comparison to some of the guarantees that you really wonder how they can do it .  well they get to invest in something we can't- DEAD BODY'S  .

the bang for the buck with some of these deferred longevity annuity products is amazing .

when you only plan to age 85 or so and not 95 the difference in your strategy needed can be a world apart . then if you or a spouse do live that long the annuity kicks in .

it can be a very very nice way of enjoyiing your own money more , investing less aggressively and being covered if you live past 85 .

to me it seems a far better option than trying to do it solely with our own investing and shouldering 100% of that burden ourselves 

[barrett]

in my opinion the assets went from helping each other as each could develop strong trends to getting in the way of each others tepid performance stalling each others feeble attempt out . 

math, I get that no PP asset has been able to establish a strong trend in recent months. Harry Brown had spoken about that many times... that sometimes it would take a while for trend to develop. But putting HB aside, how exactly are PP assets getting in the way of each other? Haven't they always done that to a certain extent? What is the specific difference between assets having a good deal of negative correlation and them "getting in the way of each other"?

[mathjak107]

they get in the way now because expected returns on anything are weak and because we never really have stocks at high valuations and bonds at high valuations and cash near zero , the likelihood of equities , bonds and cash performing below average for quite a while is very high .

just watch the days action now as stocks take off and gold or volatile LT  bonds pull the pp down to a loss .

the pp needs strong trends in something but today such a horse does not exist  . until things change somewhere which could take many years  mediocre results from anything may be a fact of life .

the more an asset diminishes the effect of equity's which i believe will still be the horse even at weak levels the harder it will be for the portfolio to pull out . equity's have always been the lead horse over most of history because they do tend to recover the fastest .

[barrett]

I guess I just don't see that anything has fundamentally changed since 2008. Stocks were high in late 2007/early 2008 & the long bond was at about 4.5%. Stocks plunged and long bonds dropped to about 2.6%. If you rebalanced then, great. It was classic PP buy high, sell low in action. But bond yields quickly went back up again (as in January of 2009) and then staged excellent performances in both 2011 and 2014. This puts them in this relatively narrow trading range that folks have talked about frequently on this forum. They will at times inflict portfolio pain (PP) but you can still get some excellent periods from them. You just need to trim your holdings after a rally, IMO.

I would say the same for stocks even though their bull markets tend to be longer. Stocks appear to be very fragile at the moment. They have tended to plunge on negative news and, by your own admission, have lower than expected returns going forward for the next few years. One could easily make the argument that now is a terrible time to be in stocks because they are so susceptible to negative news from The Fed, China or wherever. Should one really hold an asset that is so fragile in the face of negative news? I think the answer is yes because they well may be the engine that drives a portfolio over the next X amount of time.

I know you have often cited February of 2015 as the end of the great bond bull but you could also pick January of 2009 or some other time since then. Yes, yields are low from a historic standpoint but that has been the case for seven years now.

[mathjak107]

time will tell right ?

[barrett]

time will tell right ?

Yes, I think we can all agree on that!

[mathjak107]

the big difference between 2007 and now was bonds were continuing their decline and paying in the high 4% range and  had quite away to go  in appreciation  and cash was at about 5-1/2 %. 

[barrett]

the big difference between 2007 and now was bonds were continuing their decline and paying in the high 4% range and  had quite away to go  in appreciation  and cash was at about 5-1/2 %.

They also got up to 4.6% - 4.7% again in 2011 and almost 4% at the beginning of 2014. Again, I just don't see that anything has fundamentally changed. What I do see is their current yields are too low to pull off a 2008 repeat, unless they were to drop to something less than 2%.

[mathjak107]

that bump up in rates was a speed bump in a bond bull market .

i don't think we are still in a bond bull market.  that can be a pretty big gamble if you are wrong holding long term bonds  a rise in rates is becoming more likely and that will strengthen the dollar more .  not good for gold and making manufacturers here even less competitive over seas hurting earnings further .


i would sooner chance a total bond fund than than LT bonds at this stage . this is nothing like 2007

[ochotona]

that bump up in rates was a speed bump in a bond bull market .

i don't think we are still in a bond bull market.  that can be a pretty big gamble if you are wrong holding long term bonds  a rise in rates is becoming more likely and that will strengthen the dollar more .  not good for gold and making manufacturers here even less competitive over seas hurting earnings further .


i would sooner chance a total bond fund than than LT bonds at this stage . this is nothing like 2007

Agreed, I am extremely pleased with ETF SCHZ, similar to BND, it pays about the same coupon as a 10 year Treasury, and the volatility is much less. I am sleeping better.

[barrett]

that bump up in rates was a speed bump in a bond bull market .

i don't think we are still in a bond bull market.  that can be a pretty big gamble if you are wrong holding long term bonds  a rise in rates is becoming more likely and that will strengthen the dollar more .  not good for gold and making manufacturers here even less competitive over seas hurting earnings further .

i would sooner chance a total bond fund than than LT bonds at this stage . this is nothing like 2007

The long bond has been under 4% since July of 2011. Yes, rates may rise but, if anything, I see a dramatic rise as less likely now than even a couple of years ago. I see a lot of deflationary pressure all over the place. The US is the big growth engine of the world right now and I am frankly not impressed.

Not saying that there is anything wrong with a total bond fund. My wife and I hold a bit of that where it's most practical to do so. And I'd never say that now is the time to go all in on 30-year bonds. I just think that they can still play an important part in a diversified portfolio.