Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why?

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YRT70
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Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why?

Post by YRT70 » Mon Apr 29, 2019 10:16 am

I'm trying to learn more about asset allocation in portfolios. I'm quite new to it. I'm running tests with 60% stocks (half US half, global) and 40% bonds on this tool: https://www.portfoliovisualizer.com/bac ... allocation

It seems I get the best results with all bonds in long term treasury: the highest final balance and the lowest drop off in the worst year. But if I look at the common advice I see Vanguard recommending global bonds (which does worse in the tool) and the Boglehead wiki for my region (EU) recommends iShares aggregated bonds (probably also worse).

I understand back testing is no guarantee for the future. But why the discrepancy? Or am I missing something else?

Thanks.

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midareff
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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by midareff » Mon Apr 29, 2019 10:23 am

What was may not be again. We are also diversification fans.

HEDGEFUNDIE
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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by HEDGEFUNDIE » Mon Apr 29, 2019 10:25 am

midareff wrote:
Mon Apr 29, 2019 10:23 am
What was may not be again. We are also diversification fans.
Long term Treasuries provide the best diversification for equities of any bond fund.

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by AlohaJoe » Mon Apr 29, 2019 10:29 am

YRT70 wrote:
Mon Apr 29, 2019 10:16 am
I'm trying to learn more about asset allocation in portfolios. I'm quite new to it. I'm running tests with 60% stocks (half US half, global) and 40% bonds on this tool: https://www.portfoliovisualizer.com/bac ... allocation
PortfolioVisualizer only goes back to 1972. That means it begins right before the biggest bond bull market in world history. It is no surprise that long term Treasuries did well. But there have been other regimes in market history, some of which were not as good for long term bonds.

You can find other datasets -- SBBI, DMS, etc -- that include data before 1972 and see that long-term bonds aren't always the best thing when you back test.

The standard recommendation for intermediate term is a hedging your bets. You get a bit more yield than going totally short term but not as much as long-term. But you're also less likely to get caught but some regime change that smashes long-term bonds.

Some people feel that even intermediate-term bonds are taking an unnecessary risk. (Something about "taking the risk on the equity side not the bond side" so why take credit & term risk....)

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by pdavi21 » Mon Apr 29, 2019 10:42 am

1. Because back-testing doesn't go into the future.
2. Because your investment horizon may be less than 20-30 years.
3. Because diversification is a usually a free lunch. Instead of increasing duration risk in your bonds, you can simply increase your stock percentage. Some advocate a lower bond percentage AND LTT...it would have worked in the past, but can easily fail in the future.
4. Because INTL bonds are the largest asset class.
5. Many here do say to avoid corporate bonds (especially junk) in a stock-bond portfolio because they have a higher correlation with stocks. Those people say to replace your corporate bonds with a mix of stocks and bonds that will behave similarly.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by pdavi21 » Mon Apr 29, 2019 10:44 am

HEDGEFUNDIE wrote:
Mon Apr 29, 2019 10:25 am
midareff wrote:
Mon Apr 29, 2019 10:23 am
What was may not be again. We are also diversification fans.
Long term Treasuries [have, in the past, provided] the best diversification for equities of any bond fund.
I hold only EDV for bonds, but I still couldn't let that comment slide.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by midareff » Mon Apr 29, 2019 10:52 am

HEDGEFUNDIE wrote:
Mon Apr 29, 2019 10:25 am
midareff wrote:
Mon Apr 29, 2019 10:23 am
What was may not be again. We are also diversification fans.
Long term Treasuries provide the best diversification for equities of any bond fund.
Would not argue that point, not at all. OTOH, they are only one flavor of bond and in an extended period of inflation and rising FED interest rates may not do very well for a time period the investor may find important.

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by DB2 » Mon Apr 29, 2019 11:02 am

YRT70 wrote:
Mon Apr 29, 2019 10:16 am
I'm trying to learn more about asset allocation in portfolios. I'm quite new to it. I'm running tests with 60% stocks (half US half, global) and 40% bonds on this tool: https://www.portfoliovisualizer.com/bac ... allocation

It seems I get the best results with all bonds in long term treasury: the highest final balance and the lowest drop off in the worst year. But if I look at the common advice I see Vanguard recommending global bonds (which does worse in the tool) and the Boglehead wiki for my region (EU) recommends iShares aggregated bonds (probably also worse).

I understand back testing is no guarantee for the future. But why the discrepancy? Or am I missing something else?

Thanks.
We've seen lowering interest rates since the 1980s, so long term treasuries have done well and like most long term bonds, there is more risk, thus more potential reward. However, long term treasuries are very volatile and can be difficult for some investors to hold onto exclusively. So given inflation uncertainties over time and balance, a balanced bond approach which averages closer to an intermediate term is often preferred and recommended. As mentioned, some prefer a shorter term to have that "tighter leash" so to speak. But when 'things' hit the fan, long term treasuries have been the safe haven (I think they were up 30-some percent in 2008).

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by HEDGEFUNDIE » Mon Apr 29, 2019 11:53 am

pdavi21 wrote:
Mon Apr 29, 2019 10:44 am
HEDGEFUNDIE wrote:
Mon Apr 29, 2019 10:25 am
midareff wrote:
Mon Apr 29, 2019 10:23 am
What was may not be again. We are also diversification fans.
Long term Treasuries [have, in the past, provided] the best diversification for equities of any bond fund.
I hold only EDV for bonds, but I still couldn't let that comment slide.
If something could apply to every possibility being discussed, then it can go without saying.

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YRT70
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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by YRT70 » Mon Apr 29, 2019 12:03 pm

AlohaJoe wrote:
Mon Apr 29, 2019 10:29 am
PortfolioVisualizer only goes back to 1972. That means it begins right before the biggest bond bull market in world history. It is no surprise that long term Treasuries did well. But there have been other regimes in market history, some of which were not as good for long term bonds.

You can find other datasets -- SBBI, DMS, etc -- that include data before 1972 and see that long-term bonds aren't always the best thing when you back test.

The standard recommendation for intermediate term is a hedging your bets. You get a bit more yield than going totally short term but not as much as long-term. But you're also less likely to get caught but some regime change that smashes long-term bonds.

Some people feel that even intermediate-term bonds are taking an unnecessary risk. (Something about "taking the risk on the equity side not the bond side" so why take credit & term risk....)
Thanks for the feedback. Interesting.
pdavi21 wrote:
Mon Apr 29, 2019 10:42 am
2. Because your investment horizon may be less than 20-30 years.
Thanks for the insights. If I buy an ETF I wouldn't necessarily have to have such a long horizon right? Even with shorter time frames long term treasuries did best when I ran the analyser (I've only tested a couple of timeframes though). (And yes I understand past results don't necessarily say anything about the future.)
5. Many here do say to avoid corporate bonds (especially junk) in a stock-bond portfolio because they have a higher correlation with stocks. Those people say to replace your corporate bonds with a mix of stocks and bonds that will behave similarly.
In that way of thinking is something like Vanguard Global Bonds index fund acceptable? (~10% corporate bonds iirc)
DB2 wrote:
Mon Apr 29, 2019 11:02 am
We've seen lowering interest rates since the 1980s, so long term treasuries have done well and like most long term bonds, there is more risk, thus more potential reward. However, long term treasuries are very volatile and can be difficult for some investors to hold onto exclusively. So given inflation uncertainties over time and balance, a balanced bond approach which averages closer to an intermediate term is often preferred and recommended. As mentioned, some prefer a shorter term to have that "tighter leash" so to speak. But when 'things' hit the fan, long term treasuries have been the safe haven (I think they were up 30-some percent in 2008).
Interesting stuff. Thanks.
HEDGEFUNDIE wrote:
Mon Apr 29, 2019 11:53 am
If something could apply to every possibility being discussed, then it can go without saying.
I think that's probably true for people with more experience. For me personally it was a helpful comment.

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by pdavi21 » Mon Apr 29, 2019 12:53 pm

HEDGEFUNDIE wrote:
Mon Apr 29, 2019 11:53 am
pdavi21 wrote:
Mon Apr 29, 2019 10:44 am
HEDGEFUNDIE wrote:
Mon Apr 29, 2019 10:25 am
midareff wrote:
Mon Apr 29, 2019 10:23 am
What was may not be again. We are also diversification fans.
Long term Treasuries [have, in the past, provided] the best diversification for equities of any bond fund.
I hold only EDV for bonds, but I still couldn't let that comment slide.
If something could apply to every possibility being discussed, then it can go without saying.
It is specifically pertinent here, where the uncertainty of the future makes a higher volatility investment a riskier bet. LTT can lose money at the same time as stocks. LTT can gain less/lose more than Total INTL Bond when stocks tank.
1973 and 2018 are two market pullbacks where LTT would have been a worse diversifier for stocks than Total Bond/Total International Bond.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by aristotelian » Mon Apr 29, 2019 1:00 pm

Some people like the bond side to be for stability. While noncorrelated with stocks, LTT are just as risky. I would want at least a few years expenses in ST/IT bonds in case interest rates go up at the same time that stocks crash. Also, from a timing standpoint, buying LTT now would be a bad move with long term interest rates back near historic lows and the yield curve pretty much flat as a pancake.

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by Taylor Larimore » Mon Apr 29, 2019 1:09 pm

YRT70 wrote:
Mon Apr 29, 2019 10:16 am
I'm trying to learn more about asset allocation in portfolios. I'm quite new to it. I'm running tests with 60% stocks (half US half, global) and 40% bonds on this tool: https://www.portfoliovisualizer.com/bac ... allocation

It seems I get the best results with all bonds in long term treasury: the highest final balance and the lowest drop off in the worst year. But if I look at the common advice I see Vanguard recommending global bonds (which does worse in the tool) and the Boglehead wiki for my region (EU) recommends iShares aggregate bonds (probably also worse).

I understand back testing is no guarantee for the future. But why the discrepancy? Or am I missing something else?

Thanks.
YRT70:

Be wary of back testing. The government requires mutual funds to say it is dangerous. Believe it.
Jack Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by HomerJ » Mon Apr 29, 2019 1:29 pm

HEDGEFUNDIE wrote:
Mon Apr 29, 2019 10:25 am
midareff wrote:
Mon Apr 29, 2019 10:23 am
What was may not be again. We are also diversification fans.
Long term Treasuries provide the best diversification for equities of any bond fund.
Long term Treasuries PROVIDED the best diversification from 1982 onwards. Past tense.

And portfolio visualizer only goes back to 1972.

It's really that simple. If the next 30 years looks like the past 30 years, Long-term treasuries will do great.

But I don't that's possible, since interest rates can't really fall 10% from a starting point of 3%.
The J stands for Jay

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by pascalwager » Mon Apr 29, 2019 2:35 pm

aristotelian wrote:
Mon Apr 29, 2019 1:00 pm
Some people like the bond side to be for stability. While noncorrelated with stocks, LTT are just as risky. I would want at least a few years expenses in ST/IT bonds in case interest rates go up at the same time that stocks crash. Also, from a timing standpoint, buying LTT now would be a bad move with long term interest rates back near historic lows and the yield curve pretty much flat as a pancake.
Would this be a bucket for all redemptions during the stock crash, or would you maintain your usual total return approach to taking redemptions? Also, if a bucket, then I assume it would normally be maintained as a fixed $ amount rather than a fixed % amount.

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by aristotelian » Mon Apr 29, 2019 2:53 pm

pascalwager wrote:
Mon Apr 29, 2019 2:35 pm
aristotelian wrote:
Mon Apr 29, 2019 1:00 pm
Some people like the bond side to be for stability. While noncorrelated with stocks, LTT are just as risky. I would want at least a few years expenses in ST/IT bonds in case interest rates go up at the same time that stocks crash. Also, from a timing standpoint, buying LTT now would be a bad move with long term interest rates back near historic lows and the yield curve pretty much flat as a pancake.
Would this be a bucket for all redemptions during the stock crash, or would you maintain your usual total return approach to taking redemptions? Also, if a bucket, then I assume it would normally be maintained as a fixed $ amount rather than a fixed % amount.
I don't really believe in buckets but in that scenario short term bonds would be the only asset that isn't down, so spending them would have the same net effect as rebalancing.

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by btenny » Mon Apr 29, 2019 3:26 pm

Get on M* and look at what happened to long bonds of any kind during the 1950s and 1960s and 1970s when interest rates went up. The bonds fell in value by big amounts due to big inflation versus modest yield. So bonds got hammered. So a Long treasury bond fund is risky in a raising interest rate environment like we are currently experiencing. Economists and analysts now suggest Intermediate term bonds are the best compromise in this situation to give OK returns.

I could not find a graph to show the exact numbers but here is graph of ten year treasury which are similar to your question. It is for ten year treasury real return over time above inflation.

https://pensionpartners.com/what-real-r ... rs-expect/

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by dcabler » Mon Apr 29, 2019 3:37 pm

btenny wrote:
Mon Apr 29, 2019 3:26 pm
Get on M* and look at what happened to long bonds of any kind during the 1950s and 1960s and 1970s when interest rates went up. The bonds fell in value by big amounts due to big inflation versus modest yield. So bonds got hammered. So a Long treasury bond fund is risky in a raising interest rate environment like we are currently experiencing. Economists and analysts now suggest Intermediate term bonds are the best compromise in this situation to give OK returns.

I could not find a graph to show the exact numbers but here is graph of ten year treasury which are similar to your question. It is for ten year treasury real return over time above inflation.

https://pensionpartners.com/what-real-r ... rs-expect/
You can get a good idea by downloading the Simba spreadsheet - available here on bogleheads, with data going back pretty far...
https://www.bogleheads.org/wiki/Simba%2 ... preadsheet

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by Carlos Danger » Mon Apr 29, 2019 3:42 pm

Only bond option in 403(b) is a Janus intermediate-term bond fund, so I use that.

But in our Vanguard IRAs, I use TLT. Long term treasuries are less correlated with stocks than a bond market index, and have performed better and in my humble opinion will continue to perform better as well over the coming decade(s) than a total bond market index.

Yes, interest rates can't fall from present levels as far as they fell from higher levels, but they're not going back up significantly either. Demography is destiny and we know what the U.S. working age population will look like over the coming decade(s) and that cake has been baked - we can't time travel backwards and alter birth rates. Interest rates (and inflation) will be heavily influenced by demographic trends.

Fortunately, unlike China and the EU, which will be joining Japan in experiencing a DECLINE in their working age populations, the U.S. will merely experience a much lower rate of growth in working age population (A major reason why I believe it's not a great leap/stretch to expect U.S. equities to continue their recent outperformance). Our growth rate peaked in the late 90s, and will finally trough in the mid 2020s. We'll then see it rise again through the 2030s, but not to levels seen in the 90s or to the post-war average. Obviously after that it's all projections since we don't know for sure what birth rates will look like in the 2020s.

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by Carlos Danger » Mon Apr 29, 2019 3:43 pm

btenny wrote:
Mon Apr 29, 2019 3:26 pm
Get on M* and look at what happened to long bonds of any kind during the 1950s and 1960s and 1970s when interest rates went up.
Working age population growth was accelerating in the 1950s towards the post-war average, and spent the 60s and 70s WELL ABOVE it. IMO, interest rates will not be behaving in the 2020s, 30s, and 40s as they did in the 1950s, 60s, and 70s.

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by MindBogler » Mon Apr 29, 2019 3:48 pm

btenny wrote:
Mon Apr 29, 2019 3:26 pm
Get on M* and look at what happened to long bonds of any kind during the 1950s and 1960s and 1970s when interest rates went up. The bonds fell in value by big amounts due to big inflation versus modest yield. So bonds got hammered. So a Long treasury bond fund is risky in a raising interest rate environment like we are currently experiencing. Economists and analysts now suggest Intermediate term bonds are the best compromise in this situation to give OK returns.

I could not find a graph to show the exact numbers but here is graph of ten year treasury which are similar to your question. It is for ten year treasury real return over time above inflation.

https://pensionpartners.com/what-real-r ... rs-expect/
How do you know this is a rising rate environment? Seems like you're predicting bond yields can only go up? That advice has been wrong for over a decade. Bond yields in the US are much higher than other developed countries. Can you explain that differential?

I don't know why rates are where they are but the US is a major anomaly compared to the rest of the developed world.

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by Carlos Danger » Mon Apr 29, 2019 3:56 pm

MindBogler wrote:
Mon Apr 29, 2019 3:48 pm
I don't know why rates are where they are but the US is a major anomaly compared to the rest of the developed world.
Image

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by MindBogler » Mon Apr 29, 2019 3:59 pm

Carlos Danger wrote:
Mon Apr 29, 2019 3:56 pm
MindBogler wrote:
Mon Apr 29, 2019 3:48 pm
I don't know why rates are where they are but the US is a major anomaly compared to the rest of the developed world.
Image
That's an interesting slide with a reasonable r^2. Thanks for sharing.

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by Thesaints » Mon Apr 29, 2019 4:01 pm

YRT70 wrote:
Mon Apr 29, 2019 10:16 am
I understand back testing is no guarantee for the future. But why the discrepancy?
Because backtesting is no guarantee for the future.
If you backtest the NFL, this year there is the same chance of the Pats winning the superbowl as either the Raiders or the Redskins doing so. We know that it is not true, though.

More in general, the "discrepancy", if you like, comes from the fact that there are many possible future outcomes while there has been only a single past history to be observed ex-post. Chances in the past are not observable by analyzing the history that actually took place, yet they are important for determining future chances.

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by Carlos Danger » Mon Apr 29, 2019 4:04 pm

MindBogler wrote:
Mon Apr 29, 2019 3:59 pm

That's an interesting slide with a reasonable r^2. Thanks for sharing.
Wish I could have found a more recent one, I'd guess it's even higher now with some of those EU nations closer to the line.

I'm too lazy in my middle-age to do this sort of work myself anymore. :D

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by MindBogler » Mon Apr 29, 2019 4:16 pm

Carlos Danger wrote:
Mon Apr 29, 2019 4:04 pm
MindBogler wrote:
Mon Apr 29, 2019 3:59 pm

That's an interesting slide with a reasonable r^2. Thanks for sharing.
Wish I could have found a more recent one, I'd guess it's even higher now with some of those EU nations closer to the line.

I'm too lazy in my middle-age to do this sort of work myself anymore. :D
Now we just need to see an age trend overlay. :)

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by robertmcd » Mon Apr 29, 2019 4:38 pm

In my opinion when you are young you should hold the equity bond/portfolio with the highest drawdown you are comfortable with based on backtesting. As you age you should decrease fixed income duration while increasing fixed income allocation and decreasing equity allocation. At a certain equity allocation and bond duration it will be better to hold brokered and direct CD's for the yield premium vs. the diversification with equities benefit of duration. Your wage earnings should protect you from inflation when you are young so this plan is all about hedging risk.

And the amount of bond market timing bias that is present in this forum is truly astounding when anyone who is hesitant about going 100% equity all at once gets grilled for market timing.

It was difficult for me to buy zero duration strips (EDV) yielding less than 5 yr CD's back in the fall, but at my equity allocation it ended up being exactly what I needed when stocks were down ~ 20% in December. Anyone who was in risk parity had a rough go in the fall of 2018 until bonds yields reversed, but were well rewarded if they rebalanced into stocks from bonds.

50/50
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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by 50/50 » Mon Apr 29, 2019 4:48 pm

HomerJ wrote:
Mon Apr 29, 2019 1:29 pm
HEDGEFUNDIE wrote:
Mon Apr 29, 2019 10:25 am
midareff wrote:
Mon Apr 29, 2019 10:23 am
What was may not be again. We are also diversification fans.
Long term Treasuries provide the best diversification for equities of any bond fund.
Long term Treasuries PROVIDED the best diversification from 1982 onwards. Past tense.

And portfolio visualizer only goes back to 1972.

It's really that simple. If the next 30 years looks like the past 30 years, Long-term treasuries will do great.

But I don't that's possible, since interest rates can't really fall 10% from a starting point of 3%.
"since interest rates can't fall 10% from a starting point of 3%"

Sure they can. 3% x .90= 2.7% :happy

I'm guessing you mean 10 percentage points.

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by robertmcd » Mon Apr 29, 2019 4:52 pm

50/50 wrote:
Mon Apr 29, 2019 4:48 pm
HomerJ wrote:
Mon Apr 29, 2019 1:29 pm
HEDGEFUNDIE wrote:
Mon Apr 29, 2019 10:25 am
midareff wrote:
Mon Apr 29, 2019 10:23 am
What was may not be again. We are also diversification fans.
Long term Treasuries provide the best diversification for equities of any bond fund.
Long term Treasuries PROVIDED the best diversification from 1982 onwards. Past tense.

And portfolio visualizer only goes back to 1972.

It's really that simple. If the next 30 years looks like the past 30 years, Long-term treasuries will do great.

But I don't that's possible, since interest rates can't really fall 10% from a starting point of 3%.
"since interest rates can't fall 10% from a starting point of 3%"

Sure they can. 3% x .90= 2.7% :happy

I'm guessing you mean 10 percentage points.
Sure they can 3%-10% = -7%

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by dbr » Mon Apr 29, 2019 4:55 pm

Looking at a chart of interest rates in the US from 1960 to 2020 shows such an extraordinary rise for 20 years and then fall for the next 30 years that it is hard to imagine what back testing over that data set could possibly mean if intended to make estimates for future behavior of portfolios.

That doesn't mean that a Monte-Carlo test of stocks plus long bonds would not show that higher returning higher volatility bonds might not be a good combination with a portfolio heavy in stocks. For those having more modest allocations in stocks it is less clear whether or not increasing stock allocation might not be better than extending duration in bonds.

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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by HEDGEFUNDIE » Mon Apr 29, 2019 4:57 pm

HomerJ wrote:
Mon Apr 29, 2019 1:29 pm
HEDGEFUNDIE wrote:
Mon Apr 29, 2019 10:25 am
midareff wrote:
Mon Apr 29, 2019 10:23 am
What was may not be again. We are also diversification fans.
Long term Treasuries provide the best diversification for equities of any bond fund.
Long term Treasuries PROVIDED the best diversification from 1982 onwards. Past tense.

And portfolio visualizer only goes back to 1972.

It's really that simple. If the next 30 years looks like the past 30 years, Long-term treasuries will do great.

But I don't that's possible, since interest rates can't really fall 10% from a starting point of 3%.
1. The lower bound is not zero.
2. Just because something has gone down does not mean it can only go up from here.

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permport
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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by permport » Mon Apr 29, 2019 4:58 pm

I personally think everyone should have global bond exposure.

Domestic aggregate and Treasury only allocations are fine under the assumption that things will be "business as usual" during your investment lifetime.

However, there's no guarantee of that. And that's not reflected in the backtest data. An investment lifetime is a long time. That once in 100 year storm might happen during your life.

On top of that, adding international exposure or alternative asset class exposure is super cheap and easy these days, so there's really no reason not to.
Buy right and hold tight.

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HomerJ
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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by HomerJ » Mon Apr 29, 2019 10:41 pm

HEDGEFUNDIE wrote:
Mon Apr 29, 2019 4:57 pm
HomerJ wrote:
Mon Apr 29, 2019 1:29 pm
HEDGEFUNDIE wrote:
Mon Apr 29, 2019 10:25 am
midareff wrote:
Mon Apr 29, 2019 10:23 am
What was may not be again. We are also diversification fans.
Long term Treasuries provide the best diversification for equities of any bond fund.
Long term Treasuries PROVIDED the best diversification from 1982 onwards. Past tense.

And portfolio visualizer only goes back to 1972.

It's really that simple. If the next 30 years looks like the past 30 years, Long-term treasuries will do great.

But I don't that's possible, since interest rates can't really fall 10% from a starting point of 3%.
1. The lower bound is not zero.
2. Just because something has gone down does not mean it can only go up from here.
I don't think LTT will work the way you think it will work if rates go to -7%

I never said interest rates can only go up. I said 1982-2015 where rates fell from 12% to 2% is unlikely to repeat since we are currently at 3%.

Looking at past results of LTT where rates dropped from 12% to 2% and using those past results to make a plan for the next 10-20 years assuming the same returns doesn't make any sense.
The J stands for Jay

HEDGEFUNDIE
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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by HEDGEFUNDIE » Tue Apr 30, 2019 1:59 am

HomerJ wrote:
Mon Apr 29, 2019 10:41 pm
HEDGEFUNDIE wrote:
Mon Apr 29, 2019 4:57 pm
HomerJ wrote:
Mon Apr 29, 2019 1:29 pm
HEDGEFUNDIE wrote:
Mon Apr 29, 2019 10:25 am
midareff wrote:
Mon Apr 29, 2019 10:23 am
What was may not be again. We are also diversification fans.
Long term Treasuries provide the best diversification for equities of any bond fund.
Long term Treasuries PROVIDED the best diversification from 1982 onwards. Past tense.

And portfolio visualizer only goes back to 1972.

It's really that simple. If the next 30 years looks like the past 30 years, Long-term treasuries will do great.

But I don't that's possible, since interest rates can't really fall 10% from a starting point of 3%.
1. The lower bound is not zero.
2. Just because something has gone down does not mean it can only go up from here.
I don't think LTT will work the way you think it will work if rates go to -7%

I never said interest rates can only go up. I said 1982-2015 where rates fell from 12% to 2% is unlikely to repeat since we are currently at 3%.

Looking at past results of LTT where rates dropped from 12% to 2% and using those past results to make a plan for the next 10-20 years assuming the same returns doesn't make any sense.
Who said anything about returns?

We’re talking diversification. Not returns.

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HomerJ
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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by HomerJ » Tue Apr 30, 2019 10:15 am

HEDGEFUNDIE wrote:
Tue Apr 30, 2019 1:59 am

Who said anything about returns?

We’re talking diversification. Not returns.
Ah, I get your point now.

However, the OP is talking about returns. If you want to talk about something else, you probably should have started a different thread.
YRT70 wrote:
Mon Apr 29, 2019 10:16 am
I'm trying to learn more about asset allocation in portfolios. I'm quite new to it. I'm running tests with 60% stocks (half US half, global) and 40% bonds on this tool: https://www.portfoliovisualizer.com/bac ... allocation

It seems I get the best results with all bonds in long term treasury: the highest final balance and the lowest drop off in the worst year.
The J stands for Jay

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YRT70
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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by YRT70 » Tue Apr 30, 2019 12:41 pm

Thanks for all the feedback guys. So basically me backtesting certain scenarios was my way of trying to figure out what bonds I should choose. But now I learned that backtesting is probably less useful than I was thinking, I have a hard time making my decision.

Here's the background: I'm close to 50. I received a large sum of money. I've been investing most of the money in Vanguard World ETF. I read that investing in bonds will help stabilize the worth of my portfolio. I would like some safe guard in case there's a bear market coming.

Here's the shortlist I came up with. All of them are global and hedged to EUR (my currency) because this is what Vanguard recommends. Choice 1 is what the Bogleheads wiki suggests. Choice 2 is what I got from reading blogs who said it's best to only go for government. Choice 3 is an option I found myself and that happens to be available through my bank.

1) iShares Global Aggregate Bond UCITS ETF EUR Hedged (Acc) (EUR) | AGGH TER: 0.1
IE00BDBRDM35

2) Xtrackers II Global Government Bond UCITS ETF 1C - EUR Hedged (EUR) | DBZB TER: 0.25
LU0378818131

3) Vanguard Global Bond Index Fund Institutional Plus EUR Hedged Accumulation TER: 0.1
IE00BGCZ0B53

Any feedback on these options is welcome. Or any advice on how to make the decision also. My current preference would be to go for the lowest TER so either 1 or 3. I think I prefer 3 over 1 for no specific reason. 3 is a fund while 1 is an ETF, not sure how much that matters.

One of the questions that I haven't been able to answer is whether aggregated bonds serve my purpose better than only government bonds or vice versa.
Thesaints wrote:
Mon Apr 29, 2019 4:01 pm
Because backtesting is no guarantee for the future.
If you backtest the NFL, this year there is the same chance of the Pats winning the superbowl as either the Raiders or the Redskins doing so. We know that it is not true, though.

More in general, the "discrepancy", if you like, comes from the fact that there are many possible future outcomes while there has been only a single past history to be observed ex-post. Chances in the past are not observable by analyzing the history that actually took place, yet they are important for determining future chances.
That's an helpful example. I don't understand much from the bond market, but I understand sports quite well.

MotoTrojan
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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by MotoTrojan » Tue Apr 30, 2019 1:36 pm

While the NFL example is helpful, it is also a bit flawed. You can safely say the Pats have a better chance of winning the Superbowl than the Giants, but efficient market would say you cannot determine if short or long treasuries will perform better in the (near) future. A better example there is the spread of a game between the two teams. One may be way more likely to win, but picking that team in a bet straight-up will have a very small reward because of this fact. Instead you could bet with or against them outscoring the other team relative to the predicted differential (the spread) and have a presumed 50/50 shot, but also equal payout either way. The market works the same way. For example nobody is denying that Amazon will outgrow Bestbuy in the next year, but Amazon is trading at far more per dollar of earnings than Bestbuy is, which offsets this known fact.

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galeno
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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by galeno » Tue Apr 30, 2019 1:51 pm

Long term treasuries are very volatile. Short term treasuries yield too little. Medium term treasuries are a "just right" compromise.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

DonIce
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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by DonIce » Tue Apr 30, 2019 8:45 pm

HomerJ wrote:
Mon Apr 29, 2019 10:41 pm
Looking at past results of LTT where rates dropped from 12% to 2% and using those past results to make a plan for the next 10-20 years assuming the same returns doesn't make any sense.
But people do the same thing constantly with stocks. They look back on some previous number of years, whether 10 or 20 or 30 or 100, and extrapolate those returns into the future and assume a similar rate of return will be available, maybe subtracting a percent or two if they want to be "conservative". They don't take into account the relative expected "yields" of the stock market (the closest thing would be 1/PE ratio) at different times as that would be considered "market timing".

Is the implication of your statement that it is much easier to time the bond market, and that it is therefore a fruitful endeavor to time the bond market? For example, will buying LTT when they are yielding >x%, and selling LTT when they are yielding <y%, reliably lead to better returns than just holding LTT? If you take the normal reasoning applied to stocks, all one cay say about LTT is that it offers the highest available interest rate risk, and therefore should have the highest expected return out of the different durations of treasuries (LTT vs ITT vs STT).

To summarize, isn't saying that "you'll get worse returns if you buy LTT when yields are 2% than at 12%" the same as saying "you'll get worse returns if you buy TSM when PE is 30 than when PE is 10"? And yet people argue quite vehemently against the second point on this forum.

HEDGEFUNDIE
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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by HEDGEFUNDIE » Tue Apr 30, 2019 8:58 pm

galeno wrote:
Tue Apr 30, 2019 1:51 pm
Long term treasuries are very volatile. Short term treasuries yield too little. Medium term treasuries are a "just right" compromise.
Uncorrelated volatility is your friend.

xxd091
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Location: UK

Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by xxd091 » Wed May 01, 2019 3:59 am

For info-may be relevant
I am a U.K. investor-16 years retired
The Bond Allocation of my Portfolio is Vanguard Global Bond Index Fund (Hedged to the Pound)
Averaged over 5% return over the last 10 years(see Vanguard web site)
May be not so good going forward but has been a satisfactory “anchor to windward “for me
xxd091

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YRT70
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Re: Back testing assets: best results with long term treasury yet common advice is aggregated bonds or global bonds. Why

Post by YRT70 » Wed May 01, 2019 7:56 am

xxd091 wrote:
Wed May 01, 2019 3:59 am
For info-may be relevant
I am a U.K. investor-16 years retired
The Bond Allocation of my Portfolio is Vanguard Global Bond Index Fund (Hedged to the Pound)
Averaged over 5% return over the last 10 years(see Vanguard web site)
May be not so good going forward but has been a satisfactory “anchor to windward “for me
xxd091
Thank you.

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