Gyroscopic Investing

hi guys,

is the cash and long bond allocation in the PP suppose to create an average duration of 10 years?

can someone explain to me how that works.

its really been hard to watch the my PP porfolio recently,  first gold gets hit, now i look and long bonds had a big drop.

thanks

I wouldn't necessarily say it is "supposed" to be 10 years, but I will say that a PP consisting of 50% 10 year Treasuries, 25% stocks, and 25% gold is nearly identical to a vanilla PP. Having a targeted maturity instead of the barbell gives you a higher expected return if interest rates stay the same, but the barbell outperforms if interest rates move either up or down because a barbell has a higher convexity. The barbell also allows you to profit from unexpected inversions in the yield curve. The difference is quite small though.

The barbell is nice because you get that arbitrary dollar symmetry of the 4x25 which makes the portfolio easier to explain 

The barbell also means that you have 25% of your savings which is pretty much readily accessible in an emergency.  This is actually a really nice feature of the PP.

Cash is probably the most underrated asset class I can think of. I love cash.

melveyr wrote: I wouldn't necessarily say it is "supposed" to be 10 years, but I will say that a PP consisting of 50% 10 year Treasuries, 25% stocks, and 25% gold is nearly identical to a vanilla PP. Having a targeted maturity instead of the barbell gives you a higher expected return if interest rates stay the same, but the barbell outperforms if interest rates move either up or down because a barbell has a higher convexity. The barbell also allows you to profit from unexpected inversions in the yield curve. The difference is quite small though.

The barbell is nice because you get that arbitrary dollar symmetry of the 4x25 which makes the portfolio easier to explain 

This is a great concise explanation.

Xan wrote: The barbell also means that you have 25% of your savings which is pretty much readily accessible in an emergency.  This is actually a really nice feature of the PP.

+1

The only other thing I'll add is that the bullet is a nice fallback for mediocre 401k plans. You can do
50% intermediate treasury index, total bond index, or other low cost intermediate bond fund
25% total stock market index, S&P 500 index, or other low cost large cap stock fund
25% physical gold bullion, or gold ETF in IRA and/or taxable brokerage account

Harry Browne made it clear that we should sell our long bonds, even at a loss, to buy new ones when there is only twenty years left on the original bonds.

The other day I was wondering, what if I wanted to buy intermediate bonds instead of an intermediate index? (I don't. I buy t-bills and long bonds). How often would those have to be replaced? Maybe avoid selling but buy new ones every year?

dualstow wrote: The other day I was wondering, what if I wanted to buy intermediate bonds instead of an intermediate index? (I don't. I buy t-bills and long bonds). How often would those have to be replaced? Maybe avoid selling but buy new ones every year?

If you're doing a bullet approach using individual bonds, why not just set up a 20- or 25-year bond ladder and use the proceeds from the maturing bond each year to buy a new one? It's simple, and you basically just own the entire yield curve.

(I guess that wouldn't really be a bullet per se. Instead of a barbell or a bullet it would be more of a bar.)

Yeah, not a bullet, but it does make a sort of sense.

I've thought about moving "expired" 20 year long bonds to the VP rather than selling them. 

For the PP, though, I'd stick with the barbell approach.  Even though a collection of Treasuries with "average" maturity of 10 years might deliver the same performance in the accumulation phase, I think it would be far better to have the barbell when you're drawing down the portfolio.  Being able to live off the cash and avoid having to sell during big market drops is undoubtedly a big factor in keeping your portfolio alive during retirement.  I haven't looked into this in detail yet, but I believe the 4% withdrawal rate is less safe in a standard, cash-free portfolio than it is in the PP.  It's one of the ideas that helped put me into the PP camp, WITH the 25% cash allotment that many have suggested circumventing.

I emphatically agree with sophie.

Cash seems like a drag on the portfolio, but that's focusing too much on returns. Heck, ordinarily it still provides a reasonable rate of return, and it has many useful roles. At a time like this when it's basically zero, you can think of it as buying a certain amount of safety and flexibility.

sophie wrote: I've thought about moving "expired" 20 year long bonds to the VP rather than selling them. 

For the PP, though, I'd stick with the barbell approach. ...

I think about that, too, and I keep thinking that at some point my long bonds and I will expire around the same time anyway.
Actually, that's a bit premature. The bonds will probably reach maturity around the time that I expire.

melveyr wrote: ... The barbell also allows you to profit from unexpected inversions in the yield curve. The difference is quite small though.

This is a good point.  Typically, interest rates will be rising during prosperity.  When deflation is anticipated in the bond market, however, the price will go up on longer duration bonds, lowering their yield.  This is what results in an "inverted" yield curve, a traditional indicator of recessions.  In this case, the cash portion of the PP may be providing more returns than the LT bonds.  I have a feeling this may be why Harry Browne picked cash to be the asset to hold in recessions, even if it may not be a perfect fit.  This is probably why cash was the best performing asset in '81, '90 and '01. However, it didn't outperform in 2008, lending credence to Harry's opinion that cash isn't a perfect fit during recessions, just the best that he saw.

IMO, this is another good reason to stick with the 25% in cash and 25% in LTT's.  A 50% allocation in a more intermediate duration bond portfolio may not work as well when economic conditions are changing.  And isn't that one of the reasons why we hold the portfolio?

sophie wrote: I've thought about moving "expired" 20 year long bonds to the VP rather than selling them. 

For the PP, though, I'd stick with the barbell approach.  Even though a collection of Treasuries with "average" maturity of 10 years might deliver the same performance in the accumulation phase, I think it would be far better to have the barbell when you're drawing down the portfolio.  Being able to live off the cash and avoid having to sell during big market drops is undoubtedly a big factor in keeping your portfolio alive during retirement.  I haven't looked into this in detail yet, but I believe the 4% withdrawal rate is less safe in a standard, cash-free portfolio than it is in the PP.  It's one of the ideas that helped put me into the PP camp, WITH the 25% cash allotment that many have suggested circumventing.

+1

Maintaining consistent real returns in the 3-6% range across a variety of economic conditions, greatly reducing volatility relative to traditional stock-heavy portfolios, and offering a sizable cash buffer to minimize selling assets in down years all are great ingredients for an effective retirement portfolio.  Those are all tangible benefits I can use right now, rather than simply a back-tested percentage to reassure me that I'll be OK when my portfolio craters by 50%.