Gyroscopic Investing

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I keep all my long's in tax-deferred accounts, but this is an excellent question/point.  I don't know the answer.

If you buy individual bonds on the exact same schedule as the ETF, there is no significant difference between the portfolio of individual bonds and the ETF, beyond the expense ratio and the logistics of buying and selling.

The market value of individual bonds in a treasury direct account fluctuates the same way as the price of ETF shares.  However those fluctuations are much easier to see with ETFs, which may or may not be a good thing.  Some people find it easier to buy & hold when they can't see prices easily.  An analogy is how the price of an individual house may fluctuate quite a bit an sync with REIT shares, but people have an easier time buying & holding a house for 30 years than they do REIT shares.

A few considerations:

1.  If you're going to buy the LT bonds directly from the Treasury, you need at least $10k minimum or else you have to buy on the secondary market, which may have a pretty high fee (as high as $40 at Vanguard).  

2.  If you want to sell LT bonds prior to expiration (which you will do if you stick to PP) you'll have to do it on the secondary market, which will also have a fee, again as high as $40 at Vanguard.  

So for small amounts of money, it's not a bad idea to use TLT.

I personally like to mix the two.  This may sound silly, but I think it's a good idea to buy the bonds themselves, b/c you will learn how the bond market actually works by doing this.  TLT is good for rebalancing b/c the transaction fees are lower.

doodle wrote: As a scenario....if the long bond yield goes up to 9% lets say on the back of decreased US financial standing and inflation and I decide that I am comfortable with this return over the next 30 years...would it be better to buy the bonds myself at treasury direct as opposed to ETF? This would give me the option to hold them longer if rates decrease precipitously in the future in contrast to a bond ETF which must sell according to a schedule....

I like individual bond purchases but be very careful about holding them only because you like the interest rate.  Doing this will "break" the Permanent Portfolio.

We're talking way out in the future here, of course, but if you hold a bond for a very long time (because of its appealing interest rate), it's going to lose its ability to generate capital appreciation in the event of deflation.  A 9% bond with 26 years left to ago has tremendous power to protect your portfolio against deflation while a 9% bond with 6 years left to go has very little.  While the interest rate on the bond has remained the same, its volatility has fallen sharply, which is problematic for our asset balance.

As far as purchasing individual bonds, I like doing that.  My approach has been to mostly buy individual long-term bonds for the bulk of my LT holdings and TLT to fill in the gaps (and some smaller retirement accounts.)  I am not sure that buying from TreasuryDirect is the best way to go, though.  I remember finding their procedure for selling securities on the secondary market unappealing and expensive-looking (there was some sort of fairly high commission.)  You'll probably want to look into that first.  I use Fidelity for trading Treasury securities because they don't charge me any fees.

One thing I woud suggest when it come to the question of whether to buy bonds or a bond ETF is to buy at least some bonds if you are able to.  By doing this you will have firsthand exposure to how buying individual bonds works, how the coupon payments are made, and how the overall experience compares to holding an ETF.

This is sort of the bond equivalent of the advice in the gold arena that every PP investor should own SOME physical gold, even if it is a very small amount, just so there will be some familiarity with how physical gold differs from the PM ETFs (i.e., the ways in which the two ownership experiences differ from one another will give you more insight into the nature of the two asset configurations.  When it comes to gold, for example, I think people would own a lot less of the gold ETFs if they owned even a small amount of physical bullion).

Lone Wolf wrote: I like individual bond purchases but be very careful about holding them only because you like the interest rate.  Doing this will "break" the Permanent Portfolio.

This is one of the reasons I think what MT said (see below) is very true.  If you don't understand how your bonds work, you might make a mistake like this and not even realize it.

MediumTex wrote: Buy at least some bonds if you are able to.  By doing this you will have firsthand exposure to how buying individual bonds works, how the coupon payments are made, and how the overall experience compares to holding an ETF.

If a new 30-year bond has a duration of about 15 or 16, then what would the duration fall to 10 years later?  I ask because TLT keeps a portfolio of very new bonds while a buy-your-own-and-hold-for-10-years approach means you'll end up with comparatively older bonds.

The bond part was my biggest obstacle to implementing the PP. Not that I've taken the plunge, I like direct bond ownership:

-much less chance i'll tinker w/ the holding
-no expense ratio for the 10 years I'll hold bond !
-no manager (except myself) who can game the holding (like a fund manager could be tempted to do)...admittedly an outside chance w/ TLT or EDV
-even if markets close due to catastrophe, US gov't will get me my interest payment (again, very outside risk of needing this benefit)

I just thought of more reasons to hold gold outside the financial system! (all of the above!)

I agree, Murphy.  It's also nice to just get a bit closer picture of how these things work.  It's only a little bit of extra effort and makes bonds seem so much more "concrete" (although I admittedly hold all my bonds electronically.)  Do you get physical paper bonds or hold them in electronic form?

While the expense ratios in TLT are very reasonable, it is just so easy to purchase a bond on the secondary market.  If you've got a brokerage with free Treasury trades, this keeps your overall PP expense ratio unbelievably low.

I do love that TLT is there, though, particularly for "filling in gaps" in retirement accounts and things like that.  It also makes a Permanent Portfolio so much simpler to set up if someone just wants to get in and get it done.

Lone Wolf wrote: Do you get physical paper bonds or hold them in electronic form?

they're in Vanguard acct. I'm sure Uncle Sam will know where to send the check if he can't get thru to Vanguard ;-)


After dealing w/ a 1" stack of EEs after my mother's death (RIP), I will NEVER deal with paper bonds (or probably even Treasury direct)...major league pain the the a$$, signature guarantees, UPS, Fed Reserve branch in Minn (yeah...they would talk to me @ my local Fed Res branch) & all.

murphy_p_t wrote: After dealing w/ a 1" stack of EEs after my mother's death (RIP), I will NEVER deal with paper bonds (or probably even Treasury direct)...major league pain the the a$$, signature guarantees, UPS, Fed Reserve branch in Minn (yeah...they would talk to me @ my local Fed Res branch) & all.

Wow... I buy paper I-bonds every single year!  I hadn't realized they made this sort of thing so painful for heirs.  (While I plan to live forever as a brain in a jar, I do have to allow for the narrow possibility that I won't be around forever.)

Lone Wolf wrote:

murphy_p_t wrote: After dealing w/ a 1" stack of EEs after my mother's death (RIP), I will NEVER deal with paper bonds (or probably even Treasury direct)...major league pain the the a$$, signature guarantees, UPS, Fed Reserve branch in Minn (yeah...they would talk to me @ my local Fed Res branch) & all.

Wow... I buy paper I-bonds every single year!  I hadn't realized they made this sort of thing so painful for heirs.  (While I plan to live forever as a brain in a jar, I do have to allow for the narrow possibility that I won't be around forever.)

i'm sure the accountant & estate lawyer won't mind shuffling those things like a Vegas poker dealer  :-(

TBV wrote: If a new 30-year bond has a duration of about 15 or 16, then what would the duration fall to 10 years later?  I ask because TLT keeps a portfolio of very new bonds while a buy-your-own-and-hold-for-10-years approach means you'll end up with comparatively older bonds.

This reason, as well as the simplicity of maintaining the long bond allocation should something happen to me has kept me a TLT man. When I was starting my PP, the standard advice was to buy the longest dated bonds you can. I am fortunate to have started the permanent portfolio with a a significant sum, so I would have either needed to create a ladder from, for example, 25-30 years, or just buy 30 year bonds, but in 7 to 10 years that large initial bolus would have shortened the duration of my holdings until time to sell. That said, 0.15 % is what it is.