First 20% of bonds in long-term Treasuries

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vineviz
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

Corvidae wrote: Mon May 23, 2022 1:53 pm I believe assumptions include uniform/parallel shift in the yield curve for interest-rate changes and the timing of specific cash flows--maturing bonds--to the settlement of liabilities. Maybe these aren't that big of a deal--someone more interested should do a sensitivity analysis--but I think they motivate some of the suspicions in this thread.
Duration matching and cash flow matching are different forms of interest rate immunization. Both accomplish the same goal (insulating the portfolio from the effect of changes in yields) through slightly different mechanisms.

Both forms always work perfectly well when yield curves shift in a parallel fashion. When the yield curve changes in non-parallel ways, the cash flow approach will still work without management whereas duration matching will sometimes require rebalancing (ergo the glide path concept). With continuous rebalancing the duration matching approach also works perfectly well, so really it's up to the investor to decide on the cost/benefit tradeoff of rebalancing frequency. It's my opinion that annual rebalancing is "good enough", but highly risk-averse (or obsessively compulsive) investor could certainly do it more frequently.

Either solution is likely to be FAR superior to the conventional approach of simply picking an intermediate term fund and hoping that it works. And both approaches incorporate less interest rate risk than a DIY rolling bond ladder implemented without any consideration for duration matching OR cash flow matching.
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Re: First 20% of bonds in long-term Treasuries

Post by Morik »

vineviz wrote: Mon May 23, 2022 2:25 pm Both forms always work perfectly well when yield curves shift in a parallel fashion. When the yield curve changes in non-parallel ways, the cash flow approach will still work without management whereas duration matching will sometimes require rebalancing (ergo the glide path concept).

If I have $100 in a 3-year bond fund and $100 in a 7-year bond fund (for blended duration of 5 years), and yields rise 1% across the whole curve, don't I now have $97 in 3-year + $92 in 7-year?, which should then be rebalanced to $94.5 in each to get back to the blended 5 year duration?

I.e., despite the fact that this was a parallel shift, I still need to rebalance if I'm using the two bond funds with duration matching approach?

With a non-parallel shift I can see that I wouldn't necessarily need to rebalance. E.g., if 3-year rate went up 1% but the 7-year rate only went up 0.42% I'd get a ~3% drop in both funds' NAVs.
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

Morik wrote: Mon May 23, 2022 2:39 pm I.e., despite the fact that this was a parallel shift, I still need to rebalance if I'm using the two bond funds with duration matching approach?
Because of convexity, the duration of each fund would change slightly with the change in yield so technically yes there would be a little drift in the duration. I think the average duration would drop from 5.0 years to 4.95 years or something like that. Keep in mind that a single 5-year bond would also experience a mild decrease in duration under the same circumstances unless it was a zero coupon bond.
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Re: First 20% of bonds in long-term Treasuries

Post by Corvidae »

vineviz wrote: Mon May 23, 2022 2:25 pm
Corvidae wrote: Mon May 23, 2022 1:53 pm I believe assumptions include uniform/parallel shift in the yield curve for interest-rate changes and the timing of specific cash flows--maturing bonds--to the settlement of liabilities. Maybe these aren't that big of a deal--someone more interested should do a sensitivity analysis--but I think they motivate some of the suspicions in this thread.
Duration matching and cash flow matching are different forms of interest rate immunization. Both accomplish the same goal (insulating the portfolio from the effect of changes in yields) through slightly different mechanisms.

Both forms always work perfectly well when yield curves shift in a parallel fashion. When the yield curve changes in non-parallel ways, the cash flow approach will still work without management whereas duration matching will sometimes require rebalancing (ergo the glide path concept). With continuous rebalancing the duration matching approach also works perfectly well, so really it's up to the investor to decide on the cost/benefit tradeoff of rebalancing frequency. It's my opinion that annual rebalancing is "good enough", but highly risk-averse (or obsessively compulsive) investor could certainly do it more frequently.

Either solution is likely to be FAR superior to the conventional approach of simply picking an intermediate term fund and hoping that it works. And both approaches incorporate less interest rate risk than a DIY rolling bond ladder implemented without any consideration for duration matching OR cash flow matching.
Well, maybe, but let's only change one thing at a time when making comparisons. Comparing barbell vs. bullet or DIY ladder vs. fund while also changing whether we cross our fingers or attempt immunization is confusing the issue. In any event, it seems there are differences between DIY ladder with consideration for duration or cash flow matching and using bond funds with the same objective. Posters are sensing such issues exist, and the question is how meaningful are these differences. They may be small, but if we could quantify them with some examples, it seems that would be beneficial to readers.
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Re: First 20% of bonds in long-term Treasuries

Post by Jaylat »

muffins14 wrote: Mon May 23, 2022 12:00 pm Do you actually hold a different portfolio because you are protecting against risk of divorce, house fire, and long-term disability?
I do actually, but not just because of these kind of events. Again, stuff happens. Maybe your son is buying a house in Silicon Valley, it would be nice to be in a position to give him a loan. I just loaded up on I Bonds, which I could never have done if I was locked into LTT. None of this was predictable a year or two ago.

It also makes sense to keep significant liquidity for portfolio rebalancing purposes, as for example right now with falling equity prices.

Anyone touting LTT should include a disclaimer to the effect that it should be used only for that portion of the portfolio that you are completely 100% sure does not need to be touched in the foreseeable future.
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

Corvidae wrote: Mon May 23, 2022 3:15 pm In any event, it seems there are differences between DIY ladder with consideration for duration or cash flow matching and using bond funds with the same objective.
A call for precise language is fine, so let's be precise.

There are no economic differences in outcomes between a rolling DIY bond ladder and a single bond fund, because they are managed the same way. Both have constant duration, and have the same interest rate risk.

The only difference between a non-rolling DIY bond ladder (which is implicitly a cash flow matching portfolio) and a duration glide path approach using two bond funds (or a bond fund and cash) is in the amount of maintenance required to keep the duration of the assets matched to the liabilities. If that maintenance is performed, there is no economic difference in outcomes.
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Re: First 20% of bonds in long-term Treasuries

Post by Corvidae »

vineviz wrote: Mon May 23, 2022 3:49 pm
Corvidae wrote: Mon May 23, 2022 3:15 pm In any event, it seems there are differences between DIY ladder with consideration for duration or cash flow matching and using bond funds with the same objective.
A call for precise language is fine, so let's be precise.

There are no economic differences in outcomes between a rolling DIY bond ladder and a single bond fund, because they are managed the same way. Both have constant duration, and have the same interest rate risk.

The only difference between a non-rolling DIY bond ladder (which is implicitly a cash flow matching portfolio) and a duration glide path approach using two bond funds (or a bond fund and cash) is in the amount of maintenance required to keep the duration of the assets matched to the liabilities. If that maintenance is performed, there is no economic difference in outcomes.
The latter is effectively untrue as discussed above. Oh, well.
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

Corvidae wrote: Mon May 23, 2022 3:54 pm The latter is effectively untrue as discussed above. Oh, well.
It is not untrue at all, I'm sorry to say. If you think it is then you misunderstand something about bond portfolio construction. Unless you can spell out exactly what difference you think exists, I'm not sure I can help you figure it out.
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

Jaylat wrote: Mon May 23, 2022 3:40 pm It also makes sense to keep significant liquidity for portfolio rebalancing purposes, as for example right now with falling equity prices.
What security is more liquid than US Treasury bonds?
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Re: First 20% of bonds in long-term Treasuries

Post by BigJohn »

Jaylat wrote: Mon May 23, 2022 10:05 am
vineviz wrote: Sun May 22, 2022 1:46 pm It's not necessary to dedicate a particular "bucket" of bonds to this perpetual rolling five-year duration: it is sufficient (and recommended) to simply included that possible liquidity event when calculating the investment horizon.
And doing this is highly impractical. As I noted before, it results in a ludicrous logic:

"I expect to retire in 30 years, but I have a 15% chance of getting a divorce in year 10, plus a 5% chance of my house burning down in year 20, plus a 30% chance of getting run over by a truck in year 25, resulting in a debilitating spinal injury."

The simple fact is that any one of these events is binary - they happen or they don't. You don't get a 20% divorce, or a 35% layoff. Assigning a percentage probability to each is a fool's errand.

If one of these events does happen, your carefully constructed LTT portfolio or "glide path" will blow up. Put simply, what you are recommending in these posts is a bond portfolio that is not resilient, and will not perform well in an uncertain world - which is the world we actually live in.
Unfortunately there is no portfolio that will give 100% protection for all scenarios. Let’s forget about LTTs for a minute and consider inflation. Right now I’m at 60/40 TIPS/nominals but recognize that this does not give me bullet proof 100% protection from high unexpected inflation. It’s a compromise that gives me some protection in multiple scenarios.

I agree that LTTs can be problematic if/when you have an unexpected event that requires a large amount of cash at a time much sooner than the investment horizon for which you picked the duration. But there’s also a risk in having all ST bonds as well. I can’t remember all the details but for most allocations I believe vineviz has recommended a mix of long and short term which won’t give you 100% protection for any scenario but will give you some protection for many possible outcomes. Given my life stage, I haven’t gone the LT route, instead I mix IT and ST. But, if were younger, I’d give more serious consideration to LT but would only do so using TIPS.
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Re: First 20% of bonds in long-term Treasuries

Post by 2pedals »

Jaylat wrote: Mon May 23, 2022 3:40 pm
muffins14 wrote: Mon May 23, 2022 12:00 pm Do you actually hold a different portfolio because you are protecting against risk of divorce, house fire, and long-term disability?
I do actually, but not just because of these kind of events. Again, stuff happens. Maybe your son is buying a house in Silicon Valley, it would be nice to be in a position to give him a loan. I just loaded up on I Bonds, which I could never have done if I was locked into LTT. None of this was predictable a year or two ago.

It also makes sense to keep significant liquidity for portfolio rebalancing purposes, as for example right now with falling equity prices.

Anyone touting LTT should include a disclaimer to the effect that it should be used only for that portion of the portfolio that you are completely 100% sure does not need to be touched in the foreseeable future.
This is a good point. I would also like to add it may be okay or preferable for an investor to take long-term risks in the equity market.
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Re: First 20% of bonds in long-term Treasuries

Post by Corvidae »

vineviz wrote: Mon May 23, 2022 4:01 pm
Corvidae wrote: Mon May 23, 2022 3:54 pm The latter is effectively untrue as discussed above. Oh, well.
It is not untrue at all, I'm sorry to say. If you think it is then you misunderstand something about bond portfolio construction. Unless you can spell out exactly what difference you think exists, I'm not sure I can help you figure it out.
No need to be sorry. I think I've figured it out. I think others have figured it out as well. Your approach requires more maintenance to approximate the immunization effectiveness of a non-rolling bond ladder. That is not even getting into the relationship between more maintenance introducing more room for behavioral errors, which others also are catching onto. I'm not sure why this is a difficult point to concede. It's not a bad strategy. But it's perhaps not as superior as you make it out to be.
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

Corvidae wrote: Mon May 23, 2022 4:16 pm No need to be sorry. I think I've figured it out. I think others have figured it out as well. Your approach requires more maintenance to approximate the immunization effectiveness of a non-rolling bond ladder. That is not even getting into the relationship between more maintenance introducing more room for behavioral errors, which others also are catching onto. I'm not sure why this is a difficult point to concede. It's not a bad strategy. But it's perhaps not as superior as you make it out to be.
To be clear, duration matching is not MY strategy: it's been an industry standard approach for decades.

To be even more clear, I don't think I've EVER claimed that duration matching is "superior" to a non-rolling bond ladder in any general way. Duration matching has advantages in some cases and disadvantages in other cases, but BOTH approaches expose the investor to far less interest rate risk than approaches that eschew any consideration of matching the bonds to the investment horizon of the investor.

I will add, though, that in these discussions when people bring up a DIY bond ladder they almost ALWAYS refer to a rolling bond ladder not a non-rolling one. That's the context in which this thread exists.
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Re: First 20% of bonds in long-term Treasuries

Post by Jaylat »

vineviz wrote: Mon May 23, 2022 4:03 pm
Jaylat wrote: Mon May 23, 2022 3:40 pm It also makes sense to keep significant liquidity for portfolio rebalancing purposes, as for example right now with falling equity prices.
What security is more liquid than US Treasury bonds?
I think you're smart enough to understand my point, which is that you don't want to be selling LTT at a loss. Yes, LTT are liquid, but those readers who took your advice to buy LTT over the past few years are underwater on those positions, and if they need to sell will get back less than they paid for them. (That sure sounds like exposure to interest rate risk to me.)

I'm not saying the loss was completely predictable; they could just as easily have been in the money. The point is that they are exposing themselves to a potential gain or loss which could have been avoided had they not been in fully invested in LTT (as you recommend for bond portfolios of 20% or less).
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

Jaylat wrote: Mon May 23, 2022 4:30 pm
I think you're smart enough to understand my point, which is that you don't want to be selling LTT at a loss.
I understand that YOU don't want "to be selling LTT at a loss".

What I'm not smart enough to understand is why you think that matters.
Jaylat wrote: Mon May 23, 2022 4:30 pm Yes, LTT are liquid, but those readers who took your advice to buy LTT over the past few years are underwater on those positions, and if they need to sell will get back less than they paid for them. (That sure sounds like exposure to interest rate risk to me.)
[Disrespectful comment removed by Moderator Misenplace.]
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Re: First 20% of bonds in long-term Treasuries

Post by Corvidae »

vineviz wrote: Mon May 23, 2022 4:28 pm
Corvidae wrote: Mon May 23, 2022 4:16 pm No need to be sorry. I think I've figured it out. I think others have figured it out as well. Your approach requires more maintenance to approximate the immunization effectiveness of a non-rolling bond ladder. That is not even getting into the relationship between more maintenance introducing more room for behavioral errors, which others also are catching onto. I'm not sure why this is a difficult point to concede. It's not a bad strategy. But it's perhaps not as superior as you make it out to be.
To be clear, duration matching is not MY strategy: it's been an industry standard approach for decades.

To be even more clear, I don't think I've EVER claimed that duration matching is "superior" to a non-rolling bond ladder in any general way. Duration matching has advantages in some cases and disadvantages in other cases, but BOTH approaches expose the investor to far less interest rate risk than approaches that eschew any consideration of matching the bonds to the investment horizon of the investor.

I will add, though, that in these discussions when people bring up a DIY bond ladder they almost ALWAYS refer to a rolling bond ladder not a non-rolling one. That's the context in which this thread exists.
Fair enough. My understanding is that duration matching was borrowed from institutional settings and applied to personal finance. I think there are problems with that, but I won't rehash what's probably been said elsewhere. (I haven't read this entire thread.)
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Re: First 20% of bonds in long-term Treasuries

Post by Jaylat »

vineviz wrote: Mon May 23, 2022 4:33 pm
Jaylat wrote: Mon May 23, 2022 4:30 pm
I think you're smart enough to understand my point, which is that you don't want to be selling LTT at a loss.
I understand that YOU don't want "to be selling LTT at a loss".

What I'm not smart enough to understand is why you think that matters.
Jaylat wrote: Mon May 23, 2022 4:30 pm Yes, LTT are liquid, but those readers who took your advice to buy LTT over the past few years are underwater on those positions, and if they need to sell will get back less than they paid for them. (That sure sounds like exposure to interest rate risk to me.)
This leads me to conclude that you don't know what interest rate risk actually is.
Look, I really don't care what some random guy on the internet thinks, I'm quite satisfied with my background in finance which includes stints with some of the biggest financial institutions in the world, and advice to major corporations. I've structured and closed literally billions of dollars worth of complex transactions, so maybe that's just dumb luck?

I'm only posting here because I think [Disrespectful content removed by Moderator Misenplace] You are focusing only on one narrow aspect of financial risk - that of lower future reinvestment rates - and ignoring exposure to interest rate volatility and liquidity risk.

Those who took your advice are locked into a low yielding LTT portfolio that is significantly underwater. If that's your definition of "completely eliminating interest rate risk" then, yes, I agree I don't understand what you're talking about.
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Re: First 20% of bonds in long-term Treasuries

Post by bhough »

Don't want to fight, just want to add one piece of information which may or may not have been mentioned in the last 33 pages.

This thread made me think of something I hadn't thought about before. For that reason, I purchased some 30 years nominals. Since I purchase them, they have in fact gone down. However, every 6 months, the government puts $950 into my account for interest. If I looked only at the current price on the secondary market and compared to what I would have had if I just left it in cash, it is true that both the current asset value for the 30 year nominal plus the interest is less than what the cash would have been sitting in my account. However, I didn't put all of my assets in 30 year nominals. I put some in I bonds and TIPS and index funds. I don't think the question is whether a dollar last year in a 30 year nominal has done better than a dollar last year in short term nominals or TIPS (which one had to purchase at a premium for a negative return) or has done better than cash. I think the question is larger. How does one construct a long term strategy of asset purchases that has the potential (not certainty) to grow with the least amount of risk.

Every asset has been beaten down the last 12 months except for real estate and that is next on the chopping block if you believe the relationship between rising interest rates and demand for single family homes. Investing in a bear market is less fun than investing in a bull market, but to quote Rush: "If you choose not to decide you still have made a choice".

Appreciate the discussion from all participants. Thank you to all.
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Last edited by bhough on Mon May 23, 2022 7:23 pm, edited 1 time in total.
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

Jaylat wrote: Mon May 23, 2022 5:44 pm Look, I really don't care what some random guy on the internet thinks, I'm quite satisfied with my background in finance which includes stints with some of the biggest financial institutions in the world, and advice to major corporations. I've structured and closed literally billions of dollars worth of complex transactions, so maybe that's just dumb luck?
I'm not qualified to comment on the role that luck played in your career, if any. I've worked with enough investment bankers to not assume anything about luck versus skill, one way or the other.

Jaylat wrote: Mon May 23, 2022 5:44 pm Those who took your advice are locked into a low yielding LTT portfolio that is significantly underwater. If that's your definition of "completely eliminating interest rate risk" then, yes, I agree I don't understand what you're talking about.
I'm not making up my own definition of interest rate risk here. It's a pretty fundamental investment concept.

And for the record, an 80/20 investor who allocated their 20% to Vanguard Long-Term Treasury ETF when this thread started has seen their portfolio grow by the same 20% as an investor who put the 20% in Vanguard Total Bond Market ETF. Not only did they reduce their interest rate risk, they experienced less volatility and a smaller drawdown relative to the peak.

Is that a resounding win? For sure "no".

But we all know not to judge a long-term portfolio by less than 24 months of results right?
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Re: First 20% of bonds in long-term Treasuries

Post by SCSurf »

Jaylat wrote: Mon May 23, 2022 5:44 pm
vineviz wrote: Mon May 23, 2022 4:33 pm
Jaylat wrote: Mon May 23, 2022 4:30 pm
I think you're smart enough to understand my point, which is that you don't want to be selling LTT at a loss.
I understand that YOU don't want "to be selling LTT at a loss".

What I'm not smart enough to understand is why you think that matters.
Jaylat wrote: Mon May 23, 2022 4:30 pm Yes, LTT are liquid, but those readers who took your advice to buy LTT over the past few years are underwater on those positions, and if they need to sell will get back less than they paid for them. (That sure sounds like exposure to interest rate risk to me.)
This leads me to conclude that you don't know what interest rate risk actually is.
Look, I really don't care what some random guy on the internet thinks, I'm quite satisfied with my background in finance which includes stints with some of the biggest financial institutions in the world, and advice to major corporations. I've structured and closed literally billions of dollars worth of complex transactions, so maybe that's just dumb luck?

I'm only posting here because I think [Disrespectful content removed by Moderator Misenplace] You are focusing only on one narrow aspect of financial risk - that of lower future reinvestment rates - and ignoring exposure to interest rate volatility and liquidity risk.


Those who took your advice are locked into a low yielding LTT portfolio that is significantly underwater. If that's your definition of "completely eliminating interest rate risk" then, yes, I agree I don't understand what you're talking about.
Could you provide your opinion on how one should approach the fixed income part of the portfolio. Again, I am here to learn and not argue.
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Re: First 20% of bonds in long-term Treasuries

Post by abc132 »

This is a really important thread in that most Bogleheads do not have a duration that matches the intended use of their bonds. I think this mismatch is a result of the general Boglehead recommendations for intermediate bonds. The question becomes whether we have bonds in our portfolio because

1) bonds are individually less volatile than stocks
2) bonds help control the volatility of the entire portfolio
3) volatility doesn't matter and the bonds are just set aside for future spending

My guess is that the general Boglehead recommendation meets #1 and may help prevent behavioral errors with respect to the stock portion of our portfolio, but that we would all do well to consider the purpose of bonds in our portfolio.

I want to spend down all of my bonds in early retirement, roughly 10 years of expenses in fixed income over 20 years before social security. With expected retirement a few years away, that's an average duration of over 10 years, and the bond funds I do have have a duration of 6.7 years. It is easy enough to read about the importance of duration matching and apply to my own situation - I would benefit from an interest rate risk perspective from having some longer term bonds in my portfolio.
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Re: First 20% of bonds in long-term Treasuries

Post by Morik »

A google search gives this: https://www.finra.org/investors/learn-t ... -bond-risk

And under the "interest rate risk" section:
"If you need to sell your 4 percent bond prior to maturity you must compete with newer bonds carrying higher coupon rates. These higher coupon rate bonds decrease the appetite for older bonds that pay lower interest. This decreased demand depresses the price of older bonds in the secondary market, which would translate into you receiving a lower price for your bond if you need to sell it. In fact, you may have to sell your bond for less than you paid for it. This is why interest rate risk is also referred to as market risk."

Though this page only talks about reinvestment risk in the context of a callable bond (further down)...

This does sound like Jaylat's posited situation--having to sell the bond early carries a risk of interest rates having risen, reducing the principle value.

Though perhaps what Vince is saying is that you have to consider the spread of all potential events when calculating your investment horizon.
if you had a 1% chance of having to sell the bond early, that doesn't mean you should set your duration very short and expose yourself to reinvestment risk. Your best estimate of investment horizon has to take the probability of withdrawal at various time periods into account.
You can optimize for the "you unexpectedly have to withdraw money way before you thought you would" scenario, but doing so exposes you to reinvestment risk which can hit you in any scenario where you don't end up having to unexpectedly withdraw money early.
Having a good emergency fund to help mitigate the potential need for early withdrawals from your retirement portfolio would be good.
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

Morik wrote: Mon May 23, 2022 8:11 pm Though this page only talks about reinvestment risk in the context of a callable bond (further down)...
Many sources aimed at general audiences make the same error of considering only the price risk component of interest rate risk.
Obviously the concept of duration matching as a strategy for immunizing against interest rate risk makes no sense using that faulty definition.

The CFA curriculum presents a more complete explanation:
The investment horizon is at the heart of understanding interest rate risk and return. There are two offsetting types of interest rate risk that affect the bond investor: coupon reinvestment risk and market price risk. The future value of reinvested coupon payments (and, in a portfolio, the principal on bonds that mature before the horizon date) increases when interest rates rise and decreases when rates fall. The sale price on a bond that matures after the horizon date (and thus needs to be sold) decreases when interest rates rise and increases when rates fall. Coupon reinvestment risk matters more when the investor has a long-term horizon relative to the time-to-maturity of the bond. For instance, a buy-and-hold investor only has coupon reinvestment risk. Market price risk matters more when the investor has a short-term horizon relative to the time-to-maturity. For example, an investor who sells the bond before the first coupon is received has only market price risk. Therefore, two investors holding the same bond (or bond portfolio) can have different exposures to interest rate risk if they have different investment horizons.
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Re: First 20% of bonds in long-term Treasuries

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Look, I really don't care what some random guy on the internet thinks, I'm quite satisfied with my background in finance which includes stints with some of the biggest financial institutions in the world, and advice to major corporations. I've structured and closed literally billions of dollars worth of complex transactions, so maybe that's just dumb luck?
Vineviz is not just some random guy on the internet. His name is Vincent E. Vizachero, CFA.
I am a CFA® charterholder who was a mutual fund manager and equity analyst at Van Kampen Funds and Fidelity.

I studied Economics at The College of William & Mary and then earned my MBA, with concentrations in Finance and Strategic Management, at The University of Chicago Booth School of Business.
That is not a bad background to have. Doesn't mean Vince is always right but a background as a mutual fund manager and an equity analyst with an MBA at University of Chicago isn't bad. I am sure he learned a thing or two along the way.

On his Twitter feed he has this to say about his experience studying at University of Chicago:
I was a decidedly mediocre student of Fama @ChicagoBooth: every class was an exercise is trying to keep up with someone who possessed superhuman intellectual capacity.

It was a far more enjoyable and humbling experience than I ever could have imagined.
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Re: First 20% of bonds in long-term Treasuries

Post by Jaylat »

SCSurf wrote: Mon May 23, 2022 6:15 pm Could you provide your opinion on how one should approach the fixed income part of the portfolio. Again, I am here to learn and not argue.
To quote my post above: "A more reasonable and less risky approach would be to have a mix of long and short term fixed rate investments, thus covering both alternatives." (i.e, rates go up, rates go down) In other words, do not put your first 20% of bonds in long-term Treasuries.

I agree, I don't see why people need to be so defensive and argumentative about these things. Thanks for your query.
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Re: First 20% of bonds in long-term Treasuries

Post by CletusCaddy »

Jaylat wrote: Mon May 23, 2022 3:40 pm Anyone touting LTT should include a disclaimer to the effect that it should be used only for that portion of the portfolio that you are completely 100% sure does not need to be touched in the foreseeable future.
Did vineviz ever claim otherwise?
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Re: First 20% of bonds in long-term Treasuries

Post by Jaylat »

nedsaid wrote: Mon May 23, 2022 9:51 pm Vineviz is not just some random guy on the internet. His name is Vincent E. Vizachero, CFA.
He's obviously a really intelligent guy; I wouldn't bother to debate with him otherwise. That's an impressive resume.

After my MBA I've had stints as a senior banker at JP Morgan Chase and other multinational financial institutions in NYC and Hong Kong, before I started my own private equity company in China.

In addition to closing deals, I've taught seminars on securitization and interest rate swaps at JP Morgan Chase and Columbia Business School. So I think I'm no slouch in that regard.

I've worked with equity analysts before, and I can see how Vineviz' approach comes from that line of thinking; more theoretical, and (I would say) less practical and real-world oriented than "investment bankers" and "deal makers" like myself. In my experience, analysts tend to be overly pedantic, getting caught up in definitions and sometimes lost in the weeds.

I'm sure equity analysts have equally catty things to say about the "deal makers" like myself.
Last edited by Jaylat on Tue May 24, 2022 12:12 am, edited 2 times in total.
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Re: First 20% of bonds in long-term Treasuries

Post by LTCM »

Jaylat wrote: Mon May 23, 2022 3:40 pm I just loaded up on I Bonds, which I could never have done if I was locked into LTT.
Why couldn't you do it? I just did it.

Is it the loss aversion?
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Re: First 20% of bonds in long-term Treasuries

Post by dcabler »

LTCM wrote: Mon May 23, 2022 11:57 pm
Jaylat wrote: Mon May 23, 2022 3:40 pm I just loaded up on I Bonds, which I could never have done if I was locked into LTT.
Why couldn't you do it? I just did it.

Is it the loss aversion?
I guess everybody's in a different situation, but I have both LTT (both nominal and TIPs) as well as I-bonds...
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Re: First 20% of bonds in long-term Treasuries

Post by SCSurf »

Jaylat wrote: Mon May 23, 2022 10:54 pm
SCSurf wrote: Mon May 23, 2022 6:15 pm Could you provide your opinion on how one should approach the fixed income part of the portfolio. Again, I am here to learn and not argue.
To quote my post above: "A more reasonable and less risky approach would be to have a mix of long and short term fixed rate investments, thus covering both alternatives." (i.e, rates go up, rates go down) In other words, do not put your first 20% of bonds in long-term Treasuries.

I agree, I don't see why people need to be so defensive and argumentative about these things. Thanks for your query.
Do you believe that long term treasuries have a place in a portfolio? Would you hold a bond barbell? What do you think the best plan is for fixed investments?
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Re: First 20% of bonds in long-term Treasuries

Post by muffins14 »

Jaylat wrote: Mon May 23, 2022 10:54 pm
SCSurf wrote: Mon May 23, 2022 6:15 pm Could you provide your opinion on how one should approach the fixed income part of the portfolio. Again, I am here to learn and not argue.
To quote my post above: "A more reasonable and less risky approach would be to have a mix of long and short term fixed rate investments, thus covering both alternatives." (i.e, rates go up, rates go down) In other words, do not put your first 20% of bonds in long-term Treasuries.

I agree, I don't see why people need to be so defensive and argumentative about these things. Thanks for your query.
It sounds like you just want people to have an emergency fund for emergencies and perhaps to have some kind of “rainy day fund” for something like known but inpredicrablr events like roof repair, new car etc.

I do not have a car or own a home, so I consider myself as having no risk of those events. Thus I am not holding short term bonds for that purpose. If I lose my job, I will sell some equities as needed and interview ferociously for a new job
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Re: First 20% of bonds in long-term Treasuries

Post by SantaClaraSurfer »

I started purchasing SCHQ (LTT ETF) in Jan 2021 for ballast in our taxable account instead of SCHZ (US Total Bond, our previous ballast bond fund choice which I sold off completely in March of 2020.)

A comparison of SCHQ versus SCHZ since Jan. 2021 shows SCHZ down 13.55% and SCHQ down 25.37%.

At this point, even with the recent equity declines, I am guessing the standard advice would be either DO NOTHING, ie. don't sell either equities or bonds to rebalance, since both equities and bonds have had a steep decline, or, if anything, perhaps BUY MORE BONDS with new money if, like me, you've been purchasing SCHQ.

However, it would be great to see a less theoretical discussion here, and a more pragmatic discussion of how an investor in my situation should approach this real life situation. Especially, as behaviorally, we are asking the LTT to serve as ballast AND a long term investment.

In my case, as mid-career accumulators, and new to taxable accounts, my horizon is long, so I purchased LTT via SCHQ.

Stocks dropped, but LTT, so far, since Jan 1, 2021, has dropped even more.

Is the answer as simple as buy more LTT? Ie. Stay the course and buy even more LTT when they drop?

Real life behavioral reality: I sold 100 shares of SCHQ (and took the loss) in favor of rebalancing to equities when my US Total Market shares were down almost 20% for the year and SCHQ had an upturn one day.

Why did I do this?

Basically, because the bonds are for ballast and I'd made a grid instructing me to sell bonds if equities hit a certain mark at the beginning of the year. (SCHB < $47.50 / share) It's a VERY difficult behavioral scenario to have BOTH bonds and equities down approaching 20%, and, given that I see these bonds as mostly for ballast, when SCHB hit $45.11 per share, I followed my plan to sell bonds and buy equities after SCHB dropped well below my given share price.

The fact is, I did not countenance that SCHQ would drop the way it has. My planning simply didn't include this scenario where I probably should not have sold my ballast bonds. I need to include guidance in my IPS to cover this.

I think clarifying what an accumulator like me who is purchasing LTT should do in this scenario (where BOTH LTT and equities are down) would be helpful guidance.
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Re: First 20% of bonds in long-term Treasuries

Post by jeffyscott »

SantaClaraSurfer wrote: Tue May 24, 2022 8:47 amThe fact is, I did not countenance that SCHQ would drop the way it has.
Why not?

The average weighted maturity is >20 years and current duration is 17.6 (and may have been higher, when yield was lower). In January 2021, the 20 year bond yield was around 1.6. Why would you not think that it was possible for that to go to 2.5 or 3% and cause an estimated loss of 15-25% based on that duration?

I'm not an advocate of this LTT treasury idea, so I will leave the advice to those who are.

For myself, I am not and was not interested in making a loan to the Federal government for 20 years, when they were only going to pay me 1.6%. Especially given that we all know that the Fed wants to see 2% inflation (or more like 2.25% using CPI).
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Re: First 20% of bonds in long-term Treasuries

Post by muffins14 »

SantaClaraSurfer wrote: Tue May 24, 2022 8:47 am
Basically, because the bonds are for ballast and I'd made a grid instructing me to sell bonds if equities hit a certain mark at the beginning of the year. (SCHB < $47.50 / share) It's a VERY difficult behavioral scenario to have BOTH bonds and equities down approaching 20%, and, given that I see these bonds as mostly for ballast, when SCHB hit $45.11 per share, I followed my plan to sell bonds and buy equities after SCHB dropped well below my given share price.

The fact is, I did not countenance that SCHQ would drop the way it has. My planning simply didn't include this scenario where I probably should not have sold my ballast bonds. I need to include guidance in my IPS to cover this.

I think clarifying what an accumulator like me who is purchasing LTT should do in this scenario (where BOTH LTT and equities are down) would be helpful guidance.

This is indeed just a rebalancing exercise. For me, if my allocations are off by 5%, I'd rebalance somewhere. Otherwise when I buy with new paycheck money, it goes to whatever is lagging.
I don't really know what this grid system is that you created -- why don't you just rebalance to a set ratio like X% stocks and Y% bonds? Most people doing that might have seen that both stocks and bonds were down, and they might not have had to do any actions to rebalance.

Perhaps you need to rethink the timeframe over which "bonds are for ballast". Perhaps you should think of bonds as being for ballast over the course of 10-20 years, not that bonds are going to be 100% flat and then sometimes spike up when stocks go down. The volatility goes both ways.
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Re: First 20% of bonds in long-term Treasuries

Post by drumboy256 »

SantaClaraSurfer wrote: Tue May 24, 2022 8:47 am I started purchasing SCHQ (LTT ETF) in Jan 2021 for ballast in our taxable account instead of SCHZ (US Total Bond, our previous ballast bond fund choice which I sold off completely in March of 2020.)

A comparison of SCHQ versus SCHZ since Jan. 2021 shows SCHZ down 13.55% and SCHQ down 25.37%.

At this point, even with the recent equity declines, I am guessing the standard advice would be either DO NOTHING, ie. don't sell either equities or bonds to rebalance, since both equities and bonds have had a steep decline, or, if anything, perhaps BUY MORE BONDS with new money if, like me, you've been purchasing SCHQ.

However, it would be great to see a less theoretical discussion here, and a more pragmatic discussion of how an investor in my situation should approach this real life situation. Especially, as behaviorally, we are asking the LTT to serve as ballast AND a long term investment.

In my case, as mid-career accumulators, and new to taxable accounts, my horizon is long, so I purchased LTT via SCHQ.

Stocks dropped, but LTT, so far, since Jan 1, 2021, has dropped even more.

Is the answer as simple as buy more LTT? Ie. Stay the course and buy even more LTT when they drop?

Real life behavioral reality: I sold 100 shares of SCHQ (and took the loss) in favor of rebalancing to equities when my US Total Market shares were down almost 20% for the year and SCHQ had an upturn one day.

Why did I do this?

Basically, because the bonds are for ballast and I'd made a grid instructing me to sell bonds if equities hit a certain mark at the beginning of the year. (SCHB < $47.50 / share) It's a VERY difficult behavioral scenario to have BOTH bonds and equities down approaching 20%, and, given that I see these bonds as mostly for ballast, when SCHB hit $45.11 per share, I followed my plan to sell bonds and buy equities after SCHB dropped well below my given share price.

The fact is, I did not countenance that SCHQ would drop the way it has. My planning simply didn't include this scenario where I probably should not have sold my ballast bonds. I need to include guidance in my IPS to cover this.

I think clarifying what an accumulator like me who is purchasing LTT should do in this scenario (where BOTH LTT and equities are down) would be helpful guidance.
Call me a market timer, call me a knee jerk, call me a whatever you want. I am a firm believer in LTT as a RISK aversion to the 100% equities group in terms of having assets that are not just cash but bonds as well. Last year, I sold off all of my LTT (at a premium since they rose based on when I bought them previously) and exited bonds all together. You'll noticed, on days like today, LTT's are going up when the stocks are going down-- As I'm sure Vineviz would state, this is working as intended.

If I had to equate LTT's I would say they are akin to SCV in terms of volatility due to the nature of their time horizon. Going 15, 20 or 25+ years into the future for "bond" coupons is a fools errand to try and predict however, given the fluctuation in pricing, interest rates and market rationale, there isn't a good "silver bullet" answer other than "Risk" in my opinion.

Those who are 100% equities or even those in the 80/20, 70/30 camp with LTT's feeling the pain of LTT's due to interest rate hikes--- All I would say, anecdotally is that this is normal. Even in this thread, having the first 20% in LTT's based on time horizon makes the most sense based on the risk profile of the investor.

I think the "Bonds as Ballast" statement is a false narrative. The statement reads:
"If I own Bonds, my retirement account won't go down"

Now, I'm not saying you're saying that, but I think that is what MOST people believe and they can't understand WTH their portfolios would go down if in fact, they owned bonds. Whereas if you have the statement:
"Bonds as tailwind"

Bonds are meant to keep pushing you forward both seen and unseen independent of total market conditions of people's opinions on if "Bonds as a Ballast" actually means anything. Getting back to risk, the point here is that LTT help, not hinder total risk exposure of returns independent of interest rates, what Goldman Sachs or JP Morgan is doing with their hedge funds because you're relying on the time horizon to be that tailwind.

Selling LTT's at a loss (imo) is not worth the time or effort and if you are realizing you have a greater appetite for risk (meaning less LTT's as your overall bond %) then simply DCA into your IPS strategy to the assets that are NOT bonds. At the end of the day, the risk tolerance of the investor is what should guide them on if they do or do not want bonds in their portfolio--- LTT or otherwise. As of this writing, SCHQ is up over 2% :sharebeer
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

SantaClaraSurfer wrote: Tue May 24, 2022 8:47 am
I think clarifying what an accumulator like me who is purchasing LTT should do in this scenario (where BOTH LTT and equities are down) would be helpful guidance.
In my opinion, rebalancing should be triggered whenever your asset allocation drifts meaningfully away from your target.

If your target allocation is 80/20 and you're using a 5% rebalancing band, then rebalance whenever the stocks grow to 85% of the portfolio or shrink to 75% of the portfolio. It should be that simple, and even if you weren't contributing to the portfolio such a rebalance should only be triggered about once every 2-4 years on average.

It is common to experience periods when both stocks and bonds are up at the same time or down at the same time. This can be annoying to compulsive rebalancers, but it is just the way that noisy markets behave.
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

drumboy256 wrote: Tue May 24, 2022 9:34 am I think the "Bonds as Ballast" statement is a false narrative.
I largely agree.

At the very least, I think it's an incomplete narrative.

Bond investors need to understand that bonds can EITHER provide a steady price OR a steady income, but the same bond can't do both at the same time.

A long-term investor should, IMHO, care a lot more about long-term returns/income than about short-term price movements.

On the other hand, investors with a very short time horizon should - by necessity - place more importance on bonds offering a stable value than on bonds offering stable income.

This is very basis for matching duration to investment horizon.
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Re: First 20% of bonds in long-term Treasuries

Post by alluringreality »

SantaClaraSurfer wrote: Tue May 24, 2022 8:47 am I started purchasing SCHQ (LTT ETF) in Jan 2021 for ballast in our taxable account instead of SCHZ (US Total Bond, our previous ballast bond fund choice which I sold off completely in March of 2020.)
Judging by how Vanguard describes ballast, I'm simply going to question if that frame for fixed income is necessarily congruent with this strategy. For my own investment decisions, I make absolutely sure that I agree with a strategy before I would consider rebalancing into it. In certain respects I generally agree with this strategy by purchasing savings bonds, and in other ways, I still question if the nominal bond market is necessarily compensating individuals for taking on duration risk. Of course the future is always unknown, so future relative results across a particular period cannot necessarily be determined in advance. Your duration is much longer than this recent period of rising rates, and generally I would expect people taking on this strategy to understand the following before investing or rebalancing.
https://www.finra.org/investors/insight ... s-duration
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Re: First 20% of bonds in long-term Treasuries

Post by er999 »

I appreciate vineviz’s postings and hope he continues to do so as it has been very interesting. There’ve been too many posters with controversial ideas who end up leaving the board and I hope that isn’t his fate as that is a big loss for the board.

The last 5 months have been very educational too for the risk of long term bonds when interest rates rise — I’m keeping my 10% long term treasurys allocation / 90% stock in the accumulation phase but I also have a pension to fall back on and still not sure if 100% stocks would be better. (And of course I’m not really that high with an emergency fund and building up ibonds)

I’m not as certain that the first 20% in long term bonds is best if this was all the resources available for retirement based on wanting to have some safe money where the principal doesn’t drop. I’m more inclined to go with the stay short term advice of William Bernstein and would rather have, say, 70% stocks, 30% t bills rather than 50% stocks, 30% t bills, 20% long term treasurys but I’m interested in the debate.

I recently finished The Great Depression a diary by Benjamin Roth and he commented many times that only those who put their money in long term government bonds were safe during the depression and many of his clients (he was a lawyer) talked about wishing they put 1/2 their fortune into bonds rather than losing it all in stock declines. So there could come a time again when one wishes they had long term bonds.

I wonder if there is some interest rate at which it makes more sense to load up with 20% long term bonds based on comparison to historical interest rate levels. I suspect when that time comes no one will want to buy them, though. Let’s say inflation stays high for another couple years and there is continued raising of rates. If the 30 year treasury rate ends up going to 5% in 2 years and inflation rate stays high few will want to buy then thinking I’m still getting negative real returns even though that could be like the equivalent opportunity to buy a 30 year treasury in 1980.
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Re: First 20% of bonds in long-term Treasuries

Post by Morik »

With LTT you are buying future dollars at a known rate. If you want to use those dollars early, sure you don't know what the value is going to be.
For me I don't care about stability in accumulation; I have found I'm not bothered by drops.

The whole point of adding bonds to my portfolio (for me) is stability of future consumption, not stability of my portfolio value in the intervening time period.
I.e., stocks could have major & long lasting drops which would seriously impact my retirement. Adding LTTs adds a stable base of consumable dollars during the retirement consumption phase.
I am hedging against bad equity returns leading up to/during my retirement consumption phase.
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Re: First 20% of bonds in long-term Treasuries

Post by SantaClaraSurfer »

jeffyscott wrote: Tue May 24, 2022 9:15 am
SantaClaraSurfer wrote: Tue May 24, 2022 8:47 amThe fact is, I did not countenance that SCHQ would drop the way it has.
Why not?
I think the simplest answer is previous experience may have taught me a false lesson.

We opened a taxable account in 2018/19 and purchased SCHZ as our bond ballast component in that account.

We sold SCHZ and purchased equities in Feb and March of 2020, and it worked out well.

I was aware that the NAV of an LTT, or any another bond index fund, will drop when interest rates increase. But I also read and understood this tread indicating that SCHQ might be a better choice for us.

I was not experientially aware that equities could drop 20% and bonds could effectively drop MORE at the same time, and that there would not be any 'flight to safety' effect lifting bond index fund prices.

Note, I'm not arguing or trying to justify my actions, I'm trying to describe this so others can read, understand, and if relevant, learn from my experience and errors.
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Re: First 20% of bonds in long-term Treasuries

Post by muffins14 »

er999 wrote: Tue May 24, 2022 10:18 am I’m not as certain that the first 20% in long term bonds is best if this was all the resources available for retirement based on wanting to have some safe money where the principal doesn’t drop. I’m more inclined to go with the stay short term advice of William Bernstein and would rather have, say, 70% stocks, 30% t bills rather than 50% stocks, 30% t bills, 20% long term treasurys but I’m interested in the debate.
I still don't understand this point of view. If you have enough money to retire, you have like 25x-30x, and you expect to withdraw it over 25-40 years. Why would you want to get the minimum possible interest for 25-40 years rather than getting longer-term bonds? It's not like you are going to withdraw 25x expenses in year 1, you're going to withdraw 1x expenses, or around 3-4%

If you told me that your retirement strategy required you to withdraw 10x expenses or 25x expenses in year 1, I would be confused, but I would agree that was a good reason to avoid long-term bonds
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

SantaClaraSurfer wrote: Tue May 24, 2022 10:28 am Note, I'm not arguing or trying to justify my actions, I'm trying to describe this so others can read, understand, and if relevant, learn from my experience and errors.
There is a generation+ of investors who have been conditioned by aphorisms like "bonds are for safety" or "bonds are ballast", so I'm willing to bet you are not alone in your experience.

I'm not sure what "errors" you're referring to, though.

I will say that the very first bond fund that Jack Bogle every launched, back when he was still in charge of Wellington in 1973, was a long-term bond fund. He didn't launch a short-term bond fund until nearly a decade later, and that launch was marketed - in part - using this chart that makes the tradeoff between "stability of income" and "stability of principal" unavoidably explicit.

Image
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Re: First 20% of bonds in long-term Treasuries

Post by jeffyscott »

SantaClaraSurfer wrote: Tue May 24, 2022 10:28 am
jeffyscott wrote: Tue May 24, 2022 9:15 am
SantaClaraSurfer wrote: Tue May 24, 2022 8:47 amThe fact is, I did not countenance that SCHQ would drop the way it has.
Why not?
I think the simplest answer is previous experience may have taught me a false lesson.

We opened a taxable account in 2018/19 and purchased SCHZ as our bond ballast component in that account.

We sold SCHZ and purchased equities in Feb and March of 2020, and it worked out well.

I was aware that the NAV of an LTT, or any another bond index fund, will drop when interest rates increase. But I also read and understood this tread indicating that SCHQ might be a better choice for us.

I was not experientially aware that equities could drop 20% and bonds could effectively drop MORE at the same time, and that there would not be any 'flight to safety' effect lifting bond index fund prices.

Note, I'm not arguing or trying to justify my actions, I'm trying to describe this so others can read, understand, and if relevant, learn from my experience and errors.
Thanks for explaining.

At least now you can look at it as what you have in LTT is paying you nearly what your EEs held for exactly 20 years will.
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Re: First 20% of bonds in long-term Treasuries

Post by SantaClaraSurfer »

drumboy256 wrote: Tue May 24, 2022 9:34 am Those who are 100% equities or even those in the 80/20, 70/30 camp with LTT's feeling the pain of LTT's due to interest rate hikes--- All I would say, anecdotally is that this is normal. Even in this thread, having the first 20% in LTT's based on time horizon makes the most sense based on the risk profile of the investor.

I think the "Bonds as Ballast" statement is a false narrative. The statement reads:
"If I own Bonds, my retirement account won't go down"

Now, I'm not saying you're saying that, but I think that is what MOST people believe and they can't understand WTH their portfolios would go down if in fact, they owned bonds. Whereas if you have the statement: "Bonds as tailwind"

Bonds are meant to keep pushing you forward both seen and unseen independent of total market conditions of people's opinions on if "Bonds as a Ballast" actually means anything. Getting back to risk, the point here is that LTT help, not hinder total risk exposure of returns independent of interest rates, what Goldman Sachs or JP Morgan is doing with their hedge funds because you're relying on the time horizon to be that tailwind.

Selling LTT's at a loss (imo) is not worth the time or effort and if you are realizing you have a greater appetite for risk (meaning less LTT's as your overall bond %) then simply DCA into your IPS strategy to the assets that are NOT bonds. At the end of the day, the risk tolerance of the investor is what should guide them on if they do or do not want bonds in their portfolio--- LTT or otherwise. As of this writing, SCHQ is up over 2% :sharebeer
I appreciate your perspective, thank you. I feel that my SCHQ >>> SCHB rebalance trade will not be one that I regret much down the road, and as we are just starting our Taxable investing journey, the dollar totals and net cost basis loss are relatively small compared to many others here. (Fwiw, today's values are pretty much where I made the trade.)

Going forward, I think I will need to spell out rebalancing in our taxable accounts. We hold steady purchases of EE Bonds, I Bonds, and LT Muni Bonds that are not pencilled for rebalancing. We also passively auto-rebalance and glide path our 401(k)s, which is where a large swath of our retirement security lives. We see very clearly that our total balance in the 401(k)s has gone down or been level (despite new contributions), so that's not new or alarming.

The only area to work out is

-What bond fund(s) do we hold inside of Schwab? (Should we perhaps mix SCHQ/SCHZ?)
-What circumstances trigger a rebalance, if ever, in that account?

To use your quote framework, I would say that my mentality regarding bonds in Schwab had been "For the bonds we purchase in this taxable investing account, we sell them when equities hit a certain level."

I've learned that perspective needs more nuance.

Someday, five, ten, or fifteen years from now, I might be glad that I feathered into an SCHQ/SCHZ allocation in 2022 with clearer rebalancing rules and perhaps, as you mention, more of a DCA approach.
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Re: First 20% of bonds in long-term Treasuries

Post by er999 »

muffins14 wrote: Tue May 24, 2022 10:40 am
er999 wrote: Tue May 24, 2022 10:18 am I’m not as certain that the first 20% in long term bonds is best if this was all the resources available for retirement based on wanting to have some safe money where the principal doesn’t drop. I’m more inclined to go with the stay short term advice of William Bernstein and would rather have, say, 70% stocks, 30% t bills rather than 50% stocks, 30% t bills, 20% long term treasurys but I’m interested in the debate.
I still don't understand this point of view. If you have enough money to retire, you have like 25x-30x, and you expect to withdraw it over 25-40 years. Why would you want to get the minimum possible interest for 25-40 years rather than getting longer-term bonds? It's not like you are going to withdraw 25x expenses in year 1, you're going to withdraw 1x expenses, or around 3-4%

If you told me that your retirement strategy required you to withdraw 10x expenses or 25x expenses in year 1, I would be confused, but I would agree that was a good reason to avoid long-term bonds
Let’s say you have a million dollar portfolio, 70% stocks (likely too high stock percentage but just to illustrate the point), withdrawing 40,000 a year. If you have 30% t bills that is 7.5 years of expenses in safe money that you can withdraw even if stocks crash while waiting for the recovery.

Compared to a 20% long term treasuries (purchased with $200,000 last year) 30% t bills, 50% stocks you’d have a guaranteed $4000 a year x 30 year on your $200,000 in long term treasurys bought last year (although the value is now $160,000). So your 30% in safe t bills can last 8.3 years instead of 7.5 years. But you’ve given up the opportunity to earn more money on the $200,000 that could have been in stocks.

Current 30 year treasuries are close to 3% and a 5 year cd is paying 2.5%. You are taking a risk on the duration side if rates rise but only getting a very small extra payment (0.5%/year) so not sure if it is worth it.

To me the biggest benefit is the potential negative correlation with stocks with a rate cut In a recession. In the past this has led to a long term treasury rise (see 2008) but not sure if that is worth giving up the potential extra return of stocks over a decade. To me it’s worth trying for 10% while in the accumulation phase.
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Re: First 20% of bonds in long-term Treasuries

Post by muffins14 »

SantaClaraSurfer wrote: Tue May 24, 2022 11:50 am
The only area to work out is

-What bond fund(s) do we hold inside of Schwab? (Should we perhaps mix SCHQ/SCHZ?)
-What circumstances trigger a rebalance, if ever, in that account?
It will *usually* be more tax-efficient to hold your bonds in tax-advantaged, and *usually* more tax efficient to rebalance in your tax-advantaged accounts rather than buying/selling inside your taxable account if that is going to trigger capital gains.

There are some exceptions for the former when bond yields are very low and stock yields are high, depending on your tax bracket, and there are exceptions for the latter if you are doing some tax-loss harvesting that negates capital gains.
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Re: First 20% of bonds in long-term Treasuries

Post by muffins14 »

er999 wrote: Tue May 24, 2022 11:55 am
muffins14 wrote: Tue May 24, 2022 10:40 am
er999 wrote: Tue May 24, 2022 10:18 am I’m not as certain that the first 20% in long term bonds is best if this was all the resources available for retirement based on wanting to have some safe money where the principal doesn’t drop. I’m more inclined to go with the stay short term advice of William Bernstein and would rather have, say, 70% stocks, 30% t bills rather than 50% stocks, 30% t bills, 20% long term treasurys but I’m interested in the debate.
I still don't understand this point of view. If you have enough money to retire, you have like 25x-30x, and you expect to withdraw it over 25-40 years. Why would you want to get the minimum possible interest for 25-40 years rather than getting longer-term bonds? It's not like you are going to withdraw 25x expenses in year 1, you're going to withdraw 1x expenses, or around 3-4%

If you told me that your retirement strategy required you to withdraw 10x expenses or 25x expenses in year 1, I would be confused, but I would agree that was a good reason to avoid long-term bonds
Let’s say you have a million dollar portfolio, 70% stocks (likely too high stock percentage but just to illustrate the point), withdrawing 40,000 a year. If you have 30% t bills that is 7.5 years of expenses in safe money that you can withdraw even if stocks crash while waiting for the recovery.

Compared to a 20% long term treasuries (purchased with $200,000 last year) 30% t bills, 50% stocks you’d have a guaranteed $4000 a year x 30 year on your $200,000 in long term treasurys bought last year (although the value is now $160,000). So your 30% in safe t bills can last 8.3 years instead of 7.5 years. But you’ve given up the opportunity to earn more money on the $200,000 that could have been in stocks.

Current 30 year treasuries are close to 3% and a 5 year cd is paying 2.5%. You are taking a risk on the duration side if rates rise but only getting a very small extra payment (0.5%/year) so not sure if it is worth it.

To me the biggest benefit is the potential negative correlation with stocks with a rate cut In a recession. In the past this has led to a long term treasury rise (see 2008) but not sure if that is worth giving up the potential extra return of stocks over a decade. To me it’s worth trying for 10% while in the accumulation phase.
I don't think this is a reasonable comparison of the properties of bond durations -- you're sort of saying that short-term bonds are better because 70/30 has higher expected return (due to more equity exposure) than 50/50? I agree that the expected return is indeed higher, but I don't think that means that short-term bonds are good and long-term bonds are bad, it means more stocks has higher expected return than less stocks.

My main point was that you should care more about the long-term ability of your portfolio to provide income over 30-40 years of retirement, not the ability for the total asset value to remain unchanged from year-to-year. I think striving for the lowest bond volatility is not necessarily aligned with the best long-term outcomes. If stocks are down you don't need to pursue a strategy of "only spend the TBills", instead, you would likely be just fine with normal rebalancing bands and pulling out money in accordance with maintaining your AA. By keeping so much in TBills, your portfolio will likely be smaller over time than if you had been getting more income from longer-duration bonds, and that means something for your success.

In short, I'd rather my assets follow a slightly more wiggly line that went up and to the right than a straight line that was flat and never changed in value.
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Re: First 20% of bonds in long-term Treasuries

Post by SantaClaraSurfer »

vineviz wrote: Tue May 24, 2022 10:47 am
SantaClaraSurfer wrote: Tue May 24, 2022 10:28 am Note, I'm not arguing or trying to justify my actions, I'm trying to describe this so others can read, understand, and if relevant, learn from my experience and errors.
There is a generation+ of investors who have been conditioned by aphorisms like "bonds are for safety" or "bonds are ballast", so I'm willing to bet you are not alone in your experience.
Thank you for your perspective and for creating this thread. Bonds are ballast is a very frequent refrain here.

For clarity, I am currently 18% VLGSX (Long Term Treasuries) and 4% VBTLX (US Total Bond, mostly) in my 401(k) (set to auto-rebalance.)

Over time, I will gradually increase the VBTLX percentage, and add TIPS, eventually, while reducing US and Int'l equities.

My RMD date will fall vicinity 2042/3. My wife's RMDs a decade later. So I think that makes sense.

I am now thinking that for taxable, it might be smart for me to adopt a similar approach, or even shorten the duration given the above.

-DCA into something like 12% SCHQ / 8% SCHZ instead of 20% SCHQ
-Set clearer rules for Rebalancing (or maybe just choose to mostly DCA?)

Most of the long term fixed income in our taxable portfolio is in the form of EE Bonds, I Bonds and CA LT Munis, which, at least for now, we don't intend to consider for rebalancing. So the question for us may be, given those long term Fixed Income commitments, maybe the use of 100% SCHQ to partner our taxable equities is too much and too long of a duration for that application.
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

er999 wrote: Tue May 24, 2022 11:55 am
Current 30 year treasuries are close to 3% and a 5 year cd is paying 2.5%. You are taking a risk on the duration side if rates rise but only getting a very small extra payment (0.5%/year) so not sure if it is worth it.
To be clear, if we're taking about a typical retirement the risk is with the CD not with the Treasury in this example.

The Treasury is certain to pay that 3% for the entire 30-year period. After 5 years we have no idea what the yield on new CDs will be.
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