"U.S. Treasuries not the safe bet they once were"

[Kevin K.]

Like Hal, I've been meaning to start a thread on this topic, so thanks to all for your contributions.

Deflation is the least likely scenario: it has happened just twice in U.S. history (1930-33 during the Great Depression and briefly from 2007-2009 during the GFC). It makes the least send of all to allocate a full quarter of the portfolio, at great expense, to combat this least likely scenario.

I mean I get the appeal of equal weighting in terms of simplicity and rebalancing but IMHO it makes no sense otherwise. I think the GB is a significant improvement on the original PP but historically it has worked even better if you switch out the bond barbell with a true intermediate term (i.e. 5 year not 10) Treasury fund like VFITX. But the biggest improvement comes from not just upping the stocks but including SCV and in so doing creating a stock allocation that is going to be successful without relying on the outsized returns from a few big tech firms as TSM is.

While I don't necessarily disagree with what Kevin says here (and I'm thinking seriously about switching from HBPP to GB for the reasons he lays out), I wonder if HB's justifications are truly relevant. From a practical perspective, what matters is your trading bands. As an example, in March and April of 2020 the stock market crashed (down 20-30% if I recall correctly) and bond prices spiked because interest rates went from 2% in February to as low as 1% in March/April. Watching my trading bands, I happened to rebalance in early April. As a result, I sold some of my suddenly more expensive bonds and bought some of the suddenly less expensive stocks. Bingo, the gyroscope functioned just as designed! It's immaterial to me whether in hindsight someone defined the short-lived pandemic crash as a period of deflation - all I care about is that following the PP process instead of my own emotions led me to rebalance when it counted.

Having rebalancing bands and sticking to them certainly helps most of the time - but not all of the time. Just look at what happened in 2022:

VTI: -19.51%
TLT: -31.41%
GLD: -.077%
SGOV (T-Bills) 1.58%

And looking at market history, it is not at all uncommon for bonds and stocks to tank simultaneously. I think a lot of the enthusiasm for the traditional PP is based on not looking at market history before the 2008 crash. But the 2022 results underline why I think using bonds with longer than 5 years duration in the PP or GB given 2+ years of interest rate curve inversion is a dubious choice.

[yankees60]

Your house dropped 30% of its value between 2018 and 2022? I would think that's a very rare situation.

My Zillow graph for the last 10 years. It was not precisely between 2018 and 2022. It was the two months I chose for each of those two years.

Capture.JPG (24.63 KiB) Viewed 10691 times

[stpeter]

I find it helpful to look at where gold and LTT's fit in his Defined Duration chart:

https://disciplinefunds.com/defined-duration-investing/

You can see how both gold and LTT's are super long-duration assets that act as insurance when anomalous or "black swan" type events occur.

Well, gold is up ~30% in the last 12 months. Did we experience a black swan event in there somewhere? Or was there simply a lot of uncertainty, and gold did well because it's an uncertainty hedge? Or is central bank buying having an outsized impact? Or are there multiple causes?

I think what we're all trying to figure out is: have there been secular changes in the investment picture such that (some of) Harry Browne's insights and conclusions no longer apply?

Anyone here have experience in seances?

[stpeter]

Having rebalancing bands and sticking to them certainly helps most of the time - but not all of the time. Just look at what happened in 2022:

VTI: -19.51%
TLT: -31.41%
GLD: -.077%
SGOV (T-Bills) 1.58%

And looking at market history, it is not at all uncommon for bonds and stocks to tank simultaneously. I think a lot of the enthusiasm for the traditional PP is based on not looking at market history before the 2008 crash. But the 2022 results underline why I think using bonds with longer than 5 years duration in the PP or GB given 2+ years of interest rate curve inversion is a dubious choice.

Yes, 2022 was tough.

To my mind, the PP doesn't guarantee that you'll never see two of the assets go down at the same time. But, after all, there are no guarantees in investing. The question is, what performs better according to criteria that most PP / lazy portfolio adherents care about, and over what time frames?

[dualstow]

I think what we're all trying to figure out is: have there been secular changes in the investment picture such that (some of) Harry Browne's insights and conclusions no longer apply?

Anyone here have experience in seances?

I’m sure someone’s hard at work on an AI Harry Browne. He is not to be trusted.

[Smith1776]

I think there indeed has been a couple fundamental shifts that suggest some revision. Namely, the advent of two investable asset classes that didn’t exist during his time: broad commodity funds and crypto.

I think the general principle should not be to steadfastly stick to a prescribed formula of an even split between 4 specific asset classes. Rather, I think a more timeless interpretation would be an even split between whatever and however many major asset classes happen to exist during your era.

How about:

25% total stock
25% total bond
25% total commodity
25% total crypto

?

[Xan]

Your house dropped 30% of its value between 2018 and 2022? I would think that's a very rare situation.

My Zillow graph for the last 10 years. It was not precisely between 2018 and 2022. It was the two months I chose for each of those two years.

Capture.JPG

Mine has a similar overall trend to yours, but the 2022-ish spike was in the opposite direction from yours.

[boglerdude]

> have there been secular changes in the investment picture such that (some of) Harry Browne's insights and conclusions no longer apply

We past peak working age populations in US EU and China. The pie only grows for everyone with young people taking out car loans, educations loans and mortgages. When that slows down you get deflation. And the west is rich, savings glut. Too many seniors offering to loan folks money.

And the Fed has more legal power to print than when the PP was concocted. Im treating long bonds like gold, as insurance. You want most of your wealth in real assets that do work ie they are worth 100,000 widgets and they produce 1,000 widgets per month. So, a business or rental property. Basically Buffett's suggestion, own assets that do work and enough cash to get through a few years of deflation. But because the Fed doesnt offer savers a real return on bonds, it is possible for too many people to blindly throw all their savings into VTSMX

VTIP since inception

scrnli_03klHeQ5uBi0aJ.png (49.31 KiB) Viewed 10611 times

[barrett]

I was particularly disappointed to see little evidence of a flight to safety T bond gain during the Covid pandemic.

There actually was a flight to safety in early March of 2020 as the following link shows:

https://fred.stlouisfed.org/series/DGS30

Change the dates at the top so that you are only looking at, say, 3/1/2020 to just a couple of months later. From 3/4/2020 to 3/9/2020, the 30-year went from 1.67% to .99% according to this chart, but I remember seeing on Bloomberg one of those early March days that intraday the yield went down to .69%. My contention with LTTs is that to get the benefits of a flight to safety, one has to follow their price moves extremely closely and be ready to sell at a moment's notice.

Even the classic case in Craig & Medium T's book was late 2008 when the yield went from roughly 4.3% to 2.5% in a five-week period toward the end of the year. But to capture most or all of that gain, one had to sell during a two-week period at the very end of 2008. And by late May of 2009 the yield was back up to 4.5%. Ditto for March of 2020, meaning that the window for taking profits (and for there to be any significant benefit to holding LTTs) was of extremely short duration.

So my conclusion is that LTTs are no longer an appropriate holding for a lazy portfolio. Could have made more sense when their yields were way higher but that hasn't really been the case for a long time.

[Kevin K.]

> have there been secular changes in the investment picture such that (some of) Harry Browne's insights and conclusions no longer apply

We past peak working age populations in US EU and China. The pie only grows for everyone with young people taking out car loans, educations loans and mortgages. When that slows down you get deflation. And the west is rich, savings glut. Too many seniors offering to loan folks money.

And the Fed has more legal power to print than when the PP was concocted. Im treating long bonds like gold, as insurance. You want most of your wealth in real assets that do work ie they are worth 100,000 widgets and they produce 1,000 widgets per month. So, a business or rental property. Basically Buffett's suggestion, own assets that do work and enough cash to get through a few years of deflation. But because the Fed doesnt offer savers a real return on bonds, it is possible for too many people to blindly throw all their savings into VTSMX

VTIP since inceptionscrnli_03klHeQ5uBi0aJ.png

I agree with you on all points here. I guess the question is how much "Insurance" (long bonds and gold) to own. Cullen Roche suggests 10% of each, but in most of the portfolio testing I've done it takes 15-20% gold to offer meaningful protection against sequence-of-returns-risk in retirement and/or to offset stock and bond market crashes.

BTW according to Vanguard the return of VTIP since inception is +1.90%. Not stellar, but not negative as the chart shows.

https://investor.vanguard.com/investmen ... mance-fees

[dualstow]

But because the Fed doesnt offer savers a real return on bonds, it is possible for too many people to blindly throw all their savings into VTSMX

Hey now. When Pointed Stick put everything into equities, I doubt it was done blindly

[yankees60]

But because the Fed doesnt offer savers a real return on bonds, it is possible for too many people to blindly throw all their savings into VTSMX

Hey now. When Pointed Stick put everything into equities, I doubt it was done blindly

Yes. Mr. Pointed Stick would never do anything blindly. Conversely, it was always part of a well-thought out plan.

[stpeter]

... the Fed has more legal power to print than when the PP was concocted. Im treating long bonds like gold, as insurance. You want most of your wealth in real assets that do work ie they are worth 100,000 widgets and they produce 1,000 widgets per month. So, a business or rental property. Basically Buffett's suggestion, own assets that do work and enough cash to get through a few years of deflation.

Leaving Buffett aside, that makes sense for regular folks who are willing and able to own a business or rental property, but not everyone is cut out for that (especially not in their later years). However, it makes me wonder about REITs - is anyone here on the forum invested in REITs?

[stpeter]

I guess the question is how much "Insurance" (long bonds and gold) to own. Cullen Roche suggests 10% of each, but in most of the portfolio testing I've done it takes 15-20% gold to offer meaningful protection against sequence-of-returns-risk in retirement and/or to offset stock and bond market crashes.

At 20% gold, it sounds like we're back to something like GB. However, if we take Buffett seriously about having enough cash on hand to survive a few years of deflation, then cash or cash equivalents wouldn't be a percentage but a fixed amount, which would free up more money for investable assets - or, to keep it simple, 10% cash. Would a 10% allocation to LTT/TIPs be reasonable as further insurance? That would point to something like 60/20/10/10, with the majority in equities (perhaps split among TSM and SCV). Maybe I need to play around with Portfolio Charts...

[Kevin K.]

I guess the question is how much "Insurance" (long bonds and gold) to own. Cullen Roche suggests 10% of each, but in most of the portfolio testing I've done it takes 15-20% gold to offer meaningful protection against sequence-of-returns-risk in retirement and/or to offset stock and bond market crashes.

At 20% gold, it sounds like we're back to something like GB. However, if we take Buffett seriously about having enough cash on hand to survive a few years of deflation, then cash or cash equivalents wouldn't be a percentage but a fixed amount, which would free up more money for investable assets - or, to keep it simple, 10% cash. Would a 10% allocation to LTT/TIPs be reasonable as further insurance? That would point to something like 60/20/10/10, with the majority in equities (perhaps split among TSM and SCV). Maybe I need to play around with Portfolio Charts...

I don't know if Warren Buffett's choices for Berkshire offer anything actionable for individual investors. This recent article explains his views on cash vs bonds and how he deploys them:

https://www.barrons.com/articles/warren ... s-8474db0a

He's always believed on having ample cash on hand to be able to take advantage of buying opportunities. Surely no one alive has been better at "being greedy when others are fearful and fearful when others are greedy." But he and Charlie Munger have also been clear that the kind of opportunities to find and buy undervalued businesses they enjoyed before the internet made what used to be hard-to-find info readily are far harder to find anymore.

There are probably many iterations of the GB that would work just fine. I posted one on another thread that someone shared on Bogleheads of all places (50% VT, 17% each GLDM and VGIT, 16% T-Bills) that I thought was pretty cool, but personally I like everything about the original version as Tyler came up with it except the fixed income allocation. I've gone with 20% VTIP, 15% VGIT and 5% SGOV (T Bills) in my own version of it and have kept the equally-weighted 40% VTI:VBR equity slices. I could certainly see going with something like 30% VTI, 30% VBR, 15%-20% gold and the rest in short-term Treasuries and/or T-Bills if I were still in the accumulation phase with decades of investing ahead of me and money coming in to replenish and rebalance.

The TIPS may turn out to be a mistake but I suspect not a major one. I also like (and have used in the past) the Jonathan Clements "coward's barbell" (my name for it - not his) of half VGSH half VTIP. Of course in his case he's using those short-term Treasuries as cash-like ballast for a 70-75%+ global equity portfolio (VT) and doesn't mind volatility or drawdowns one bit (has in fact bought heavily during every major market crash). That's more of the Buffett mindset, but I have never had such nerves of steel (or anywhere near enough assets to placidly deal with ~50% multi-year portfolio drawdowns).

[Smith1776]

The funny thing about these diversified portfolios I've been playing with all these years, whether it be the PP, GB, All Seasons etc., they all would have been demolished by anything that had even a modest allocation to BTC.

I really think it deserves a place in these strategies.

[Kevin K.]

The funny thing about these diversified portfolios I've been playing with all these years, whether it be the PP, GB, All Seasons etc., they all would have been demolished by anything that had even a modest allocation to BTC.

I really think it deserves a place in these strategies.

Good timing because Cullen Roche wrote recently about both how to think about Bitcoin and why Warren Buffett keeps so much cash on hand:

https://disciplinefunds.com/2024/11/20/ ... n-bitcoin/

So Roche agrees that Bitcoin should be in the same "insurance" category as gold and LTT's:

"I guess I am what Bitcoin Maximalists might call a “traditional finance” (tradfi) guy. I’ve long stated that there are perfectly rational reasons to own Bitcoin. I believe this is especially true if you live in a 3rd world economy where the probability of currency collapse is even moderately high. I believe the story is more complex for US investors where the Dollar is so stable. When it comes to practical money management it’s an asset you might want, but don’t necessarily need. I think most people in tradfi think of Bitcoin somewhat similarly.

I’ve mentioned this in the past, but Bitcoin falls into the Defined Duration model as a form of insurance. It’s a super long duration instrument that exhibits huge asymmetric upside at times and gives you an insurance hedge against fiat currency. The question someone has to ask themselves about an asset like this is:

a) Do I need insurance of this type?

b) If yes, then how much?

These are super personal questions and in the case of a US investor I’d argue the use case isn’t nearly as compelling as the use case for someone in, say, Argentina. When you think of it as a form of insurance there’s nothing within traditional finance that says this is wrong. In fact, traditional finance mastered the art of selling insurance to people. But there’s nothing wrong with a traditional finance portfolio holding something like Bitcoin. I just think you have to compartmentalize it properly and thinking of it as insurance has helped me understand the use cases without getting caught up in all the competing narratives about it (or worse, dismissing it entirely)."

[dualstow]

I don't know if Warren Buffett's choices for Berkshire offer anything actionable for individual investors.
…
He's always believed on having ample cash on hand to be able to take advantage of buying opportunities.
…

Looking at the context of the whole post, I thought stpeter was talking about advice to individual investors and not about Berkshire. A mininum of cash to survive, but no more.

[stpeter]

I don't know if Warren Buffett's choices for Berkshire offer anything actionable for individual investors.
…
He's always believed on having ample cash on hand to be able to take advantage of buying opportunities.
…

Looking at the context of the whole post, I thought stpeter was talking about advice to individual investors and not about Berkshire. A mininum of cash to survive, but no more.

Right. I suppose it's like an emergency fund plus. If we take the Berkshire approach, we'd always have some investable (not consumable) cash on hand to take advantage of buying opportunities in the primary investable assets. So call it 10% or whatever.

[yankees60]

... the Fed has more legal power to print than when the PP was concocted. Im treating long bonds like gold, as insurance. You want most of your wealth in real assets that do work ie they are worth 100,000 widgets and they produce 1,000 widgets per month. So, a business or rental property. Basically Buffett's suggestion, own assets that do work and enough cash to get through a few years of deflation.

Leaving Buffett aside, that makes sense for regular folks who are willing and able to own a business or rental property, but not everyone is cut out for that (especially not in their later years). However, it makes me wonder about REITs - is anyone here on the forum invested in REITs?

I have been invested in the Vanguard Index Reit fund continuously since January 2003. Made my initial investment into it and have neither added or taken away from it aside from reinvested dividends.

[yankees60]

The funny thing about these diversified portfolios I've been playing with all these years, whether it be the PP, GB, All Seasons etc., they all would have been demolished by anything that had even a modest allocation to BTC.

I really think it deserves a place in these strategies.

For how many years can we document its performance?

[Smith1776]

The funny thing about these diversified portfolios I've been playing with all these years, whether it be the PP, GB, All Seasons etc., they all would have been demolished by anything that had even a modest allocation to BTC.

I really think it deserves a place in these strategies.

For how many years can we document its performance?

Portfolio Visualizer offers 10 years. The following is the performance comparison between a plain vanilla 60/40 portfolio (blue line) and a 57.5/37.5/5 portfolio of stocks, bonds, and bitcoin respectively (green line).

btcin6040.png (360.15 KiB) Viewed 10378 times

[Kevin K.]

But then again.....

https://prospect.org/power/2024-11-26-c ... -reserves/

[dualstow]

But then again.....

https://prospect.org/power/2024-11-26-c ... -reserves/

oh my

[Smith1776]

I have no idea whether the plan for a Strategic Bitcoin Reserve will pass, but I am hopeful.

Adam Back says that if it passes then be ready for 7-figure Bitcoin during this market cycle.