(Update: seeking the truth) Optimized PP Allocation 2020 (-Higher Sharpe Ratio, Sortino Ratio, Less Drawdown)

[Henryinroad]

UPDATE 15 / AUG / 2020
Just want to start over, and here's my reasoning:

Before reading further, pls delve into the specifics of this article:
https://www.bridgewater.com/grappling-w ... everywhere

My thought:
Backtesting is a bit (not entirely) useless:
Why useless?

1) The impressive past performance of PP is based on four cornerstones - one of which is TLT.
TLT worked , because when the government faced economic headwinds or crisis, they can stimulate the economy by loose monetary policies. The logic behind: Interest rate down , TLT up, offsetting the downside risk of Equity.

2) However, todays enivronment is unprecedented.
Interest rate is close to negative territory.
There is not much room for the Fed to reduce the interest level.
So whether TLT can provide a upside as a great buffer to the whole portfolio seems a biggest uncertainty to PP followers.

3) This abnormality is not taken into account when we backtest

4) Some possible solution to the dire future of TLT:
GOLD and TIP, regarde by Ray Dalio, as a better alternative to TLT.

Phase Five (The Latest Version)

Ticker Name Allocation
Anti recession:
TLT iShares 20+ Year Treasury Bond ETF 7.50%

TIP iShares TIPS Bond ETF 7.50% ( Depression -> stimulative/reflationary policy -> involve high debt levels -> policy makers have an incentive to lower real debt burdens by lowering real yields -> often by generating inflation-> Falling real yields cause IL bonds to outperform )

GLD SPDR Gold Shares 25.00% ( Depression -> stimulative/reflationary policy -> fiat currencies are being debased -> favourable to GOLD)


Stock:
VTI Vanguard Total Stock Market ETF 25.00%
QQQ Invesco QQQ Trust 5.00%

Cash:
CASHX Cash 30.00%


Result:
Click here

Note the backtest totally ignore today's distorted interest rate and assume TLT would work fine forever.
There are some serious concerns about whether TLT work the charm like it does.


UPDATE 8 / AUG / 2020

Really thankful for all the comments and insights. Thought-provoking, and has got me thinking how to solve the puzzles

Came as a surprise the use of TIPs raises most concerns among the members, this is a concern. I decided to spend a morning to do some research on this issue.

Source of my findings (Its really worth reading, highly recommended):
https://personal.vanguard.com/pdf/ISGCTIPS.pdf
https://www.alliancebernstein.com/CmsOb ... ckbook.pdf

Insightful Summary:
1) When we view tools for inflation hedge, we must analyze it in two perspectives: inflation beta(sensitivity), and consistency of the inflation hedge.

2) When we talk about inflation, we must factor in two scenario: sudden unexpected inflation, or expected.

3) GOLD has a much stronger inflation beta to inflation, which the spike in gold price will act as a cushion to the inflation impact to the whole portfolio. But the problem of GOLD is it doesnt deliver consistent and reliable inflation hedge performance. This is because of a myraid of factors that can alter the value of GOLD , deviate its function as an inflation hedge

4) TIP has a moderate inflation beta, that means it is showing moderate negative correlation to inflation, this must disappoint PP investors who wants to see TIP can offset losses in other assets. However, its strengths lies in its much more reliable persistance in hedging inflation.

5) Short term TIP, no matter facing unexpected inflation or expected, are far more effective inflation-hedge tools than Long Term Duration TIP. This is seen in many researches tracing decades of historical data.

6) Other issues of TIP inclues deflation exposure, tax inefficiency, and possible manipulation by the producer of the inflation index.

7) Researches shows that in choosing your "shields" to defend the storm of inflation, the optimal approach is to go for diversification (Not only GLD and TIP but also other "real assets" such as real estates). This would help investors gain best long-term reward and risk ratio.

First amendment:
Lower the TIP allocation to 5% as a "diversifier" and give 20% to GOLD as "core"

Second amendment:
Add 5% to "TOK" as "diversifier" and lower the allocation for VTI to 20% as "core".

TOK increase exposure to a broad range of companies, ex Japan, in developed markets:
United States 71.30
United Kingdom 4.58
France 3.59
Canada 3.44
Switzerland 3.38
Germany 3.13
Australia 2.27
Netherlands 1.45
Hong Kong 1.08
Sweden 1.08

Third amendment:
Lower the CASH allocation to 20% as a "core" and give 5% to other currencies ETF as "core"
1% FXA - Aussie Dollar
1% FXB - British Pound
1% CYB - Chinese Yuen
1% FXY - Yen
1% FXF - Swiss


Phase Four (The Latest Version)

CASH 25%:
FXF Invesco CurrencyShares Swiss Franc 1.00%
FXY Invesco CurrencyShares Japanese Yen 1.00%
CYB WisdomTree Chinese Yuan Strategy ETF 1.00%
FXB Invesco CcyShrs British Pound Stlg 1.00%
FXA Invesco CcyShrs Australian Dllr Trust 1.00%
CASHX USD Cash 20.00%

GOLD + TIPS 25%:
GLD SPDR Gold Shares 20.00%
TIP iShares TIPS Bond ETF 5.00%

STOCK 25%
TOK iShares MSCI Kokusai ETF 5.00%
QQQ Invesco QQQ Trust 5.00%
SPY SPDR S&P 500 ETF Trust 15.00%

BOND 25%
TLT iShares 20+ Year Treasury Bond ETF 25.00%


Click Here - Result

CAGR are almost identical to Classic PP
Stdev Drops from 7.06% to 6.08%
Max. Drawdown Drops: 12.65 to 12.16%
Sharpe Ratio Increase: 0.9 to 0.93
Sortino Ratio Increase: 1.61 to 1.65


Why subtantial change to the allocation?
This is totally based on the assumption from the viewpoint of Ray Dalio
https://www.bridgewater.com/ray-dalio-m ... nvironment

1) Put it simply, Ray Dalio cautioned that the world is much more chaotic than before, and he suggests : "stock and currency in the portfolio" should be "as diverisified as possible, more than ever", and invest in "competitive countries".

2) Problem is, if u increase too much your stock exposure to the globe, u are potentially sacrificising the exceptional outperforming returns from US stock market, which has been last for more than 20 years, for lower geographical risk.

3) Whenever I attempt to increase international exposure, the annualized return shown in backtesting will deminished quickly. This is because of the fairly weak economic performance of other developed countries for almost two decades.

4) So the main questions is if the superpower status of US will be gone in future? and replaced by others? I don't know. But I can sense the fear of Ray Dalio. Which make me want to do sth about that.

5) 5% diversification is an attempt for balance between some diversification and higher return

Welcome for any comments and feedback

===========================================
UPDATE 6 / AUG / 2020


Studying different famous portfolio models, I believe there is always a way to optimize a "standard" portfolio to suit your risk and reward preference. So, the standard 25% rule is no exception.

GOAL:
Lower Maximum Drawdown (10% , is it possible to keep it at 10% while earning more?)
Higher Sharpe Ratio (at least higher than Classic PP)
Respectable return (at least 7%)
Lower Stdev (5 - 6%, I want a smoother equity curve)
Sortino Ratio (Lower Downside Risk)


THis is the standard PP performance:
Click here

PP does a fanastic job in outperforming the standard 70:30 stock bond allocation in the sense of MUCH lower Stdev + Max. Drawdown and far superior Sharpe Ratio + Sortino Ratio.

Inspired by Ray Dalio AW, I think the standard PP can use TIPs as another tool to manage the inflation risk.
AW strategy has considerable emphasis on the use of TIPs, the value of TIPs is non-negligible.
If it is inferior to GOLD, Why they dont fully use GOLD?

Devling into the specifics, I start finding TIPs has its own merits/drawbacks vs GOLD
Click here

1) TIPs are much less volatile and risky:
- Max. Drawdown: 11.79% vs -42.91% !!
- Stdev: 5.58% vs 17.42% !!
Some reasons I guess: because 1) its an asset backed by US government, 2) its return rate is contractually linked to inflation rate with more certainty than GOLD

2) TIPs a huge annual correlation with GOLD. This somehow proves its value in substituting GOLD for inflation protection

3) Due to its lower volatility, TIPs also has lower CAGR
- CAGR: 4.08% vs 9.70%

To put it simply:
Gold volatility is quite crazy, while Tips can act as a stability cushion.
Gold annualized return is impressive. (From 2005)

What is the opportunity we see from the two extreme difference in these two assets:
Instead of solely relying on GOLD, we attempt to add TIPs in the portfolio.
This will help the portfolio capture the benefit of two inflation-proof assets.

To maintain impartial view between two assets,
equal allocation will be given to TIPs and GOLD
12.5% TIPs
12.5% GOLD

Let's see would the performance of TIPs hugely affected by the "sluggish" return of TIPs?
Click here

Stdev and Max Drawdown have both seen much better outcomes.
Stdev: 5.57% vs 6.71%
Max Drawdown: 12.63% vs 10.56%
Which is quite compelling

Of course, without the fuel of GOLD, annualized return would drop
7.73% -> 6.94%

Sharpe Ratio increased from 0.96 to 1

===============
So this is the Phase one of the modification

GLD SPDR Gold Shares 12.50%
TIP iShares TIPS Bond ETF 12.50%
CASHX Cash 25.00%
TLT iShares 20+ Year Treasury Bond ETF 25.00%
SPY SPDR S&P 500 ETF Trust 25.00%
===============

Phase two:
There must be something that can be used as fuel
Here we attempt to raise our stake in US tech by as little as 5%

GLD SPDR Gold Shares 12.50%
TIP iShares TIPS Bond ETF 12.50%
CASHX Cash 25.00%
TLT iShares 20+ Year Treasury Bond ETF 25.00%
SPY SPDR S&P 500 ETF Trust 20.00%
QQQ 5.00%

5% has its reasons, we cant add too much weighting to US tech, otherwise it can be risky.
In case of US tech bubble (which I find it unlikely, because the bubble in 2000 stemmed from the inability of US tech to materialized their fantasy and big plan to solid earnings, which is different from this era),
significant loss to QQQ will be manageable to the whole account

Here is the astonishing result:
Click here

Phase 2 inherit the stability from phase 1:
-10.37% Max Drawdown in 2008
-5.60% Stdev

But the 5% QQQ does improve the return
-7.23% CAGR (HEY! with much lower risk, the return is only 0.09% behind 70 stock : 30 bond strategy, and 0.5% behind classic PP! )

In terms of RISK / REWARD relationship
- 1.05 Sharpe ratio
- 1.82 Sortino Ratio , far higher than Phase 1 and classic PP


====================

Any suggestions or comments!?

[Smith1776]

I cannot argue much with your findings. You've done a great job of finding modifications to the HB PP. Most importantly, if this fits your temperament then all the better.

Coincidentally, I have been mentally mulling an approach that involves the use of TIPS (referred to as Real Return Bonds/RRBs here in Canada) in the PP. My idea isn't quite the same as yours but you might find that they meld together fairly well. You know how a lot of people split the gold allocation in the PP between physical and digital? Well, that physical allocation doesn't reflect itself in my account values and the portfolio becomes lopsided and cumbersome. I've always thought that it would be nice to have an asset class that fills in that "gap" left by the physical allocation. That's where TIPS/RRBs come in. You could do, say, the following:

Digital Portion of the PP:

- 25% stocks
- 25% bonds
- 25% cash
- 20% gold
- 5% TIPS/RRBs

Physical Portion of the PP:

- 5% physical gold

See how TIPS/RRBs fill in the gap and help to maintain portfolio balance? This allows inflation protected bonds to enter the picture with the PP without breaking the original balance found in Browne's ideas. Note that of course you can pick any percentage you want to allocate to TIPS and physical gold. I just arbitrarily chose 5%.

Another thought it is that you may want to consider adding international stocks and factor exposure in your equity. The 5% bet on QQQ is not a bad one given that it seems to be appropriately sized. I would say getting some global exposure, especially emerging markets is prudent. Further diversifying through momentum, size, value, etc. can allow for an improved return profile too. Perhaps something to experiment with?

The most squirrely facet of this whole topic is the risk factors attached to TIPS. There was an excellent post on the Knuckleheads forum recently by someone about TIPS risks in one of the many gold threads that have popped up. I don't want to get into a debate about the long-term efficacy and risks of a government's inflation guarantee at the moment (post is already long). All I'll say is that I don't fully trust them. Your proposal in the OP to take half of the gold portion of the portfolio and replace it with TIPS is the absolute max I would ever do and still be somewhat comfortable. This is, admittedly, a personal preference though.

Overall, I enjoyed your post and your work is great. Welcome to our community.

EDIT: Oh yeah, insert necessary comment here about how TIPS only protect the part of the portfolio that's actually invested in them against inflation. They don't have the kind of volatility gold has to protect the rest of the portfolio if needed.

[mathjak107]

my opinion is adds adds even more downside risk as far as the pp's Achilles heel , rising rates ...tips add to much additional rate sensitivity for my taste ... besides here in the US i would never trust putting those in charge of my interest adder who have a vsted interest in showing inflation is lower than it is if we start to go to high

[Kbg]

The main thing that should be understood is that if you add TIPS you are adding more bonds...full stop. The duration of TIPS is 7.83 while the duration of IEF is 7.64 which is a comparative duration fund consisting of treasury bonds. So if interest rates go up 1% (often due to inflation) your TIPS ETF is going down 7.83% along with your LTTs (TLT) that are going to go down 19.19% Your cash stash fortunately starts earning 1% more.

With regard to risk, your risk went down because you reallocated from gold to bonds...not because you added to/morphed gold in a less risky way. And, I assume you know your entire backtest was conducted in a falling rates environment.

Whatever you want to do with your portfolio is of course your choice, I just think you framed your results in a completely inaccurate fashion.

On the positive side, I think QQQ is a good add because I think tech is a long-term secular/structural issue phenomenon. Think of railroads in the 1800s which were "the" major driver of the market. However, to be clear it's a tilt to technology no doubt and therefore a bet that you are just bit smarter than the market consensus that gets expressed in a cap-weighted ETF.

I'm certainly not going to tell anyone on this board they shouldn't mess with the classic PP's allocation percentages, but if one is going to mess with them it should be done with an understanding of how the change is going to alter the portfolio's characteristics.

In short, the proposed adds more bonds at the expense of gold and tilts the stock component more to tech. Therefore, the portfolio is going to take on more "bondish" characteristics and less "goldish" ones.

[Kevin K.]

Lots of great responses here - and if I were the OP I'd especially take Kbg's to heart, along with carefully reading (or re-reading?) Craig Rowland and J.M. Lawson's book on the PP, which among other things addresses why TIPS are inappropriate for the PP.

https://www.goodreads.com/book/show/138 ... -portfolio

Obviously a lot of folks tweak the PP or use the lessons it offers to inspire other portfolios. But IMHO it's one thing to do so on the basis of not just backtesting but looking at the most and least likely economic conditions and what it costs to "defend" against each, as Tyler does with the Golden Butterfly, vs. what I see in this case which is radically altering the PP based on a couple of decades of market history, bets on tech and the existence of new sector funds like QQQ. Not to say it may not work out great, but I don't see anything "Permanent" about it. Maybe it's just a really interesting PP-inspired VP; nothing wrong with that.

[Henryinroad]

I cannot argue much with your findings. You've done a great job of finding modifications to the HB PP. Most importantly, if this fits your temperament then all the better.

Coincidentally, I have been mentally mulling an approach that involves the use of TIPS (referred to as Real Return Bonds/RRBs here in Canada) in the PP. My idea isn't quite the same as yours but you might find that they meld together fairly well. You know how a lot of people split the gold allocation in the PP between physical and digital? Well, that physical allocation doesn't reflect itself in my account values and the portfolio becomes lopsided and cumbersome. I've always thought that it would be nice to have an asset class that fills in that "gap" left by the physical allocation. That's where TIPS/RRBs come in. You could do, say, the following:

Digital Portion of the PP:

- 25% stocks
- 25% bonds
- 25% cash
- 20% gold
- 5% TIPS/RRBs

Physical Portion of the PP:

- 5% physical gold

See how TIPS/RRBs fill in the gap and help to maintain portfolio balance? This allows inflation protected bonds to enter the picture with the PP without breaking the original balance found in Browne's ideas. Note that of course you can pick any percentage you want to allocate to TIPS and physical gold. I just arbitrarily chose 5%.

Another thought it is that you may want to consider adding international stocks and factor exposure in your equity. The 5% bet on QQQ is not a bad one given that it seems to be appropriately sized. I would say getting some global exposure, especially emerging markets is prudent. Further diversifying through momentum, size, value, etc. can allow for an improved return profile too. Perhaps something to experiment with?

The most squirrely facet of this whole topic is the risk factors attached to TIPS. There was an excellent post on the Knuckleheads forum recently by someone about TIPS risks in one of the many gold threads that have popped up. I don't want to get into a debate about the long-term efficacy and risks of a government's inflation guarantee at the moment (post is already long). All I'll say is that I don't fully trust them. Your proposal in the OP to take half of the gold portion of the portfolio and replace it with TIPS is the absolute max I would ever do and still be somewhat comfortable. This is, admittedly, a personal preference though.

Overall, I enjoyed your post and your work is great. Welcome to our community.

EDIT: Oh yeah, insert necessary comment here about how TIPS only protect the part of the portfolio that's actually invested in them against inflation. They don't have the kind of volatility gold has to protect the rest of the portfolio if needed.

PP seems simple, but the customization of PP is far more complicated, and thank you for all your insights and inspiration.

I have updated my post with my thoughts , can't wait to hear your thoughts!

There are so many experiement ideas , esp on the topics of global exposure, that I am gonna start with.

Digital Portion vs Physical Portion is another issue that Im gonna look into too

Cheers!

[Henryinroad]

my opinion is adds adds even more downside risk as far as the pp's Achilles heel , rising rates ...tips add to much additional rate sensitivity for my taste ... besides here in the US i would never trust putting those in charge of my interest adder who have a vsted interest in showing inflation is lower than it is if we start to go to high

Rate sensitivity is not a bad thing. In theory, IPS could perform better in a rising interest rate environment than conventional Treasury bonds because their inflation adjustments provide better price protection, but only when rates are rising as a result of increasing inflation.

While in a rising interest rate environment , stocks and conventional treasury bonds could face pressure.

[Henryinroad]

The main thing that should be understood is that if you add TIPS you are adding more bonds...full stop. The duration of TIPS is 7.83 while the duration of IEF is 7.64 which is a comparative duration fund consisting of treasury bonds. So if interest rates go up 1% (often due to inflation) your TIPS ETF is going down 7.83% along with your LTTs (TLT) that are going to go down 19.19% Your cash stash fortunately starts earning 1% more.

With regard to risk, your risk went down because you reallocated from gold to bonds...not because you added to/morphed gold in a less risky way. And, I assume you know your entire backtest was conducted in a falling rates environment.

Whatever you want to do with your portfolio is of course your choice, I just think you framed your results in a completely inaccurate fashion.

On the positive side, I think QQQ is a good add because I think tech is a long-term secular/structural issue phenomenon. Think of railroads in the 1800s which were "the" major driver of the market. However, to be clear it's a tilt to technology no doubt and therefore a bet that you are just bit smarter than the market consensus that gets expressed in a cap-weighted ETF.

I'm certainly not going to tell anyone on this board they shouldn't mess with the classic PP's allocation percentages, but if one is going to mess with them it should be done with an understanding of how the change is going to alter the portfolio's characteristics.

In short, the proposed adds more bonds at the expense of gold and tilts the stock component more to tech. Therefore, the portfolio is going to take on more "bondish" characteristics and less "goldish" ones.

Code: Select all

So if interest rates go up 1% (often due to inflation) your TIPS ETF is going down 7.83% along with your LTTs (TLT) that are going to go down 19.19% Your cash stash fortunately starts earning 1% more.

The logic behind interest rate and all kind of stuff are complex. But in a nutshell, why interest rate would rise 1% ?
If this is because of the inflation, TIPS would rise isnt it?

One potential danger is, if rates were to rise in an environment of low or no inflation, TIPS’ prices could decline.

So I wonder what are the odds of this scenario. Perhaps worth more digging

[Henryinroad]

Lots of great responses here - and if I were the OP I'd especially take Kbg's to heart, along with carefully reading (or re-reading?) Craig Rowland and J.M. Lawson's book on the PP, which among other things addresses why TIPS are inappropriate for the PP.

https://www.goodreads.com/book/show/138 ... -portfolio

Obviously a lot of folks tweak the PP or use the lessons it offers to inspire other portfolios. But IMHO it's one thing to do so on the basis of not just backtesting but looking at the most and least likely economic conditions and what it costs to "defend" against each, as Tyler does with the Golden Butterfly, vs. what I see in this case which is radically altering the PP based on a couple of decades of market history, bets on tech and the existence of new sector funds like QQQ. Not to say it may not work out great, but I don't see anything "Permanent" about it. Maybe it's just a really interesting PP-inspired VP; nothing wrong with that.

Thanks for the book suggestion , gonna delve into it! TIPs vs GOLD is a very interesting topic.

What is "Permanent" is also hard to predict. Yes, adding QQQ is a bit speculative. So 5% allocation.

[Kbg]

My guess is you don't quite understand how TIPS work. I would recommend you spend some time learning about them and you will then understand that in most respects they behave like other bonds...there is one difference but I will leave you to discover it.

[Hal]

Here's a starter
https://www.asx.com.au/products/bonds/e ... -bonds.htm

If you want to invest in the Pacific Peso

[Henryinroad]

My guess is you don't quite understand how TIPS work. I would recommend you spend some time learning about them and you will then understand that in most respects they behave like other bonds...there is one difference but I will leave you to discover it.

Hi Kbg, followed many of your posts for some time, kudos to your insightful sharing.

I have found an article, by Ray Dalio, highlighting the risk of nominal bonds in the midst of negative interest rate envionment:
https://www.bridgewater.com/grappling-w ... everywhere

What's your take on this article?
Much appreciated for any thoughts.

[mathjak107]

The main thing that should be understood is that if you add TIPS you are adding more bonds...full stop. The duration of TIPS is 7.83 while the duration of IEF is 7.64 which is a comparative duration fund consisting of treasury bonds. So if interest rates go up 1% (often due to inflation) your TIPS ETF is going down 7.83% along with your LTTs (TLT) that are going to go down 19.19% Your cash stash fortunately starts earning 1% more.

With regard to risk, your risk went down because you reallocated from gold to bonds...not because you added to/morphed gold in a less risky way. And, I assume you know your entire backtest was conducted in a falling rates environment.

Whatever you want to do with your portfolio is of course your choice, I just think you framed your results in a completely inaccurate fashion.

On the positive side, I think QQQ is a good add because I think tech is a long-term secular/structural issue phenomenon. Think of railroads in the 1800s which were "the" major driver of the market. However, to be clear it's a tilt to technology no doubt and therefore a bet that you are just bit smarter than the market consensus that gets expressed in a cap-weighted ETF.

I'm certainly not going to tell anyone on this board they shouldn't mess with the classic PP's allocation percentages, but if one is going to mess with them it should be done with an understanding of how the change is going to alter the portfolio's characteristics.

In short, the proposed adds more bonds at the expense of gold and tilts the stock component more to tech. Therefore, the portfolio is going to take on more "bondish" characteristics and less "goldish" ones.

Code: Select all

So if interest rates go up 1% (often due to inflation) your TIPS ETF is going down 7.83% along with your LTTs (TLT) that are going to go down 19.19% Your cash stash fortunately starts earning 1% more.

The logic behind interest rate and all kind of stuff are complex. But in a nutshell, why interest rate would rise 1% ?
If this is because of the inflation, TIPS would rise isnt it?

One potential danger is, if rates were to rise in an environment of low or no inflation, TIPS’ prices could decline.

So I wonder what are the odds of this scenario. Perhaps worth more digging

rising rates could squelch inflation so you can see a rise in rates yet inflation not rise much or at all as it is choked.. that would be bad for tips .

[Kbg]

My guess is you don't quite understand how TIPS work. I would recommend you spend some time learning about them and you will then understand that in most respects they behave like other bonds...there is one difference but I will leave you to discover it.

Hi Kbg, followed many of your posts for some time, kudos to your insightful sharing.

I have found an article, by Ray Dalio, highlighting the risk of nominal bonds in the midst of negative interest rate envionment:
https://www.bridgewater.com/grappling-w ... everywhere

What's your take on this article?
Much appreciated for any thoughts.

Dude! That is a seriously good find. There is a lot to absorb in this article and I'll likely read it a couple of times. It's really good and like or dislike those guys they always come with data...which I like way more than opinion.

Anyway...one first thought. Everyone on this board should study the "Nominal Bond Cumulative Total Returns This Year" graphic...the US is where the other countries are now, and while it's a sample size of one, provides some good insight into how useful bonds are going to be as a shock absorber going forward.

The reality is, as demonstrated quite nicely from the article, there was nothing in the data set when the PP was formed that covers what is going on now with regard to interest rates. Not even in the Great Depression. This time actually "IS" different. Currently I'm sticking with the mix I have that I post on in the VP section of the board, but I would not fault a person at all for bailing on LTTs and or some cash and upping their weightings in stocks and gold. With cash and bonds essentially earning nothing unless you go way out on the duration scale, it's tough. It really is.

When interest rates are so low or negative, it's hard to argue that gold sucks as an asset anymore relative to cash/bonds. But to be sure, if one ups their allocation they should understand they are buying some highly volatile "cash."

And I agree with their opening, this issue is probably the most important in terms of investing right now.

[Kbg]

Very interesting analysis on TIPS...looks like the suggestion further back in this thread might be a pretty good move and I probably need to revise my thoughts along these lines.

"To go a level deeper on the mechanics of IL bonds and gold in an MP3 environment:

In terms of IL bonds, as alluded to in Part 1 of this series, a critical aspect of why they can provide diversification in an MP3 world is that real yields have no floor in the way that nominal yields likely do. Inflation-linked bonds pay a real yield plus actual accrued inflation. And the real yield is equal to the nominal yield minus breakeven inflation, which is a measure of markets’ discounting of future inflation. Even with a nominal yield near zero, with positive discounted inflation, the real yield will be negative—and if discounted inflation rises, the real yield will go further negative. Below, we show the real yields and returns of IL bonds in the UK, France, and Sweden since 2010; as shown, even after real yields became negative they continued to fall, and IL bonds generated strong performance as a result."

Short version in straight forward English...better to error on the side of reflation. (Please note further in the article that the cost is nominal bonds do much better during deflation...such is the case when investing, there is always a trade off.)