Bond portion of PP

[portart]

Is there a bond ETF that will give you a more laddered, safer approach then investing the whole portion in 20 Year treasury bonds? All of mine in in TLT

[MediumTex]

You don't want a laddered "safer" approach in the bond allocation.

You want maximum volatility in each of the PP's three volatile asset classes.

For the bond portion of the PP, you want as much sensitivity to interest rate moves as you can get.

[portart]

If you search for volatility in bonds, don't you have to stay away from US Treasuries? I might be wrong but didn't HB say only get the highest credit level, AAA? Do you not agree with this approach?

[rickb]

If you search for volatility in bonds, don't you have to stay away from US Treasuries? I might be wrong but didn't HB say only get the highest credit level, AAA? Do you not agree with this approach?

MT (who, by the way, is one of the co-authors of the recent book on the Permanent Portfolio) is suggesting staying with 20+ year treasuries, rather than a "safer" ladder - presumably including shorter term bonds.  The point is that you want the volatility that long term treasuries provide, and to keep them long you can't hold them until they mature (as you would bonds in a ladder).  If you want, you could create a rolling ladder of 20-30 year treasuries, buying 30 year bonds at auction and selling them when they reach 20 years left - but I suspect this is not at all the kind of ladder you're talking about, and it wouldn't be any "safer" (meaning less volatile) than TLT.

There are other safety considerations with TLT (see, for example, http://gyroscopicinvesting.com/forum/bo ... d-harmful/).  Any direct ownership of treasuries, including a rolling 20-30 year ladder, avoids these issues.

[portart]

I could be wrong because I am not great with understanding bonds. I guess I was referring to the bond mix in PRPFX and not just 20 yr. They seem to use a mix of dates of maturity. Is there an ETF that mimics what PRPFX does in bonds? Right now I just use TLT for all my bond exposure which I guess he recommends based on what you wrote.

[rickb]

I could be wrong because I am not great with understanding bonds. I guess I was referring to the bond mix in PRPFX and not just 20 yr. They seem to use a mix of dates of maturity. Is there an ETF that mimics what PRPFX does in bonds? Right now I just use TLT for all my bond exposure which I guess he recommends based on what you wrote.

Let's back up.  We're talking about Harry Browne's Permanent Portfolio (25% each in cash, stocks, gold, and bonds), not the Permanent Portfolio Fund (PRPFX), right?  In particular, the 25% that is in "bonds".

Harry Browne (and the recent book as well) say these bonds should be long term treasuries, ideally held directly (either through TreasuryDirect or a brokerage account) but holding them in an ETF like TLT is second best.  The point of owning these (as well as the other specific assets) is to keep your overall portfolio "safe" (safe in this sense meaning not likely to lose much value, no matter what happens).  The portion that is in long term treasuries protects you in times like 2008 when stocks don't do so hot (stocks were down 37% for the year).  That year, long term treasuries were UP 22.5%, gold was up a little, and the overall portfolio was slightly down (0.7%).  If instead of long term treasuries, you had 25% in a "safe" bond ladder, that year your bonds would not have gone up as much so your overall portfolio would have taken a bigger hit.  Somewhat counterintuitively, by making the bond portion of your portfolio "safer" what you're actually doing is making your overall portfolio more risky (less likely to withstand the significant hits the other portions of the portfolio will endure).

You WANT the bond portion of the portfolio to be invested in long term (20+ year) treasuries.  If you try to make this portion "safer" you also need to make the other portions safer (less gold, less stocks).  If you want the overall portfolio to be less risky (not as likely to lose significant amounts of nominal value), increase the cash and keep equal amounts of stock, long term treasuries and gold - for example 50% cash and only 16.6% gold/stocks/bonds (or 55% cash and 15% each of the others).  Stocks are VERY risky - they can go up a lot but they also can go down a lot.  Ditto gold.  Ditto long term treasuries.  Mixed together, in equal proportions, they tend to counterbalance each other.  Mess with one to make it less "risky" and you throw the whole mix out of balance.

[portart]

Great answers! I needed to hear that. One more question which is really more of an opinion since were not trying to time stuff. Bonds go down when rates go up. The historical average over all time of interest rates is 5% so I am told. Given these facts, and with rates close to zero, do we really feel balanced in the fact that bonds have to go negative to keep going up enough to carry a PP when other stuff suffers. For example, the last time stocks got smacked down, the bonds rose enough to keep from losing much as you noted. Let's assume after a huge run up, stocks again go down, say 25% since 40% is probably a once in a lifetime event. How could bonds being close to zero help out as before? We would have to hope gold goes ballistic to carry two parts of a portfolio. Just thinking, that's all...

[Pointedstick]

Which rates are zero again? 30-year treasuries are near 4% right now. If you're talking about short-term rates, I don't believe it's correct that their average is 5%. IIRC it's more like 2%. But I'm sure you can dig up from FRED data to find out the exact average rate.

[MediumTex]

Let's assume after a huge run up, stocks again go down, say 25% since 40% is probably a once in a lifetime event. How could bonds being close to zero help out as before? We would have to hope gold goes ballistic to carry two parts of a portfolio. Just thinking, that's all...

Well, as an initial matter, note that stocks have lost 40% of their value twice in the last 15 years, so it's not a once in a lifetime even by any stretch.

Bonds at close to 0% rates don't help you.  What helps you is when bond rates trade in a range between, say, 2% and 4% and bounce between those two points for an extended period.  That's what has been happening for over five years now and a PP investor has simply harvested these gains as they presented themselves.

No asset goes straight up or straight down, and thus no matter how close to 0% long term bonds ever get, it will still be within the context of a trading range, and you just need to have a rational way of getting exposure to the gains offered by that trading range, and the PP offers one conservative way of doing that.

Perhaps more so than in other spheres of life, understanding the bond market involves bending your mind into the shape of reality, rather than trying to bend reality into the shape of your mind.