Large LTT purchase

Discussion of the Bond portion of the Permanent Portfolio

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ppnewbie
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Large LTT purchase

Post by ppnewbie » Thu May 23, 2019 1:55 pm

Trying to figure out how this works. The numbers magnitude I am talking about is in the hundreds of thousands of dollars - TLT will end up costing quite a bit per year nearly $1000 so want to just buy the bonds.

Do I just buy a bunch of the longest 30 year bonds I can buy and not worry about a laddering or rolling. If I do this, they will all hit their 20 year mark at a pretty much the same time. So I'll have a massive sale (Tax Deferred) and then redo it all? I have a tax deferred account and a taxable account.

How would this work in each of those accounts.
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Re: Large LTT purchase

Post by pmward » Thu May 23, 2019 2:41 pm

Personally what I would do is buy all of them at the next auction (next one is June 6). Then you can roll them a little each year. So if you want to target a 5 year rollover you sell and rollover 1/5 for the next 5 years, then after then they just roll automatically. If you do a 10 year rollover, you sell and rollover 1/10 every year for the next 10 years.
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Kbg
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Re: Large LTT purchase

Post by Kbg » Thu May 23, 2019 2:46 pm

Good problem to have.

We know not much about your account other than taxable and tax deferred. Standard practice would be to put all of these in the tax differed and put other assets (stocks/gold particularly) in the taxable.

Assuming you can buy open market bonds (e.g. those already issued) via a brokerage account(s) I'd definitely ladder. You want to be able to reinvest if interest rates ratchet up. (But that's an implicit forecast for sure)
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Re: Large LTT / STT purchase

Post by ppnewbie » Thu May 23, 2019 2:47 pm

Expanding the question to STT

Should I buy 1mo,3mo,6mo,1yr in equal proportions with autoroll enabled (see note). OR
Just put it all in 1 yr tbills with autoroll enabled.
Or maybe buy 1/12 for a year and have a permanent 1 year tbill.

Note: autoroll feature only rolls into the same duration tbill.
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Re: Large LTT / STT purchase

Post by pmward » Thu May 23, 2019 2:53 pm

ppnewbie wrote:
Thu May 23, 2019 2:47 pm
Expanding the question to STT

Should I buy 1mo,3mo,6mo,1yr in equal proportions with autoroll enabled (see note). OR
Just put it all in 1 yr tbills with autoroll enabled.

Note: autoroll feature only rolls into the same duration tbill.
It doesn't really matter to be honest. I originally started down the path of having some in 1 mo, 3 mo, etc but quickly realized I was overcomplicating things and canned it for just all 1 year bills. I'm trying to spread it out a bit throughout the year so I have at least 3-4k maturing each month, just so I have short dated liquidity for emergencies. Aside from that 3-4k per month for emergencies, the rest of it I use some discretion to place wherever I want to put it at the time. In the meantime while I'm building this 1 year bill ladder out, the cash I need to ladder in future months for the rest of the year is all either sitting in the Fidelity treasury money market fund or SHV.

When it comes to cash just whatever works for you and your liquidity needs will be fine. When in doubt, keep it simple. It's funny how we here make cash, what should be the simplest asset, into the most complicated asset just to try and chase a measly extra 10-20 basis points out of 1/4 of our portfolio, haha.
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Re: Large LTT purchase

Post by pmward » Thu May 23, 2019 2:59 pm

Kbg wrote:
Thu May 23, 2019 2:46 pm
Assuming you can buy open market bonds (e.g. those already issued) via a brokerage account(s) I'd definitely ladder. You want to be able to reinvest if interest rates ratchet up. (But that's an implicit forecast for sure)
Mathematically, is there really any difference between buying a ladder, or just buying all at auction up front? All changes in past yields should be prorated into the existing bonds.
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Re: Large LTT purchase

Post by ppnewbie » Thu May 23, 2019 3:50 pm

Excellent Thread:
FNBGX vs. individual bonds at Fidelity
viewtopic.php?f=3&t=9866&hilit=FNBGX

I can probably start with all FNBGX (.03% ER) and figure it out (.03% ER).
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Re: Large LTT purchase

Post by pmward » Thu May 23, 2019 3:57 pm

ppnewbie wrote:
Thu May 23, 2019 3:50 pm
Excellent Thread:
FNBGX vs. individual bonds at Fidelity
viewtopic.php?f=3&t=9866&hilit=FNBGX

I can probably start with all FNBGX (.03% ER) and figure it out (.03% ER).
Yep, that would be a good low cost fund. You can even do the same thing I'm doing with cash, use that fund as a way to dollar cost average into direct LTT's. If you're doing the standard 10 year rollover, you could put 1/10 into direct long term treasuries and 9/10 into FNBGX, then each year for the next 10 years peel 1/10 out of that fund and into direct bonds.
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Re: Large LTT purchase

Post by ppnewbie » Thu May 23, 2019 4:07 pm

pmward wrote:
Thu May 23, 2019 3:57 pm
ppnewbie wrote:
Thu May 23, 2019 3:50 pm
Excellent Thread:
FNBGX vs. individual bonds at Fidelity
viewtopic.php?f=3&t=9866&hilit=FNBGX

I can probably start with all FNBGX (.03% ER) and figure it out (.03% ER).
Yep, that would be a good low cost fund. You can even do the same thing I'm doing with cash, use that fund as a way to dollar cost average into direct LTT's. If you're doing the standard 10 year rollover, you could put 1/10 into direct long term treasuries and 9/10 into FNBGX, then each year for the next 10 years peel 1/10 out of that fund and into direct bonds.
Thanks I was thinking that exact thing.
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Kbg
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Re: Large LTT purchase

Post by Kbg » Thu May 23, 2019 11:04 pm

pmward wrote:
Thu May 23, 2019 2:59 pm
Kbg wrote:
Thu May 23, 2019 2:46 pm
Assuming you can buy open market bonds (e.g. those already issued) via a brokerage account(s) I'd definitely ladder. You want to be able to reinvest if interest rates ratchet up. (But that's an implicit forecast for sure)
Mathematically, is there really any difference between buying a ladder, or just buying all at auction up front? All changes in past yields should be prorated into the existing bonds.
Yes, because the coupons will all be different on day 1. Ladders at the end of the day are an averaging mechanism. If you know interest rates are heading straight south then you would never ladder and you would load up on 30 yr bonds. If you knew interest rates were headed straight north you would buy 4wk T-Bills. If you don’t claim to know any of that in advance, ladders get you the average over the time period you run the ladder at the bond duration level you target.

In the financial markets average is good. Most investors don’t achieve it.
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Re: Large LTT purchase

Post by pmward » Fri May 24, 2019 8:57 am

Kbg wrote:
Thu May 23, 2019 11:04 pm
pmward wrote:
Thu May 23, 2019 2:59 pm
Kbg wrote:
Thu May 23, 2019 2:46 pm
Assuming you can buy open market bonds (e.g. those already issued) via a brokerage account(s) I'd definitely ladder. You want to be able to reinvest if interest rates ratchet up. (But that's an implicit forecast for sure)
Mathematically, is there really any difference between buying a ladder, or just buying all at auction up front? All changes in past yields should be prorated into the existing bonds.
Yes, because the coupons will all be different on day 1. Ladders at the end of the day are an averaging mechanism. If you know interest rates are heading straight south then you would never ladder and you would load up on 30 yr bonds. If you knew interest rates were headed straight north you would buy 4wk T-Bills. If you don’t claim to know any of that in advance, ladders get you the average over the time period you run the ladder at the bond duration level you target.

In the financial markets average is good. Most investors don’t achieve it.
Well I was speaking purely about laddering 30 year in the context of a PP where someone rolls over at 20 year maturity. Mathematically, the if someone is buying all 30 year bonds anyways, there shouldn't be much difference in the purchase (assuming all are in tax deferred, obviously in taxable lower yields are more tax efficient). I mean, they will be a bit more volatile the first couple years on a day to day basis, but come time to sell and roll there shouldn't really be much difference. I'm not sure if it's worth the hassle to split up and buy in the repo markets 10% 2009 issue, 10% 2010 issue, ... I'm a big fan of "keep it simple, stupid" wherever possible.
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Re: Large LTT purchase

Post by Kbg » Fri May 24, 2019 9:44 am

There are probably endless ways to do this...I personally would ladder annually for sound financial reasons as a lot can happen in 5 years and especially with 30 yr bonds. But if simplicity is a significant issue, go for it. It’s your $$$.

If you are going to roll out at the 20 or 25 year point do your duration calculations, run some scenarios and make sure you are good with the potential results if interest rates go up. What you will find in general is A) you will roll with a loss most likely (specifics will matter here) and B) laddering will have been a better financial choice.

A good assumption for scenarios is nominal at 4-7%.
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