Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

Interesting long-term chart, although it's missing the financing rates. Never hurts to remind oneself that interest rates are still near 60-year bottoms.

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comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

comeinvest wrote: Fri Feb 24, 2023 1:06 pm
skierincolorado wrote: Fri Feb 24, 2023 12:32 pm
comeinvest wrote: Fri Feb 24, 2023 11:11 am /ZF and /ZN implied financing cost dropped today by ca. 0.1% p.a. compared to yesterday for the next 3-4 months, if my math is right. Unfortunately I bought the calendar rolls yesterday.
All the while the Dec 2022 and the Mar 2023 SOFR which cover the period of the next 4 months, stayed almost unchanged or slightly dropped indicating unchanged or slightly increasing interest rates.
I have a hard time reconciling this, or is my logic wrong?
The directions of the entire movements over the last 2 weeks are even more in conflict, or not?

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I don't think the spread is really the same as the implied financing right? They're different securities. The June contract probably has a longer dated maturity. The roll price would decrease when the 0-4 year spread flattens. Which is what we've been seeing this month and today. The part of the curve that the June contract includes went up in rates more. So the June contract will decrease in price, and make the roll cheaper.
The CTD of the March 2023 /ZN contract matures 10/31/2029. The CTD of the June 2023 /ZN contract matures 12/31/2029. https://www.cmegroup.com/tools-informat ... ytics.html That's a 2 months difference in almost 7 years. That wouldn't move the needle, right? The rest of the calendar roll price is the implied financing cost over the next 3 months, right?
The 7y treasury yield to maturity is ca. 4.1%. The forward rate for 4Q 2029 is ca. 3.6%.

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But we don't have to speculate. The two underlying CTDs moved by almost exactly the same amount today, making me believe that we had a change in implied financing cost of ca. 0.1% in just one day:

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If unemployed physicist was still here, he could provide the absolute implied financing cost :)

The two CTDs over the last 2 weeks: (IB has an option to create a chart of yields, but it looks like I don't have the required data permissions.)

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comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

The effects of varying short-term policy expectations on various maturities:

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Chocolatebar
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Chocolatebar »

After working with Fidelity I found out that I actually can leverage my 401k by using a BrokerageLink account. This means that I can now leverage ~32% of my portfolio (~52k) ~1.4x.

Since I always want less leverage in my taxable (preferably none at all once my tax-advantaged accounts are big enough), I'm wondering if I should consider using portfolio margin instead of LETFs. The current margin rates in M1 are 6.5%, which I think is too high. Ultimately, I like the idea of having my taxable unleveraged and being able to take out margin loans for investments outside of my taxable, but for now since I need a little bit to maintain overall leverage ~1.25-1.5x, I'm trying to determine whether the leverage is cheaper from margin or LETFs. They each have their pros and cons. I like that the leverage in my taxable would be more diversified if I used margin, but I wouldn't be able to adjust my leverage well as the market moves to maintain my AA. For that reason, I'm leaning towards sticking with my original plan. What I can't quite figure out is - at what point is regular margin worth considering over LETFs for small amounts of leverage (<1.25x)?
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

Chocolatebar wrote: Thu Mar 02, 2023 4:42 pm After working with Fidelity I found out that I actually can leverage my 401k by using a BrokerageLink account. This means that I can now leverage ~32% of my portfolio (~52k) ~1.4x.

Since I always want less leverage in my taxable (preferably none at all once my tax-advantaged accounts are big enough), I'm wondering if I should consider using portfolio margin instead of LETFs. The current margin rates in M1 are 6.5%, which I think is too high. Ultimately, I like the idea of having my taxable unleveraged and being able to take out margin loans for investments outside of my taxable, but for now since I need a little bit to maintain overall leverage ~1.25-1.5x, I'm trying to determine whether the leverage is cheaper from margin or LETFs. They each have their pros and cons. I like that the leverage in my taxable would be more diversified if I used margin, but I wouldn't be able to adjust my leverage well as the market moves to maintain my AA. For that reason, I'm leaning towards sticking with my original plan. What I can't quite figure out is - at what point is regular margin worth considering over LETFs for small amounts of leverage (<1.25x)?
I didn't follow the entire conversation between you and skier, but I had similar thoughts of leaving the taxable largely unleveraged so I can take out loans in lieu of mortgages for opportunistic real estate or something; but finally decided it's much less hassle to leverage all accounts about equally, where possible. Otherwise you would have to do some complex de-leveraging in one account and start leveraging a previously non-leveraged account, when a sharp market downturn actually occurs.
Also, if you have IRAs or 401k's "over-" leveraged to compensate for little or no leverage in taxable, and the market occasionally does have deep drawdowns that need deleveraging in the more leveraged accounts, then I think you would have effectively "drained" equity from the tax-advantaged accounts, and you would have inadvertently "virtually teleported" equity from tax-advantaged into taxable, after the markets recovered and all is said and done. I haven't thought through all of this, but in any case it would be too stressful for me, and it may have unintended consequences.
Topic Author
skierincolorado
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

Chocolatebar wrote: Thu Mar 02, 2023 4:42 pm After working with Fidelity I found out that I actually can leverage my 401k by using a BrokerageLink account. This means that I can now leverage ~32% of my portfolio (~52k) ~1.4x.

Since I always want less leverage in my taxable (preferably none at all once my tax-advantaged accounts are big enough), I'm wondering if I should consider using portfolio margin instead of LETFs. The current margin rates in M1 are 6.5%, which I think is too high. Ultimately, I like the idea of having my taxable unleveraged and being able to take out margin loans for investments outside of my taxable, but for now since I need a little bit to maintain overall leverage ~1.25-1.5x, I'm trying to determine whether the leverage is cheaper from margin or LETFs. They each have their pros and cons. I like that the leverage in my taxable would be more diversified if I used margin, but I wouldn't be able to adjust my leverage well as the market moves to maintain my AA. For that reason, I'm leaning towards sticking with my original plan. What I can't quite figure out is - at what point is regular margin worth considering over LETFs for small amounts of leverage (<1.25x)?
The implied financing rate in LETFs should always be lower than a margin loan. 1.5% lower in your case. So I would pick LETF.
Chocolatebar
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Chocolatebar »

comeinvest wrote: Thu Mar 02, 2023 8:25 pm
Chocolatebar wrote: Thu Mar 02, 2023 4:42 pm After working with Fidelity I found out that I actually can leverage my 401k by using a BrokerageLink account. This means that I can now leverage ~32% of my portfolio (~52k) ~1.4x.

Since I always want less leverage in my taxable (preferably none at all once my tax-advantaged accounts are big enough), I'm wondering if I should consider using portfolio margin instead of LETFs. The current margin rates in M1 are 6.5%, which I think is too high. Ultimately, I like the idea of having my taxable unleveraged and being able to take out margin loans for investments outside of my taxable, but for now since I need a little bit to maintain overall leverage ~1.25-1.5x, I'm trying to determine whether the leverage is cheaper from margin or LETFs. They each have their pros and cons. I like that the leverage in my taxable would be more diversified if I used margin, but I wouldn't be able to adjust my leverage well as the market moves to maintain my AA. For that reason, I'm leaning towards sticking with my original plan. What I can't quite figure out is - at what point is regular margin worth considering over LETFs for small amounts of leverage (<1.25x)?
I didn't follow the entire conversation between you and skier, but I had similar thoughts of leaving the taxable largely unleveraged so I can take out loans in lieu of mortgages for opportunistic real estate or something; but finally decided it's much less hassle to leverage all accounts about equally, where possible. Otherwise you would have to do some complex de-leveraging in one account and start leveraging a previously non-leveraged account, when a sharp market downturn actually occurs.
Also, if you have IRAs or 401k's "over-" leveraged to compensate for little or no leverage in taxable, and the market occasionally does have deep drawdowns that need deleveraging in the more leveraged accounts, then I think you would have effectively "drained" equity from the tax-advantaged accounts, and you would have inadvertently "virtually teleported" equity from tax-advantaged into taxable, after the markets recovered and all is said and done. I haven't thought through all of this, but in any case it would be too stressful for me, and it may have unintended consequences.
My thinking is a little different, but feel free to be blunt and just say it's dumb haha. I think of it as letting my taxable determine what my leverage ratio is. Ultimately, I want to be ~1.5, but because I have twice as much in my taxable account, I'm fine with running less until my tax-advantaged accounts catch up (they should eventually now since my 401k is included). I want my taxable to mostly hold international stocks and value small caps to diversify my portfolio (basically make sure my entire portfolio is ~70/30). Then, the additional space in my taxable can be leveraged, and I'll leverage my tax-advantaged ones a little more.

I don't see a a huge problem with this since I can add leverage to each account as the market declines (up to 2x). Worst case scenario all 3 accounts eventually get to that point then when we recover what you described will probably happen, but then I would just deleverage my taxable faster than my 401k+roth accounts to compensate.

I guess my main hesitation to run the same allocations across all three goes back to trying to be tax efficient, but also leaving the taxable available for margin loans to invest in real estate or some other opportunity I decide I want to pursue in the future. I am wondering if for now though it would be best to just run the same allocations across each one since it would be significantly less work for me to manage. I don't mind having to recalc and adjust allocations every couple months, but perhaps I should just not worry about being tax efficient until my taxable is my smallest account. I also won't be using margin to buy my first house anyway (whenever that happens), so margin isn't even an option in the short-term.
Last edited by Chocolatebar on Fri Mar 03, 2023 7:24 am, edited 4 times in total.
Chocolatebar
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Chocolatebar »

skierincolorado wrote: Fri Mar 03, 2023 1:12 am
Chocolatebar wrote: Thu Mar 02, 2023 4:42 pm After working with Fidelity I found out that I actually can leverage my 401k by using a BrokerageLink account. This means that I can now leverage ~32% of my portfolio (~52k) ~1.4x.

Since I always want less leverage in my taxable (preferably none at all once my tax-advantaged accounts are big enough), I'm wondering if I should consider using portfolio margin instead of LETFs. The current margin rates in M1 are 6.5%, which I think is too high. Ultimately, I like the idea of having my taxable unleveraged and being able to take out margin loans for investments outside of my taxable, but for now since I need a little bit to maintain overall leverage ~1.25-1.5x, I'm trying to determine whether the leverage is cheaper from margin or LETFs. They each have their pros and cons. I like that the leverage in my taxable would be more diversified if I used margin, but I wouldn't be able to adjust my leverage well as the market moves to maintain my AA. For that reason, I'm leaning towards sticking with my original plan. What I can't quite figure out is - at what point is regular margin worth considering over LETFs for small amounts of leverage (<1.25x)?
The implied financing rate in LETFs should always be lower than a margin loan. 1.5% lower in your case. So I would pick LETF.
Thanks - that's good to know!
Topic Author
skierincolorado
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Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

Just learned something j think is significant. Comeinvest previously pointed out that midcap futures have lower implied financing. I wasn't sure if this was a persistent feature or why this would be true. But I found this explanation today:

https://www.cmegroup.com/education/arti ... -etfs.html

If you scroll to halfway it explains that because the Russell 2000 is hard to short the companies it contains, the easiest way to short those companies is to hold the future contract short. This leads to a supply demand imbalance and persistently low implied financing for the long holder. Looking at today it appears the implied financing is about 0.2% less than MES. I will monitor the next few days as the pace or the roll increases. Right now the roll has barely begun for Russell 2000 so the edge over MES may grow in the next few days. The above CME analysis pegs it at

https://www.cmegroup.com/trading/equity ... /main.html

I plan to not only buy Russell 2000 and s&p400 midcap futures, but will likely significantly overweight them given the .2% risk free edge they have over MES.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

skierincolorado wrote: Fri Mar 03, 2023 11:32 am Just learned something j think is significant. Comeinvest previously pointed out that midcap futures have lower implied financing. I wasn't sure if this was a persistent feature or why this would be true. But I found this explanation today:

https://www.cmegroup.com/education/arti ... -etfs.html

If you scroll to halfway it explains that because the Russell 2000 is hard to short the companies it contains, the easiest way to short those companies is to hold the future contract short. This leads to a supply demand imbalance and persistently low implied financing for the long holder. Looking at today it appears the implied financing is about 0.2% less than MES. I will monitor the next few days as the pace or the roll increases. Right now the roll has barely begun for Russell 2000 so the edge over MES may grow in the next few days. The above CME analysis pegs it at

https://www.cmegroup.com/trading/equity ... /main.html

I plan to not only buy Russell 2000 and s&p400 midcap futures, but will likely significantly overweight them given the .2% risk free edge they have over MES.
Another explanation that I heard is that the counterparties hedging their short Russell 2000 futures exposure buy the Russell 2000 stocks, and earn the borrow fees by lending part of their stock portfolio. In other words, the securities lending income should be considered along with the dividend income for futures fair value calculation. However, I checked the securities lending income of a few midcap and smallcap ETFs, and found that it is much smaller than the difference between /ES, /EMD and /RTY implied financing cost. So either the ETFs are not very efficient in lending portfolio securities, or this is not a full explanation. I'm also not sure if your explanation would explain such a large difference; but it is what it is.

I observed a difference of about 0.4% in financing cost between /ES on the one hand and /EMD and /RTY on the other hand the last few calendar rolls.

I observed that /EMD and /RTY have about equal implied financing cost. But /EMD shines, while /RTY sucks. Do some reading on seekingalpha or elsewhere. You don't want to invest in the Russell 2000 index. It's a lousy index with serious structural issues, consistently underperforming similar S&P and other small cap indexes.

Be aware however that an /EMD contract is worth about $265k currently, and there is no micro version. /EMD also has a tiny bit wider bid/ask spreads than /ES of course; but it's negligible compared to the difference in financing cost, and the calendar rolls are very efficient. So stick to it once you buy it.

I personally implemented my U.S. equities exposure with long /EMD and short /MES and /RTY to get to my target allocation. /EMD has a slight value tilt which /RTY has not, so with the trio +EMD-MES-RTY I get a factor exposure for a negative fee i.e. I get paid for it (hard to beat that). I hit the jackpot last quarter when the big tech bubble reversed; but in the long run the S&P midcap 400 and S&P 500 track each other quite accurately, and have similar risk-adjusted return characteristics. The midcap index is arguably more diversified.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

/ES roll spread to 3M SOFR is currently ca. 0.35%; /RTY spread to 3M SOFR is ca. 0.1%.

For comparison, my recent June expiration SPX options boxes were filled at 0.05% above Term SOFR and 0.2% above T-bills.

I'm not sure if the current Term SOFR to T-bill spread is normal. LIBOR was replaced, and I'm not sure if Term SOFR is more like LIBOR or more like T-bills.
Topic Author
skierincolorado
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

comeinvest wrote: Fri Mar 03, 2023 1:58 pm
skierincolorado wrote: Fri Mar 03, 2023 11:32 am Just learned something j think is significant. Comeinvest previously pointed out that midcap futures have lower implied financing. I wasn't sure if this was a persistent feature or why this would be true. But I found this explanation today:

https://www.cmegroup.com/education/arti ... -etfs.html

If you scroll to halfway it explains that because the Russell 2000 is hard to short the companies it contains, the easiest way to short those companies is to hold the future contract short. This leads to a supply demand imbalance and persistently low implied financing for the long holder. Looking at today it appears the implied financing is about 0.2% less than MES. I will monitor the next few days as the pace or the roll increases. Right now the roll has barely begun for Russell 2000 so the edge over MES may grow in the next few days. The above CME analysis pegs it at

https://www.cmegroup.com/trading/equity ... /main.html

I plan to not only buy Russell 2000 and s&p400 midcap futures, but will likely significantly overweight them given the .2% risk free edge they have over MES.
Another explanation that I heard is that the counterparties hedging their short Russell 2000 futures exposure buy the Russell 2000 stocks, and earn the borrow fees by lending part of their stock portfolio. In other words, the securities lending income should be considered along with the dividend income for futures fair value calculation. However, I checked the securities lending income of a few midcap and smallcap ETFs, and found that it is much smaller than the difference between /ES, /EMD and /RTY implied financing cost. So either the ETFs are not very efficient in lending portfolio securities, or this is not a full explanation. I'm also not sure if your explanation would explain such a large difference; but it is what it is.

I observed a difference of about 0.4% in financing cost between /ES on the one hand and /EMD and /RTY on the other hand the last few calendar rolls.

I observed that /EMD and /RTY have about equal implied financing cost. But /EMD shines, while /RTY sucks. Do some reading on seekingalpha or elsewhere. You don't want to invest in the Russell 2000 index. It's a lousy index with serious structural issues, consistently underperforming similar S&P and other small cap indexes.

Be aware however that an /EMD contract is worth about $265k currently, and there is no micro version. /EMD also has a tiny bit wider bid/ask spreads than /ES of course; but it's negligible compared to the difference in financing cost, and the calendar rolls are very efficient. So stick to it once you buy it.

I personally implemented my U.S. equities exposure with long /EMD and short /MES and /RTY to get to my target allocation. /EMD has a slight value tilt which /RTY has not, so with the trio +EMD-MES-RTY I get a factor exposure for a negative fee i.e. I get paid for it (hard to beat that). I hit the jackpot last quarter when the big tech bubble reversed; but in the long run the S&P midcap 400 and S&P 500 track each other quite accurately, and have similar risk-adjusted return characteristics. The midcap index is arguably more diversified.
Yeah I should have mentioned the jssues with Russell 2000. I was considering owning just 1 and going mostly emd, but you're probably right that going all emd is better.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

A chart copied from an SA article https://seekingalpha.com/article/458421 ... be-bullish
Another article points out the relation between commodities and treasuries, and the risk of the fed increasing the inflation target: https://seekingalpha.com/article/458403 ... steepening
I think an increase in the fed target rate would be a one-time benefit to the government, and at the same time they would lose their credibility and increase their future cost of debt forever. But what does my opinion count.

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Last edited by comeinvest on Sun Mar 05, 2023 9:56 pm, edited 1 time in total.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

The paper "The Rate of Return on Everything, 1870–2015" has some interesting information pertinent to mHFEA, in particular a comparison of the nature of risky and risk-free returns. https://economics.harvard.edu/files/eco ... s28533.pdf
Three striking features of Figure X deserve comment. First, low real rates and, in fact, negative real rates have been relatively common during modern financial history. Second, for the most part, returns to long-term and short-term safe assets have tracked each other very closely—with a premium of about 1% that has widened considerably since the well-documented decline of the mid-1980s (see, e.g., Holston, Laubach, and Williams, 2017). Third, a major stylized fact leaps out once we compare the safe rates of return in Figure X to the risky rates of return in Figure VII above. Prior to WW2, real returns on housing, safe assets, and equities followed remarkably similar trajectories. After WW2 this was no longer the case.

Safe rates are far from stable in the medium-term. There is enormous time-series, as well as cross-country, variability. In fact, real safe rates appear to be as volatile as real risky rates (sometimes more volatile), a topic we return to in the next section. Considerable variation in the risk premium often comes from sharp changes in safe real returns, not from real returns on risky assets. Two four-decade-long declines in real rates stand out: (1) from 1870 to WW1 (with a subsequent further collapse during the war); and (2) the well-documented decline that started in the mid-1980s. We could add to this list the briefer, albeit more dramatic decline that followed the Great Depression into WW2. Some observers have therefore interpreted the recent downward trend in safe rates as a sign of a new era of “secular stagnation” (see, e.g., Summers, 2014). However, in contrast to 1870–1913 and the 1930s, the more recent decline is characterized by a much higher term premium—a feature with few precedents in our sample.44 There are other periods in which real rates remained low, such as in the 1960s. They were pushed below zero, particularly for the longer tenor bonds, during the 1970s inflation spike, although here too term premiums remained relatively tight. Returns also dipped dramatically during both world wars. This is perhaps to be expected: demand for safe assets spikes during disasters although the dip may also reflect periods of financial repression and high inflation that usually emerge during times of conflict, and which often persist into peacetime. Thus, from a broad historical perspective, high rates of return on safe assets and high term premiums are more the exception than the rule.

Both risky and safe returns were high during the 19th century but had been gradually declining in the run up to WW1, after which they declined sharply, as is to be expected. After the war, returns were recovering during the 1920s. From 1930 onwards, the risky return stayed high and relatively stable, whereas the safe return dropped sharply and remained low until the late 1970s, before increasing and falling back again during the past three decades. These findings have implications for current debates around secular stagnation and the pricing, or mis-pricing, of risk.

Secular stagnation is associated with low rates of return, driven by an excess of savings or a general unwillingness to borrow and invest. These in turn reflect a variety of potential factors, including: (1) lower rates of productivity growth; (2) lower fertility and mortality rates; (3) a decline in the relative price of investment goods; (4) greater firm level market power; and (5) higher income inequality (Eggertsson, Mehrotra, and Robbins, 2017; Rachel and Smith, 2015; Thwaites, 2015). Indeed, we can see that the safe return fell sharply during the 1930s, when Hansen (1939) originally proposed the secular stagnation hypothesis. That time also coincided with a demographic bust and was preceded by a big rise in income inequality in the run-up to the Great Depression. The safe return has been falling again since the mid-1980s as many have noted.46 Understandably, this has led some observers to suggest that advanced economies are again in danger of entering secular stagnation, e.g., Summers (2014), and Eggertsson and Mehrotra (2014).

But the picture changes radically when we consider the trend in risky returns in addition to safe returns. Unlike safe returns, risky returns have remained high and broadly stable through the best part of the last 100 years, and show little sign of a secular decline. Turning back to the trend for safe assets, even though the safe return has declined recently, much as it did at the start of our sample, it remains close to its historical average. These two observations call into question whether secular stagnation is quite with us. The high and stable risky return coupled with falling safe rates could also be consistent with the notion of a “safety trap” brought about by the relative shortage of safe assets (Caballero and Farhi, 2017). However with risk premiums still not far off their historical averages, the evidence for a safety trap is thus far also not clear-cut.
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Chocolatebar
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Chocolatebar »

I know followers implementing this kind of strategy with futures and box spreads probably won't care, but figured I'd share the portfolio allocations I settled on using LETFs for the sake of closure.

tax-adv
UPRO 33
AVUV 29
VEA 8
AVDV 8
VWO 8
AVES 8
TYD 6

128/32/18 us/int/bnd | 80/20 us/int | 90/10 stock/bond | ER .5% | 1.6x equity leverage

taxable
UPRO 17
AVUV 26
VEA 13
AVDV 13
VWO 13
AVES 13
TYD 5

77/52/15 us/int/bnd | 60/40 us/int | 90/10 stock/bond | ER .38% | 1.29x equity leverage

total (approx)
UPRO 22
AVUV 27
VEA 11.4
AVDV 11.4
VWO 11.4
AVES 11.4
TYD 5.3

93.5/45.5/16 us/int/bnd | 70/30 (target) us/int | 90/10 stock/bond | ER .42% | 1.39x equity leverage

I settled on running very similar allocations in every account, but decided to roll with 80/20 us/int in tax-adv for now and run a little more leverage. My logic for 90/10 stock/bonds is basically that since the market is currently down, I don't need as many bonds, so can trade that for some leverage as I normally would. I think once we reach all time highs again I'll consider aiming for at least 80/20 (maybe more in tax-adv) to reload for future downturns. Over time I expect my portfolio to trade leverage for bonds as my net worth increases. Ultimately, my overall target for us/int is 70/30. If the markets continue to decline, my plan is to trade bonds for leverage, then international for leverage, then just rebalance through to follow Lifecycle Investing until we see ATH again.

NOTE - I looked at NTSI and NTSE to see if they would be cheaper substitutes for VEA, VWO, and TYD, but they aren't even close. I plan on trading TYD for TYA once it reaches 50 AUM.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

Chocolatebar wrote: Mon Mar 06, 2023 2:41 pm I know followers implementing this kind of strategy with futures and box spreads probably won't care, but figured I'd share the portfolio allocations I settled on using LETFs for the sake of closure.

tax-adv
UPRO 33
AVUV 29
VEA 8
AVDV 8
VWO 8
AVES 8
TYD 6

128/32/18 us/int/bnd | 80/20 us/int | 90/10 stock/bond | ER .5% | 1.6x equity leverage

taxable
UPRO 17
AVUV 26
VEA 13
AVDV 13
VWO 13
AVES 13
TYD 5

77/52/15 us/int/bnd | 60/40 us/int | 90/10 stock/bond | ER .38% | 1.29x equity leverage

total (approx)
UPRO 22
AVUV 27
VEA 11.4
AVDV 11.4
VWO 11.4
AVES 11.4
TYD 5.3

93.5/45.5/16 us/int/bnd | 70/30 (target) us/int | 90/10 stock/bond | ER .42% | 1.39x equity leverage

I settled on running very similar allocations in every account, but decided to roll with 80/20 us/int in tax-adv for now and run a little more leverage. My logic for 90/10 stock/bonds is basically that since the market is currently down, I don't need as many bonds, so can trade that for some leverage as I normally would. I think once we reach all time highs again I'll consider aiming for at least 80/20 (maybe more in tax-adv) to reload for future downturns. Over time I expect my portfolio to trade leverage for bonds as my net worth increases. Ultimately, my overall target for us/int is 70/30. If the markets continue to decline, my plan is to trade bonds for leverage, then international for leverage, then just rebalance through to follow Lifecycle Investing until we see ATH again.

NOTE - I looked at NTSI and NTSE to see if they would be cheaper substitutes for VEA, VWO, and TYD, but they aren't even close. I plan on trading TYD for TYA once it reaches 50 AUM.
I didn't follow this entire conversation, but it looks quite nice, and thanks for sharing; I think you will do very well in the long run. I would probably go a similar route if I didn't use futures and options.
Be aware that when the stock market reaches new all-time highs, it might coincide with a time when treasury yields are lower too, for theoretical reasons. So I would consider not market-timing the stocks:bonds ratio in this way.
I would also have somewhat more international, but that's a personal decision; your ratio is good. I also have only individual stocks that sample the indexes, and no ETFs, in the taxable account, for better tax efficiency and as I want to avoid headaches in retirement with international taxation, and also I don't want to be locked for the rest of my life into any specific ETF product (which effectively happens in taxable over time as the unrealized gains increase).
I have one account (my HSA - health savings account) that I can't leverage with futures or options. I currently put the high beta (but not traditional "growth") stocks and ETFs (AVUV, KKR, APO, DGS, AVES) into it, so save fees but still have indirect leverage. But it's a small amount of my total assets. If it was larger, I would go a similar route as you do.
comeinvest
Posts: 2669
Joined: Mon Mar 12, 2012 6:57 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

Today's treasuries movements

Image
Chocolatebar
Posts: 192
Joined: Tue Feb 14, 2023 10:58 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Chocolatebar »

comeinvest wrote: Mon Mar 06, 2023 6:08 pm I didn't follow this entire conversation, but it looks quite nice, and thanks for sharing; I think you will do very well in the long run. I would probably go a similar route if I didn't use futures and options.
Yeah one of my goals this year is to learn how to use futures and options to see if it's for me. Oh - and actually read Lifecycle Investing lol. What's up with it being 50 bucks on Amazon?!?
comeinvest wrote: Mon Mar 06, 2023 6:08 pm Be aware that when the stock market reaches new all-time highs, it might coincide with a time when treasury yields are lower too, for theoretical reasons. So I would consider not market-timing the stocks:bonds ratio in this way.
So, this is an interesting point. First, I don't quite consider my approach to be "market-timing". In my opinion, bonds only serve as a parachute in the event of a market crash. Once a crash or correction has happened, bonds have already done their job right? Doesn't it make sense to ditch them for as many stocks as possible (up to 2x), assuming we sell off the bonds strategically with predetermined bands (like sell 5% every 10% portfolio loss or something like that). Then we're basically betting on a market recovery to ATH, something that has happened after every crash?

It could be argued that this is timing the market. It's probably as close as one should ever get to doing so. I like to think of it as "reading the room" though. Also, I think if we do get to ATH and interest rates are still high, LTT might be more attractive than ITT, but we probably won't have to worry about that for a bit.
comeinvest wrote: Mon Mar 06, 2023 6:08 pm I would also have somewhat more international, but that's a personal decision; your ratio is good. I also have only individual stocks that sample the indexes, and no ETFs, in the taxable account, for better tax efficiency and as I want to avoid headaches in retirement with international taxation, and also I don't want to be locked for the rest of my life into any specific ETF product (which effectively happens in taxable over time as the unrealized gains increase).
I actually expected people to say I have too much international haha. Glad you agree! What ratio do you prefer? 60/40?

I really really want to be as tax efficient as possible while deploying leverage. My problem is that my taxable is so much larger than my tax-adv ones. You can tell I'm trying to be by going more international heavy in the taxable and leverage/us heavy in the tax-adv (eventually bonds too), but if you see an improvement that can be made please let me know!
comeinvest wrote: Mon Mar 06, 2023 6:08 pm I have one account (my HSA - health savings account) that I can't leverage with futures or options. I currently put the high beta (but not traditional "growth") stocks and ETFs (AVUV, KKR, APO, DGS, AVES) into it, so save fees but still have indirect leverage. But it's a small amount of my total assets. If it was larger, I would go a similar route as you do.
Yeah, eventually I hope to be able to throw my HSA into the equation too, but have had too many medical expenses unfortunately.
Topic Author
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

Chocolatebar wrote: Mon Mar 06, 2023 2:41 pm I know followers implementing this kind of strategy with futures and box spreads probably won't care, but figured I'd share the portfolio allocations I settled on using LETFs for the sake of closure.

tax-adv
UPRO 33
AVUV 29
VEA 8
AVDV 8
VWO 8
AVES 8
TYD 6

128/32/18 us/int/bnd | 80/20 us/int | 90/10 stock/bond | ER .5% | 1.6x equity leverage

taxable
UPRO 17
AVUV 26
VEA 13
AVDV 13
VWO 13
AVES 13
TYD 5

77/52/15 us/int/bnd | 60/40 us/int | 90/10 stock/bond | ER .38% | 1.29x equity leverage

total (approx)
UPRO 22
AVUV 27
VEA 11.4
AVDV 11.4
VWO 11.4
AVES 11.4
TYD 5.3

93.5/45.5/16 us/int/bnd | 70/30 (target) us/int | 90/10 stock/bond | ER .42% | 1.39x equity leverage

I settled on running very similar allocations in every account, but decided to roll with 80/20 us/int in tax-adv for now and run a little more leverage. My logic for 90/10 stock/bonds is basically that since the market is currently down, I don't need as many bonds, so can trade that for some leverage as I normally would. I think once we reach all time highs again I'll consider aiming for at least 80/20 (maybe more in tax-adv) to reload for future downturns. Over time I expect my portfolio to trade leverage for bonds as my net worth increases. Ultimately, my overall target for us/int is 70/30. If the markets continue to decline, my plan is to trade bonds for leverage, then international for leverage, then just rebalance through to follow Lifecycle Investing until we see ATH again.

NOTE - I looked at NTSI and NTSE to see if they would be cheaper substitutes for VEA, VWO, and TYD, but they aren't even close. I plan on trading TYD for TYA once it reaches 50 AUM.
The excess yield (ECY) of stocks over bonds is at ATL arguably making stocks expensive and bonds cheap. Never before have we seen 30y yield so high and PE so high at the same time. Either stock valuations will fall or bond prices will go up (or we've entered a new paradigm where stock returns are only marginally better than bond returns). I'd call what you're doing market timing.
Chocolatebar
Posts: 192
Joined: Tue Feb 14, 2023 10:58 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Chocolatebar »

skierincolorado wrote: Mon Mar 06, 2023 7:15 pm
Chocolatebar wrote: Mon Mar 06, 2023 2:41 pm I know followers implementing this kind of strategy with futures and box spreads probably won't care, but figured I'd share the portfolio allocations I settled on using LETFs for the sake of closure.

tax-adv
UPRO 33
AVUV 29
VEA 8
AVDV 8
VWO 8
AVES 8
TYD 6

128/32/18 us/int/bnd | 80/20 us/int | 90/10 stock/bond | ER .5% | 1.6x equity leverage

taxable
UPRO 17
AVUV 26
VEA 13
AVDV 13
VWO 13
AVES 13
TYD 5

77/52/15 us/int/bnd | 60/40 us/int | 90/10 stock/bond | ER .38% | 1.29x equity leverage

total (approx)
UPRO 22
AVUV 27
VEA 11.4
AVDV 11.4
VWO 11.4
AVES 11.4
TYD 5.3

93.5/45.5/16 us/int/bnd | 70/30 (target) us/int | 90/10 stock/bond | ER .42% | 1.39x equity leverage

I settled on running very similar allocations in every account, but decided to roll with 80/20 us/int in tax-adv for now and run a little more leverage. My logic for 90/10 stock/bonds is basically that since the market is currently down, I don't need as many bonds, so can trade that for some leverage as I normally would. I think once we reach all time highs again I'll consider aiming for at least 80/20 (maybe more in tax-adv) to reload for future downturns. Over time I expect my portfolio to trade leverage for bonds as my net worth increases. Ultimately, my overall target for us/int is 70/30. If the markets continue to decline, my plan is to trade bonds for leverage, then international for leverage, then just rebalance through to follow Lifecycle Investing until we see ATH again.

NOTE - I looked at NTSI and NTSE to see if they would be cheaper substitutes for VEA, VWO, and TYD, but they aren't even close. I plan on trading TYD for TYA once it reaches 50 AUM.
The excess yield (ECY) of stocks over bonds is at ATL arguably making stocks expensive and bonds cheap. Never before have we seen 30y yield so high and PE so high at the same time. Either stock valuations will fall or bond prices will go up (or we've entered a new paradigm where stock returns are only marginally better than bond returns). I'd call what you're doing market timing.
Didn't you suggest selling bonds to buy more stocks to maintain leverage?
comeinvest
Posts: 2669
Joined: Mon Mar 12, 2012 6:57 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

Chocolatebar wrote: Mon Mar 06, 2023 6:51 pm
comeinvest wrote: Mon Mar 06, 2023 6:08 pm Be aware that when the stock market reaches new all-time highs, it might coincide with a time when treasury yields are lower too, for theoretical reasons. So I would consider not market-timing the stocks:bonds ratio in this way.
So, this is an interesting point. First, I don't quite consider my approach to be "market-timing". In my opinion, bonds only serve as a parachute in the event of a market crash. Once a crash or correction has happened, bonds have already done their job right? Doesn't it make sense to ditch them for as many stocks as possible (up to 2x), assuming we sell off the bonds strategically with predetermined bands (like sell 5% every 10% portfolio loss or something like that). Then we're basically betting on a market recovery to ATH, something that has happened after every crash?

It could be argued that this is timing the market. It's probably as close as one should ever get to doing so. I like to think of it as "reading the room" though. Also, I think if we do get to ATH and interest rates are still high, LTT might be more attractive than ITT, but we probably won't have to worry about that for a bit.
Yes, I shouldn't have used the term "market timing", as I'm not a big fan of using it as it's hard to define; nor would I follow any dogma "just because". What I meant is a more systematic, rules-based approach to rebalancing than the one you were alluding to. Many approaches were discussed in this thread, anything from a strict, constant percent ratio, to for example decreasing the bond percentage allocation of NAV on a sliding scale based on bond yields. If you don't use futures or options, you are a bit more constrained, because the sum of your leveraged and non-leveraged investment products has to equal 100%; but I think the most important thing is to have a rules-based plan. You were just referring to the scenario of an all-time high of the stock market, and you later clarified the combo of stock market all-time high and treasury yields still being high. There is a chance that the latter scenario materializes, in which case I would agree that it might make sense to rebalance; but it's just one out of many combinations of scenarios, and I think you need a more comprehensive rules-based rebalancing approach. You may have overlooked that both stocks and bonds are currently down; and also skier advised against considering treasuries purely as "rescue" for stock market crashes.
Last edited by comeinvest on Mon Mar 06, 2023 8:54 pm, edited 4 times in total.
comeinvest
Posts: 2669
Joined: Mon Mar 12, 2012 6:57 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

Chocolatebar wrote: Mon Mar 06, 2023 6:51 pm I actually expected people to say I have too much international haha. Glad you agree! What ratio do you prefer? 60/40?
I would say anywhere from 30%-70% international doesn't matter much (a priori), nor does it matter much (a priori) which countries exactly are included or how they are weighted, at least the countries that have no systemic, asymmetric expropriation risk for Westerners based on residence, like Russia in the past, or possibly China. Nor does "full geographic coverage" matter, which I think is a nonsensical attempt and rationale. The point is: a sizable amount of international markets, for the free lunch of diversification of the dispersion of long-run returns (not to be confused with short-term correlation). There are a gazillion of threads on this, to the tune of one per week - please no more domestic/international threads!
Last edited by comeinvest on Mon Mar 06, 2023 8:55 pm, edited 1 time in total.
comeinvest
Posts: 2669
Joined: Mon Mar 12, 2012 6:57 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

skierincolorado wrote: Mon Mar 06, 2023 7:15 pm The excess yield (ECY) of stocks over bonds is at ATL arguably making stocks expensive and bonds cheap. Never before have we seen 30y yield so high and PE so high at the same time. Either stock valuations will fall or bond prices will go up (or we've entered a new paradigm where stock returns are only marginally better than bond returns). I'd call what you're doing market timing.
Is that all-time low so clear? Does your equation include the recent and the expected inflation that only stocks will profit from? Does it also apply to value (AVUV) or mid-cap stocks (/EMD futures), or just to the big tech dominated market? (I hear that small-cap value stock valuations are relatively low in historical comparison.) Does it also apply to international stocks that have higher yields? Does it reflect the increased percentage of stock buybacks in the U.S. that you would have to add to the dividend yields? Does dividend yield matter at all? Or are you referring to P/E ratios? Or Shiller P/E ratios? My guess is you will get as many opinions on which market is more expensive, as the number of analysts you ask or the number of statistics and studies that you read.
Chocolatebar
Posts: 192
Joined: Tue Feb 14, 2023 10:58 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Chocolatebar »

comeinvest wrote: Mon Mar 06, 2023 7:49 pm
Chocolatebar wrote: Mon Mar 06, 2023 6:51 pm
comeinvest wrote: Mon Mar 06, 2023 6:08 pm Be aware that when the stock market reaches new all-time highs, it might coincide with a time when treasury yields are lower too, for theoretical reasons. So I would consider not market-timing the stocks:bonds ratio in this way.
So, this is an interesting point. First, I don't quite consider my approach to be "market-timing". In my opinion, bonds only serve as a parachute in the event of a market crash. Once a crash or correction has happened, bonds have already done their job right? Doesn't it make sense to ditch them for as many stocks as possible (up to 2x), assuming we sell off the bonds strategically with predetermined bands (like sell 5% every 10% portfolio loss or something like that). Then we're basically betting on a market recovery to ATH, something that has happened after every crash?

It could be argued that this is timing the market. It's probably as close as one should ever get to doing so. I like to think of it as "reading the room" though. Also, I think if we do get to ATH and interest rates are still high, LTT might be more attractive than ITT, but we probably won't have to worry about that for a bit.
Yes, I shouldn't have used the term "market timing", as I'm not a big fan of using it as it's hard to define; nor would I follow any dogma "just because". What I meant is a more systematic, rules-based approach to rebalancing than the one you were alluding to. Many approaches were discussed in this thread, anything from a strict, constant percent ratio, to for example decreasing the bond percentage allocation of NAV on a sliding scale based on bond yields. If you don't use futures, you are a bit more constrained; but I think the most important is to have a rules-based plan. You were just referring to the scenario of an all-time high of the stock market, and you later clarified the combo of stock market all-time high and treasury yields still being high. There is a chance that the latter scenario materializes, in which case I would agree that it might make sense to rebalance; but it's just one out of many combinations of scenarios, and I think you need a more comprehensive rules-based rebalancing approach. You may have overlooked that both stocks and bonds are currently down; and also skier advised against considering treasuries purely as "rescue" for stock market crashes.
I know treasuries are down with stocks right now, but they are still the best crash insurance available. Market timing is hard to define because no matter what we're taking action with the expectation that the value of our assets will go a specific way over a specific period of time. I don't believe anyone can ever know for sure what any market will do in the short term, especially because I believe that markets are irrational. We do however know what stocks and bonds should do in the long-term, so I'll bet on that. I can't time the market, but I can read the room. We don't know when stocks will go down, but we know when they have. When they are down, it's ALWAYS a great time to buy them. If I need to sell bonds to make room in my portfolio to buy more as they decline, that's fine by me.

Obviously it should be done strategically though. I wouldn't sell off all bonds after a 10% drawdown for example. I also think I didn't make it clear enough that my main incentive for selling bonds would be to control my leverage, not because I believe it's always worth betting on a US stock market rebound.
Chocolatebar
Posts: 192
Joined: Tue Feb 14, 2023 10:58 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Chocolatebar »

comeinvest wrote: Mon Mar 06, 2023 8:21 pm
Chocolatebar wrote: Mon Mar 06, 2023 6:51 pm I actually expected people to say I have too much international haha. Glad you agree! What ratio do you prefer? 60/40?
I would say anywhere from 30%-70% international doesn't matter much (a priori), nor does it matter much (a priori) which countries exactly are included or how they are weighted, at least the countries that have no systemic, asymmetric expropriation risk for Westerners based on residence, like Russia in the past, or possibly China. Nor does "full geographic coverage" matter, which I think is a nonsensical attempt and rationale. The point is: a sizable amount of international markets, for the free lunch of diversification of the dispersion of long-run returns (not to be confused with short-term correlation). There are a gazillion of threads on this, to the tune of one per week - please no more domestic/international threads!
Hahaha! Yeah, I didn't mean to turn this into one of those. I was just surprised by your response, so wondered if you preferred a specific ratio. I agree that my 80/20 in tax-adv is aggressive, but it's by design. My taxable can hold more to balance my overall AA and earn FTC.
comeinvest
Posts: 2669
Joined: Mon Mar 12, 2012 6:57 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

Chocolatebar wrote: Mon Mar 06, 2023 9:10 pm
comeinvest wrote: Mon Mar 06, 2023 7:49 pm
Chocolatebar wrote: Mon Mar 06, 2023 6:51 pm
comeinvest wrote: Mon Mar 06, 2023 6:08 pm Be aware that when the stock market reaches new all-time highs, it might coincide with a time when treasury yields are lower too, for theoretical reasons. So I would consider not market-timing the stocks:bonds ratio in this way.
So, this is an interesting point. First, I don't quite consider my approach to be "market-timing". In my opinion, bonds only serve as a parachute in the event of a market crash. Once a crash or correction has happened, bonds have already done their job right? Doesn't it make sense to ditch them for as many stocks as possible (up to 2x), assuming we sell off the bonds strategically with predetermined bands (like sell 5% every 10% portfolio loss or something like that). Then we're basically betting on a market recovery to ATH, something that has happened after every crash?

It could be argued that this is timing the market. It's probably as close as one should ever get to doing so. I like to think of it as "reading the room" though. Also, I think if we do get to ATH and interest rates are still high, LTT might be more attractive than ITT, but we probably won't have to worry about that for a bit.
Yes, I shouldn't have used the term "market timing", as I'm not a big fan of using it as it's hard to define; nor would I follow any dogma "just because". What I meant is a more systematic, rules-based approach to rebalancing than the one you were alluding to. Many approaches were discussed in this thread, anything from a strict, constant percent ratio, to for example decreasing the bond percentage allocation of NAV on a sliding scale based on bond yields. If you don't use futures, you are a bit more constrained; but I think the most important is to have a rules-based plan. You were just referring to the scenario of an all-time high of the stock market, and you later clarified the combo of stock market all-time high and treasury yields still being high. There is a chance that the latter scenario materializes, in which case I would agree that it might make sense to rebalance; but it's just one out of many combinations of scenarios, and I think you need a more comprehensive rules-based rebalancing approach. You may have overlooked that both stocks and bonds are currently down; and also skier advised against considering treasuries purely as "rescue" for stock market crashes.
I know treasuries are down with stocks right now, but they are still the best crash insurance available. Market timing is hard to define because no matter what we're taking action with the expectation that the value of our assets will go a specific way over a specific period of time. I don't believe anyone can ever know for sure what any market will do in the short term, especially because I believe that markets are irrational. We do however know what stocks and bonds should do in the long-term, so I'll bet on that. I can't time the market, but I can read the room. We don't know when stocks will go down, but we know when they have. When they are down, it's ALWAYS a great time to buy them. If I need to sell bonds to make room in my portfolio to buy more as they decline, that's fine by me.

Obviously it should be done strategically though. I wouldn't sell off all bonds after a 10% drawdown for example. I also think I didn't make it clear enough that my main incentive for selling bonds would be to control my leverage, not because I believe it's always worth betting on a US stock market rebound.
Exactly. You need a rules-based rebalancing strategy. People in this thread and in the related threads in particular the lifecycle thread have been thinking and writing about this, and I think some of us, at least I for myself, are still in the process of defining a rules-based allocation and rebalancing strategy ahead of time. The scenarios that you described are some; there are a few more, which are impossible to time.
Topic Author
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

Chocolatebar wrote: Mon Mar 06, 2023 7:44 pm
skierincolorado wrote: Mon Mar 06, 2023 7:15 pm
Chocolatebar wrote: Mon Mar 06, 2023 2:41 pm I know followers implementing this kind of strategy with futures and box spreads probably won't care, but figured I'd share the portfolio allocations I settled on using LETFs for the sake of closure.

tax-adv
UPRO 33
AVUV 29
VEA 8
AVDV 8
VWO 8
AVES 8
TYD 6

128/32/18 us/int/bnd | 80/20 us/int | 90/10 stock/bond | ER .5% | 1.6x equity leverage

taxable
UPRO 17
AVUV 26
VEA 13
AVDV 13
VWO 13
AVES 13
TYD 5

77/52/15 us/int/bnd | 60/40 us/int | 90/10 stock/bond | ER .38% | 1.29x equity leverage

total (approx)
UPRO 22
AVUV 27
VEA 11.4
AVDV 11.4
VWO 11.4
AVES 11.4
TYD 5.3

93.5/45.5/16 us/int/bnd | 70/30 (target) us/int | 90/10 stock/bond | ER .42% | 1.39x equity leverage

I settled on running very similar allocations in every account, but decided to roll with 80/20 us/int in tax-adv for now and run a little more leverage. My logic for 90/10 stock/bonds is basically that since the market is currently down, I don't need as many bonds, so can trade that for some leverage as I normally would. I think once we reach all time highs again I'll consider aiming for at least 80/20 (maybe more in tax-adv) to reload for future downturns. Over time I expect my portfolio to trade leverage for bonds as my net worth increases. Ultimately, my overall target for us/int is 70/30. If the markets continue to decline, my plan is to trade bonds for leverage, then international for leverage, then just rebalance through to follow Lifecycle Investing until we see ATH again.

NOTE - I looked at NTSI and NTSE to see if they would be cheaper substitutes for VEA, VWO, and TYD, but they aren't even close. I plan on trading TYD for TYA once it reaches 50 AUM.
The excess yield (ECY) of stocks over bonds is at ATL arguably making stocks expensive and bonds cheap. Never before have we seen 30y yield so high and PE so high at the same time. Either stock valuations will fall or bond prices will go up (or we've entered a new paradigm where stock returns are only marginally better than bond returns). I'd call what you're doing market timing.
Didn't you suggest selling bonds to buy more stocks to maintain leverage?
Yes but for different reasons.
Topic Author
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

comeinvest wrote: Mon Mar 06, 2023 8:43 pm
skierincolorado wrote: Mon Mar 06, 2023 7:15 pm The excess yield (ECY) of stocks over bonds is at ATL arguably making stocks expensive and bonds cheap. Never before have we seen 30y yield so high and PE so high at the same time. Either stock valuations will fall or bond prices will go up (or we've entered a new paradigm where stock returns are only marginally better than bond returns). I'd call what you're doing market timing.
Is that all-time low so clear? Does your equation include the recent and the expected inflation that only stocks will profit from? Does it also apply to value (AVUV) or mid-cap stocks (/EMD futures), or just to the big tech dominated market? (I hear that small-cap value stock valuations are relatively low in historical comparison.) Does it also apply to international stocks that have higher yields? Does it reflect the increased percentage of stock buybacks in the U.S. that you would have to add to the dividend yields? Does dividend yield matter at all? Or are you referring to P/E ratios? Or Shiller P/E ratios? My guess is you will get as many opinions on which market is more expensive, as the number of analysts you ask or the number of statistics and studies that you read.
That's the point. Nobody knows. If international or scv is cheap by historical standards there's probably a reason for it. I'm just sayint I certainly wouldn't be piling into stocks and going light on bonds based on overall valuations. The ECY has strong theoretical foundation.
Chocolatebar
Posts: 192
Joined: Tue Feb 14, 2023 10:58 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Chocolatebar »

skierincolorado wrote: Tue Mar 07, 2023 1:27 am
Chocolatebar wrote: Mon Mar 06, 2023 7:44 pm Didn't you suggest selling bonds to buy more stocks to maintain leverage?
Yes but for different reasons.
So, selling bonds to buy more stocks throughout market downturns to follow Lifecycle Investing isn't market timing, but selling bonds to buy more stocks throughout market downturns to follow Lifecycle Investing AND because you believe the stock market will survive to see all time highs again is? If that's the case, then any form of investing is timing the market.
Topic Author
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

Chocolatebar wrote: Tue Mar 07, 2023 6:26 am
skierincolorado wrote: Tue Mar 07, 2023 1:27 am
Chocolatebar wrote: Mon Mar 06, 2023 7:44 pm Didn't you suggest selling bonds to buy more stocks to maintain leverage?
Yes but for different reasons.
So, selling bonds to buy more stocks throughout market downturns to follow Lifecycle Investing isn't market timing, but selling bonds to buy more stocks throughout market downturns to follow Lifecycle Investing AND because you believe the stock market will survive to see all time highs again is? If that's the case, then any form of investing is timing the market.
Selling the gains on the bonds in order to maintain constant exposure. Not dynamically making huge swings in exposure that open you to sequence of return risk. Not the same thing.
Chocolatebar
Posts: 192
Joined: Tue Feb 14, 2023 10:58 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Chocolatebar »

skierincolorado wrote: Tue Mar 07, 2023 9:34 am
Chocolatebar wrote: Tue Mar 07, 2023 6:26 am
skierincolorado wrote: Tue Mar 07, 2023 1:27 am
Chocolatebar wrote: Mon Mar 06, 2023 7:44 pm Didn't you suggest selling bonds to buy more stocks to maintain leverage?
Yes but for different reasons.
So, selling bonds to buy more stocks throughout market downturns to follow Lifecycle Investing isn't market timing, but selling bonds to buy more stocks throughout market downturns to follow Lifecycle Investing AND because you believe the stock market will survive to see all time highs again is? If that's the case, then any form of investing is timing the market.
Selling the gains on the bonds in order to maintain constant exposure. Not dynamically making huge swings in exposure that open you to sequence of return risk. Not the same thing.
Where did I propose "making huge swings in exposure"?
Topic Author
skierincolorado
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

Chocolatebar wrote: Tue Mar 07, 2023 9:46 am
skierincolorado wrote: Tue Mar 07, 2023 9:34 am
Chocolatebar wrote: Tue Mar 07, 2023 6:26 am
skierincolorado wrote: Tue Mar 07, 2023 1:27 am
Chocolatebar wrote: Mon Mar 06, 2023 7:44 pm Didn't you suggest selling bonds to buy more stocks to maintain leverage?
Yes but for different reasons.
So, selling bonds to buy more stocks throughout market downturns to follow Lifecycle Investing isn't market timing, but selling bonds to buy more stocks throughout market downturns to follow Lifecycle Investing AND because you believe the stock market will survive to see all time highs again is? If that's the case, then any form of investing is timing the market.
Selling the gains on the bonds in order to maintain constant exposure. Not dynamically making huge swings in exposure that open you to sequence of return risk. Not the same thing.
Where did I propose "making huge swings in exposure"?
If I understand, you're starting with a 10% bond exposure with plans to decrease or increase the exposure based on market variables. Unless you're talking about immaterial moves, in which case why bother, it's a bad idea and opens to sequence of return risk. It's either the moves are too small to matter, or if they're large enough to matter then it's a bad idea.

I'm open to the idea of not holding bonds during large QE or when interest rates are extremely low. I'm also open to the idea of not holding bonds at all, or only in small static amounts. But market timing just based on how close the stock market is to ATH makes no sense to me and opens large sequence of return risk. It's probably fine though because if you don't find bonds attractive now you probably never will and so there is no sequence of return risk. You're saying you would own more bonds if stocks are at ATH, but let's say that we achieve a soft landing and inflation subsides faster than expected, bond yields drop and stock reach ATH in a year. Are you really going to buy bonds at 3% interest rates when you wouldn't buy them at 5% interest rates? Of course the worst case scenario for you is that the fed overshoots again and kills the economy and puts us back into deflation, low interest rates, and recession with a crashing stock market.
Chocolatebar
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Chocolatebar »

skierincolorado wrote: Tue Mar 07, 2023 11:12 am
Chocolatebar wrote: Tue Mar 07, 2023 9:46 am
skierincolorado wrote: Tue Mar 07, 2023 9:34 am
Chocolatebar wrote: Tue Mar 07, 2023 6:26 am
skierincolorado wrote: Tue Mar 07, 2023 1:27 am
Yes but for different reasons.
So, selling bonds to buy more stocks throughout market downturns to follow Lifecycle Investing isn't market timing, but selling bonds to buy more stocks throughout market downturns to follow Lifecycle Investing AND because you believe the stock market will survive to see all time highs again is? If that's the case, then any form of investing is timing the market.
Selling the gains on the bonds in order to maintain constant exposure. Not dynamically making huge swings in exposure that open you to sequence of return risk. Not the same thing.
Where did I propose "making huge swings in exposure"?
If I understand, you're starting with a 10% bond exposure with plans to decrease or increase the exposure based on market variables. Unless you're talking about immaterial moves, in which case why bother, it's a bad idea and opens to sequence of return risk. It's either the moves are too small to matter, or if they're large enough to matter then it's a bad idea.

I'm open to the idea of not holding bonds during large QE or when interest rates are extremely low. I'm also open to the idea of not holding bonds at all, or only in small static amounts. But market timing just based on how close the stock market is to ATH makes no sense to me and opens large sequence of return risk. It's probably fine though because if you don't find bonds attractive now you probably never will and so there is no sequence of return risk. You're saying you would own more bonds if stocks are at ATH, but let's say that we achieve a soft landing and inflation subsides faster than expected, bond yields drop and stock reach ATH in a year. Are you really going to buy bonds at 3% interest rates when you wouldn't buy them at 5% interest rates? Of course the worst case scenario for you is that the fed overshoots again and kills the economy and puts us back into deflation, low interest rates, and recession with a crashing stock market.
Clearly I didn't do a good job explaining my strategy. I was being vague about it because I didn't think the details mattered much. I think referencing ATH is what triggered the market timing accusations. Basically, I plan on following Lifecycle Investing and buying more stocks as my portfolio loses value. At some point I'll want to buy the bonds back - either because my portfolio has recovered and my leverage is above my desired target or because my net worth is now high enough to justify carrying more bonds than before and less leverage. That's basically it. None of it is market timing. I'm simply adjusting my AA as my net worth increases or decreases. Just like everyone else.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

On some days only the long maturity contracts benefit.
The ultra 30y contract in a way is the most diversified and therefore in a way the "safest", as it theoretically represents ca. 25 * 4 = 100 individual 3-month SOFR contracts ca. 40 of which are already listed, and it is also the only one that is (sort of) guaranteed to benefit from long-term declining rates; while the other ones could theoretically just mimic lower rates at the time of calendar rolls. I'm not changing my strategy though. STT and ITT will benefit from mean reversion, if it occurs at any time in the next few years. But although the current situation is extreme with only one time in modern history where the yield curve had more negative slope, in finance you never know if and when mean reversion occurs.

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comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

skierincolorado wrote: Fri Mar 03, 2023 3:32 pm
comeinvest wrote: Fri Mar 03, 2023 1:58 pm
skierincolorado wrote: Fri Mar 03, 2023 11:32 am Just learned something j think is significant. Comeinvest previously pointed out that midcap futures have lower implied financing. I wasn't sure if this was a persistent feature or why this would be true. But I found this explanation today:

https://www.cmegroup.com/education/arti ... -etfs.html

If you scroll to halfway it explains that because the Russell 2000 is hard to short the companies it contains, the easiest way to short those companies is to hold the future contract short. This leads to a supply demand imbalance and persistently low implied financing for the long holder. Looking at today it appears the implied financing is about 0.2% less than MES. I will monitor the next few days as the pace or the roll increases. Right now the roll has barely begun for Russell 2000 so the edge over MES may grow in the next few days. The above CME analysis pegs it at

https://www.cmegroup.com/trading/equity ... /main.html

I plan to not only buy Russell 2000 and s&p400 midcap futures, but will likely significantly overweight them given the .2% risk free edge they have over MES.
Another explanation that I heard is that the counterparties hedging their short Russell 2000 futures exposure buy the Russell 2000 stocks, and earn the borrow fees by lending part of their stock portfolio. In other words, the securities lending income should be considered along with the dividend income for futures fair value calculation. However, I checked the securities lending income of a few midcap and smallcap ETFs, and found that it is much smaller than the difference between /ES, /EMD and /RTY implied financing cost. So either the ETFs are not very efficient in lending portfolio securities, or this is not a full explanation. I'm also not sure if your explanation would explain such a large difference; but it is what it is.

I observed a difference of about 0.4% in financing cost between /ES on the one hand and /EMD and /RTY on the other hand the last few calendar rolls.

I observed that /EMD and /RTY have about equal implied financing cost. But /EMD shines, while /RTY sucks. Do some reading on seekingalpha or elsewhere. You don't want to invest in the Russell 2000 index. It's a lousy index with serious structural issues, consistently underperforming similar S&P and other small cap indexes.

Be aware however that an /EMD contract is worth about $265k currently, and there is no micro version. /EMD also has a tiny bit wider bid/ask spreads than /ES of course; but it's negligible compared to the difference in financing cost, and the calendar rolls are very efficient. So stick to it once you buy it.

I personally implemented my U.S. equities exposure with long /EMD and short /MES and /RTY to get to my target allocation. /EMD has a slight value tilt which /RTY has not, so with the trio +EMD-MES-RTY I get a factor exposure for a negative fee i.e. I get paid for it (hard to beat that). I hit the jackpot last quarter when the big tech bubble reversed; but in the long run the S&P midcap 400 and S&P 500 track each other quite accurately, and have similar risk-adjusted return characteristics. The midcap index is arguably more diversified.
Yeah I should have mentioned the jssues with Russell 2000. I was considering owning just 1 and going mostly emd, but you're probably right that going all emd is better.
B.t.w. do you happen do know how accurate the dividend estimates for the next quarter are? Are those mostly already announced by the companies and the rest is just a formality, or are there measurable deviations from the estimates? Historically.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

I know common wisdom in this thread is that equities+treasuries is the way to go; but I'm also following another thread, where someone just showed that 100% equities + 100% corporate bonds outperforms everything else since Sep 2007 - a period that includes the equities run-up, but also 3 significant market crashes. And that is after the presumably higher financing cost of S&P 500 equities compared to treasuries, and also after the almost 1% expense ratio that PSLDX had during most of that period. Can someone please break this down for me, what am I missing?

viewtopic.php?p=7156425#p7156425

Given my confirmation bias towards mHFEA, I tried to beat these charts with mHFEA (VFINX+VGIT 150/250). I was able to achieve higher returns with deeper drawdowns, but not higher risk-adjusted returns:

https://www.portfoliovisualizer.com/bac ... ion6_3=250

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comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

I'm not fully understanding why, but my Dec 2022 SOFR contract that expires in 6 days from now, is in positive territory. I bought all SOFR contracts at about the same time. Wouldn't that be a happy ending? Lol.

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DMoogle
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by DMoogle »

Just letting anyone know that's doing futures in an IRA and NOT on IBKR - you should probably switch. I was using ETrade, but the rates on cash deposits are negligible. In years past, this hasn't mattered, but with interest rates as they are my cash reserves were missing out on something like a 3% extra return.

It's hard to keep up with this thread, but I assume there have been no real changes to the fundamentals of this strategy, even after a piss-poor past year and a half? I'm still all-in.
impatientInv
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by impatientInv »

comeinvest wrote: Thu Mar 09, 2023 2:48 am I'm not fully understanding why, but my Dec 2022 SOFR contract that expires in 6 days from now, is in positive territory. I bought all SOFR contracts at about the same time. Wouldn't that be a happy ending? Lol.

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I guess you don't need to sell the SOFR contracts and can let them expire to get the profit/loss. Correct? I bought a few, want to make sure I can just let them expire.

Have you seen any comparisons between holding ZT 2 year futures and SOFR? I saw your earlier post that trading cost were cheaper with SOFR.

comeinvest wrote: Wed Mar 08, 2023 9:16 pm I know common wisdom in this thread is that equities+treasuries is the way to go; but I'm also following another thread, where someone just showed that 100% equities + 100% corporate bonds outperforms everything else since Sep 2007 - a period that includes the equities run-up, but also 3 significant market crashes. And that is after the presumably higher financing cost of S&P 500 equities compared to treasuries, and also after the almost 1% expense ratio that PSLDX had during most of that period. Can someone please break this down for me, what am I missing?

viewtopic.php?p=7156425#p7156425

Given my confirmation bias towards mHFEA, I tried to beat these charts with mHFEA (VFINX+VGIT 150/250). I was able to achieve higher returns with deeper drawdowns, but not higher risk-adjusted returns:
See the chart below of the comparison between PSLDX and mHFEA equivalent with STT and ITT. Till Dec 2021 they outperformed by close to 2% without financing costs.

Code: Select all

Sep 2007 - Dec 2021
PSLDX                         17.52%
VFINX/ VFISX ~2.6yrs(100/600) 19.32%
VFINX/ VFITX ~6.3yrs(100/250) 19.54%
Sep 2007 - Feb 2023
PSLDX                         12.31%
VFINX/ VFISX ~2.6yrs(100/600) 11.28% 
VFINX/ VFITX ~6.3yrs(100/250) 13.07%
https://www.portfoliovisualizer.com/bac ... ion7_2=600

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Here is the comparison with replacing PSLDX with equivalent VFIX/LTT. This goes back all the way to 1991

Code: Select all

Nov 1991 - Feb 2023
PSLDX eq VFINX/VUSTX ~16.4yrs  13.23%
VFINX/ VFISX ~2.6yrs(100/600)  14.76%
VFINX/ VFITX ~6.3yrs(100/250)  15.26%
https://www.portfoliovisualizer.com/bac ... ion7_2=600

Image
No individual stocks.
comeinvest
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Joined: Mon Mar 12, 2012 6:57 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

impatientInv wrote: Thu Mar 09, 2023 12:21 pm I guess you don't need to sell the SOFR contracts and can let them expire to get the profit/loss. Correct? I bought a few, want to make sure I can just let them expire.
That is the idea.
comeinvest
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Joined: Mon Mar 12, 2012 6:57 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

impatientInv wrote: Thu Mar 09, 2023 12:21 pm Have you seen any comparisons between holding ZT 2 year futures and SOFR? I saw your earlier post that trading cost were cheaper with SOFR.
I have found no direct historical performance comparison. That's the piece that I'm missing.
comeinvest
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Joined: Mon Mar 12, 2012 6:57 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

impatientInv wrote: Thu Mar 09, 2023 12:21 pm
comeinvest wrote: Wed Mar 08, 2023 9:16 pm I know common wisdom in this thread is that equities+treasuries is the way to go; but I'm also following another thread, where someone just showed that 100% equities + 100% corporate bonds outperforms everything else since Sep 2007 - a period that includes the equities run-up, but also 3 significant market crashes. And that is after the presumably higher financing cost of S&P 500 equities compared to treasuries, and also after the almost 1% expense ratio that PSLDX had during most of that period. Can someone please break this down for me, what am I missing?

viewtopic.php?p=7156425#p7156425

Given my confirmation bias towards mHFEA, I tried to beat these charts with mHFEA (VFINX+VGIT 150/250). I was able to achieve higher returns with deeper drawdowns, but not higher risk-adjusted returns:
See the chart below of the comparison between PSLDX and mHFEA equivalent with STT and ITT. Till Dec 2021 they outperformed by close to 2% without financing costs.

Code: Select all

Sep 2007 - Dec 2021
PSLDX                         17.52%
VFINX/ VFISX ~2.6yrs(100/600) 19.32%
VFINX/ VFITX ~6.3yrs(100/250) 19.54%
Sep 2007 - Feb 2023
PSLDX                         12.31%
VFINX/ VFISX ~2.6yrs(100/600) 11.28% 
VFINX/ VFITX ~6.3yrs(100/250) 13.07%
https://www.portfoliovisualizer.com/bac ... ion7_2=600

Image


Here is the comparison with replacing PSLDX with equivalent VFIX/LTT. This goes back all the way to 1991

Code: Select all

Nov 1991 - Feb 2023
PSLDX eq VFINX/VUSTX ~16.4yrs  13.23%
VFINX/ VFISX ~2.6yrs(100/600)  14.76%
VFINX/ VFITX ~6.3yrs(100/250)  15.26%
https://www.portfoliovisualizer.com/bac ... ion7_2=600

Image
All these charts and statistics may be inaccurate as we don't have historical duration data of the ETFs.
Your first chart would indicate that you didn't match the duration of the corp bonds in PSLDX with the duration of the STT and ITT, correct?

Reconciling your and my charts: https://www.portfoliovisualizer.com/bac ... bol7=VFISX

stocks + ITT beats PSLDX (thank you!). Then increasing equities from 100% to 150% decreases short-term risk-adjusted return measures, but the final result is better; the Sharpe and Sortino would probably change with longer backtesting periods.

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Last edited by comeinvest on Fri Mar 10, 2023 1:54 am, edited 3 times in total.
impatientInv
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by impatientInv »

Yes you are right. I did not match the durations with PSLDX. Please make changes and repost if you can.
No individual stocks.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

On some days, the mHFEA portfolio actually behaves as designed. So much fun.

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comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

impatientInv wrote: Thu Mar 09, 2023 6:26 pm Yes you are right. I did not match the durations with PSLDX. Please make changes and repost if you can.
I added the statistics and the chart with the correct comparison to my post above.
Topic Author
skierincolorado
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

Wow huge moves in treasuries especially at the short end
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

I think there was an exaggeration up on Mar 9 and an exaggeration down on Mar 10 of the /EMD calendar roll. We'll see on Monday on the CME roll page.

For whatever reason, the futures combination charts only paint the combination order book quotes while the chart is online; they paint the synthetic quotes for the historical portion of the chart. I subscribed to the futures market data bundle because it's free based on my commissions volume.

EDIT: Per CME quarterly roll analyzer, /ES implied financing rate on Friday Mar 10 was 5.39%, and /EMD was at 5.04% (almost identical to 3-months SOFR). However, there was a deeper drawdown of the /EMD roll at times during the day.

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comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

skierincolorado wrote: Fri Mar 10, 2023 8:47 am Wow huge moves in treasuries especially at the short end
From about 11.50 p.m. PDT Sunday evening, not the Friday movements

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impatientInv
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by impatientInv »

comeinvest wrote: Mon Mar 13, 2023 1:52 am
skierincolorado wrote: Fri Mar 10, 2023 8:47 am Wow huge moves in treasuries especially at the short end
From about 11.50 p.m. PDT Sunday evening, not the Friday movements

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Huge move today.

Edit: big swing.
No individual stocks.
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