Too Good To Be True Portfolio

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Bentonkb
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Too Good To Be True Portfolio

Post by Bentonkb »

I was fooling around with Portfolio Visualizer (edit: should be Portfolio Charts) and found a portfolio that seems too good to be true.

15% US market stock, 15% small cap value, 15% gold, 45% long bonds, 45% short bonds

The total is 135% so there would obviously be a little leverage required.

The result was a portfolio that has a very high Safe Withdrawal Rate and a low likelihood of an extensive drawdown.

https://portfoliocharts.com/portfolio/my-portfolio/ gives you a bunch of choices for which measure of risk and return you look at. I chose the withdrawal rate and the ulcer index, which quantifies the depth and length of the historical drawdowns. This portfolio looked pretty darn good by any measure.

What is it he fatal flaw here? Is it possible to make a real world portfolio like this?
Last edited by Bentonkb on Fri May 14, 2021 6:25 am, edited 2 times in total.
123
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Re: Too Good To Be True Portfolio

Post by 123 »

I'm not a math wizard but couldn't you just reduce your percentages to drop your total to 100%?

Edited to add:

If you squeeze the leverage out you might get something like:

13.33% US market stock, 13.33% small cap value, 13.33% gold, 29.97% long bonds, 29.97% short bonds

I didn't try those numbers but the math should hold true (such as it might be)
Last edited by 123 on Thu May 13, 2021 7:08 pm, edited 3 times in total.
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Astones
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Re: Too Good To Be True Portfolio

Post by Astones »

Bentonkb wrote: Thu May 13, 2021 6:46 pm What is it he fatal flaw here? Is it possible to make a real world portfolio like this?
Your leverage costs will be larger than the yield you get from the bonds.
HippoSir
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Re: Too Good To Be True Portfolio

Post by HippoSir »

Sounds somewhat similar to The Weird Portfolio (although it's not leveraged):

https://valuestockgeek.medium.com/the-w ... c0154d1c4a

My issue is always that I'm not sure the historical data for gold is really usable due to abandoning the gold standard.
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climber2020
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Re: Too Good To Be True Portfolio

Post by climber2020 »

Bentonkb wrote: Thu May 13, 2021 6:46 pm What is it he fatal flaw here?
Future may not resemble the past.
Marseille07
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Re: Too Good To Be True Portfolio

Post by Marseille07 »

You got a link to your simulation? Curious how you are 45% shorting bonds.
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Watty
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Re: Too Good To Be True Portfolio

Post by Watty »

Bentonkb wrote: Thu May 13, 2021 6:46 pm What is it he fatal flaw here?
Google "data mining".

When you backtest performance just you can find some combination of investments that trounced an index fund.
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firebirdparts
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Re: Too Good To Be True Portfolio

Post by firebirdparts »

The basic problem is we don’t have a time machine. Nothing in the portfolio can actually be counted on to behave the same way. SCV doesn’t work, bonds pay zero with likely negative asset value growth. Gold made two spectacular waves since 1970 perfectly timed, but we can’t predict the next one. Large cap is overpriced. I don’t trust it to recur.
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JamesDean44
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Re: Too Good To Be True Portfolio

Post by JamesDean44 »

Bentonkb wrote: Thu May 13, 2021 6:46 pm I was fooling around with Portfolio Visualizer and found a portfolio that seems too good to be true.

15% US market stock, 15% small cap value, 15% gold, 45% long bonds, 45% short bonds

The total is 135% so there would obviously be a little leverage required.

The result was a portfolio that has a very high Safe Withdrawal Rate and a low likelihood of an extensive drawdown. The Portfolio Visualizer site gives you a bunch of choices for which measure of risk and return you look at. I chose the withdrawal rate and the ulcer index, which quantifies the depth and length of the historical drawdowns. This portfolio looked pretty darn good by any measure.

What is it he fatal flaw here? Is it possible to make a real world portfolio like this?
It's certainly possible to make a real world portfolio like that. But it's a huge mistake to just rely upon a backtest.
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Bentonkb
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Re: Too Good To Be True Portfolio

Post by Bentonkb »

123 wrote: Thu May 13, 2021 6:52 pm I'm not a math wizard but couldn't you just reduce your percentages to drop your total to 100%?

Edited to add:

If you squeeze the leverage out you might get something like:

13.33% US market stock, 13.33% small cap value, 13.33% gold, 29.97% long bonds, 29.97% short bonds

I didn't try those numbers but the math should hold true (such as it might be)
I tried that and it performed worse than the Golden Butterfly.
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Bentonkb
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Re: Too Good To Be True Portfolio

Post by Bentonkb »

Astones wrote: Thu May 13, 2021 6:52 pm
Bentonkb wrote: Thu May 13, 2021 6:46 pm What is it he fatal flaw here? Is it possible to make a real world portfolio like this?
Your leverage costs will be larger than the yield you get from the bonds.
That is my suspicion. I know that futures are the cheapest way to get leverage, but I don't really understand how to backtest a portfolio made of some ETFs and some futures contracts.
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Bentonkb
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Re: Too Good To Be True Portfolio

Post by Bentonkb »

firebirdparts wrote: Thu May 13, 2021 7:45 pm The basic problem is we don’t have a time machine. Nothing in the portfolio can actually be counted on to
for behavee the same way. SCV doesn’t work, bonds pay zero with likely negative asset value growth. Gold made two spectacular waves since 1970 perfectly timed, but we can’t predict the next one. Large cap is overpriced. I don’t trust it to recur.
That is the kind of sobering negativity that I was looking for. All good points. I see where you are coming from, except for the comment about Small Cap Value not working. Why are you sceptical of SCV?
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Re: Too Good To Be True Portfolio

Post by whereskyle »

Bentonkb wrote: Thu May 13, 2021 6:46 pm I was fooling around with Portfolio Visualizer and found a portfolio that seems too good to be true.

15% US market stock, 15% small cap value, 15% gold, 45% long bonds, 45% short bonds

The total is 135% so there would obviously be a little leverage required.

The result was a portfolio that has a very high Safe Withdrawal Rate and a low likelihood of an extensive drawdown. The Portfolio Visualizer site gives you a bunch of choices for which measure of risk and return you look at. I chose the withdrawal rate and the ulcer index, which quantifies the depth and length of the historical drawdowns. This portfolio looked pretty darn good by any measure.

What is it he fatal flaw here? Is it possible to make a real world portfolio like this?
It's basically the permanent portfolio (25% stocks, 25% gold, 25% long-term bonds, 25% cash), which has been a solid choice since Harry Browne proposed it in the 80s. But firebirdparts is right. I wouldn't bet on small-cap value in the low interest rate world of globalization.
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Bentonkb
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Re: Too Good To Be True Portfolio

Post by Bentonkb »

Marseille07 wrote: Thu May 13, 2021 6:56 pm You got a link to your simulation? Curious how you are 45% shorting bonds.
I meant to say "short term bonds". I assume the simulation uses 2 year Treasury returns for short term and 20 year Treasury returns for long term.

I'm on my phone and the site doesn't work on mobile. https://portfoliocharts.com/portfolio/my-portfolio/
You will have to enter in the allocations manually. 15% each for total stock market, small cap value, and gold. 45% each for long duration bonds and short duration bonds.
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Re: Too Good To Be True Portfolio

Post by bloom2708 »

Just get long bonds up to 10% and then have them go to 1% over a couple years.

But wait until 10% to buy first.
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Bentonkb
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Re: Too Good To Be True Portfolio

Post by Bentonkb »

whereskyle wrote: Fri May 14, 2021 5:43 am
Bentonkb wrote: Thu May 13, 2021 6:46 pm

What is it he fatal flaw here? Is it possible to make a real world portfolio like this?
It's basically the permanent portfolio (25% stocks, 25% gold, 25% long-term bonds, 25% cash), which has been a solid choice since Harry Browne proposed it in the 80s. But firebirdparts is right. I wouldn't bet on small-cap value in the low interest rate world of globalization.
I'm sure there are lots of allocations that are roughly equivalent. Swapping out the 15% total stock and 15% SCV for 30% total stock (or world stock) might be one of them.

I'm having trouble figuring out practical means for getting a 1.35 leverage ratio, though. Nobody in their right mind would buy treasuries on margin, right? But what about a futures contract backed by cash? That would be equivalent to a leveraged treasuries position if the cash is slightly less than the notional value of the futures.
Last edited by Bentonkb on Fri May 14, 2021 6:32 am, edited 1 time in total.
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Bentonkb
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Re: Too Good To Be True Portfolio

Post by Bentonkb »

bloom2708 wrote: Fri May 14, 2021 6:20 am Just get long bonds up to 10% and then have them go to 1% over a couple years.

But wait until 10% to buy first.
I assume you are talking about the bond coupon rates?

I think your point is that the period from 1970 until now has been unusually good for investors holding long duration treasuries. If you lever up on them now with the interest rates so low it won't perform.
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Re: Too Good To Be True Portfolio

Post by snailderby »

Have you checked out these similar suggestions from other investors?

https://www.optimizedportfolio.com/all- ... -portfolio (leveraged All-Weather Portfolio)
viewtopic.php?t=327599 (leveraged U.S./ex-U.S. equities/long-term treasuries/gold)

The Efficient Investor also has a blog called the https://theleveragedindexer.com/. I'm tagging him here in case he has any insight to add:
EfficientInvestor wrote: Mon Oct 12, 2020 1:06 pm
The technical details of the best way to leverage a portfolio are beyond me, but perhaps you might find some insight in the long, HFEA thread:

viewtopic.php?t=272007 (part 1)
viewtopic.php?t=288192 (part 2)
IowaFarmBoy
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Re: Too Good To Be True Portfolio

Post by IowaFarmBoy »

Watty wrote: Thu May 13, 2021 7:28 pm
Bentonkb wrote: Thu May 13, 2021 6:46 pm What is it he fatal flaw here?
Google "data mining".

When you backtest performance just you can find some combination of investments that trounced an index fund.
This. I did some work with predictive models years ago. It is easy to build a model that fits the historic data perfectly but frequently those models are "overfitted" - they fit that data perfectly but are not robust in that they hold up in other scenarios. When building a model, the way to mitigate this is to use some portion of your data (like randomly select 60% of the data) to train the model and hold back 40% to validate it- to see if it works against this set of data also. I think things like monte carlo simulations are intended to mitigate this but I'm not sure how effective they really are.
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Re: Too Good To Be True Portfolio

Post by firebirdparts »

Bentonkb wrote: Thu May 13, 2021 9:09 pm That is the kind of sobering negativity that I was looking for. All good points. I see where you are coming from, except for the comment about Small Cap Value not working. Why are you sceptical of SCV?
Well, I just meant that when the premium was publicized, it appears it may have ceased to exist as a result. I would assume that it's just as good as total stocks, though. Just to let you know, I am a very optimistic person, and so that means a lot.

We discuss portfolios all the time, and when you look at the dataset of interest, the portfolios with a lot of gold (which is after all just some shiny rocks people pick up off the ground) just look spectacular. So I became attuned to the reason for that. There's a reason for it, and the reason is timing. $30 in 1970 on the gold standard, $660 in 1980. Remember the worst stock market period in recent history? Yes, that's it. Then, when the stock market took off, gold went to $260 in Y2K. Imagine you rebalanced there. Then in 2011, after the lost decade, holy cow Gold is $1800. It's also $1800 today. Gold is volatile, and it turned out to be a spectacular investment if you are rebalancing in the past. It may happen again, but you can't know.

Meanwhile, we know now that the last 40 years was a fabulous time to hold long bonds. We know that now, but i didn't know it 40 years ago. Wish I had.
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Re: Too Good To Be True Portfolio

Post by Marseille07 »

Bentonkb wrote: Fri May 14, 2021 6:11 am
Marseille07 wrote: Thu May 13, 2021 6:56 pm You got a link to your simulation? Curious how you are 45% shorting bonds.
I meant to say "short term bonds". I assume the simulation uses 2 year Treasury returns for short term and 20 year Treasury returns for long term.

I'm on my phone and the site doesn't work on mobile. https://portfoliocharts.com/portfolio/my-portfolio/
You will have to enter in the allocations manually. 15% each for total stock market, small cap value, and gold. 45% each for long duration bonds and short duration bonds.
Oh got it, thanks for the clarification. I got mixed up because some people have seriously argued buying instruments to short bonds, like TMV.
Last edited by Marseille07 on Fri May 14, 2021 9:32 am, edited 1 time in total.
EfficientInvestor
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Re: Too Good To Be True Portfolio

Post by EfficientInvestor »

snailderby wrote: Fri May 14, 2021 7:30 am The Efficient Investor also has a blog called the https://theleveragedindexer.com/. I'm tagging him here in case he has any insight to add:
The blog is no longer active. I took it down because I started an investment advisory business and didn't want to worry about old content that was not written with compliance in mind. I might republish blog posts at some point about the implementation of risk parity portfolios for individual investors. But for now, I will add a little insight....

- Just because 30% bonds, 15% gold, 45% LTT, and 45% STT has been more efficient in the past doesn't mean it will be most efficient in the future. I like to make broad assumptions of forward looking returns, plug those assumptions into the Portfolio Visualizer Forecasted Efficient Frontier tool, and use those outputs to set my base allocation. I assume that volatility and correlation will continue to be what they have been in the past. If you assume that stocks will have a 6-7% return going forward, bonds will return their current yield, and gold will track inflation, you get something like this:

42% Stock (26% US/16% Intl)
34% 10-yr Treasury, 13% LTT
11% Gold
Link - https://www.portfoliovisualizer.com/eff ... ints=false
- The expected volatility of this portfolio is 7.4% Standard Deviation (SD). If you would otherwise be a 100% stock investor and are comfortable with a comparable risk (~15% SD), you could lever this portfolio up by a factor of 2.

- Once you determine what you want your allocations to be, you can then determine what products will help you hit the allocations. If you are targeting a moderate volatility or less, you could probably use NTSX (90% S&P 500, 60% US treasuries) as a core holding and supplement with TLT (LTT), GLDM, and VXUS and hit your targets. If you have a higher volatility target, you might have to use more leverage than what NTSX can provide and need to consider other leverage sources (futures, options, etc.).
- Generally speaking, the cheapest leverage is futures contracts. The general rule of thumb I use is that the financing rate will average out around 3-month LIBOR, which is currently about 0.16%. Sometimes it's more than 3-month LIBOR, sometimes it's less. To take it a step further, you can calculate the current financing rate of any given contract by comparing the price of a given futures contract against the current spot price, subtract out the expected yield/dividend and storage costs, and be left with the financing rate. For non-commodities, there are no storage costs, so you just have to subtract out expected yield (bonds) or dividend (stocks).
- The expense ratios and volatility decay of LETFs make them unattractive, at least for me. You could potentially make a case for them being a better option in a taxable account. However, in taxable accounts, I would prefer using NTSX because it only has a 0.2% expense ratio and doesn't have the volatility decay issue. I have read that WisdomTree has a 90/60 fund with international stocks in the works.
- I use options regularly to implement my risk parity portfolio. If I only want leverage, I stick with futures. But if I want to use some leverage while also adding some hedges, I use options.
- I would get rid of the small cap value tilt and just stick with a total market (all world) approach. To me, the whole point of the small cap value tilt is to take on more risk and get more return. If you're going to be using leverage to take on more risk to target more return, why do you need the small cap value tilt?
- Short bonds (2 year) aren't much use right now given the low rates
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willthrill81
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Re: Too Good To Be True Portfolio

Post by willthrill81 »

If you're open to unorthodox portfolios, you might want to look at this one I discovered a while back: 40% small-cap value, 40% long-term Treasuries, and 20% gold. Since 1970, the lowest real returns it's had over a 10 year period were 5%, it's averaged 7.5% real returns, and it's produced positive real returns in every three year period. The 30 year SWR was 6.8%. :shock:
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DarkHelmetII
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Re: Too Good To Be True Portfolio

Post by DarkHelmetII »

Bentonkb wrote: Thu May 13, 2021 6:46 pm I was fooling around with Portfolio Visualizer (edit: should be Portfolio Charts) and found a portfolio that seems too good to be true.

15% US market stock, 15% small cap value, 15% gold, 45% long bonds, 45% short bonds

The total is 135% so there would obviously be a little leverage required.

The result was a portfolio that has a very high Safe Withdrawal Rate and a low likelihood of an extensive drawdown.

https://portfoliocharts.com/portfolio/my-portfolio/ gives you a bunch of choices for which measure of risk and return you look at. I chose the withdrawal rate and the ulcer index, which quantifies the depth and length of the historical drawdowns. This portfolio looked pretty darn good by any measure.

What is it he fatal flaw here? Is it possible to make a real world portfolio like this?
Seems to me that you've stumbled upon a variant of the Harry Browne Permanent Portfolio which is 25% Stock 25% Stock % Long-term treasuries 25 % Gold 25% Cash.

https://www.portfoliovisualizer.com/bac ... tion6_3=25

IMHO the Harry Browne Permanent Portfolio is not too good to be true. It is formulated based on a simple enough yet rationale premise and has proven to avoid gut-wrenching downturns in the late 80's, dot com bust, great recession, and most recently COVID dip. Said that, still there is no free lunch in that for long-term goals (e.g. 25 year-old investing for retirement), some may argue it is too conservative.
Last edited by DarkHelmetII on Fri May 14, 2021 10:21 am, edited 1 time in total.
hi_there
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Re: Too Good To Be True Portfolio

Post by hi_there »

"15% US market stock, 15% small cap value, 15% gold, 45% long bonds, 45% short bonds

The total is 135% so there would obviously be a little leverage required."

What does it mean to borrow 35% of your portfolio to go 45% short bonds?
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Bentonkb
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Re: Too Good To Be True Portfolio

Post by Bentonkb »

snailderby wrote: Fri May 14, 2021 7:30 am Have you checked out these similar suggestions from other investors?

https://www.optimizedportfolio.com/all- ... -portfolio (leveraged All-Weather Portfolio)
viewtopic.php?t=327599 (leveraged U.S./ex-U.S. equities/long-term treasuries/gold)

The Efficient Investor also has a blog called the https://theleveragedindexer.com/. I'm tagging him here in case he has any insight to add:
EfficientInvestor wrote: Mon Oct 12, 2020 1:06 pm
The technical details of the best way to leverage a portfolio are beyond me, but perhaps you might find some insight in the long, HFEA thread:

viewtopic.php?t=272007 (part 1)
viewtopic.php?t=288192 (part 2)
I'm familiar with Hedgefundie and optimizedportfolio.com. They both use leveraged ETFs, which is an idea I first heard about from Frank Vasquez on his risk parity radio podcast. I am a Vasquez fan and think very highly of his work, but I'm not comfortable using UPRO and TMF as a long term hold strategy. They are designed as a short term tool. Franks says that they have worked so far, but I am afraid that they will malfunction in an extended crisis.

The leveragedindexer site was unavailable when I checked it. Do they use futures? Reading the thread by Market Timer introduced me to the idea of using futures contracts for leverage.
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Re: Too Good To Be True Portfolio

Post by EfficientInvestor »

Bentonkb wrote: Fri May 14, 2021 10:54 am The leveragedindexer site was unavailable when I checked it. Do they use futures? Reading the thread by Market Timer introduced me to the idea of using futures contracts for leverage.
See my post upthread: https://www.bogleheads.org/forum/viewt ... 5#p6006385
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Re: Too Good To Be True Portfolio

Post by aristotelian »

Seems similar to the "Larry" (Sweetie) portfolio. Works if SCV premium holds true but a poor sequence for SCV could be devastating. I would also hesitate to extrapolate positive real return from bond when current TIPS yields are negative and bonds have been benefiting from long term declining rates.
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Bentonkb
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Re: Too Good To Be True Portfolio

Post by Bentonkb »

EfficientInvestor wrote: Fri May 14, 2021 9:01 am
snailderby wrote: Fri May 14, 2021 7:30 am The Efficient Investor also has a blog called the https://theleveragedindexer.com/. I'm tagging him here in case he has any insight to add:

- Just because 30% bonds, 15% gold, 45% LTT, and 45% STT has been more efficient in the past doesn't mean it will be most efficient in the future. I like to make broad assumptions of forward looking returns, plug those assumptions into the Portfolio Visualizer Forecasted Efficient Frontier tool, and use those outputs to set my base allocation. I assume that volatility and correlation will continue to be what they have been in the past. If you assume that stocks will have a 6-7% return going forward, bonds will return their current yield, and gold will track inflation, you get something like this:

42% Stock (26% US/16% Intl)
34% 10-yr Treasury, 13% LTT
11% Gold
Link - https://www.portfoliovisualizer.com/eff ... ints=false
- The expected volatility of this portfolio is 7.4% Standard Deviation (SD). If you would otherwise be a 100% stock investor and are comfortable with a comparable risk (~15% SD), you could lever this portfolio up by a factor of 2.
Thank you for typing up all of that for me. I've got some homework to do.

Your point about over fitting the historical data is a good one. The small cap value premium might be such a case.

My objective was not to match the SD of the stock market. That would be too much volatility for a post retirement portfolio, IMO. I was trying to get a Safe Withdrawal Rate that was up near 7% while keeping the volatility down in the same range as the Golden Butterfly portfolio.

I tried levering up the Golden Butterfly, but that produced too much volatility. It only seemed to work if I put a very heavy weight on the bonds, then applied leverage. As others have pointed out, the future yield of long duration bonds is not likely to be as good as it was in the past. That might ruin this idea.

Where should I go to learn about the practical aspects of investing in futures now that you have taken down your blog? It isn't a widely discussed topic among DIY investors.
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Bentonkb
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Re: Too Good To Be True Portfolio

Post by Bentonkb »

hi_there wrote: Fri May 14, 2021 10:20 am "15% US market stock, 15% small cap value, 15% gold, 45% long bonds, 45% short bonds

The total is 135% so there would obviously be a little leverage required."

What does it mean to borrow 35% of your portfolio to go 45% short bonds?
Sorry. I meant "short duration" bonds.
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Re: Too Good To Be True Portfolio

Post by secondopinion »

hi_there wrote: Fri May 14, 2021 10:20 am "15% US market stock, 15% small cap value, 15% gold, 45% long bonds, 45% short bonds

The total is 135% so there would obviously be a little leverage required."

What does it mean to borrow 35% of your portfolio to go 45% short bonds?
I would agree that this is a bad idea. What about 15% US market stock, 15% small cap value, 15% gold, 45% long bonds, 10% short bonds

This is not my idea of a solid portfolio for most people (gold is debatable). It supposes a long investment timeframe (since the short term investments are relatively few to all the long term investments) but it holds too few of stocks in my opinion. Either it is a long timeframe portfolio (20% US market stock, 20% small cap value, 15% gold, 45% long bonds) that has a lot of matched liabilities at the end; or the portfolio need more short term bonds (15% US market stock, 15% small cap value, 15% gold, 20% long bonds, 25% short bonds) to match liabilities that exist presently (as in retirement). In short, the goals it is meant for are kind of contradictory.

I am not a gold holder, and I will never hold it in this amount.
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Re: Too Good To Be True Portfolio

Post by scout1 »

Bentonkb wrote: Fri May 14, 2021 11:39 am
hi_there wrote: Fri May 14, 2021 10:20 am "15% US market stock, 15% small cap value, 15% gold, 45% long bonds, 45% short bonds

The total is 135% so there would obviously be a little leverage required."

What does it mean to borrow 35% of your portfolio to go 45% short bonds?
Sorry. I meant "short duration" bonds.
I thought he was making a joke. Would you take out a loan to buy short duration bonds?
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inittowinit
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Re: Too Good To Be True Portfolio

Post by inittowinit »

climber2020 wrote: Thu May 13, 2021 6:56 pm
Bentonkb wrote: Thu May 13, 2021 6:46 pm What is it he fatal flaw here?
Future may not resemble the past.
/thread
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Re: Too Good To Be True Portfolio

Post by EfficientInvestor »

Bentonkb wrote: Fri May 14, 2021 11:27 am Where should I go to learn about the practical aspects of investing in futures now that you have taken down your blog? It isn't a widely discussed topic among DIY investors.
These videos provide a good general overview of futures contracts: https://www.tdameritrade.com/futures/ed ... asics.html

This article provides a good explanation of how the pricing of a futures contract works: https://www.futurelearn.com/info/course ... teps/39296
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Re: Too Good To Be True Portfolio

Post by EfficientInvestor »

Bentonkb wrote: Fri May 14, 2021 11:27 am Where should I go to learn about the practical aspects of investing in futures now that you have taken down your blog? It isn't a widely discussed topic among DIY investors.
After you watch the videos and read the articles I linked in previous post, take a look at the "Prior Settle" Quotes of the 10-year treasury to put the cost of carry equation into action. Note that the equation I linked in previous post doesn't include the expected yield. See my explanation below of how this can be accounted for.

Future Price = (1 + r)^time * Spot Price
r = interest rate (in our case, interest rate should account for the premium you need to pay for the financing rate minus the discount your would get for the expected yield). In other words, r = financing rate - yield

10-year treasury quotes: https://www.cmegroup.com/trading/intere ... lobex.html
Take note that the 10-year contract has maturities from 6.5 years to 10 years. So let's assume the comparable, consolidated interest rate is an average of the US 7 year (https://www.cnbc.com/quotes/US7Y) and US 10 year (https://www.cnbc.com/quotes/US10Y).

Current quotes:
The June 2021 quote is 132 + 105/320 = 132.188
The Sep 2021 quote is 131 + 145/320 = 131.313

Plug in the current quotes for future and spot price, the 3 month time interval (3/12) for t, and solve for r.

Future/Spot = 131.313/132.188 = 0.993
Raise both side of equation to a power of 12/3=4
Leaves you with 0.9738 = 1 - r
r = 2.62%
In comparison, the 7-year treasury yield is 1.29% and the 10-year yield is currently 1.65%. Let's call the average 1.47%. Based on this, the current financing rate is -1.15%/year (as in you get paid to borrow). In comparison, the current 3-month LIBOR is 0.15%. So the contract is currently "rolling cheap" by 1.30%.

Here is a CME document that explains these calculations in a different way and defines "rolling cheap" vs "rolling rich": https://www.cmegroup.com/education/file ... ancing.pdf
james22
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Joined: Tue Aug 21, 2007 2:22 pm

Re: Too Good To Be True Portfolio

Post by james22 »

Why not 100% Amazon?
When people say things are different, 20 percent of the time they are right. John Templeton
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