Gyroscopic Investing

In an ideal world, we would have access to the VG Treasury MMF and when rates rise again, we just might. I'm thinking of a possible work around that accomplishes a similar goal.

In the PP we want 25% Long Term Treasuries and 25% Short Term Treasuries. The problem with VG funds of the same name are that the short-term fund is too long in duration and the long-term fund is too short in duration. Additionally, VG requires $10k minimum to buy treasuries at auction and charges a fee for the secondary market trades.

Here's what I propose to do for a fix:

20% Physical Long Term Treasuries that I buy at auction for free
5% VG Long Term Treasury Bond Fund
25% VG Treasury Short Term Bond Fund

In theory, the mix between the physical treasuries and the bond fund will create something similar to a pure 25% LTT and 25% "cash" T-Bills. This is because if interest rates decrease, while you don't capture the full momentum from the Bonds Section (Because you have a reduced average duration due to using the "Long" Bond fund for 1/5 of your Bonds), you get a bit of a gain in your "Cash" portion due to the extended duration of the bonds there.

If interest rates increase, then while you lose money in your "Cash" portion (due to the VG Short Treasury Fund having a duration of 2 years, thus losing 2% of principal for every 1% rise in interest rates), you will not lose as much money in your "Long" Bond section because you have a slightly lower duration due to the presence of the Bond Fund mixed in with the actual treasuries.

The additional benefit to this strategy is that I can hold the physical treasuries for a longer period of time because if re-balancing is necessary, I can do it from the mutual fund instead of selling bonds. Additionally, even when the T-Bill MMF reopens at VG, this might be a better strategy because it allows one to more easily rebalance the Bond section, from the Mutual fund, rather than doing so with individual treasuries. I could do that while using the T-MMF for the cash portion but then I'd lose interest-rate protection in deflation.

I believe CraigR just uses the VG Short Bond fund as "cash" and doesn't worry if it loses some money when interest rates rise. I feel this strategy may be closer to true PP while not adding much work to the portfolio to maintain.

Thoughts?

I agree about VUSTX not being long-enough in duration, but if you're okay with holding a fund, who not just use EDV instead? I hold a bunch of EDV in a Vanguard brokerage account inside the Roth IRA. I like its extremely high volatility. It usually does a great job offsetting whatever stocks are doing that day.

As for the cash, I just use VFISX, SHY, and SCHO as my short-term bond portion and don't really worry much about it. Backtesting at riskcog.com revealed that substituting 1-3yr treasuries for T-bills cut the volatility by more than a full percentage point and actually boosted the return by a few basis points.

TripleB wrote: VG requires $10k minimum to buy treasuries at auction and charges a fee for the secondary market trades.

I'm also a Vanguard Brokerage Svcs (VBS) customer.  I use EDV to entirely fill out 30 yr T-Bond asset, but am interested in the possibility of buying T-Bonds at VBS.

afaict, sometime in recent months VBS changed their fees to afaict match Fidelity on the feature of free buying/selling of T-Bonds/Notes at Secondary Auctions.
https://personal.vanguard.com/us/whatwe ... ommissions
goto Bonds & CDs>Security Type=US Treasury Securities, note free commission.
I'm not sure about the minimum, but it seems that it would be in $1000 increments.  I doubt there's a $10K min, because footnote 7 in that fee page indicates a $10K min, & this applies to "U.S. government agency securities" section (presumably Fannie Mae type orgs?) & not the UST Securities section

so presumably you fill
your Bond asset by buying $X000 in a 2042 UST-Bond
your Cash asset by buying say a mix of 1 2013 T-Note, 1 2014 T-Note, 1 2015 T-Note

The only downsize I see is that depending on account size, this change from indirect VG UST funds to direct UST Securities could possibly knock somebody from Voyager status to Standard status, which means going from a $0 to a $20 annual account fee.  This is because only VG funds (mutual funds, ETFs, VMMXX sweep account) count towards this $50K Voyager figure; direct USTs do not.  OTOH even this negative might be not really a negative, since you indirectly pay something based on expense ratio in a VG fund, whereas direct UST Securities have 0.00%er.

Let quickly check the break-even point, assuming simplistically you only have 1 VG Treasury fund
(X amount of fund) * (expense ratio)=$20

EDV 0.13%er, X$ in EDV * (0.0013) = $20 => if you have >= $15,385 EDV, you're better off paying the $20 annual acct fee

VUSTX 0.20%ER => if you have >= $10,000, you're better off paying the $20 annual acct fee

ditto for the Cash short-term Treasury fund VFISX 0.20%er.

Also note that while EDV is 100% USTs, VUSTX & VFISX are iirc something like 80% USTs, 20% "garbage" ("technical term" PPers might use for non-UST bonds) bonds like Fannie Mae.

Let me know what you think.  Am I missing something obvious wrt directly buying USTs in a VBS account?