Clarification on TLT duration

[melveyr]

Hello all,

This is my first post on the forum and I look forward to many more because it seems like a great place to learn. So i made the leap and bought the PP, so far its been about a month.

I'm using TLT for the long bond portion because i have free equity trades. However I keep reading mixed things about the TLT's effective maturity. It's labeled as ranging from 10-20 years but when I look at the portfolio of bonds etrade says it has an effective duration of 15.39  years. I have seen other sites use numbers around the 16 year mark as well. Looking up treasury yields the 20 year is at about 3.8 and the 30 is at 4. So the TLT is right in between leading me to believe it is behaving as 10-20 year bond as advertised. As anyone else found the definitive answer? I'm ultimately wondering if the TLT has as much kick as harry browne would like.

[craigr]

Welcome to the forum!

Duration is what you want to look for as it best represents the sensitivity to interest rates. TLT's duration is around 15-16 or so as you point out which is very close to the duration you'd have if you bought long term bonds yourself. Although it's always best to own the bonds yourself if you are able, the TLT fund is a good choice for those that can't or don't want to do this.

If you want the scoop on any fund it's always best to go directly to the fund's own website and bypass the third-party information. In the case of TLT, you can read all about it at the iShares site which should have the definitive answer:

http://us.ishares.com/product_info/fund ... ew/TLT.htm

They say effective duration is 15.54 years currently with average maturity of 28 years. That's what I'd rely on.  

Fundamentals as of 6/25/2010
Weighted Average Maturity 28.07 yr
Weighted Average Coupon 4.45%
Effective Duration  15.54
Standard Deviation (3 year) 
as of 4/30/2010 16.59%

[melveyr]

Ah. Ok. I realize now that I really didn't understand what effective duration was. I was confusing it with average weighted maturity. I'm only 19 so I don't have enough capital to buy physical gold or treasury bonds and make it worth the expenses involved. I would love to own a vault behind a secret book case with both safely stashed inside though someday haha.

[MiniB]

A duration of 15 years means that for every 1% increase in interest rates, the value of the principal will drop by 15%.  Conversely for every 1% decrease in interest rates, the bond will rise by 15%.  That 15% is the duration.

So a short term bond fund with a duration of 2 years will move by 2% for every 1% change in interest rates.

The duration formula is not exactly linear so it changes dynamically a little as interest rates change.

[MediumTex]

I'm only 19...

Learning about HB at 19 and getting it is pretty impressive.

Congratulations.  You are way ahead of most already.

[melveyr]

Thanks. I'm pretty excited about it. I feel like I own my own mini hedge fund, except unlike most hedge funds I'm actually hedged . I have heard all the reasoning for running a riskier allocation at my age, but with the PP I can put away more money than I would with all stocks. I have 90% of my money in the PP and fall asleep great every night. I do consider removing the cash portion sometimes but I am sticking it out for now. Thanks for everyone's posts. And thanks craigr for this amazing slice of the internet you provide. It's pretty remarkable.

[Storm]

Wow, I'm impressed.  If I would have found out about PP and started at 19 I could be halfway retired by now...    As it is I'm just starting PP at 36 so if everything works out ok I'll be able to retire comfortably at a normal age of 65 or so.  You are probably going to be able to retire any time after 50 if you want.  Congratulations!