Gyroscopic Investing

dualstow wrote:

buddtholomew wrote: Excuse my ignorance, but how do i reconcile Kshartle and AgAuMoney responses?

Looks like it's up to you. :-)

Yeah. Debates like this are why I keep coming back here. We can all look at the same data set and come to wildly different conclusions. To me, it reinforces the desire to hedge my bets and just stick to the original 4x25 plan.

EDV is to TLT what TLT is to TLH.

Less EDV will give you the same protection and downside of TLT when it comes to interest rate moves.

Inflation risk is less in EDV though because you can hold less of it for nearly the same impact on your portfolio.

In my opinion inflation is the biggest risk to the PP because 50% is in dollars. Reducing that risk while not giving up the smooth ride offered by the different assets is a plus.

I dont have the background to evaluate the responses and want to leverage tax deferred space to the full extent. Can someone explain their arguments in laymans terms?

I was typing this post when Kshartle responded. Thanks for the explanation.

May have mentioned this a while ago but I'm (still) using UUP (Dollar Index) as a proxy for Cash instead..  at least until interest rates rise back to normal levels (around 3-6%)..

My mix has been 4x25 SPY/GLD/TLT/UUP since day 1 (about mid 2011)

The issue is that EDV moves more with interest rate changes.  Earlier in this thread it was assumed to be 1.5x TLT.  I don't know if that is correct, but I'll keep using it.

Let's say you have $21,000 in TLT and it moves 10%.  That means you will gain or lose 0.10 * $21,000 = $2100.

Compare with $14,000 in EDV.  1.5x means it will move 15%.  That means you will gain or lose 0.15 * $14,000 = $2100.

The dollar risk is the same.  I think this is what Kshartle is referring to as interest rate risk.

As for inflation risk, I agree you will have less dollars in "treasuries" in your portfolio, but as long as those less dollars in EDV act the same as more dollars in TLT, the dollar impact on your portfolio will be the same.

The kicker pointed out by Kshartle is that you can then spread those different dollars (in the above example, $7000) into gold and/or stock where in theory you will be be better compensated for that inflation risk.

The problems are 1st in the assumption that the relationship between EDV and TLT will stay the same, and 2nd assuming that your other choice for the dollars will be at least as good as having done all TLT instead of your new mix.  It's all "it sounds good" theory until it happens...

AgAuMoney wrote: The issue is that EDV moves more with interest rate changes.  Earlier in this thread it was assumed to be 1.5x TLT.  I don't know if that is correct, but I'll keep using it.

The beta to TLT is 1.63 over the past 63 months.