Gyroscopic Investing

If you do following to the bottom, how would you know when it starts climbing again.

lordmetroid wrote: If you do following to the bottom, how would you know when it starts climbing again.

I'll answer on the Stocks sub-forum.

A single 1% increase in interest rates will result in approximately a 16% loss if invested in TLT. It would take 16 years to recoup those losses if reinvesting interest. We invest in LTT's for their volatility and not their interest payments.

Budd,

Are you suggesting that a 5% increase in interests rates will drop the value of LTTs by 80%?

Thanks.

bedraggled wrote: Budd,

Are you suggesting that a 5% increase in interests rates will drop the value of LTTs by 80%?

Thanks.

There are numerous bond value calculators on the web.  According to this one, a $1000 face value 30-year bond with a coupon rate of 2.9% (today's rate) is worth about

$824 if rates rise to 3.9%
$687 if rates rise to 4.9%
$580 if rates rise to 5.9%
$496 if rates rise to 6.9%
$429 if rates rise to 7.9%

Of course, rates can't possibly rise from 2.9% to 7.9% overnight (this would likely take at least several years) which affects the computation in two ways - 1) you'll have received dividend payments along the way, 2) by the time rates are 7.9% the bond won't have 30 years left (so the change in value won't be quite as dramatic).

Nevertheless, long term bonds definitely do not do well in an environment of rising interest rates.  However, from the same calculator, the same $1000 2.9% bond is worth about

$1106 if rates fall to 2.4%
$1228 if rates fall to 1.9%
$1366 if rates fall to 1.4%

People have been saying for years that rates have nowhere to go but up.  Here's the yield for 30 year treasuries over the last 5 years: http://finance.yahoo.com/echarts?s=%5et ... 2:%225y%22}.  30 year bonds in Japan are currently yielding 1.43%.  Rather than "nowhere to go but up" I think it's more accurate to say rates could up or they could go down.  Betting one way or the other requires seeing into the future. 

As Neils Bohr is reputed to have said, "Prediction is very difficult, especially about the future".

Thanks, Rickb,

I have been a deflationist since 1982 and rates are playing out as I thought and with room to drop significantly.  Lately, though, things seem weird, at least to me, and I wonder what the future looks like just beyond the near term.  With China and Russia creating that bank thing in Asia, will that toss a wrench into the machine?

Thoughts, please.

With the very low rates that we have now, the loss will barely be mitigated by the interest paid by the bonds, if I read this correctly. This will make the end of the treasury bull that much more painful.

rickb wrote: Of course, rates can't possibly rise from 2.9% to 7.9% overnight (this would likely take at least several years) which affects the computation in two ways - 1) you'll have received dividend payments along the way, 2) by the time rates are 7.9% the bond won't have 30 years left (so the change in value won't be quite as dramatic).

Not sure how much this adds to your post, rickb, but you also need to consider that you'd most likely be rebalancing into bonds as rates rise, and by the time they get to 7.9% you'd have a bunch of bonds with higher coupons and thus a PP with (at last!) some more income.

Love the Neils Bohr quote.

The 35 year bull market in long bonds is not as large if you adjust for inflation.

I am looking at VUSTX (Vanguard Long-Term Treasury Fund Investor Shares) on 1/1/2000 on Google, the price was $9.67, but in 2015 Dollars it was $13.18. It peaked lately in February 2015 at $14.14. During that period, VUSTX is up 7.28%, or CAGR 0.46% in real terms. Not really a bull market, mostly just inflation.

I don't have market values for LTT going back to 1980, but bear in mind from 1980-2015, the purchasing power of a US Dollar has decreased by 71.5% !!!   http://www.bls.gov/data/inflation_calculator.htm

30 year bond prices were at all-time highs 3 months ago. Literally just 3 months ago. The bull market has been going on since the 80s.

FWIW, isn't a steep bond correction a GOOD thing for PP holders? And a steep stock correction for that matter. Don't you want to start seeing these assets show some wild volatility so that you can finally capture some of it? Or do people think bond yields are going to fly straight to 6,7,8%+ with no dips along the way?

Short-term portfolio pain is a necessary evil if you want long-term gains.

iwealth wrote: 30 year bond prices were at all-time highs 3 months ago. Literally just 3 months ago. The bull market has been going on since the 80s.

Yes, but those who fear, "OMG, we could go back to the bond prices of 1980, if we went back to the interest rates of 1980!" forget that we can't just roll back downhill in reverse to 1980, unless they give us "Super Dollars with 1980 purchasing power" when the bonds un-mature  at the end of our backwards time travel.

I'm not saying it won't be bad, but if we went back to 1980 LT interest rates, bond prices would not fall to 1980 nominal levels, they would fall to the 1980 prices inflated to the Present Day Dollar value... which would be a greatly lessened hit, reduced by 71.5%.

If the multi-decade downhill slope in LTT interest rates eventually bottoms out and the rates start climbing, who's to say the rates will continue to climb in a steady slope for decades? The interest rate behavior going forward could be completely different, for example, bouncing randomly back and forth within a certain range for many, many years.

In that case, it would be a good thing to have LTTs in the PP to harvest the volatility and counterbalance the wild swings in stocks and gold. Yes, there could be some short-term losses in the LTT piece for a year or two, as there sometimes are, but then interest rates could reverse and drop right back down, giving us big LTT gains for the year or two after that. Isn't that just how the PP's three volatile asset classes are supposed to work?

It all depends, and nobody knows. Accordingly, I choose to keep holding my LTTs and let the PP do its thing.

Tortoise wrote: If the multi-decade downhill slope in LTT interest rates eventually bottoms out and the rates start climbing, who's to say the rates will continue to climb in a steady slope for decades? The interest rate behavior going forward could be completely different, for example, bouncing randomly back and forth within a certain range for many, many years.

In that case, it would be a good thing to have LTTs in the PP to harvest the volatility and counterbalance the wild swings in stocks and gold. Yes, there could be some short-term losses in the LTT piece for a year or two, as there sometimes are, but then interest rates could reverse and drop right back down, giving us big LTT gains for the year or two after that. Isn't that just how the PP's three volatile asset classes are supposed to work?

It all depends, and nobody knows. Accordingly, I choose to keep holding my LTTs and let the PP do its thing.

Interest rates are completely unpredictable. I agree with you. Close your eyes and let it work.

bedraggled wrote: Thanks, Rickb,

I have been a deflationist since 1982 and rates are playing out as I thought and with room to drop significantly.  Lately, though, things seem weird, at least to me, and I wonder what the future looks like just beyond the near term.  With China and Russia creating that bank thing in Asia, will that toss a wrench into the machine?

Thoughts, please.

Again, "Prediction is very difficult, especially about the future".

Current prices for all assets (not just long term bonds) reflect the entire market's consensus. If it was clear that any asset would inevitably go in the toilet tomorrow, it would already be in the toilet today.  If it was clear any asset would inevitably go to the moon tomorrow, it would already be close to the moon today.  The market is occasionally wrong and large "corrections" (mostly down) do happen, but even if you can determine a correction must come (meaning the market consensus is wrong) there's no good way to predict when it will happen.  If stocks are in a bubble and "everyone" knows it, stocks still might double before a correction happens (if everyone actually knew it, the correction would have happened already).

The genius of Browne's PP is that you don't have to do any predictions.  25% of your assets are in stocks, whether pundits are saying stocks are currently high or low - and wherever they are today there's no way to tell whether they'll go higher or lower tomorrow.  25% of your assets are in long term bonds, again regardless of whether anyone says they're currently high or low (and again, there's no way to tell which way they'll go tomorrow).  Similarly gold.  You can spend every waking moment trying to outguess the market, but my guess is you won't.  Stop trying. 

"Use the Force, Luke.  Let go." - Obi-Wan Kenobi

In the popular press, an article came out over the weekend advocating the "bond free portfolio". I wonder if that doesn't mean it's time to buy bonds.

ochotona wrote: In the popular press, an article came out over the weekend advocating the "bond free portfolio". I wonder if that doesn't mean it's time to buy bonds.

It would be one thing if the situation in Japan was not a piece of history.  Considering that it is, I'm surprised people are so quick to abandon fixed income in portfolios, substituting in modest-valuation stock funds.

Interest rates don't exist in vacuum.  The interest rates of the mid-1980's were far more appealing than today... but so were our stock-market valuations.  Simply put, the market for "renting" my money was a lot better in the 1980's.  Right now, there isn't much need for capital

I don't think either is good/bad enough today to warrant making an un-hedged bet in one or the other.

ochotona wrote: In the popular press, an article came out over the weekend advocating the "bond free portfolio". I wonder if that doesn't mean it's time to buy bonds.

Or should we wait 30 years or so?

Why so down in the dumps about bonds, Reub?

moda,

Loved your comment on abandoning fixed income.

I am still in deflation mode.  If Europe can have zero interest rates, should we be denied?  That would be one big overextended bond bull market!  There must be a chuckle or two in here somewhere.

Have you checked the rates in Europe recently?

German bund yields have risen precipitously.

http://www.reuters.com/article/2015/05/ ... VE20150511

Reub wrote: Have you checked the rates in Europe recently?

German bund yields have risen precipitously.

http://www.reuters.com/article/2015/05/ ... VE20150511

1. Isn't that just the short-term noise?

2. I don't live in Europe; what do I care?

3. And if I did, aren't rising rates good? That would mean higher coupon payments for decades every time I bought bonds by rebalancing into them or with my new contributions. Right?

Rates up in Europe!

Could be a blip.

Rising interest rates are good....if you're a banker. For the PP, they represent a loss of bond principal and an eventual stock market downturn. What was artificially elevated by central banks, namely bond prices and equities, will eventually come back to reality.

This is the last part of the article that Reub linked to:

"Stocks jumped overnight after China cut interest rates for the third time in six months on Sunday to try to stoke a sputtering economy that is headed for its worst year in a quarter-century.
   
The People's Bank of China said on its website that it was lowering its benchmark, one-year lending rate by 25 basis points to 5.1 percent from May 11. It cut the benchmark deposit rate by the same amount to 2.25 percent."

So Europe bounces off its bond lows while China seems headed for lower growth. The economy is global and there seem to be different signals coming to us from either side of the US.

Desert wrote: I'm hoping rates continue to rise, with inflation remaining low.  It does lead to short-term pain, but I don't see how any of us will get decent real rates of return with present low yields.

with the PP using  long term treasury's ,  loses are magnified compared to total bond funds or a popular intermediate term etf like AGG.

you can see a 20-30% loss with just a 1% rise .