Gyroscopic Investing

Here is another good article about historical rising rates like the one from Schwab magazine that I posted last year.  Hedgewise is a new roboadvisor firm that does a risk-parity PP all but in name, but splits gold into gold and oil and also uses futures contracts for extra alpha generation.  Unfortunately, their management fee is too high to be competitive or we could all have boat drinks (see http://www.imdb.com/title/tt0114660/).

https://www.hedgewise.com/blog/marketco ... 8-1982.php

Desert wrote: That's a great article, MG.  It would be even better if results were presented in real rather than nominal terms, but it's still a very educational read. 

From what I can guess just by eyeballing the first graph on that page, it shows a 48% (or thereabouts) total return from mid-1958 to 1-1-1982 for LTT bonds).

This means that if you had started with $100 (nominal) in assets invested in bonds in 1958; you would've had roughly $148 (nominal) in assets by January of 1982 (assuming you somehow managed to avoid taxes and thus were able to reinvest all your coupons along the way without them being taxed)

Of course, as per https://www.minneapolisfed.org/ you would have to have just over $334 in January of 1982 to purchase what $100 purchased in 1958; as such, in real (i.e. not nominal but in inflation adjusted terms), you had roughly $50.26 in purchasing power that your $334.25 bought you in 1982 vs $100 of purchasing power that your $100 bought you in 1958.

Got gold? Got stocks?

Actually, it's not quite so bad for the PP as it appears since the duration of the PP's total treasury holdings would be nowhere near what a 20-year T-bond would provide since PPers hold cash as well as LTT bonds but still....ouch. After 1958 was over, 1960, 1962, 1970, and 1976 were the only truly good years for LTTs during this period; the rest ranged from "mediocre" to "OMG please make it stop...when will it stop?!?"

D1984 wrote: Actually, it's not quite so bad for the PP as it appears since the duration of the PP's total treasury holdings would be nowhere near what a 20-year T-bond would provide since PPers hold cash as well as LTT bonds but still....ouch. After 1958 was over, 1960, 1962, 1970, and 1976 were the only truly good years for LTTs during this period; the rest ranged from "mediocre" to "OMG please make it stop...when will it stop?!?"

( 17 + 1 ) / 2 = 9 max???  That's comforting.

I do think judicious use of stacking longer dated breakable CD's is all but mandatory for a horrendous period like this.

Inflation back then also didn't have hedonistic adjustments to account for productivity improvements.  Surely, no one in the 60's to 80's didn't benefit from the transistor and microprocessor revolution? (along with bowling alleys, roller skating and disco).

So I think we worry about inflation way too much...  as Americans.

This is from the Hedgewise link that Desert posted:

Using the same 'dollars at risk' concept discussed earlier, you can determine that you'd want a ratio of $1 gold : $1.57 S&P 500 : $2.75 20yr Treasuries. The equivalent portfolio mix is:

Gold: 19%
20yr Treasuries: 52%
S&P 500: 29%

Sure looks like the bullet strategy with a bit more stocks and a bit less gold (and none of the advantages of cash).

MachineGhost wrote: I do think judicious use of stacking longer dated breakable CD's is all but mandatory for a horrendous period like this.

CDs especially for someone in the distribution phase of life, where they have to budget how much they are going to receive in order to live, where they can't play around with interest rate risk.

So what would be the merits of instead of cash : 20-30 year Treasuries in ratio 1:1 with average duration 10-20 years, instead

cash : 10 year Treasuries :  20-30 year Treasuries in ratio 1:1:1. The duration would not change, it would still be 10+ years.

Would sampling THREE points along the yield curve bring any benefits or any problems as compared the PP's traditional "barbell"?

So this is not a barbell, not a bullet... but a Trident?

Desert wrote:

barrett wrote: This is from the Hedgewise link that Desert posted:

Using the same 'dollars at risk' concept discussed earlier, you can determine that you'd want a ratio of $1 gold : $1.57 S&P 500 : $2.75 20yr Treasuries. The equivalent portfolio mix is:

Gold: 19%
20yr Treasuries: 52%
S&P 500: 29%

Sure looks like the bullet strategy with a bit more stocks and a bit less gold (and none of the advantages of cash).

And a very LONG duration bullet, also.  I typically think of a bullet being closer to 10 yr Treasuries.

True. Maybe a "bullet plus" or some such designation.

Also I was struck by the fact that the periods of time that Hedgewise examined in that link were always long enough to mask short-term bond pain issues like we have experienced so far this year. Meaning that over time coupon payments tend to alleviate the damage done to the long bond portion of a portfolio. This is of course similar to how dividends prop up overall stock performance but it's easy to miss either of these things when one is focussed on the short term.

barrett wrote: Also I was struck by the fact that the periods of time that Hedgewise examined in that link were always long enough to mask short-term bond pain issues like we have experienced so far this year. Meaning that over time coupon payments tend to alleviate the damage done to the long bond portion of a portfolio. This is of course similar to how dividends prop up overall stock performance but it's easy to miss either of these things when one is focussed on the short term.

And the reason why people are especially freaking out now so much about long-term bond prices is that the coupons are so much less than they have been historically. If we were getting 5% on a 30-year we wouldn't care as much.

ochotona wrote:

MachineGhost wrote: I do think judicious use of stacking longer dated breakable CD's is all but mandatory for a horrendous period like this.

CDs especially for someone in the distribution phase of life, where they have to budget how much they are going to receive in order to live, where they can't play around with interest rate risk.

So what would be the merits of instead of cash : 20-30 year Treasuries in ratio 1:1 with average duration 10-20 years, instead

cash : 10 year Treasuries :  20-30 year Treasuries in ratio 1:1:1. The duration would not change, it would still be 10+ years.

Would sampling THREE points along the yield curve bring any benefits or any problems as compared the PP's traditional "barbell"?

So this is not a barbell, not a bullet... but a Trident?

When would you sell the 10 year treasuries? The cash just matures in a year or two, and HB recommended selling 30 year treasuries at 20 years. If you use the same percentage (66%) with the 10 years, you'd be selling them at 6.6 years. Would that be too much different from a broad bond index?

Kriegsspiel wrote: When would you sell the 10 year treasuries? The cash just matures in a year or two, and HB recommended selling 30 year treasuries at 20 years. If you use the same percentage (66%) with the 10 years, you'd be selling them at 6.6 years. Would that be too much different from a broad bond index?

If you have an ETF, the fund manger is always selling... I guess I hadn't thought about actually owning the bonds themselves. You could buy a longer-term Treasury bond off the resale rack  that only has, say, 12 years left to maturity, and sell it at 8 years left, and build a ladder like that. But a broad bond index owns Corporates, Municipals, MBS, Foreign, all that stuff, not the same as a Treasury.

Over the past few time, the bond prices have declined with rise in it's yields. These rising yields are said to be affecting the stock market. Because of the rising yields on the bonds, the probability of the stock market rise is said to remain low. 

PureSoul wrote: Over the past few time, the bond prices have declined with rise in it's yields. These rising yields are said to be affecting the stock market. Because of the rising yields on the bonds, the probability of the stock market rise is said to remain low.

Bond prices always decline with a rise in yield...not just the last few times.

Also, a rise in yields may or may not impact the stock market. I would recommend that you challenge some of the herd mentality written above. Banks, for example, would benefit from rising interest rates as they can extend loans at these rates and increase their profits (since they can borrow cheaply).

MangoMan wrote: I don't get this logic. Banks make their profit on the spread between their rate to borrow [from the Fed or customers with cash accounts] vs the rate they can charge on loans. The prevailing interest rate is irrelevant to the banks' ability to profit.

That being said, rising interest rates always drive down the price of existing bonds.

Banks borrow SHORT, lend LONG.  If short rates rise, their profits will decrease; if long term rates rise, their profits will increase.  In an economic expansion, long term rates will rise first and then the Fed will be behind the curve and raise the FFR afterwords to match the market rate (T-Bills).

And yet, regional banks are somehow borrowing SHORT and lending SHORT (where's the profit???) so that they've been rallying on expectations of a FFR increase.  I don't understand it and I'm staying away.