Hi,
In Europe, not all governments have an AAA-rating, which is a problem in the PP since all Government bond trackers consist of a variety of countries and ratings.
Lately, some AAA governmentsbond trackers came out. They cover bonds of all kinds of maturities, as well short, as long, but also middle like 10 years for example.
Could it be interesting to swap the Cash (suppose it was invested in 1 - 3 year bonds according to craigr's optimisation) and long term bonds by these AAA bonds?
You'd get then:
1) 25% stocks
2) 25% gold
3) 50% AAA bonds
This year, the YTD of these bonds is a bit above +8%
Your opinions?
EuroPP
replacing cash and bonds by all maturity AAA bonds?
Moderator: Global Moderator
Re: replacing cash and bonds by all maturity AAA bonds?
I would split the cash/bonds personally. I like having a block of cash sitting in my portfolio. It provides a very stable foundation and leaves you with dry powder in volatile markets for rebalancing and/or riding things out.
Some European users of the Permanent Portfolio have focused on German govt. fixed income for their portfolio. I would also think that Switzerland govt. fixed income could be a possibility if you are able to buy them. But this would introduce more currency risk being in Swiss Francs vs. Euros.
Some European users of the Permanent Portfolio have focused on German govt. fixed income for their portfolio. I would also think that Switzerland govt. fixed income could be a possibility if you are able to buy them. But this would introduce more currency risk being in Swiss Francs vs. Euros.
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EuroPP
Re: replacing cash and bonds by all maturity AAA bonds?
Hi,
I agree about german bonds. However, if you want to go ETF there are two problems:
1) they are hardly offered or offered in foreign currency like swiss francs
2) those trackers have no volume at all for weeks and weeks in a row (amazing iliquidity)
So that's not so good.
If you want to go real bond in safe custody, it's a lot of hassle.
I really see cash outside of my PP, in a simple savings account and I look at the PP as a kind of fund. In that way it would make sense.
What are the risks of having government bonds of all maturities (instead of only 22+ and 1-3 year)??
The reason I want to go AAA is that standard gov bond trackers in euroland are composed of all kind of bonds of countries that could also get into a greek scenario. That would kill the euro pp also.
Since the euroAAA bond index only exists since 31/12/2002 I've only been able to test it back 7 years. Not enough, I can see that the overall return becomes a tad lower.
How would the long run turn out? Is there a similar index available that's composed of all maturities US bonds to backtest the effect on tha american PP?
This would really interest me.
EuroPP
I agree about german bonds. However, if you want to go ETF there are two problems:
1) they are hardly offered or offered in foreign currency like swiss francs
2) those trackers have no volume at all for weeks and weeks in a row (amazing iliquidity)
So that's not so good.
If you want to go real bond in safe custody, it's a lot of hassle.
I really see cash outside of my PP, in a simple savings account and I look at the PP as a kind of fund. In that way it would make sense.
What are the risks of having government bonds of all maturities (instead of only 22+ and 1-3 year)??
The reason I want to go AAA is that standard gov bond trackers in euroland are composed of all kind of bonds of countries that could also get into a greek scenario. That would kill the euro pp also.
Since the euroAAA bond index only exists since 31/12/2002 I've only been able to test it back 7 years. Not enough, I can see that the overall return becomes a tad lower.
How would the long run turn out? Is there a similar index available that's composed of all maturities US bonds to backtest the effect on tha american PP?
This would really interest me.
EuroPP
Re: replacing cash and bonds by all maturity AAA bonds?
The problem is I'm out of my lane when discussing European options. Have you talked to Marc DeMesel? He runs the European Permanent Portfolio blog and has found solutions to many of these issues:
http://www.marcdemesel.be/
I would still like to see the bonds split. I really like having a stable cash platform in the allocation. If you bunch it all together in a 5-7 year maturity bond fund you can have volatility where you don't want it. During a bad recession you can have stocks and bonds both dropping. I'd hate to see you in a situation where there was no part of the portfolio that was at least keeping an even keel.
http://www.marcdemesel.be/
I would still like to see the bonds split. I really like having a stable cash platform in the allocation. If you bunch it all together in a 5-7 year maturity bond fund you can have volatility where you don't want it. During a bad recession you can have stocks and bonds both dropping. I'd hate to see you in a situation where there was no part of the portfolio that was at least keeping an even keel.
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EuroPP
Re: replacing cash and bonds by all maturity AAA bonds?
I understand,
Is there data available of all maturities US government bonds that could be used for back-testing against the american PP? That way we could see the effect in different decades.
The euro PP is only backtestable for 10 years, from the introduction of the euro.
Is there data available of all maturities US government bonds that could be used for back-testing against the american PP? That way we could see the effect in different decades.
The euro PP is only backtestable for 10 years, from the introduction of the euro.
Re: replacing cash and bonds by all maturity AAA bonds?
The most popular backtesting spreadsheet is the "Simba Spreadsheet." Made by user Simba over at the Diehards:
http://www.bogleheads.org/forum/viewtop ... sc&start=0
http://www.bogleheads.org/forum/viewtop ... sc&start=0
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EuroPP
Re: replacing cash and bonds by all maturity AAA bonds?
Thank you very much for the link. I've been testing with long term, 5 year and 2 year treasuries. It looks good, some more volatility but better performance then a standard PP.
I'm still wondering the following.
What would be the risk of owning a good part of AAA government bonds with maturities between 3 and 22 years? How risky is this?
The sheet didn't let me test that since there's a jump from 5 years to long term and nothing in between. The all maturitie i'm looking at also contains 7 years, 10 years, 15 years, ....
What is the risk of holding such bonds in a portfolio that looks like,
50% AAA gov bond all maturities
25% stocks
25% gold
as mentioned earlier?
I'm still wondering the following.
What would be the risk of owning a good part of AAA government bonds with maturities between 3 and 22 years? How risky is this?
The sheet didn't let me test that since there's a jump from 5 years to long term and nothing in between. The all maturitie i'm looking at also contains 7 years, 10 years, 15 years, ....
What is the risk of holding such bonds in a portfolio that looks like,
50% AAA gov bond all maturities
25% stocks
25% gold
as mentioned earlier?
Re: replacing cash and bonds by all maturity AAA bonds?
Hard to say what the risk is. The shorter duration bonds will have less volatility in deflationary markets. That is the number you should look for on the bond funds: Duration. The duration will indicate relatively how sensitive the bonds are to interest rate changes. Also hard to know what the credit risks are. Bond ratings that are AAA can quickly be lowered and this could make the prices dive.
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EuroPP
Re: replacing cash and bonds by all maturity AAA bonds?
the duration is 6,62 and 6,42 modified duration. I don't really know how to interprete that. Is that acceptable?
It needs to be kept in mind that the AAA bond part is 50% of the portfolio, and thus combines cash (or short term bonds) together with long term bonds.
Ane extra advantage I see is trading costs. One asset less means also less costs in rebalancing.
What do you mean with bonds getting lowered? If the rating of the country itself drops the bonds will be kicked out and replaced since the tracker, as the index, only takes up AAA rated government bonds.
That's also the reason why I'm considering it... 2010 learned us that countries can get in trouble and when they do, you don't want to hold their bonds in your PP. That element cannot be controlled with regular euro st or lt bond trackers as they have various ratings. It can with the AAA-index that takes strictly highest quality bonds. drawback, it's all maturity only.
It needs to be kept in mind that the AAA bond part is 50% of the portfolio, and thus combines cash (or short term bonds) together with long term bonds.
Ane extra advantage I see is trading costs. One asset less means also less costs in rebalancing.
What do you mean with bonds getting lowered? If the rating of the country itself drops the bonds will be kicked out and replaced since the tracker, as the index, only takes up AAA rated government bonds.
That's also the reason why I'm considering it... 2010 learned us that countries can get in trouble and when they do, you don't want to hold their bonds in your PP. That element cannot be controlled with regular euro st or lt bond trackers as they have various ratings. It can with the AAA-index that takes strictly highest quality bonds. drawback, it's all maturity only.