Tactical Bonds
Posted: Thu Aug 01, 2019 8:47 am
On his public blog, Paul Novell has been updating his old Tactical Bond portfolio somewhat (or backpedaling from it?), and talking about a different way to enhance bond performance.
FYI, the older Tactical Bond set-up is described here at Allocate Smartly.
In a nutshell, the new set-up is an even-weight BNDX, EMB, HYG, LQD during risk-on times, or purely US Treasuries during risk-off. He proposes the use of the exact same risk switch he uses to switch equities, his SPY-COMP signal, which is behind a pay-wall. However, there is public domain signal, called SPY-UI, which is an earlier version of SPY-COMP and almost as good.
With SPY-UI, you're looking at the 10 month simple moving average of SPY, and going risk-on if above, or risk-off if below, in the usual manner, but you ignore the risk-off signal while the US Unemployment Rate is below it's 12 month simple moving average. You can use that as a risk controller. Read more here.
This is a way to go bungee-jumping with riskier bonds, but with a strong bungee (the risk switch) which will put you into Treasuries.
My implementation is different, I think it's dumb to own BNDX right now due to the low coupon, so I swapped it out for Preferred Stock (PFFD). Another choice is PGX.
But you have to know... four slices of risky bonds behave significantly like stocks at times. On a buy and hold basis, my HYG / LQD / EMB / PFFD has a maximum drawdown about the same as a 50%-50% S&P 500 and aggregate bond portfolio (but with a significantly larger coupon). That's why you need to use the risk switch, or else just know that you have something like the Couch Potato portfolio in terms of risk, and don't do that if you're not happy with it.
WHY FOR GOD'S SAKE am I doing this? It all has to do with my personal situation. I win if I can book a 4% return reliably on my portfolio until I retire in 2026. So while we're in this this confused, sideways trending stock market, I'm content to take on risk by owning riskier bonds, and not a whole lot of stocks, and booking the gains in cash, on a monthly basis instead of "hoping" for Jerome Powell to do something and give me capital gains, which could go away fast. Disclosure... I still have TLT, and gold, which have done well. I haven't measured the %, but I have the Four Tactical Bonds, TLT, GLD, SPY, Cash, I-Bonds... smorgasbord.
FYI, the older Tactical Bond set-up is described here at Allocate Smartly.
In a nutshell, the new set-up is an even-weight BNDX, EMB, HYG, LQD during risk-on times, or purely US Treasuries during risk-off. He proposes the use of the exact same risk switch he uses to switch equities, his SPY-COMP signal, which is behind a pay-wall. However, there is public domain signal, called SPY-UI, which is an earlier version of SPY-COMP and almost as good.
With SPY-UI, you're looking at the 10 month simple moving average of SPY, and going risk-on if above, or risk-off if below, in the usual manner, but you ignore the risk-off signal while the US Unemployment Rate is below it's 12 month simple moving average. You can use that as a risk controller. Read more here.
This is a way to go bungee-jumping with riskier bonds, but with a strong bungee (the risk switch) which will put you into Treasuries.
My implementation is different, I think it's dumb to own BNDX right now due to the low coupon, so I swapped it out for Preferred Stock (PFFD). Another choice is PGX.
But you have to know... four slices of risky bonds behave significantly like stocks at times. On a buy and hold basis, my HYG / LQD / EMB / PFFD has a maximum drawdown about the same as a 50%-50% S&P 500 and aggregate bond portfolio (but with a significantly larger coupon). That's why you need to use the risk switch, or else just know that you have something like the Couch Potato portfolio in terms of risk, and don't do that if you're not happy with it.
WHY FOR GOD'S SAKE am I doing this? It all has to do with my personal situation. I win if I can book a 4% return reliably on my portfolio until I retire in 2026. So while we're in this this confused, sideways trending stock market, I'm content to take on risk by owning riskier bonds, and not a whole lot of stocks, and booking the gains in cash, on a monthly basis instead of "hoping" for Jerome Powell to do something and give me capital gains, which could go away fast. Disclosure... I still have TLT, and gold, which have done well. I haven't measured the %, but I have the Four Tactical Bonds, TLT, GLD, SPY, Cash, I-Bonds... smorgasbord.
