TLT in short to medium term PP

[Tom]

Hi All,

Looking for some thoughts/opinions.  I have two HBPP.  One is my long term retirement portfolio which is as strict as it gets - holding 30 year US Treasuries and physical gold.  I'm leaving that as is.

The second is a short to medium term fund.  For convenience and liquidity purposes, I hold TLT for the bond and PHYS for the gold.  I recently made a decent size draw down on the overall portfolio for a down payment on a house.  What remains is just a couple thousand more than what I have sitting in a bank account in cash for my additional short/medium term savings.

I have no other projected dates when I would need this money other than emergencies and stuff I'll need for the new house.  I'm curious to know what people think of holding TLT for short/medium term?  My fear is that it is not like my retirement potfolio where I could always hold the bond until maturity and get the principal back and may need the cash before prices could recover if rates rise.

Would other people here recommend reducing the TLT holdings down to 15% for safety?  Cashing it out all together? I'm a little nervous that I have more in my short term PP than I do in straight up cash in the bank - any thoughts appreciated!

[buddtholomew]

Allocate sufficient cash to an emergency fund for unforeseen expenses and invest the balance equally among the PP asset classes. You may end up with more cash than you would like, but it complements the fixed income portion of the portfolio and reduces the volatility in long-term treasuries when viewing cash and fixed income as a whole (barbell). Seems like a win-win situation to me.

[murphy_p_t]

you'll want to read up more on the bond allocation...the PP does not hold the bond to maturity, rather its sold at 20 years left to maturity and replace w/ a new 30 year bond.

[Tom]

Murphy - don't need to read up on it.  I know that part of the strategy - which is only recommended if the interest goes up to justify it.  I was just pointing out how there is less risk of losing money in owning the actual security vs the fund bc you always have the option of holding till maturity and getting the principle back whereas with a fund it's just based on the price with no way of recouping the original investment if you take a hit.

[rickb]

Murphy - don't need to read up on it.  I know that part of the strategy - which is only recommended if the interest goes up to justify it.  I was just pointing out how there is less risk of losing money in owning the actual security vs the fund bc you always have the option of holding till maturity and getting the principle back whereas with a fund it's just based on the price with no way of recouping the original investment if you take a hit.

I think you may be misreading something.  The 25% long term bond portion should always be kept in long term bonds (with more than 20 years remaining).  The point of this portion of the portfolio is to protect you from periods of deflation (declining interest rates), and to a lesser extent to provide dividends based on the current long term interest rate.  If you let the duration shorten, then you are giving up the protection since shorter bonds don't react as violently to changes in interest rates.  This reaction works in both directions, so if rates go up the current value of the bonds goes down, but in this circumstance the other components of the portfolio should more than make up for the decline in the bond values.

If you don't believe us, perhaps Craig or JM (he posts here has MediumTex) could comment.

[Tom]

I'm not misunderstanding anything.  I get it.  Again, I have two HBPPs.  I'm only questioning whether it's a good idea to use the strategy for the short/midterm when it's fairly obvious rates will go up at some point in the short to mid term.

I would hate to have it take a big hit with money I may need in the next few years.  Long term, yes I have no concerns.

[Tom]

Also, it may take a while for one of the other asset classes to offset loses in bonds.  They may be a year or two of significant draw down and I may or may not need the money in that time.  That's the concern - it doesn't always work like clockwork where one asset takes a huge hit and the other immediately offsets it.

[Tyler]

LTTs are an important part of the PP regardless of whether they're held directly or via TLT. They will help protect your total portfolio should the other volatile assets plunge. So reducing exposure to LTTs actually makes your portfolio LESS safe, not more.

It sounds like you fear rates rising soon. If that does happen, the nice thing about TLT is that the interest on your investment will naturally track those higher rates automatically whereas with direct treasuries you'll be holding into the lower rates for several years.

Basically, don't sweat it. If you're nervous about volatility, the best asset to play with the allocation percentage is cash. Just turn up the cash dial a bit.

[Tom]

Thanks Tyler!  That's the best answer yet.  I did not consider that the fund will be purchasing bonds at the higher rates - that is very reassuring.  I'll stick with what I have and just add cash to the portfolio and my regular bank account for now.  Appreciate it!

[buddtholomew]

Thanks Tyler!  That's the best answer yet.  I did not consider that the fund will be purchasing bonds at the higher rates - that is very reassuring.  I'll stick with what I have and just add cash to the portfolio and my regular bank account for now.  Appreciate it!

It will take "roughly" the duration for the increased coupon payments to recover losses incurred from a rise in interest rates.