When to switch from short term bond to total bond

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

When to switch from short term bond to total bond

Postby hoops777 » Sun Dec 30, 2012 10:25 pm

I fully understand the reasoning in many people recommending staying short term because of inflation.What is confusing is when do you switch out of shorter term back to total bond?How do you determine that magic moment?
My other question is after reading so many posts about the inevitable decline of total bond when inflation kicks in,would it not be better in this unique bond environment to be in some well respected managed funds instead like dodge and cox or a pimco?Wouldn't a managed fund be better able to adjust to the inflation factor?It just seems like the total mkt index has no option but to take it's medicine for a few years when the inevitable inflation kicks in.Maybe a better solution would be to split your bond allocation in 3 well respected managed funds 1/3 1/3 1/3.???
hoops777
 
Posts: 513
Joined: Sun Apr 10, 2011 1:23 pm

Re: When to switch from short term bond to total bond

Postby FNK » Sun Dec 30, 2012 10:29 pm

Not inflation, interest rates.
User avatar
FNK
 
Posts: 1353
Joined: Tue May 17, 2011 8:01 pm

Re: When to switch from short term bond to total bond

Postby hoops777 » Sun Dec 30, 2012 10:36 pm

OK, interest rates.Sorry.
hoops777
 
Posts: 513
Joined: Sun Apr 10, 2011 1:23 pm

Re: When to switch from short term bond to total bond

Postby khh » Sun Dec 30, 2012 11:29 pm

Looking at the chart from the following link, the 10-year Japanese note dipped below 2% in the late 90s and has not gone above it since. It is currently 0.8%. I guess my point is that who can say when, or even if, interest rates will rise?

http://www.gecodia.com/Japan-Government ... a1305.html
khh
 
Posts: 176
Joined: Sat Dec 27, 2008 11:31 pm

Re: When to switch from short term bond to total bond

Postby Aptenodytes » Mon Dec 31, 2012 12:16 am

If you want to shift bond assets like this you probably want to move among funds with distinctively different durations, i.e. short versus medium rather than short versus total. I would stay away from the actively managed funds -- that's the equivalent of a panic move in my opinion.

In Swedroe's book on bond investing he recommends increasing the duration when you can get 20 basis points or better per additional year of duration / conversely decrease the duration when you give up fewer than 20 basis points per year of duration. That's just one approach. I like it because it relies on a formula that takes emotions out of the picture.

The last time I applied the above evaluation short term treasuries beat out intermediate, but for investment grade corporate grade bonds intermediate beat out short term.
User avatar
Aptenodytes
 
Posts: 2170
Joined: Tue Feb 08, 2011 9:39 pm

Re: When to switch from short term bond to total bond

Postby gotherelate » Mon Dec 31, 2012 1:47 am

When the moon is in the Seventh House and Jupiter aligns with Mars. (With all due respect to the Fifth Dimension and songwriters James Rado, Gerome Ragni and Galt MacDermot) I mean, why not?
-Grandpa | I'd rather see where I'm going than see where I've been.
User avatar
gotherelate
 
Posts: 831
Joined: Wed May 28, 2008 7:57 pm
Location: Texas

Re: When to switch from short term bond to total bond

Postby Doc » Mon Dec 31, 2012 9:46 am

viewtopic.php?p=1498390#p1498390

The referenced response is kind of weedy but the entire thread gives you some good insight into using the shape of the yield curve to determine a target duration. As I read it the spread between the one and the five greater than 0.2% per year is the break point. Of course I don't think many would recommend shifting ones entire portfolio when the spread changed from 0.19 to 0.21. :|

Such a strategy is easy to implement if you have a bond ladder. You just roll maturing bonds into short or intermediate based on the slope of the yield curve. If you are talking about only a short fund and a TBM fund portfolio maybe you could establish something like changing 20% of the total per year based on the 1-5 brake point.
A scientist looks for THE answer to a problem, an engineer looks for AN answer. Investing is not a science.
User avatar
Doc
 
Posts: 4840
Joined: Sat Feb 24, 2007 2:10 pm

Re: When to switch from short term bond to total bond

Postby STC » Mon Dec 31, 2012 9:59 am

If anyone knew the answer to this, they would be a billionaire. Unfortunately, predicting the rate curve is a futile endeavor.
STC
 
Posts: 415
Joined: Wed Nov 14, 2012 10:22 am

Re: When to switch from short term bond to total bond

Postby Doc » Mon Dec 31, 2012 10:10 am

STC wrote:If anyone knew the answer to this, they would be a billionaire. Unfortunately, predicting the rate curve is a futile endeavor.


No that's not true. Larry Swedroe has stated that their is evidence that the best estimate of future yield curve is the current yield curve albeit it is not a very good one. If one had zero transaction costs one can make money by "riding the yield curve". That is buying longer notes in a rising yield curve environment and selling them before they mature. You can also see this strategy implemented in index funds. Just compare the theoretical yield difference between a 1-5 and a 0-5 Treasury index with a positive sloped yield curve. The 1-5 wins by more than can be accounted for by the duration difference. The thread I referenced earlier builds on this concept.
A scientist looks for THE answer to a problem, an engineer looks for AN answer. Investing is not a science.
User avatar
Doc
 
Posts: 4840
Joined: Sat Feb 24, 2007 2:10 pm

Re: When to switch from short term bond to total bond

Postby ResNullius » Mon Dec 31, 2012 10:12 am

Since reallocating my portfolio a number of years ago to have around 60% in fixed assets, I have read quite a bit about the various ideas on how to invest fixed assets, both in general and with respect to current conditions. While I think it's a major error to try to time the market, I find myself doing a little of that with my fixed portfolio. I've been about 50% in short investment grade and about 50% in intermediate investment grade. My thought is that if rates start going up in what appears to be a long-term upward swing (i.e., Fed rate increases in response to high inflation), then I just might move my intermediate term into the MM while rate go up a few percentage point, then move it back into intermediate. If rates continue to go up and then inflation is brought under control, I might then move most of my short term into long term. The fact is I probably won't do anything, because I've seen too many people lose far too much money by jumping around and trying to time the market. I don't fully understand bonds or bond funds, which is why I'm staying shorter and why I'm probably just going to stay the course. I'm fully retired, so our portfolio is where we get our financial support, in addition to SS, so I want to be conservative, but still try to get a real rate of return of at least 1.5% (more would be much better) in our overall portfolio. Our withdrawal rate is around 1.5% per year, hence the desire to at least maintain a stable perpetual net asset value portfolio, adjusted for inflation and adjusted for our yearly withdrawals. Good luck.
ResNullius
 
Posts: 2090
Joined: Wed Oct 24, 2007 4:22 pm

Re: When to switch from short term bond to total bond

Postby investor.saver1 » Mon Dec 31, 2012 10:19 am

Why not just do a CD ladder with 1-5 year terms? I presume you are in short term bonds because you do not want to take on price risk. Unless you are willing to buy risk (ie junk bonds) you will do equally well with CDs and have no risk.
Investor.Saver1 | | Experience is something you don't get until just after you need it.
User avatar
investor.saver1
 
Posts: 259
Joined: Sun Jan 02, 2011 10:43 pm

Re: When to switch from short term bond to total bond

Postby midareff » Mon Dec 31, 2012 10:53 am

ResNullius wrote:Since reallocating my portfolio a number of years ago to have around 60% in fixed assets, I have read quite a bit about the various ideas on how to invest fixed assets, both in general and with respect to current conditions. While I think it's a major error to try to time the market, I find myself doing a little of that with my fixed portfolio. I've been about 50% in short investment grade and about 50% in intermediate investment grade. My thought is that if rates start going up in what appears to be a long-term upward swing (i.e., Fed rate increases in response to high inflation), then I just might move my intermediate term into the MM while rate go up a few percentage point, then move it back into intermediate. If rates continue to go up and then inflation is brought under control, I might then move most of my short term into long term. The fact is I probably won't do anything, because I've seen too many people lose far too much money by jumping around and trying to time the market. I don't fully understand bonds or bond funds, which is why I'm staying shorter and why I'm probably just going to stay the course. I'm fully retired, so our portfolio is where we get our financial support, in addition to SS, so I want to be conservative, but still try to get a real rate of return of at least 1.5% (more would be much better) in our overall portfolio. Our withdrawal rate is around 1.5% per year, hence the desire to at least maintain a stable perpetual net asset value portfolio, adjusted for inflation and adjusted for our yearly withdrawals. Good luck.


Res.. I did a spread sheet comparing ITIG, GNMA and Hi-Yield under the following conditions. Interest rates went up .75% annually (on the first of the year although it makes little difference if spread through the year) with resultingly, fund value decreased by the interest rate rise (.75%) X the fund's duration. I then increased the fund value for the rest of the year based on the previous year closing SEC + the interest rate rise of .75%. I repeated the exercise for 5 years and then took the resulting increases/decreases in absolute fund value and then applied 15% (5 years of 3% inflation) to get a "in real dollars" answer. Maybe my methods are off but it sure does not look like intermediate term anything will be a place to be. :confused
User avatar
midareff
 
Posts: 2328
Joined: Mon Nov 29, 2010 11:43 am
Location: Biscayne Bay, South Florida

Re: When to switch from short term bond to total bond

Postby dbr » Mon Dec 31, 2012 12:54 pm

Why do you feel that you need to switch at all?
dbr
 
Posts: 14097
Joined: Sun Mar 04, 2007 10:50 am

Re: When to switch from short term bond to total bond

Postby mephistophles » Mon Dec 31, 2012 12:57 pm

Do it now. Trying to time the bond, or any market, is a losers game.
User avatar
mephistophles
 
Posts: 2754
Joined: Tue Mar 27, 2007 3:34 am

Re: When to switch from short term bond to total bond

Postby ofcmetz » Mon Dec 31, 2012 1:22 pm

mephistophles wrote:Do it now. Trying to time the bond, or any market, is a losers game.


^ditto

I prefer to use Intermediate Term Bond Funds and Stable Value Funds. As long as my time horizon is longer than the funds duration then I don't fret. Those that tried to time things by going short in duration have been wrong so far. They will be wrong until they are right.
Showing up at the donut shop at 5 am to get them hot out of the oil is an example of successful market timing.
User avatar
ofcmetz
 
Posts: 1737
Joined: Tue Feb 08, 2011 9:09 pm
Location: Louisiana

Re: When to switch from short term bond to total bond

Postby STC » Mon Dec 31, 2012 1:25 pm

Doc wrote:
STC wrote:If anyone knew the answer to this, they would be a billionaire. Unfortunately, predicting the rate curve is a futile endeavor.


No that's not true. Larry Swedroe has stated that their is evidence that the best estimate of future yield curve is the current yield curve albeit it is not a very good one. If one had zero transaction costs one can make money by "riding the yield curve". That is buying longer notes in a rising yield curve environment and selling them before they mature. You can also see this strategy implemented in index funds. Just compare the theoretical yield difference between a 1-5 and a 0-5 Treasury index with a positive sloped yield curve. The 1-5 wins by more than can be accounted for by the duration difference. The thread I referenced earlier builds on this concept.



If momentum plays like this worked, then funds would start to play it, nullifying the effect. That is the nature of the market. So even if you can prove that this strategy did work, I would not go on betting that it will continue to work.
STC
 
Posts: 415
Joined: Wed Nov 14, 2012 10:22 am

Re: When to switch from short term bond to total bond

Postby sscritic » Mon Dec 31, 2012 1:30 pm

gotherelate wrote:When the moon is in the Seventh House and Jupiter aligns with Mars. (With all due respect to the Fifth Dimension and songwriters James Rado, Gerome Ragni and Galt MacDermot) I mean, why not?

I prefer the Hair soundtrack version.

Oops. I meant the Original Cast version.
Last edited by sscritic on Mon Dec 31, 2012 1:31 pm, edited 1 time in total.
sscritic
 
Posts: 21863
Joined: Thu Sep 06, 2007 9:36 am

Re: When to switch from short term bond to total bond

Postby kenyan » Mon Dec 31, 2012 1:30 pm

I just stick with IT. Many have been advocating short-term for about 3 years now. Thus far, they've missed on that bet every year. Eventually, they will be right, but who knows if they'll make up the lost ground (20% over 3 years and counting) when that occurs. I don't think I can time the markets well in either direction, so I'm staying the course.
Retirement investing is a marathon.
User avatar
kenyan
 
Posts: 2356
Joined: Thu Jan 13, 2011 1:16 am

Re: When to switch from short term bond to total bond

Postby z3r0c00l » Mon Dec 31, 2012 1:39 pm

Sadly, we only know the best time after it has passed. The best time to have done this was years ago, followed by most days after that point, years ago. The best answer you can get is that you should maximize your time in the market by investing all of your investable money today, at a set asset allocation, and adjust that allocation as you age, and hold to the plan until you die. It sounds boring, even a bit depressing, but it works.
z3r0c00l
 
Posts: 554
Joined: Fri Jul 06, 2012 12:43 pm
Location: NYC

Re: When to switch from short term bond to total bond

Postby Aptenodytes » Mon Dec 31, 2012 1:46 pm

The way I'd summarize the responses so far, you have some people saying don't even bother trying and some saying to base your duration on the yield curve.

I don't think anyone is supporting your original proposal of shifting in and out of total bond market, which itself has a blend of durations in it.

So either shift or don't. If you do, make use of the information contained in the yield curves, and use funds with narrowly defined duration bands, not total bond market.
User avatar
Aptenodytes
 
Posts: 2170
Joined: Tue Feb 08, 2011 9:39 pm

Re: When to switch from short term bond to total bond

Postby Doc » Mon Dec 31, 2012 1:54 pm

STC wrote: If momentum plays like this worked, then funds would start to play it, nullifying the effect. That is the nature of the market. So even if you can prove that this strategy did work, I would not go on betting that it will continue to work.


This is fixed income not equities. It is not a momentum play. It is based on the fact that the bond yield curve is usually upwardly sloping. In order to work the trading costs have to be lower than the amount that can be gained. The main point that is different than equities is that all players in the game do not have the same goals for their FI investments. Some invest in FI for the guaranteed income. Some to meet known future cash flow needs. Some are traders out for immediate trading profit rather than the coupons. Some are just using them to counter equity variance and hence it is variance not return that is their objective. Bond funds often are trying to come close to matching some bogie and can't tolerate tracking error. All these factors are what makes the bond market more complex than the equity market despite the simple arithmetic calculations of bond yields.

Ridng the Yield Curve.
A scientist looks for THE answer to a problem, an engineer looks for AN answer. Investing is not a science.
User avatar
Doc
 
Posts: 4840
Joined: Sat Feb 24, 2007 2:10 pm

Re: When to switch from short term bond to total bond

Postby tadamsmar » Mon Dec 31, 2012 2:01 pm

hoops777 wrote:I fully understand the reasoning in many people recommending staying short term because of inflation.What is confusing is when do you switch out of shorter term back to total bond?How do you determine that magic moment?
My other question is after reading so many posts about the inevitable decline of total bond when inflation kicks in,would it not be better in this unique bond environment to be in some well respected managed funds instead like dodge and cox or a pimco?Wouldn't a managed fund be better able to adjust to the inflation factor?It just seems like the total mkt index has no option but to take it's medicine for a few years when the inevitable inflation kicks in.Maybe a better solution would be to split your bond allocation in 3 well respected managed funds 1/3 1/3 1/3.???


How long have you been in short bonds? People were saying this was a unique bond environment back in 2010 and TBM gained 7+% in 2011 and beat the heck out of short bonds. In 2012, I think TBM is doing OK compared with short bonds, but I have not checked that closely.

So, the point (if there is one) where one needs to switch out of TBM is still in the future, and you are asking when to switch back to TBM!!!
User avatar
tadamsmar
 
Posts: 6124
Joined: Mon May 07, 2007 1:33 pm

Re: When to switch from short term bond to total bond

Postby mickeyd » Mon Dec 31, 2012 2:33 pm

What does your IPS say to do?

Follow that.

Next problem...
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle
User avatar
mickeyd
 
Posts: 3593
Joined: Fri Feb 23, 2007 4:19 pm
Location: Deep in the Heart of South Texas


Return to Investing - Theory, News & General

Who is online

Users browsing this forum: Baidu [Spider], Bing [Bot], bloom2708, Leeraar, retiredjg, Rodc, rwcox123, Yahoo [Bot], zaboomafoozarg and 65 guests