Might rising rates hit LTTs more softly than we fear?

[mathjak107]

i can't guess the amount but i will say once again it is  likely will leave you with many times what the pp will.

[buddtholomew]

i can't guess the amount but i will say once again it is  likely will leave you with many times what the pp will.

As you said yourself, it is a decision based on an investors time horizon and ability to accept short-term volatility.

How about an investor with an intermediate-term (5-10 years) and long-term horizon (25+)?
HB 4x25PP for IT and 70/30 BH or long-term?

[screwtape]

i can't guess the amount but i will say once again it is  likely will leave you with many times what the pp will.

I deleted a previous post where I said the difference between our philosophical outlooks on life boil down to you believing the future will behave in the same way as the past.

The reason I deleted it was because I realized it was probably the stupidest thing I have ever said (not really, but maybe when I'm sober). A person would be hard pressed to get out of bed in the morning if he didn't believe the future was going to behave the same way it has in the past.

But financially speaking only I think it does make some sense. The agnosticism of the PP is a major part of its appeal to me. You can say that  another portfolio beside the PP is "likely" to leave me with "many times what the pp will" based on your charts of past performance but when it comes to money don't they all tell us that past performance is no guarantee of future success?

[mathjak107]

but the thing is in the past we have been through much of what the pp is geared to protect against. but in the end  time provided that protection for free and with a  bigger pay check too.

so it isn't like you are saying we have to duplicate a particular past . we have already been through it all with similar outcomes over and over.


i would bet that if you took every rolling 30 year period , regardless of the events that the markets would average  within a few percent of each other.  whether the great depression , the world wars  or the high inflation 70's  i would think the ending averages would be fairly close.

i never tried it and im guessing  but i would be surprised if many time frames differed by a lot over 30 years.

[Pointedstick]

i would bet that if you took every rolling 30 year period , regardless of the events that the markets would average  within a few percent of each other.  whether the great depression , the world wars  or the high inflation 70's  i would think the ending averages would be fairly close.

i never tried it and im guessing  but i would be surprised if many time frames differed by a lot over 30 years.

Check it out: http://www.crestmontresearch.com/docs/S ... -11x17.pdf

Over 30 years, the real CAGR of 100% stocks is in the range of 2-7%, depending on the time period, with most being clustered around 3-6%. That's a lot of variability. A 6% real return is nice, but 3% is not, especially if you have to live with the volatility of the sock market.

By contrast, the PP has generated something like a 3-5% real return over all 30-year periods so far, with far lower volatility. <insert standard caveat about not being able to predict the future>

[mathjak107]

that chart though is inflation adjusted not nominal.  yes inflation adjusted is important but it is going to be very different from nominal.

looking at another chart i found that looks purely at market returns the results are amazingly close in average returns

they work out to around 9%- 11 % over almost all 30 year time frames .

from 1900 to 1930  and every 30 years after that are  close to 9% -11 % regardless of events in that time frame..

that is amazing considering in the short term stocks are all over the map.

but longer term they just tend to smooth out and revert back to the mean .

which is why historically equities have generally been the driving force in portfolio growth  and with few exceptions the more you dilute their ability to grow the worse your results were over longer and longer periods of time. .


what i find interesting looking at a graph is that while we all fear the dips over time the dips at the bottom are still a head of where you would be if you shy'd away from the markets.

higher highs and higher lows are usually the pattern but even when nott you are usually whole again in just a few years anyway still a head of the game.

there is no disputing that stocks are generally going to be the growth vehicle over long periods of time.

it is only for reason of our stomachs that we cut that volatility with other asset classes .

on another note it looks like after yesterdays 2% plunge in TLT  it is headed for another fall today as futures markets show rates increasing again.

i hope the bleedinging stops soon but my gut says not before the long bonds are in a steep loss..


THE DOW SINCE 1900 - NOMINAL RETURNS DIVIDEND RE-INVESTED

 

[iwealth]

on another note it looks like after yesterdays 2% plunge in TLT  it is headed for another fall today as futures markets show rates increasing again.

i hope the bleedinging stops soon but my gut says not before the long bonds are in a steep loss..

If this was a stock chart, would you buy this? Clearly you see something in rates here that tells you they are about to reverse powerfully to the upside. I keep hearing that we're at the bottom of the rate cycle. I remember hearing that during the taper tantrum in 2013 as well. What's to say we don't just hang out in a 2-5% long bond range for the next 40 years with plenty of peaks and valleys along the way to take advantage of when rebalancing?

Also, a lot of people around here don't check their portfolios every day. Heck, some only check once per year. If there's one thing that will definitely fall on deaf ears here it's updates on the daily gyrations of asset prices. You simply can not make educated investment decisions based on how an asset class reacts on any one given day, especially during a particularly volatile period in markets.

[Pointedstick]

that chart though is inflation adjusted not nominal.  yes inflation adjusted is important but it is going to be very different from nominal.

I would argue that inflation-adjusted returns are the only thing that matter. What good is nominal 12% CAGR if inflation was 8% on average? Looking only at the nominal returns is like planning a retirement based on savings amount alone without taking spending into consideration.

[mathjak107]

while i agree real returns count when talking average returns over periods of time unless you specifically are looking at inflation adjusted all averages are in nominal terms.

you never see the market broadcasted in real return , only nominal .

so to get back to the point the nominal returns of the markets seem to fall in a tight range over every 30 year time frame regardless of events.

[Pointedstick]

I don't care about nominal returns. I only care about real returns.

[Greg]

A 6% real return is nice, but 3% is not, especially if you have to live with the volatility of the sock market.

"Look at how big these socks are getting! I'll certainly be able to wear one of these for the rest of my life. Oh no! It's unraveling! There must have been a loose thread somewhere in the sock market! The sock market was rigged!"

[mathjak107]

I don't care about nominal returns. I only care about real returns.

nominal returns are important too.

think of your pay check. you can't control everything about your expenses in life but what what at least helps you plan is a consist pay check that is usually enough to exceed inflation .

by having a predictable pay check to plan around it makes not having two variables that much harder to deal with.

while adjusting for inflation is important it is vastly different for each one of us. some may be effected greatly and others not so much.

as we age we tend to do and buy less so what we don't spend money on  tends to more than cover the price increases in what we do continue to spend on . that makes inflation adjusting not such a big deal  compared to someone raising a family  .  so while real returns are important they are a different yard stick measuring different things for different people.

the fact that markets tend to be so consistent in nominal terms regardless of events over 30 years i find amazing .  most 30 year time frames are within 1 or 2% of each other which for all that volatility is quite amazing .

don't forget that what caused most of the retirement time frames to fail was not market returns , that is a misbelief.  it was actually inflation that killed them off in the laboratory testing .

market returns over 30 years were not much different than any other but inflation early on did them in.

that is why the pp running with the ball  half way down field and by passing the early horror show is not really testing a withdrawal rate.

[Matthew19]

I don't care about nominal returns. I only care about real returns.

nominal returns are important too.

think of your pay check. you can't control everything about your expenses in life but what what at least helps you plan is a consist pay check that is usually enough to exceed inflation .

by having a predictable pay check to plan around it makes not having two variables that much harder to deal with.

while adjusting for inflation is important it is vastly different for each one of us. some may be effected greatly and others not so much.

as we age we tend to do and buy less so what we don't spend money on  tends to more than cover the price increases in what we do continue to spend on . that makes inflation adjusting not such a big deal  compared to someone raising a family  .  so while real returns are important they are a different yard stick measuring different things for different people.

the fact that markets tend to be so consistent in nominal terms regardless of events over 30 years i find amazing .  most 30 year time frames are within 1 or 2% of each other which for all that volatility is quite amazing .

don't forget that what caused most of the retirement time frames to fail was not market returns , that is a misbelief.  it was actually inflation that killed them off in the laboratory testing .

market returns over 30 years were not much different than any other but inflation early on did them in.

that is why the pp running with the ball  half way down field and by passing the early horror show is not really testing a withdrawal rate.

If you care most about nominal returns you wold have loved the Zimbabwe stock market a few years ago. 10,0000% gains. ?

[mathjak107]

well we are approaching the feds day of decision next week .

the cpi numbers are due out the day before the feds meeting .

so those numbers are expected to come in higher than last august.

the way i see it here is my bet.

the futures markets are telling a very different story than the financial survey's as far as what the outcome will be .

the futures markets have not priced in a rate increase at this point , it looks like they are priced as if the rate will not rise  on the short term .

if rates rise i predict the short term bonds will dip and the 10 year and longer will actually rally nicely as they would favor that increase to hold down inflation .

but if rates do not rise  short term bonds will rise and we will see a nasty fall in the 10 year and longer .

the bond market will try to curb inflation itself if the fed does not . we could see 2.35% or so on the 10 year  which would suck for TLT .

rates on the longer term bonds already factored in a bit of an increase as rates on the 10 year are 30% higher than feb . so while the fall  IN TLT will be nasty it will not be as bad .

this is going to turn out the opposite of what we think and that rate increase will rally bonds ,while no increase will cause a sell off in bonds .

[Reub]

This seems very plausible. Gundlach was predicting that a rate hike would rally long term bonds as well. With the world economies so weak I would think that the Fed might not raise rates, which if you are correct,  could cause some pain in treasuries.

[buddtholomew]

I don't understand the curb inflation argument Math as there are no indications of inflation at the present time.

[dragoncar]

that chart though is inflation adjusted not nominal.  yes inflation adjusted is important but it is going to be very different from nominal.

I would argue that inflation-adjusted returns are the only thing that matter. What good is nominal 12% CAGR if inflation was 8% on average? Looking only at the nominal returns is like planning a retirement based on savings amount alone without taking spending into consideration.

a 12% CAGR and 8% inflation sounds great to me, a person with a fixed mortgage that is by far my #1 expense.

[mathjak107]

I don't understand the curb inflation argument Math as there are no indications of inflation at the present time.

The cpi report that is due the day before  the meeting will likely be higher than last august bumping the year over year higher.
The bond market has been concerned about prospects down the road and have already bid up the 10 year rates by 30% since january.

Unless the fed shows they will start to rein things in i predict the bond market will self off thursday if we get no rate increase.

I would say the 10 year may level out at 2.33% or so.

If we do get the increase i think the bond market will like that and 2.00% is possible.

[mathjak107]

that chart though is inflation adjusted not nominal.  yes inflation adjusted is important but it is going to be very different from nominal.

I would argue that inflation-adjusted returns are the only thing that matter. What good is nominal 12% CAGR if inflation was 8% on average? Looking only at the nominal returns is like planning a retirement based on savings amount alone without taking spending into consideration.

a 12% CAGR and 8% inflation sounds great to me, a person with a fixed

mortgage that is by far my #1 expense.
W

Except think about this fact. When me and my friends took mortgages a home was 35k back in the 1970's.

That was a lot of money to owe . Our rent was only 189 dollars.

Well here we are 35 years later. In the scheme of things that 30k mortage that was 259 bucks in a world where inflation gave as 12-20k a year real estate taxes and 400 a month for gas and electric accounts for nothing more than a few dinners out that month

In other words when everything sky rockets around you that mortgage is almost like peeing in the ocean compared to the rest of the expenses.

To a tristate area homeowner even paying off the 259 buck mortgage didn't make a dent in everything else.

[mathjak107]

We like to think of fixed rate mortgages as an inflation hedge but the fact is they are not a hedge at all. They are a tool. They are only a means of buying an asset that may act as an inflation hedge.
How that hedge does is effected by other things such as if expenses shoot up for owning that hedge or its value falls because like the 1970's few could afford to buy with 20% mortgages so the market sucked then you have no hedge.

Assets like real estate and stocks only did well once inflation fell. If it didn't things would just have gotten worse.

Mortgages are neutral by themselves ,they only provide a source of funds to buy an asset that may act as a hedge.

The home is still the same hedge whether you are paying a mortgage , paid cash or paid it off already. 
This is another one of those myths that take on alife of its own because it sounds good , how many times have you heard a fixed rate mortgage is an inflation hedge.

But once you stop and think about it the fact is it only gives someone with not enough money to buy an asset the resouces to purchase that hedge.

[Mark Leavy]

A very good post MJ.  Sometimes the basics need to be repeated because they aren't common knowledge.  Thank you for taking the time to spell it out.

[mathjak107]

Thanks.

There are so many financial myths out there and i have always questioned alot of them as once you look under the hood they make little sense.

[MachineGhost]

Why is it impossible to have rising rates, falling equities, and lower gold prices? Where does it say that it  can't happen?

That has happened several times in history.  It tends to be when equities are overvalued so something has go to give to get the returns back to normal to get people to buy again.

[MachineGhost]

I don't understand the curb inflation argument Math as there are no indications of inflation at the present time.

Tell that to the landlord who is raising a freaking 3%.  BULLSHIT I say!  But what can you do about it?

[mathjak107]

Believe it or not for the first time i can remember here in nyc the rent stabilization board voted no increase for 2016.

While medicare is going up a lot because there will be no cola adjustment those collecting ss will not have to pay more in 2016.
It is going from the 104 to around 156.00 for those delaying ss