Gyroscopic Investing

Novice here, setting up PP. If I'm buy and hold (dont plan on much trading) could I just use cash (1%) instead of long bonds (VWESX?) since rates cant go much lower?

Instead of 25% cash and 25% long bonds why not 50% in treasury notes of duration say 3-5 years ? This should provide balance against stocks and still manage OK in a slowly rising rate environment.

U.S. Treasuries are the international "flight-to-safety" in the event of a deflationary crisis (i.e. 2008).

Sure, rates "can't get much lower", but they absolutely can stay low for extended periods of time (as the last 8 years has proven).

But holding long U.S. Treasuries isn't just about exploiting low rates, its about holding a "lifeboat" asset. In the event of another international deflationary crisis, you'll be holding tickets to the only lifeboat in town.

Or maybe not. Maybe people will be wary of U.S. Treasuries during the next crisis because they don't trust the U.S. to be responsible with managing the US$ (and I can't argue with anyone on that).

But if people don't trust U.S. Treasuries during the next crisis, they'll almost certainly flock to GOLD.

Either way, you're hedged. But if you decide to shun either asset, you're not.

boglerdude wrote:Novice here, setting up PP. If I'm buy and hold (dont plan on much trading) could I just use cash (1%) instead of long bonds (VWESX?) since rates cant go much lower?

Listen to TennPaGa.
I see you are a Boglehead.
BH - Total Bond Market index, duration 5.6 years.
HBPP - Cash and LTT's otherwise known as a barbell.
I hold additional cash to replicate the 5.6 year duration as I am a BH at heart too.

See how easy it is to find commonalities between the two investment philosophies. Let me know if you come up with one for gold

I just did my final 401k rollover after retiring and was forced to decide whether to buy bonds or not to balance the portfolio. I buy individual bonds on Fidelity and the lowest rate on any in my portfolio is 3.125%. I had a hard time purchasing any bond at a lower rate than that so I just bought TLT for now and said the heck with it.

It is true that we have been hearing for years and years that yields have nowhere to go but up and most of the time it would have been wise to ignore that advice but how low do the yields have to go before it is true?

curlew wrote:I just did my final 401k rollover after retiring and was forced to decide whether to buy bonds or not to balance the portfolio. I buy individual bonds on Fidelity and the lowest rate on any in my portfolio is 3.125%. I had a hard time purchasing any bond at a lower rate than that so I just bought TLT for now and said the heck with it.

It is true that we have been hearing for years and years that yields have nowhere to go but up and most of the time it would have been wise to ignore that advice but how low do the yields have to go before it is true?

Japanese rates have no where to go but up.

buddtholomew wrote:Japanese rates have no where to go but up.

Yup... since I was five years old.

Japan has fundamental issues that we don't. Either way, look at how much pain this would have caused you:



What offset that pain? Stocks? Gold? Cash?

What's important when you modify the PP --- especially the bonds -- is make sure all the assets are at risk parity or they won't be able to do their job.

MachineGhost wrote: What's important when you modify the PP --- especially the bonds -- is make sure all the assets are at risk parity or they won't be able to do their job.

How do you calculate that?

Long bond rates matter not. What matters is volatility, hmm?



Rebalance when rates rise
Harvest the gains when they fall
Been doing it since 2008
And I'm having a ball

blue_ruin17 wrote:How do you calculate that?

I started a thread on it but its not coming up in the search results (as usual). So off the top of my head you can do it four ways:

Inverse weight volatility, i.e. take the long-run historical volatility of the three assets and divide into 1, i.e. 1/15. Total up all of these inverse volatilities to find the percentage each asset gets as a portfolio weight. Then you rescale the weights symmetrically downwards to match the PP's volatility (or your own volatility target) and put the difference into cash. This is known as naive risk parity.

Same as above, but use super long-run historical volatilities back to 1920 for the assets from the Shahidi Balanced portfolio, but they're all within 5% of the PP.

Same as above, but use forward looking volatility from the options market from an at the money, longest-dated LEAP.

Calculate the long-run historical correlations, covariances and volatility for the three assets. This is known as correlated risk parity or equal risk contribution.

MediumTex wrote: Rebalance when rates rise
Harvest the gains when they fall
Been doing it since 2008
And I'm having a ball

MT, are you either using narrow bands or rebalancing annually? Seems like late 2008 was the only time in the last eight years that LTTs would have hit 35%. I maintain that lower rebalancing bands are the only really effective way to make money off of bonds now. Well, obviously that would not be true if rates were steadily declining and did not have periodic drops in price as we saw in 2015 when the rate went from 2.25% to 3.25% rather quickly.

I also don't completely agree with posters (and most of them know more than I, so here goes the loose canon novice) who say that we hold bonds for their volatility and not for their coupons. Over time the coupon has, historically at least, been a huge part of bonds' overall return. Obviously that becomes less true the closer we get to zero on 30-year rates.

Or have I just gotten too excited by a simple bond poem?

Barrett, I think you and MT are saying the same thing.
Harvest gains when rates are low (rebalance) and purchase (rebalance) when rates are higher.
The challenge is knowing what is low and what is high...
It's never been about the interest earned.

buddtholomew wrote: It's never been about the interest earned.

Ah, but budd, if it were never about the interest earned then surely you wouldn't mind sending me your interest payments, right? I'll post my routing number and SWIFT code later! We LIKE it when those payments drop into our accounts, no matter how piddling they may be. Over time those bond interest payments absolutely add a lot to the PP. It's just hard to see over a short time frame, and, frankly, uninspiring at the moment.

You're absolutely correct, but that's not the main purpose for holding LTT's at all times. If it were about the dividends, then a 5-yr CD @ 2% should be sufficient for the long term bonds in the PP.

LTT's up 15% YTD.
What % of that is attributed to dividend reinvestment.

buddtholomew wrote: LTT's up 15% YTD.
What % of that is attributed to dividend reinvestment.

Point taken. In years when interest rates are falling and long bonds are kicking ass, those slow, steady payouts don't amount to much. But they are also paying out in years when bonds are getting hit or just trending sideways. I just did some really rough math on the PP since the beginning of 2008. I believe that about a third of bond returns and maybe 10% of overall PP return during that time have been from bond coupons. Maybe a more in depth calculation is worth doing at some point. It's just hard to get an exact figure because so much depends on rebalancing timing. In my little exercise, I assumed annual rebalancing.

And, of course you know this by now, budd, but anything I post on here comes with the standard disclaimer that my head could be more than halfway up my backside.

I don't disagree that yield contributes to total bond return just as stock dividends contribute to equity returns.

We need an instrument that responds to deflationary forces and LTT's serve that purpose in the PP. Higher historical yields also came with higher inflation so it's real returns that we should analyze.

My head is most likely 90% up my buttocks but this is how I have rationalized holding LTT's even at these lower yields.

It's hard to analyze the use of T-Bonds because their purpose is CAPITAL GAINS during disinflationary and deflationary periods and not holding to maturity for a locked-in given level of yield which is what the lamestream dogma is about 99% of the time. We're simply in uncharted territory for how T-Bonds perform outside disinflationary and deflationary periods at these levels, hence the need to be prudent, but what we do know is they're gonna give you a new asshole... eventually. The PP will help offset that pain.

Rebalancing or "volatility harvesting" is incidental. It only adds about 1% a year. It's not a major driver of anything.

MachineGhost wrote:We're simply in uncharted territory for how T-Bonds perform outside disinflationary and deflationary periods at these levels...

Aren't the German and Japanese bond markets enough evidence that T-Bonds can still deliver nice gains starting from about where we are now (2.3% or so)?

MachineGhost wrote: but what we do know is they're gonna give you a new asshole... eventually.

Ah, the hidden gems on this forum always abound!

TennPaGa wrote:* People have been saying "interest rates can't go any lower" for years. And yet they keep going lower. Why do you think the prediction is right this time?

Not predicting, just sayin' that rates have been higher than 10%, and going below zero in the US might raise eyebrows. So, seems like rates can either stay about where they are, or move up as high as 10%. OTOH, the real rate was -3% a couple years ago
https://www.frbatlanta.org/cqer/researc ... px?panel=1

Also, isn't the Fed holding long term bonds from Operation Twist, that they're supposed to sell back? But I guess they could just never do that. . .lol

I just looked at returns in 2008:
VG Total Bond Market: 5%
VG Long-Term Investment-Grade: 2.3%
VG Long-Term Treasury: 22%

Seems flight to safety is real, wasnt sure since discussions of 2008 on bogleheads use total bond as the standard

For a slowly rising rate environment, is a cash money market (1%, FDIC) with CapitalOne good enough? Or would a short term bond fund increase in yield more (or faster).

Maybe I'll start with
10-25% PHYS (will be moving this year and dont want to carry coins)
25% Vanguard funds (VTWSX then tilting to emerging markets, mid cap, consumer staples, healthcare & materials)
25% cash
25% VG Long-Term Treasury

boglerdude wrote:Seems flight to safety is real, wasnt sure since discussions of 2008 on bogleheads use total bond as the standard

The majority allocation in a total bond is to Treasuries so it "works" despite the other "risk on" assets just out of lucky coincidence, though I prefer to be as pure as the white snow, not yellow.

Zero duration exposure is optimal for a rising rate environment. Since PP orthodoxy doesn't time the market, thats 25% to 1-year T-Bills and 25% to T-Bonds. Just keep in mind the lower yields on T-Bonds go, the higher the duration and the volatility so it starts straining the "natural" risk parity of the PP. I don't know if it is significant enough concern yet to worry about, but at 0% or negative yields it might. Much of the risk will be coming from like what happened in Japan when their 40-year bond went from 0% to .50% in a flash. No other asset in Japan can possibly offset that gaping wound anytime soon. So its important to keep the PP as risk neutral as possible.

MG,

What percent did the bonds decrease?

Kbg wrote:MG,

What percent did the bonds decrease?

It should be >20%.
The question is how did investors in those long bonds perform over the last 1,5,10 years and did gold, stocks buoy the rest of the portfolio.

MachineGhost wrote:

Kbg wrote:MG,

What percent did the bonds decrease?

Beats me! Download this and find out: http://expirebox.com/download/8563d2d67 ... 481a6.html