Just to be clear, the 15% allocations to LTT and Short TIPS in my sig are in funds, not individual bonds.gtwhitegold wrote: ↑Sun Mar 28, 2021 10:43 pmYour bond portfolio is very similar to my desired outcome. I'm targeting 20% LT STRIPS, around 15% ST TIPS and 5% cash. The cash amount may be less, but it's around that ballpark. I don't think that I have the patience to try and deal with a bond ladder.watchnerd wrote: ↑Sun Mar 28, 2021 4:00 pmMy risk portfolio bond allocation is visible in my signature.
But it may not be suitable for many, as I use a long-short / nominal-TIPS / deflation-inflation targeted Treasury barbell.
This is coupled with a LMP portfolio of laddered 10 YR Treasury bonds that alternates between TIPS and zero-coupon nominal STRIPS rungs.
First 20% of bonds in long-term Treasuries
Re: First 20% of bonds in long-term Treasuries
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Re: First 20% of bonds in long-term Treasuries
That's what I was thinking, but I wasn't sure.watchnerd wrote: ↑Sun Mar 28, 2021 11:22 pmJust to be clear, the 15% allocations to LTT and Short TIPS in my sig are in funds, not individual bonds.gtwhitegold wrote: ↑Sun Mar 28, 2021 10:43 pmYour bond portfolio is very similar to my desired outcome. I'm targeting 20% LT STRIPS, around 15% ST TIPS and 5% cash. The cash amount may be less, but it's around that ballpark. I don't think that I have the patience to try and deal with a bond ladder.watchnerd wrote: ↑Sun Mar 28, 2021 4:00 pmMy risk portfolio bond allocation is visible in my signature.
But it may not be suitable for many, as I use a long-short / nominal-TIPS / deflation-inflation targeted Treasury barbell.
This is coupled with a LMP portfolio of laddered 10 YR Treasury bonds that alternates between TIPS and zero-coupon nominal STRIPS rungs.
Re: First 20% of bonds in long-term Treasuries
i clicked on this topic to see if vineviz was still answering questions and find he is. very impressive, i half expected you to go the way of hedgefundie, you are a patient man or woman. well done!
Re: First 20% of bonds in long-term Treasuries
You mean extremely sensible?foosball wrote: ↑Sun Mar 28, 2021 10:02 pmSuggesting that someone put half of their portfolio in very long term bonds is... extreme.cos wrote: ↑Sun Mar 28, 2021 4:00 pmKeep it simple. If you're worried about inflation, duration match with TIPS. If you aren't worried, duration match with nominal Treasuries.Fat-Tailed Contagion wrote: ↑Sun Mar 28, 2021 3:33 pm My reasoning is total market approach supplemented with some small hedges.
What allocation do you see as better for the bond allocation in a 50/50 portfolio?
And if you're more concerned about hedging than duration matching, I'd recommend going with either 100% long-term TIPS (e.g. LTPZ) or 100% long-term Treasuries (e.g. EDV). These assets are highly uncorrelated with equities while also delivering similar volatility and a non-zero return. They're the best equity hedges in town.
Long-term investors should own long-term bonds, to the extent they own bonds at all.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: First 20% of bonds in long-term Treasuries
I am also impressed by Vineviz's incredible patience and persistence in helping others see the light and ditch the dogma surrounding long term bonds and how "risky" they are for long term investors...I was persuaded by the logic and benefitted tremendously a year ago as a result. You can't ask for a better asset to rebalance with after an equity down turn than long term treasuries...
Every time I see a news article where Yellen shoots down 50 or 100 year treasuries I sigh as that would be a very efficient tool for those of us who have a 30/40/50/60 year horizon ahead of us still.
Every time I see a news article where Yellen shoots down 50 or 100 year treasuries I sigh as that would be a very efficient tool for those of us who have a 30/40/50/60 year horizon ahead of us still.
"Contentment", the only thing you ever truly need more of!
Re: First 20% of bonds in long-term Treasuries
While LTT are logical (I hold them), I do think they present behavioral issues for many investors.LukeHeinz57 wrote: ↑Mon Mar 29, 2021 9:07 am I am also impressed by Vineviz's incredible patience and persistence in helping others see the light and ditch the dogma surrounding long term bonds and how "risky" they are for long term investors...I was persuaded by the logic and benefitted tremendously a year ago as a result. You can't ask for a better asset to rebalance with after an equity down turn than long term treasuries...
Every time I see a news article where Yellen shoots down 50 or 100 year treasuries I sigh as that would be a very efficient tool for those of us who have a 30/40/50/60 year horizon ahead of us still.
Because of their high interest rate sensitivity and volatility, they don't "act like bonds" in the eyes of many investors.
I've seen several threads where investors complain about how LTT fund NAV is declining in a rising rate environment....which, of course, is entirely expected and shouldn't be a surprise to anyone who understands what they're buying.
LTT investing requires you to really understand what you're buying, why you're holding it, how it will be behave, and the role it plays in portfolio construction.
I'm now of the opinion that bond understanding is actually not that great among Bogleheads and that familiarity with MPT is probably even lower.
There is a fraction of Bogheleads who are well versed in the nuances of financial instruments, but a lot of them are just diligent savers who want an EZ mode investment.
The genius of TBM is that it's idiot proof.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Re: First 20% of bonds in long-term Treasuries
I suspect ingrained behavioral biases are part of the problem, but I also think persistent misinformation is another part.
My hope is that with better information some investors will be empowered to make better investment decisions.
However, there will always be a tension between accommodating irrational behavior (eg “pick the hill you die on”) and adjusting the behavior. The “first 20%” heuristic is meant to help bridge the gap between the way bonds actually function for investors and they way investors THINK they function.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Re: First 20% of bonds in long-term Treasuries
+1. I too benefited immensely by following this thread and Vineviz's reasoning for LTT. I introduced 10% EDV in my portfolio on Jan 2020 and during March 2020 crash, it was a great real-time experience to rebalance from EDV to equities. Seeing true diversification in action is really amazing.LukeHeinz57 wrote: ↑Mon Mar 29, 2021 9:07 am I am also impressed by Vineviz's incredible patience and persistence in helping others see the light and ditch the dogma surrounding long term bonds and how "risky" they are for long term investors...I was persuaded by the logic and benefitted tremendously a year ago as a result. You can't ask for a better asset to rebalance with after an equity down turn than long term treasuries...
Every time I see a news article where Yellen shoots down 50 or 100 year treasuries I sigh as that would be a very efficient tool for those of us who have a 30/40/50/60 year horizon ahead of us still.
Re: First 20% of bonds in long-term Treasuries
Yes, I think the supra-secular interest rate cycle since the 1980s has lead to a cognitive bias regarding "how bonds are supposed to behave."vineviz wrote: ↑Mon Mar 29, 2021 10:24 amI suspect ingrained behavioral biases are part of the problem, but I also think persistent misinformation is another part.
My hope is that with better information some investors will be empowered to make better investment decisions.
However, there will always be a tension between accommodating irrational behavior (eg “pick the hill you die on”) and adjusting the behavior. The “first 20%” heuristic is meant to help bridge the gap between the way bonds actually function for investors and they way investors THINK they function.
Interventions by orthodox Bogleheads can reinforce the lack of a growth mindset, who sometimes pop into threads and tell people to basically "just go 3 fund" when alternative approaches to bond allocation are brought up.
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Re: First 20% of bonds in long-term Treasuries
I agree that too many people want bonds to act like cash, not to mention they want the upside without the downside. The long-term bonds are the only "true bonds"; the rest are more like cash. Long-term bonds are a unique asset, being fundamentally different from cash and stocks; it is the only asset that guarantees its returns over long periods (barring credit risk). They are not a protection of present principal like cash; they protect future returns (again, barring credit risk). Stocks have no guarantees either way.watchnerd wrote: ↑Mon Mar 29, 2021 12:48 pmYes, I think the supra-secular interest rate cycle since the 1980s has lead to a cognitive bias regarding "how bonds are supposed to behave."vineviz wrote: ↑Mon Mar 29, 2021 10:24 amI suspect ingrained behavioral biases are part of the problem, but I also think persistent misinformation is another part.
My hope is that with better information some investors will be empowered to make better investment decisions.
However, there will always be a tension between accommodating irrational behavior (eg “pick the hill you die on”) and adjusting the behavior. The “first 20%” heuristic is meant to help bridge the gap between the way bonds actually function for investors and they way investors THINK they function.
Interventions by orthodox Bogleheads can reinforce the lack of a growth mindset, who sometimes pop into threads and tell people to basically "just go 3 fund" when alternative approaches to bond allocation are brought up.
Maybe I will post something on the side matter of long-term corporate bonds and why they are perfectly acceptable (some are fine with VGLT (or even EDV) but not VCLT, for example).
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Re: First 20% of bonds in long-term Treasuries
I'll be curious to read that.secondopinion wrote: ↑Mon Mar 29, 2021 4:58 pm Maybe I will post something on the side matter of long-term corporate bonds and why they are perfectly acceptable (some are fine with VGLT (or even EDV) but not VCLT, for example).
Generally, I'd want a pretty nice spread to take that bet.
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Re: First 20% of bonds in long-term Treasuries
Plenty of time till the ol' horizon, but I chose VGLT over EDV. Is this a terrible noob mistake? Should I just leave it alone?
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
Re: First 20% of bonds in long-term Treasuries
I also use VGLT.whereskyle wrote: ↑Mon Mar 29, 2021 5:31 pm Plenty of time till the ol' horizon, but I chose VGLT over EDV. Is this a terrible noob mistake? Should I just leave it alone?
If you're in a high equity portfolio, EDV becomes more important because the higher volatility allows you to use a smaller slice to offset equity volatility.
I can't given an opinion without knowing how many equities you have.
Also, EDV has an even longer duration than VGLT, so if you're using it in a barbell you need to take that weighting into account if you're trying to lower the average weighted duration of the entire barbell.
Even just using VGLT, I have to augment VTIP with a cash holding to lower the average weighted duration down to something more 'intermediate'.
Lastly, is your personal timeframe >24 years? Or closer to 18 years?
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Re: First 20% of bonds in long-term Treasuries
What is your target duration for your bond side watchnerd? Would you mind explaining how you came up with your bond allocation?watchnerd wrote: ↑Mon Mar 29, 2021 6:03 pmI also use VGLT.whereskyle wrote: ↑Mon Mar 29, 2021 5:31 pm Plenty of time till the ol' horizon, but I chose VGLT over EDV. Is this a terrible noob mistake? Should I just leave it alone?
If you're in a high equity portfolio, EDV becomes more important because the higher volatility allows you to use a smaller slice to offset equity volatility.
I can't given an opinion without knowing how many equities you have.
Also, EDV has an even longer duration than VGLT, so if you're using it in a barbell you need to take that weighting into account if you're trying to lower the average weighted duration of the entire barbell.
Even just using VGLT, I have to augment VTIP with a cash holding to lower the average weighted duration down to something more 'intermediate'.
Lastly, is your personal timeframe >24 years? Or closer to 18 years?
Re: First 20% of bonds in long-term Treasuries
I use the mutual fund version of VGLT, VLGSX right now. My overall portfolio is 80/20, but my VLGSX holdings are closer to 13 percent because the rest are various cash-like investments, much of which I cannot change at the moment (such as mandatory contributions to a pension account that until vested, are all that I would be entitled to).watchnerd wrote: ↑Mon Mar 29, 2021 6:03 pmI also use VGLT.whereskyle wrote: ↑Mon Mar 29, 2021 5:31 pm Plenty of time till the ol' horizon, but I chose VGLT over EDV. Is this a terrible noob mistake? Should I just leave it alone?
If you're in a high equity portfolio, EDV becomes more important because the higher volatility allows you to use a smaller slice to offset equity volatility.
I can't given an opinion without knowing how many equities you have.
Also, EDV has an even longer duration than VGLT, so if you're using it in a barbell you need to take that weighting into account if you're trying to lower the average weighted duration of the entire barbell.
Even just using VGLT, I have to augment VTIP with a cash holding to lower the average weighted duration down to something more 'intermediate'.
Lastly, is your personal timeframe >24 years? Or closer to 18 years?
Because the cash-like portion is acting as a sort of barbell, logic dictates that I should be using EDV to get the duration of my bond portfolio closer to my actual time horizon (my FI target is tentatively set for ˜18 years from now). The only thing that holds me back is that I don't currently hold any ETFs and overall I do prefer mutual funds.
Every so often I glance at my IPS and think about making some changes to incorporate EDV, but inevitably stay the course with what I have, maybe more in the interest of simplicity than anything else. Any thoughts on that?
I'm also posting to say that vineviz's various threads on bond duration have been helpful over the years.
Re: First 20% of bonds in long-term Treasuries
It's long-short / nominal-TIPS / deflation-inflation, plus cash for zero correlation asset, additional deflation cushion, and optionality.guppyguy wrote: ↑Mon Mar 29, 2021 6:45 pmWhat is your target duration for your bond side watchnerd? Would you mind explaining how you came up with your bond allocation?watchnerd wrote: ↑Mon Mar 29, 2021 6:03 pmI also use VGLT.whereskyle wrote: ↑Mon Mar 29, 2021 5:31 pm Plenty of time till the ol' horizon, but I chose VGLT over EDV. Is this a terrible noob mistake? Should I just leave it alone?
If you're in a high equity portfolio, EDV becomes more important because the higher volatility allows you to use a smaller slice to offset equity volatility.
I can't given an opinion without knowing how many equities you have.
Also, EDV has an even longer duration than VGLT, so if you're using it in a barbell you need to take that weighting into account if you're trying to lower the average weighted duration of the entire barbell.
Even just using VGLT, I have to augment VTIP with a cash holding to lower the average weighted duration down to something more 'intermediate'.
Lastly, is your personal timeframe >24 years? Or closer to 18 years?
It's designed to be used in conjunction with a equity valuation-based tactical asset allocation strategy, per my IPS rules.
The primary role is to provide modest risk parity matching and defeasance of equity risk. As such, corporate bonds are axiomatically excluded.
The secondary role is currently inactive, as I'm still working. Once I stop working, I expect to tap into it (along with equities, as needed) in the years I have to wait before getting SS, with the expectation of a rising equity glide path by the time I hit full SS at 67 and/or delay to 70.
The target weighted duration for the barbell is around 5-6, because I plan to retire around 2025.
I like LTT to equities in about a 1:4 ratio, as this gives me the trade off I want between "just enough" anti-equity volatility reduction for my taste without going too far out on duration exposure for the whole port. I expect the LTT holdings to remain in perpetuity, although they may fluctuate according to rebalancing needs.
The whole bond allocation portion, over all, is designed to be large enough to handle a minimum of 10 years of living expenses, to last through a "lost decade" or bad bear without needing to sell equities at a loss. At current portfolio size, it's about 16 years worth.
Last edited by watchnerd on Mon Mar 29, 2021 11:07 pm, edited 1 time in total.
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Re: First 20% of bonds in long-term Treasuries
I meet all the criteria for extending duration, (90/10 equities/LTT target allocation) but I didn't understand what a STRIP bond is, and I don't like buying things I don't understand. Now I think I do: the bond is sold at a discount to compensate for the extra waiting time for it to mature and then it pays out at par. Does that sum it up? Any additional risks to STRIPS apart from plain old duration (interest-rate) risk?watchnerd wrote: ↑Mon Mar 29, 2021 6:03 pmI also use VGLT.whereskyle wrote: ↑Mon Mar 29, 2021 5:31 pm Plenty of time till the ol' horizon, but I chose VGLT over EDV. Is this a terrible noob mistake? Should I just leave it alone?
If you're in a high equity portfolio, EDV becomes more important because the higher volatility allows you to use a smaller slice to offset equity volatility.
I can't given an opinion without knowing how many equities you have.
Also, EDV has an even longer duration than VGLT, so if you're using it in a barbell you need to take that weighting into account if you're trying to lower the average weighted duration of the entire barbell.
Even just using VGLT, I have to augment VTIP with a cash holding to lower the average weighted duration down to something more 'intermediate'.
Lastly, is your personal timeframe >24 years? Or closer to 18 years?
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
Re: First 20% of bonds in long-term Treasuries
Generically, STRIPS can be either principal only (PO) or interest only (IO) deconstructions of nominal bonds.whereskyle wrote: ↑Mon Mar 29, 2021 8:04 pmI meet all the criteria for extending duration, (90/10 equities/LTT target allocation) but I didn't understand what a STRIP bond is, and I don't like buying things I don't understand. Now I think I do: the bond is sold at a discount to compensate for the extra waiting time for it to mature and then it pays out at par. Does that sum it up? Any additional risks to STRIPS apart from plain old duration (interest-rate) risk?watchnerd wrote: ↑Mon Mar 29, 2021 6:03 pmI also use VGLT.whereskyle wrote: ↑Mon Mar 29, 2021 5:31 pm Plenty of time till the ol' horizon, but I chose VGLT over EDV. Is this a terrible noob mistake? Should I just leave it alone?
If you're in a high equity portfolio, EDV becomes more important because the higher volatility allows you to use a smaller slice to offset equity volatility.
I can't given an opinion without knowing how many equities you have.
Also, EDV has an even longer duration than VGLT, so if you're using it in a barbell you need to take that weighting into account if you're trying to lower the average weighted duration of the entire barbell.
Even just using VGLT, I have to augment VTIP with a cash holding to lower the average weighted duration down to something more 'intermediate'.
Lastly, is your personal timeframe >24 years? Or closer to 18 years?
When I buy Treasury STRIPS, I buy zero coupon / PO bonds.
If EDV is similarly buying zero coupon / PO bonds, I don't know where the yield it pays is coming from.
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Re: First 20% of bonds in long-term Treasuries
For STRIPS, the IRS requires you to amortize the "phantom" interest that you'll earn at maturity as a lump sum over the lifetime of the bond. That is the yield that the fund pays out -- they pass it on as a dividend so that the fund doesn't have to pay those taxes, making the holder pay them instead. Presumably they sell to pay out but I dunno.watchnerd wrote: ↑Mon Mar 29, 2021 9:39 pmGenerically, STRIPS can be either principal only (PO) or interest only (IO) deconstructions of nominal bonds.whereskyle wrote: ↑Mon Mar 29, 2021 8:04 pmI meet all the criteria for extending duration, (90/10 equities/LTT target allocation) but I didn't understand what a STRIP bond is, and I don't like buying things I don't understand. Now I think I do: the bond is sold at a discount to compensate for the extra waiting time for it to mature and then it pays out at par. Does that sum it up? Any additional risks to STRIPS apart from plain old duration (interest-rate) risk?watchnerd wrote: ↑Mon Mar 29, 2021 6:03 pmI also use VGLT.whereskyle wrote: ↑Mon Mar 29, 2021 5:31 pm Plenty of time till the ol' horizon, but I chose VGLT over EDV. Is this a terrible noob mistake? Should I just leave it alone?
If you're in a high equity portfolio, EDV becomes more important because the higher volatility allows you to use a smaller slice to offset equity volatility.
I can't given an opinion without knowing how many equities you have.
Also, EDV has an even longer duration than VGLT, so if you're using it in a barbell you need to take that weighting into account if you're trying to lower the average weighted duration of the entire barbell.
Even just using VGLT, I have to augment VTIP with a cash holding to lower the average weighted duration down to something more 'intermediate'.
Lastly, is your personal timeframe >24 years? Or closer to 18 years?
When I buy Treasury STRIPS, I buy zero coupon / PO bonds.
If EDV is similarly buying zero coupon / PO bonds, I don't know where the yield it pays is coming from.
Re: First 20% of bonds in long-term Treasuries
Yeah, even if they're passing on the phantom interest, the cash flow has to come from something.luckyducky99 wrote: ↑Mon Mar 29, 2021 11:21 pm For STRIPS, the IRS requires you to amortize the "phantom" interest that you'll earn at maturity as a lump sum over the lifetime of the bond. That is the yield that the fund pays out -- they pass it on as a dividend so that the fund doesn't have to pay those taxes, making the holder pay them instead. Presumably they sell to pay out but I dunno.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Re: First 20% of bonds in long-term Treasuries
When the LTT thing started to click for me late last year, VLGSX is what I used my TBM holdings to buy. Then, as I did more reading, thinking, and back-testing, I moved it to EDV to get more bang for my buck.donaldson wrote: ↑Mon Mar 29, 2021 6:56 pmI use the mutual fund version of VGLT, VLGSX right now. My overall portfolio is 80/20, but my VLGSX holdings are closer to 13 percent because the rest are various cash-like investments, much of which I cannot change at the moment (such as mandatory contributions to a pension account that until vested, are all that I would be entitled to).watchnerd wrote: ↑Mon Mar 29, 2021 6:03 pmI also use VGLT.whereskyle wrote: ↑Mon Mar 29, 2021 5:31 pmPlenty of time till the ol' horizon, but I chose VGLT over EDV. Is this a terrible noob mistake? Should I just leave it alone?
If you're in a high equity portfolio, EDV becomes more important because the higher volatility allows you to use a smaller slice to offset equity volatility.
Every so often I glance at my IPS and think about making some changes to incorporate EDV, but inevitably stay the course with what I have, maybe more in the interest of simplicity than anything else. Any thoughts on that?
I'm also posting to say that vineviz's various threads on bond duration have been helpful over the years.
This thread, De-Risking and Diversification aren't the same thing, and some of Tyler9000's posts have been instrumental in getting me to think of bonds (especially longer-term Treasuries) as more of an active participant in a portfolio rather than just something to water down the volatility of the stocks. Thanks vineviz and Tyler!
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Re: First 20% of bonds in long-term Treasuries
You mention that you hold long-term bonds, but I calculated your fixed income (barbell bonds + cash) duration at only 7.8 years. So, I assume you don't actually believe in duration matching with investment horizon in one's risk portfolio even if long-term bonds do happen to appear in your personal fixed income portfolio.watchnerd wrote: ↑Mon Mar 29, 2021 9:28 amWhile LTT are logical (I hold them), I do think they present behavioral issues for many investors.LukeHeinz57 wrote: ↑Mon Mar 29, 2021 9:07 am I am also impressed by Vineviz's incredible patience and persistence in helping others see the light and ditch the dogma surrounding long term bonds and how "risky" they are for long term investors...I was persuaded by the logic and benefitted tremendously a year ago as a result. You can't ask for a better asset to rebalance with after an equity down turn than long term treasuries...
Every time I see a news article where Yellen shoots down 50 or 100 year treasuries I sigh as that would be a very efficient tool for those of us who have a 30/40/50/60 year horizon ahead of us still.
Because of their high interest rate sensitivity and volatility, they don't "act like bonds" in the eyes of many investors.
I've seen several threads where investors complain about how LTT fund NAV is declining in a rising rate environment....which, of course, is entirely expected and shouldn't be a surprise to anyone who understands what they're buying.
LTT investing requires you to really understand what you're buying, why you're holding it, how it will be behave, and the role it plays in portfolio construction.
I'm now of the opinion that bond understanding is actually not that great among Bogleheads and that familiarity with MPT is probably even lower.
There is a fraction of Bogheleads who are well versed in the nuances of financial instruments, but a lot of them are just diligent savers who want an EZ mode investment.
The genius of TBM is that it's idiot proof.
Re: First 20% of bonds in long-term Treasuries
Oh I do. See above about remarks about early retirement in 2025 and rising equity glide path.pascalwager wrote: ↑Tue Mar 30, 2021 1:03 am
You mention that you hold long-term bonds, but I calculated your fixed income (barbell bonds + cash) duration at only 7.8 years. So, I assume you don't actually believe in duration matching with investment horizon in one's risk portfolio even if long-term bonds do happen to appear in your personal fixed income portfolio.
So my near term horizon is ~5 years, which is close enough to matching the ~7 weighted duration of the barbell that I don't sweat it.
The expectation is the cash and VTIP will get consumed sooner in early retirement, which will increase the duration of the barbell as I age to go along with the rising equity glide path.
We're currently at 40x, saving 2 years for every 1 year worked, so by 2025, at age 55, we'll be at ~50x (knock on wood).
25% (VTIP and cash) of 50x = 12.5 years
Burning through all the VTIP and cash in 12.5 years leaves us the bond allocation at 100% LTT by age 67 and past the pre-SS SOR danger zone.
Which is just in time to claim full Social Security and have the 100% weighted 18 year duration of VGLT in perpetuity for the rest of our lives.
(And in the meantime we're building out the LMP ladder outside of the risk portfolio, which is laddered 10 YR individual bonds, so very much duration matched to timeframes, as each ladder will be consumed as income on maturity, or invested, valuations depending)
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Re: First 20% of bonds in long-term Treasuries
This is the level of planning that I aspire to!watchnerd wrote: ↑Tue Mar 30, 2021 1:19 amOh I do. See above about remarks about early retirement in 2025 and rising equity glide path.pascalwager wrote: ↑Tue Mar 30, 2021 1:03 am
You mention that you hold long-term bonds, but I calculated your fixed income (barbell bonds + cash) duration at only 7.8 years. So, I assume you don't actually believe in duration matching with investment horizon in one's risk portfolio even if long-term bonds do happen to appear in your personal fixed income portfolio.
So my near term horizon is ~5 years, which is close enough to matching the ~7 weighted duration of the barbell that I don't sweat it.
The expectation is the cash and VTIP will get consumed sooner in early retirement, which will increase the duration of the barbell as I age to go along with the rising equity glide path.
We're currently at 40x, saving 2 years for every 1 year worked, so by 2025, at age 55, we'll be at ~50x (knock on wood).
25% (VTIP and cash) of 50x = 12.5 years
Burning through all the VTIP and cash in 12.5 years leaves us the bond allocation at 100% LTT by age 67 and past the pre-SS SOR danger zone.
Which is just in time to claim full Social Security and have the 100% weighted 18 year duration of VGLT in perpetuity for the rest of our lives.
(And in the meantime we're building out the LMP ladder outside of the risk portfolio, which is laddered 10 YR individual bonds, so very much duration matched to timeframes, as each ladder will be consumed as income on maturity, or invested, valuations depending)
"Contentment", the only thing you ever truly need more of!
Re: First 20% of bonds in long-term Treasuries
Definitions:watchnerd wrote: ↑Sun Mar 28, 2021 4:00 pmMy risk portfolio bond allocation is visible in my signature.
But it may not be suitable for many, as I use a long-short / nominal-TIPS / deflation-inflation targeted Treasury barbell.
This is coupled with a LMP portfolio of laddered 10 YR Treasury bonds that alternates between TIPS and zero-coupon nominal STRIPS rungs.
barbell - The wiki has some background information: Barbell strategy
LMP = Liability Matching Portfolio
A good discussion is in this old thread: Liability Matching Portfolio? Really? (feel free to add to the discussion)
The wiki has some background info. The article is not intended for liability matching portfolios, but it shows the general idea of how you can create a strategy: Matching strategy
This is a different topic than what's discussed here, but I wanted to make sure that readers understood the concept.
(To new investors: This isn't something you need to know now. If you're still on the learning curve, you can skip it.)
Re: First 20% of bonds in long-term Treasuries
Perhaps my point was poorly communicated. For a truly long-term investor, why recommend 50% of their portfolio be placed in bonds?vineviz wrote: ↑Mon Mar 29, 2021 8:37 amYou mean extremely sensible?foosball wrote: ↑Sun Mar 28, 2021 10:02 pmSuggesting that someone put half of their portfolio in very long term bonds is... extreme.cos wrote: ↑Sun Mar 28, 2021 4:00 pmKeep it simple. If you're worried about inflation, duration match with TIPS. If you aren't worried, duration match with nominal Treasuries.Fat-Tailed Contagion wrote: ↑Sun Mar 28, 2021 3:33 pm My reasoning is total market approach supplemented with some small hedges.
What allocation do you see as better for the bond allocation in a 50/50 portfolio?
And if you're more concerned about hedging than duration matching, I'd recommend going with either 100% long-term TIPS (e.g. LTPZ) or 100% long-term Treasuries (e.g. EDV). These assets are highly uncorrelated with equities while also delivering similar volatility and a non-zero return. They're the best equity hedges in town.
Long-term investors should own long-term bonds, to the extent they own bonds at all.
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Re: First 20% of bonds in long-term Treasuries
I've posted this before but here goes again. This the performance of SPX + long term treasuries (switching to STRIPS when VEDTX, the mutual fund equivalent to EDV, became available in ~2007).
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Re: First 20% of bonds in long-term Treasuries
Vineviz and Watchnerd, really appreciate your posts and knowledge in this and other threads.
I first read this thread about a year ago and to date haven't switched from keeping my 20% bonds in TBM and Inter-term bond index.
I've been planning to switch at least some of that 20% to LTT. I keep no separate emergency fund, so not sure I have the guts to go all 20% LTT. Is it reasonable to go half ITT and half LTT? I plan to stay 80/20 forever, although when I get to 25-30x I may reevaluate (probably about half way there right now, 10 years or so from retirement). I have no concern with seeing ITT go down 5-10%, but seeing LTT go down 15-20% would give me some heartburn if that is all I held for fixed income.
I first read this thread about a year ago and to date haven't switched from keeping my 20% bonds in TBM and Inter-term bond index.
I've been planning to switch at least some of that 20% to LTT. I keep no separate emergency fund, so not sure I have the guts to go all 20% LTT. Is it reasonable to go half ITT and half LTT? I plan to stay 80/20 forever, although when I get to 25-30x I may reevaluate (probably about half way there right now, 10 years or so from retirement). I have no concern with seeing ITT go down 5-10%, but seeing LTT go down 15-20% would give me some heartburn if that is all I held for fixed income.
Re: First 20% of bonds in long-term Treasuries
The only part I don't understand is why you are hedging against unexpected inflation using TIPS only for the shorter term.watchnerd wrote: ↑Tue Mar 30, 2021 1:19 am
The expectation is the cash and VTIP will get consumed sooner in early retirement, which will increase the duration of the barbell as I age to go along with the rising equity glide path.
We're currently at 40x, saving 2 years for every 1 year worked, so by 2025, at age 55, we'll be at ~50x (knock on wood).
25% (VTIP and cash) of 50x = 12.5 years
Burning through all the VTIP and cash in 12.5 years leaves us the bond allocation at 100% LTT by age 67 and past the pre-SS SOR danger zone.
Which is just in time to claim full Social Security and have the 100% weighted 18 year duration of VGLT in perpetuity for the rest of our lives.
(And in the meantime we're building out the LMP ladder outside of the risk portfolio, which is laddered 10 YR individual bonds, so very much duration matched to timeframes, as each ladder will be consumed as income on maturity, or invested, valuations depending)
I see VTIPS, with their current 2.7 year TIPS duration, to hedge against this for the first 12.5 years. Later, I understand you are matching future liabilities with nominal rather then inflation-indexed Treasuries (using a combo of VGLA and individual T-bonds).
Perhaps this is because you believe that (i) 50x leaves enough margin to cover this risk, (ii) the equities in your rising glide path should eventually mitigate this, and (iii) there's a good chance that SS will be more-or-less inflation adjusted?
Re: First 20% of bonds in long-term Treasuries
I'm actually not.bagle wrote: ↑Wed Mar 31, 2021 11:01 am
The only part I don't understand is why you are hedging against unexpected inflation using TIPS only for the shorter term.
I see VTIPS, with their current 2.7 year TIPS duration, to hedge against this for the first 12.5 years. Later, I understand you are matching future liabilities with nominal rather then inflation-indexed Treasuries (using a combo of VGLA and individual T-bonds).
See the LMP in my sig that uses a mixture of TIPS and STRIPS that lives outside the RP.
As for why both TIPS and STRIPS -- because of liquidity differences in between TIPS and nominals in distressed markets, like 2008, gives me improved optionality, if desired, to pull rungs off the LMP for additional over-rebalancing when stocks are cheap.
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Re: First 20% of bonds in long-term Treasuries
Huge thank you for vineviz for this thread--- I now understand bonds....
If you're 30-40 years old, 20% should be in LTT because you are diversifying your total portfolio against risk, not necessarily return; This point was lost on me for a while but now I get it.
Second, "re-balancing" bonds is simply re-allocating money of your bond fund duration based on yield + time to access said bonds for cash/living expenses.
--> This point is important; Because LTT's now have a 24.5 year time duration, as one gets closer to retirement 55/60/65 etc. the investor needs to identify "re-balancing" to duration of bonds in line with their retirement plan / draw down strategy. The entire premise of holding LTT for a long investor is: A) diversity of investments and B) protection (in part) to steep downturns based on duration.
The flip side of this--- BND, BNDW, FXNAX, FUAMX etc. are localized to their duration yields, markets of allocation, risk spread of corporate bonds and other market factors. By virtue, LTT force said investor to actually understand their investment horizon to not only have that diversification but allow potentially return rates more favorable given their investment horizon.
Having said all of that, given that I will most likely be 75/25 in retirement for the long haul, I now have some good numbers to crunch on glide path down to shorter term once I start knocking on that door. Thanks again vineviz, really appreciate it!
If you're 30-40 years old, 20% should be in LTT because you are diversifying your total portfolio against risk, not necessarily return; This point was lost on me for a while but now I get it.
Second, "re-balancing" bonds is simply re-allocating money of your bond fund duration based on yield + time to access said bonds for cash/living expenses.
--> This point is important; Because LTT's now have a 24.5 year time duration, as one gets closer to retirement 55/60/65 etc. the investor needs to identify "re-balancing" to duration of bonds in line with their retirement plan / draw down strategy. The entire premise of holding LTT for a long investor is: A) diversity of investments and B) protection (in part) to steep downturns based on duration.
The flip side of this--- BND, BNDW, FXNAX, FUAMX etc. are localized to their duration yields, markets of allocation, risk spread of corporate bonds and other market factors. By virtue, LTT force said investor to actually understand their investment horizon to not only have that diversification but allow potentially return rates more favorable given their investment horizon.
Having said all of that, given that I will most likely be 75/25 in retirement for the long haul, I now have some good numbers to crunch on glide path down to shorter term once I start knocking on that door. Thanks again vineviz, really appreciate it!
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Re: First 20% of bonds in long-term Treasuries
Forgive me if his question has been asked but how would series I/ee fit into this 20% rule. If I’m mid 30s and want to start adding bonds in the next couple years would these be preferred over a fund like edv? With series ee bonds I’m getting a higher rate but only if held to 20 years, which means no rebalancing and possibly a tax hit right as I’m a few years from retirement. What would the priority of the first 20% in fixed income assuming access to series I/ee? And once owned do people here use either for rebalancing or do they just generally hold to maturity/20 years?
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Re: First 20% of bonds in long-term Treasuries
If you're buying LTT for purposes of potential negative correlation to equities, I/EE don't do that, as they're not tradable.aschafer1984 wrote: ↑Fri Apr 02, 2021 5:21 am Forgive me if his question has been asked but how would series I/ee fit into this 20% rule. If I’m mid 30s and want to start adding bonds in the next couple years would these be preferred over a fund like edv? With series ee bonds I’m getting a higher rate but only if held to 20 years, which means no rebalancing and possibly a tax hit right as I’m a few years from retirement. What would the priority of the first 20% in fixed income assuming access to series I/ee? And once owned do people here use either for rebalancing or do they just generally hold to maturity/20 years?
And you can't directly use them for rebalancing because you can't hold them in a brokerage account.
I/EE are worth buying early in your investing career before your port gets too big, but they're a very different asset from LTT.
They're savings instruments, not marketable securities.
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Re: First 20% of bonds in long-term Treasuries
EE bonds actually earn interest for 30 years, so if you don't retire early you can delay the taxes for an additional 10 years. Of course, with the only guarantee being doubling in 20, the return for longer holding periods may make them less desirable. The interest rate for those extra 10 years can, apparently, be changed:aschafer1984 wrote: ↑Fri Apr 02, 2021 5:21 amWith series ee bonds I’m getting a higher rate but only if held to 20 years, which means no rebalancing and possibly a tax hit right as I’m a few years from retirement.
We may change the rate or the way an EE bond earns interest for the last 10 years of the bond's 30-year life. If we make a change, we have to do it before that 10-year period starts.
https://www.treasurydirect.gov/indiv/re ... ndafer.htm
There's more flexibility with I bonds, since they earn a relatively normal (or better than normal) rate of interest for any holding period of up to 30 years. I sold all of ours shortly after retiring, except about $5000 worth of old ones that are at 3% real+. We used the money to buy a new car and they were pretty much our only "taxable" investment, the 0-0.3% real that they were earning was nothing special at the time.And once owned do people here use either for rebalancing or do they just generally hold to maturity/20 years?
With EE bonds, I think it makes little sense to buy them unless the intent is to hold them for at least 20 years. Of course, if 3 years after you buy them, you can get a 5 year CD at 7% or something, then it would make sense to sell early. The longer you hold them the, less likely it is to make sense to sell them, I have some with about 12 or so years to go and the effective interest rate for the remaining term is now over 5%. It is highly unlikely we will sell before they reach 20 years.
As for rebalancing, you can do that with other parts of your portfolio, assuming you have bonds other than the savings bonds.
Re: First 20% of bonds in long-term Treasuries
In general, EE-Bonds have never made sense to me as a portfolio construction tool. You can't really rebalance with them (as they are locked-up for 20yrs), and it seems like a very bad, pessimistic bet on the future to trade off the historical returns of diversified equities for a "known" 3.5% nominal in 20-years.aschafer1984 wrote: ↑Fri Apr 02, 2021 5:21 am Forgive me if his question has been asked but how would series I/ee fit into this 20% rule.
The only valid use-case I see for EE-bonds is in saving for a child's education, as there is a tax benefit for doing so. So buying $10k-$20k for the first 4-5 years of a child's life to cover college tuition and/or costs can make sense. Although a target-date fund in a 529 plan would likely do just as well, if not better.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
Re: First 20% of bonds in long-term Treasuries
“Worst Q1 return for 30-year Treasury since 1919, worst Q1 for IG bonds since 1980, worst Q1 for gold since 1982: BOA”
Ouch
Ouch
All posts are my own opinions and are not financial advice.
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Re: First 20% of bonds in long-term Treasuries
Treasuries and gold had amazing 2020s. Everything in context.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
Re: First 20% of bonds in long-term Treasuries
I'm still sitting on net LTT gains on a dollar basis, even after rebalancing into equities in March, 2020.whereskyle wrote: ↑Sat Apr 03, 2021 8:24 pmTreasuries and gold had amazing 2020s. Everything in context.
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Re: First 20% of bonds in long-term Treasuries
I still struggle with how to tie the first 20% rule in with having short term reserves (or whether there should even be any of those).
If one keeps no dedicated emergency/liquidity fund and is 80/20, is it too conservative to keep all or a portion of that 20% in ITT (or shorter term fixed income)?
Let's say one has 15x saved and wants 1-3 years in low volatility investments to allow them to be able to switch careers if everything is tanking, use in the next 2 years in case of emergency, etc.
I believe I saw a reference in one of the threads to the 20% LTT being aside from liquidity reserves, but then the first 20% isn't really in LTT (unless we are bucketing or mental accounting and I missed that part).
Perhaps in my example there really are no "bonds" to hold--it's 20% short term reserves and the rest stocks, in that no fixed income is being held for long term investment.
If one keeps no dedicated emergency/liquidity fund and is 80/20, is it too conservative to keep all or a portion of that 20% in ITT (or shorter term fixed income)?
Let's say one has 15x saved and wants 1-3 years in low volatility investments to allow them to be able to switch careers if everything is tanking, use in the next 2 years in case of emergency, etc.
I believe I saw a reference in one of the threads to the 20% LTT being aside from liquidity reserves, but then the first 20% isn't really in LTT (unless we are bucketing or mental accounting and I missed that part).
Perhaps in my example there really are no "bonds" to hold--it's 20% short term reserves and the rest stocks, in that no fixed income is being held for long term investment.
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Re: First 20% of bonds in long-term Treasuries
Short-term reserves, I consider, an emergency fund (I.e., funds that are NOT invested). First bonds for investment in a high equity portfolio should be long term treasuries because of the recent negative correlation with equities in times of stress. The principle is simply this: your 80%+ equity position is driving your risk and return; why bother with any bonds that don't provide a robust return when equities crash?irwinmfletcher wrote: ↑Sun Apr 04, 2021 7:37 am I still struggle with how to tie the first 20% rule in with having short term reserves (or whether there should even be any of those).
If one keeps no dedicated emergency/liquidity fund and is 80/20, is it too conservative to keep all or a portion of that 20% in ITT (or shorter term fixed income)?
Let's say one has 15x saved and wants 1-3 years in low volatility investments to allow them to be able to switch careers if everything is tanking, use in the next 2 years in case of emergency, etc.
I believe I saw a reference in one of the threads to the 20% LTT being aside from liquidity reserves, but then the first 20% isn't really in LTT (unless we are bucketing or mental accounting and I missed that part).
Perhaps in my example there really are no "bonds" to hold--it's 20% short term reserves and the rest stocks, in that no fixed income is being held for long term investment.
Only when you want to actively "derisk" your portfolio should you consider intermediate and short-term fixed-income.
Emergency funds are not part of this equation.
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Re: First 20% of bonds in long-term Treasuries
Anything I don't put into stocks could potentially be used near-term. On the other hand, that might not be needed. The only way that I can think of to really bridge such a gap is I bonds. They have no principal risk, a 30 year term, yearly purchase limits, and pay nothing real before federal taxes. Right now the gap between savings bonds and market rates is still what I consider limited, so my choices would become more difficult if market rates are higher in the future. Essentially I know that I'm potentially trading some return within certain scenarios in exchange for no principal risk and additional tax deferred space, since 30 year TIPS are slightly positive and 20 year breakeven rates may favor TIPS in a tax-advantaged account for an appropriate intended holding period. Basically the original post here is centered around modern portfolio theory, and that is not my own primary concern.irwinmfletcher wrote: ↑Sun Apr 04, 2021 7:37 am Let's say one has 15x saved and wants 1-3 years in low volatility investments to allow them to be able to switch careers if everything is tanking, use in the next 2 years in case of emergency, etc.
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Re: First 20% of bonds in long-term Treasuries
So in other words, don't really put the first 20% of what is not in equities in LTT? That is, some % in short term and then LTT.whereskyle wrote: ↑Sun Apr 04, 2021 7:46 amShort-term reserves, I consider, an emergency fund (I.e., funds that are NOT invested). First bonds for investment in a high equity portfolio should be long term treasuries because of the recent negative correlation with equities in times of stress. The principle is simply this: your 80%+ equity position is driving your risk and return; why bother with any bonds that don't provide a robust return when equities crash?irwinmfletcher wrote: ↑Sun Apr 04, 2021 7:37 am I still struggle with how to tie the first 20% rule in with having short term reserves (or whether there should even be any of those).
If one keeps no dedicated emergency/liquidity fund and is 80/20, is it too conservative to keep all or a portion of that 20% in ITT (or shorter term fixed income)?
Let's say one has 15x saved and wants 1-3 years in low volatility investments to allow them to be able to switch careers if everything is tanking, use in the next 2 years in case of emergency, etc.
I believe I saw a reference in one of the threads to the 20% LTT being aside from liquidity reserves, but then the first 20% isn't really in LTT (unless we are bucketing or mental accounting and I missed that part).
Perhaps in my example there really are no "bonds" to hold--it's 20% short term reserves and the rest stocks, in that no fixed income is being held for long term investment.
Only when you want to actively "derisk" your portfolio should you consider intermediate and short-term fixed-income.
Emergency funds are not part of this equation.
I don't keep a separate emergency fund at all (or as I think of it, every $ I have is part of the emergency fund, but some parts of it are safer than others, and every single dollar is "invested"). Then the question is, of the 20% of the portfolio that is not equities, what % is shorter term and what % is LTT?
For example, if one's 20% of non-equities was 3 years of expenses, perhaps split it 50/50 ITT/LTT, or maybe 66.6/33.3.
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Re: First 20% of bonds in long-term Treasuries
I would not hold "short-term reserves" in ITTs. Again, short-term reserves, imo, are not "investments." They are "reserves" you have access to when needed, and the only vehicle I'd consider appropriate is a HYS account. Such funds should not be put at risk at all. If someone wants a separate bucket besides an emergency fund, I don't see why they'd consider that something other than part of their portfolio or the cash they're planning on spending that year (I.e., not a part of the portfolio). I would not put money in my portfolio in short-term bonds unless I had a strategic reason to do so. If I'm taking my risk through a large equity allocation and my port has a long time horizon, my first bonds should be LTTs. I don't see why anyone who is not in or near the withdrawal phase would hold short-term bonds unless volatility makes them sick and they're pursuing something like the permanent portfolio or the Larry portfolio (large allocation to ITTs and the rest in high-risk equities like scv and em)irwinmfletcher wrote: ↑Sun Apr 04, 2021 9:16 amSo in other words, don't really put the first 20% of what is not in equities in LTT? That is, some % in short term and then LTT.whereskyle wrote: ↑Sun Apr 04, 2021 7:46 amShort-term reserves, I consider, an emergency fund (I.e., funds that are NOT invested). First bonds for investment in a high equity portfolio should be long term treasuries because of the recent negative correlation with equities in times of stress. The principle is simply this: your 80%+ equity position is driving your risk and return; why bother with any bonds that don't provide a robust return when equities crash?irwinmfletcher wrote: ↑Sun Apr 04, 2021 7:37 am I still struggle with how to tie the first 20% rule in with having short term reserves (or whether there should even be any of those).
If one keeps no dedicated emergency/liquidity fund and is 80/20, is it too conservative to keep all or a portion of that 20% in ITT (or shorter term fixed income)?
Let's say one has 15x saved and wants 1-3 years in low volatility investments to allow them to be able to switch careers if everything is tanking, use in the next 2 years in case of emergency, etc.
I believe I saw a reference in one of the threads to the 20% LTT being aside from liquidity reserves, but then the first 20% isn't really in LTT (unless we are bucketing or mental accounting and I missed that part).
Perhaps in my example there really are no "bonds" to hold--it's 20% short term reserves and the rest stocks, in that no fixed income is being held for long term investment.
Only when you want to actively "derisk" your portfolio should you consider intermediate and short-term fixed-income.
Emergency funds are not part of this equation.
I don't keep a separate emergency fund at all (or as I think of it, every $ I have is part of the emergency fund, but some parts of it are safer than others, and every single dollar is "invested"). Then the question is, of the 20% of the portfolio that is not equities, what % is shorter term and what % is LTT?
For example, if one's 20% of non-equities was 3 years of expenses, perhaps split it 50/50 ITT/LTT, or maybe 66.6/33.3.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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Re: First 20% of bonds in long-term Treasuries
Have you seen the following? I tend to consider it in line with the original post here.irwinmfletcher wrote: ↑Sun Apr 04, 2021 9:16 am Then the question is, of the 20% of the portfolio that is not equities, what % is shorter term and what % is LTT?
viewtopic.php?t=340252
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Re: First 20% of bonds in long-term Treasuries
I understand your position, but I don't have much concern with ITT dropping 5 or 10% if interest rates rise. I might be concerned if LTT drops 36% if rates rise 2%. I'm using reserves as short hand for relatively low risk (that is, unlikely to drop 20% in a year). I have just 1 bucket (every $ I have), and trying to decide what % of that bucket not in equities should be LTT. Right now all of that 20% non-equity bucket is in TBM and ITB, so it's just a change of degree. I'm completely comfortable with that mix, but contemplating changing that 20% up among ITT/LTT.whereskyle wrote: ↑Sun Apr 04, 2021 9:41 amI would not hold "short-term reserves" in ITTs. Again, short-term reserves, imo, are not "investments." They are "reserves" you have access to when needed, and the only vehicle I'd consider appropriate is a HYS account. Such funds should not be put at risk at all. If someone wants a separate bucket besides an emergency fund, I don't see why they'd consider that something other than part of their portfolio. I would not put money in my portfolio in short-term bonds unless I had a strategic reason to do so. If I'm taking my risk through a large equity allocation and my port has a long time horizon, my first bonds should be LTTs. I don't see why anyone who is not in or near the withdrawal phase would hold short-term bonds unless volatility makes them sick and they're pursuing something like the permanent portfolio or the Larry portfolio (large allocation to ITTs and the rest in high-risk equities like scv and em)irwinmfletcher wrote: ↑Sun Apr 04, 2021 9:16 amSo in other words, don't really put the first 20% of what is not in equities in LTT? That is, some % in short term and then LTT.whereskyle wrote: ↑Sun Apr 04, 2021 7:46 amShort-term reserves, I consider, an emergency fund (I.e., funds that are NOT invested). First bonds for investment in a high equity portfolio should be long term treasuries because of the recent negative correlation with equities in times of stress. The principle is simply this: your 80%+ equity position is driving your risk and return; why bother with any bonds that don't provide a robust return when equities crash?irwinmfletcher wrote: ↑Sun Apr 04, 2021 7:37 am I still struggle with how to tie the first 20% rule in with having short term reserves (or whether there should even be any of those).
If one keeps no dedicated emergency/liquidity fund and is 80/20, is it too conservative to keep all or a portion of that 20% in ITT (or shorter term fixed income)?
Let's say one has 15x saved and wants 1-3 years in low volatility investments to allow them to be able to switch careers if everything is tanking, use in the next 2 years in case of emergency, etc.
I believe I saw a reference in one of the threads to the 20% LTT being aside from liquidity reserves, but then the first 20% isn't really in LTT (unless we are bucketing or mental accounting and I missed that part).
Perhaps in my example there really are no "bonds" to hold--it's 20% short term reserves and the rest stocks, in that no fixed income is being held for long term investment.
Only when you want to actively "derisk" your portfolio should you consider intermediate and short-term fixed-income.
Emergency funds are not part of this equation.
I don't keep a separate emergency fund at all (or as I think of it, every $ I have is part of the emergency fund, but some parts of it are safer than others, and every single dollar is "invested"). Then the question is, of the 20% of the portfolio that is not equities, what % is shorter term and what % is LTT?
For example, if one's 20% of non-equities was 3 years of expenses, perhaps split it 50/50 ITT/LTT, or maybe 66.6/33.3.
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Re: First 20% of bonds in long-term Treasuries
What's your investment horizon?irwinmfletcher wrote: ↑Sun Apr 04, 2021 9:57 amI understand your position, but I don't have much concern with ITT dropping 5 or 10% if interest rates rise. I might be concerned if LTT drops 36% if rates rise 2%. I'm using reserves as short hand for relatively low risk (that is, unlikely to drop 20% in a year). I have just 1 bucket (every $ I have), and trying to decide what % of that bucket not in equities should be LTT. Right now all of that 20% non-equity bucket is in TBM and ITB, so it's just a change of degree. I'm completely comfortable with that mix, but contemplating changing that 20% up among ITT/LTT.whereskyle wrote: ↑Sun Apr 04, 2021 9:41 amI would not hold "short-term reserves" in ITTs. Again, short-term reserves, imo, are not "investments." They are "reserves" you have access to when needed, and the only vehicle I'd consider appropriate is a HYS account. Such funds should not be put at risk at all. If someone wants a separate bucket besides an emergency fund, I don't see why they'd consider that something other than part of their portfolio. I would not put money in my portfolio in short-term bonds unless I had a strategic reason to do so. If I'm taking my risk through a large equity allocation and my port has a long time horizon, my first bonds should be LTTs. I don't see why anyone who is not in or near the withdrawal phase would hold short-term bonds unless volatility makes them sick and they're pursuing something like the permanent portfolio or the Larry portfolio (large allocation to ITTs and the rest in high-risk equities like scv and em)irwinmfletcher wrote: ↑Sun Apr 04, 2021 9:16 amSo in other words, don't really put the first 20% of what is not in equities in LTT? That is, some % in short term and then LTT.whereskyle wrote: ↑Sun Apr 04, 2021 7:46 amShort-term reserves, I consider, an emergency fund (I.e., funds that are NOT invested). First bonds for investment in a high equity portfolio should be long term treasuries because of the recent negative correlation with equities in times of stress. The principle is simply this: your 80%+ equity position is driving your risk and return; why bother with any bonds that don't provide a robust return when equities crash?irwinmfletcher wrote: ↑Sun Apr 04, 2021 7:37 am I still struggle with how to tie the first 20% rule in with having short term reserves (or whether there should even be any of those).
If one keeps no dedicated emergency/liquidity fund and is 80/20, is it too conservative to keep all or a portion of that 20% in ITT (or shorter term fixed income)?
Let's say one has 15x saved and wants 1-3 years in low volatility investments to allow them to be able to switch careers if everything is tanking, use in the next 2 years in case of emergency, etc.
I believe I saw a reference in one of the threads to the 20% LTT being aside from liquidity reserves, but then the first 20% isn't really in LTT (unless we are bucketing or mental accounting and I missed that part).
Perhaps in my example there really are no "bonds" to hold--it's 20% short term reserves and the rest stocks, in that no fixed income is being held for long term investment.
Only when you want to actively "derisk" your portfolio should you consider intermediate and short-term fixed-income.
Emergency funds are not part of this equation.
I don't keep a separate emergency fund at all (or as I think of it, every $ I have is part of the emergency fund, but some parts of it are safer than others, and every single dollar is "invested"). Then the question is, of the 20% of the portfolio that is not equities, what % is shorter term and what % is LTT?
For example, if one's 20% of non-equities was 3 years of expenses, perhaps split it 50/50 ITT/LTT, or maybe 66.6/33.3.
A great contribution to the forum from Vineviz is distinguishing diversification from derisking. Bonds that don't match your time horizon in that they undershoot it can certainly be effective "deriskers", in that they lower the overall risk of your portfolio. They lower the stomach acid, so to speak, but they don't necessarily provide the most diversification. Diversification is most readily measured by low, zero, or even negative correlation. The lowest correlation asset to equities is Long-term treasuries. Intermediate-term treasuries are not far off, and they can certainly provide diversification while lowering the risk that LTTs provide. But consider whether you should be taking risk off the table by "derisking" rather than investing in different sources of risk by "diversifying." I think ITTs are a fine choice for most portfolios. With my long investing horizon though, I go long.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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Re: First 20% of bonds in long-term Treasuries
In the initial post the OP mentioned how not everyone has access to a Long Term Treasury fund in their 401k and suggested those people just maintain a run of the mill long or intermediate term bond fund instead. Yet in skimming through this thread I've seen numerous people mention holding LTT funds in taxable instead. Is OP's recommendation due to the return of capital some of these LTT funds have done? The tax drag of the bond returns vs total stock market's low dividend yield? The tax event that would be created rebalancing during a downturn? All of these?
I'm 32 and 90/10 equities/bonds. Aside from a stable value fund the two bond funds offered in my employer's 401k are both intermediate term with a ~6yr duration (a total bond equivalent and a higher yield fund). I do hope to be able to retire early, but it's definitely looking like more than 6 years. Would one recommend I continue to hold the total bond fund in the 401k or would it be advantageous to move things around and hold my current 10% bonds as LTT's in my taxable account?
I'm 32 and 90/10 equities/bonds. Aside from a stable value fund the two bond funds offered in my employer's 401k are both intermediate term with a ~6yr duration (a total bond equivalent and a higher yield fund). I do hope to be able to retire early, but it's definitely looking like more than 6 years. Would one recommend I continue to hold the total bond fund in the 401k or would it be advantageous to move things around and hold my current 10% bonds as LTT's in my taxable account?
Re: First 20% of bonds in long-term Treasuries
When interest rates were higher, nominal bonds, in general, created a fair bit of taxable income.case_of_ennui wrote: ↑Sun Apr 04, 2021 11:05 am In the initial post the OP mentioned how not everyone has access to a Long Term Treasury fund in their 401k and suggested those people just maintain a run of the mill long or intermediate term bond fund instead. Yet in skimming through this thread I've seen numerous people mention holding LTT funds in taxable instead. Is OP's recommendation due to the return of capital some of these LTT funds have done? The tax drag of the bond returns vs total stock market's low dividend yield? The tax event that would be created rebalancing during a downturn? All of these?
I'm 32 and 90/10 equities/bonds. Aside from a stable value fund the two bond funds offered in my employer's 401k are both intermediate term with a ~6yr duration (a total bond equivalent and a higher yield fund). I do hope to be able to retire early, but it's definitely looking like more than 6 years. Would one recommend I continue to hold the total bond fund in the 401k or would it be advantageous to move things around and hold my current 10% bonds as LTT's in my taxable account?
This creates a tax drag on returns, which gets worse the higher your tax bracket.
But at current interest rates, it's far less of an issue.
We hold LTT in both taxable and rollover IRA accounts.
Why both? We ran out of space in tax preferred.
Last edited by watchnerd on Sun Apr 04, 2021 11:32 am, edited 1 time in total.
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