First 20% of bonds in long-term Treasuries

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

Post by Forester » Tue May 19, 2020 1:20 pm

international001 wrote:
Tue May 19, 2020 6:25 am
Forester wrote:
Mon May 18, 2020 6:18 pm
Should non-Americans have the bulk of their bonds in LT treasuries?
You should IMO, at least that 20%
Currency risk is small, sine LTT have high volatility and when in conjunction with stocks, volatility still gets higher
In my mind, exchange beteween major currencies like EUR/DOLLAR is about 8%, so as long as your portfolio has higher volatility that that, currency doesn't doesn't matter much. If your currency are argentinan pesos, then it may be different.
My thinking is that US treasuries may be more beneficial for non-Americans than Americans especially since their cost of living will be in their own currency and the USD will spike higher when SHTF.

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

Post by Anon9001 » Tue May 19, 2020 1:33 pm

international001 wrote:
Tue May 19, 2020 6:25 am
Forester wrote:
Mon May 18, 2020 6:18 pm
Should non-Americans have the bulk of their bonds in LT treasuries?
You should IMO, at least that 20%
Currency risk is small, sine LTT have high volatility and when in conjunction with stocks, volatility still gets higher
In my mind, exchange beteween major currencies like EUR/DOLLAR is about 8%, so as long as your portfolio has higher volatility that that, currency doesn't doesn't matter much. If your currency are argentinan pesos, then it may be different.
It depends entirely what Non-Americans you are talking about. For me with local inflation at 6-8% buying LTT is junk unless it is currency hedged which will bring the returns much closer to my local bonds.

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

Post by Forester » Wed May 20, 2020 3:12 am

Anon9001 wrote:
Tue May 19, 2020 1:33 pm
international001 wrote:
Tue May 19, 2020 6:25 am
Forester wrote:
Mon May 18, 2020 6:18 pm
Should non-Americans have the bulk of their bonds in LT treasuries?
You should IMO, at least that 20%
Currency risk is small, sine LTT have high volatility and when in conjunction with stocks, volatility still gets higher
In my mind, exchange beteween major currencies like EUR/DOLLAR is about 8%, so as long as your portfolio has higher volatility that that, currency doesn't doesn't matter much. If your currency are argentinan pesos, then it may be different.
It depends entirely what Non-Americans you are talking about. For me with local inflation at 6-8% buying LTT is junk unless it is currency hedged which will bring the returns much closer to my local bonds.
I mean that non-Americans should mostly own US bonds, as the USD is the senior funding currency and all things being equal should rise more than other currencies when global stocks fall.

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

Post by Noobvestor » Wed May 20, 2020 5:01 am

Forester wrote:
Mon May 18, 2020 6:18 pm
Should non-Americans have the bulk of their bonds in LT treasuries?
I wouldn't personally. Currency risk goes on the stock side of the portfolio for me. Long bonds are volatile enough without adding currency risk. I'm trying to imagine myself living in, say, Europe, and deciding to buy dismal 1%-yielding US long bonds ... and can't picture it. Seems wild. Maybe some US bonds if you have currency-hedged fund/ETF options, but outside of that, the currency fluctuations will dominate the situation.

More broadly (and I'm open to better rules of thumb) I think having at least 50% of portfolio assets denominated in your home-country currency is wise. Usually, the easiest way to get there is through bonds. E.g. A European with a 70/30 portfolio could be 50% ex-Europe stocks, 20% European stocks, 30% European bonds. If you start to switch out the bonds for Treasuries you start to up volatility a lot in Euro-denominated terms.

It's easy for US-based investors to forget currency risks, because for most of us it's just not a big deal. I'm 60/40 stocks/bonds, 50/50 US/international in stocks, for example, which means in total 70% of my portfolio is in USD (30% stocks, 40% bonds). No real issue there. For someone living in a country with a much smaller stock market cap, currency can be a harder thing to balance w/o hedged funds.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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

Post by Noobvestor » Wed May 20, 2020 5:04 am

Forester wrote:
Wed May 20, 2020 3:12 am
I mean that non-Americans should mostly own US bonds, as the USD is the senior funding currency and all things being equal should rise more than other currencies when global stocks fall.
Portfolios aren't just for hedging crises - long-term currency divergences could be very problematic for a non-US investors using USD bonds.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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

Post by Forester » Wed May 20, 2020 5:47 am

Noobvestor wrote:
Wed May 20, 2020 5:01 am
Forester wrote:
Mon May 18, 2020 6:18 pm
Should non-Americans have the bulk of their bonds in LT treasuries?
I wouldn't personally. Currency risk goes on the stock side of the portfolio for me. Long bonds are volatile enough without adding currency risk. I'm trying to imagine myself living in, say, Europe, and deciding to buy dismal 1%-yielding US long bonds ... and can't picture it. Seems wild. Maybe some US bonds if you have currency-hedged fund/ETF options, but outside of that, the currency fluctuations will dominate the situation.

More broadly (and I'm open to better rules of thumb) I think having at least 50% of portfolio assets denominated in your home-country currency is wise. Usually, the easiest way to get there is through bonds. E.g. A European with a 70/30 portfolio could be 50% ex-Europe stocks, 20% European stocks, 30% European bonds. If you start to switch out the bonds for Treasuries you start to up volatility a lot in Euro-denominated terms.

It's easy for US-based investors to forget currency risks, because for most of us it's just not a big deal. I'm 60/40 stocks/bonds, 50/50 US/international in stocks, for example, which means in total 70% of my portfolio is in USD (30% stocks, 40% bonds). No real issue there. For someone living in a country with a much smaller stock market cap, currency can be a harder thing to balance w/o hedged funds.
But wouldn't LT US government bonds be on the "other side" of a global portfolio? Maybe you're right, but I'm looking at it in terms of hedging global stocks. If US LT bonds are selling off, volatile in their own right, that would imply the global stock leg of the portfolio is probably doing OK.

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

Post by Day9 » Fri May 22, 2020 11:37 pm

Forester wrote:
Wed May 20, 2020 5:47 am
Noobvestor wrote:
Wed May 20, 2020 5:01 am
Forester wrote:
Mon May 18, 2020 6:18 pm
Should non-Americans have the bulk of their bonds in LT treasuries?
I wouldn't personally. Currency risk goes on the stock side of the portfolio for me. Long bonds are volatile enough without adding currency risk. I'm trying to imagine myself living in, say, Europe, and deciding to buy dismal 1%-yielding US long bonds ... and can't picture it. Seems wild. Maybe some US bonds if you have currency-hedged fund/ETF options, but outside of that, the currency fluctuations will dominate the situation.

More broadly (and I'm open to better rules of thumb) I think having at least 50% of portfolio assets denominated in your home-country currency is wise. Usually, the easiest way to get there is through bonds. E.g. A European with a 70/30 portfolio could be 50% ex-Europe stocks, 20% European stocks, 30% European bonds. If you start to switch out the bonds for Treasuries you start to up volatility a lot in Euro-denominated terms.

It's easy for US-based investors to forget currency risks, because for most of us it's just not a big deal. I'm 60/40 stocks/bonds, 50/50 US/international in stocks, for example, which means in total 70% of my portfolio is in USD (30% stocks, 40% bonds). No real issue there. For someone living in a country with a much smaller stock market cap, currency can be a harder thing to balance w/o hedged funds.
But wouldn't LT US government bonds be on the "other side" of a global portfolio? Maybe you're right, but I'm looking at it in terms of hedging global stocks. If US LT bonds are selling off, volatile in their own right, that would imply the global stock leg of the portfolio is probably doing OK.
The key to this is to think in REAL (after inflation) terms. The exception to your post is a stagflation scenario like the 70s where there is high inflation yet the stock market is not going up.
I'm just a fan of the person I got my user name from

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

Post by Forester » Sat May 23, 2020 6:40 am

Day9 wrote:
Fri May 22, 2020 11:37 pm
Forester wrote:
Wed May 20, 2020 5:47 am
Noobvestor wrote:
Wed May 20, 2020 5:01 am
Forester wrote:
Mon May 18, 2020 6:18 pm
Should non-Americans have the bulk of their bonds in LT treasuries?
I wouldn't personally. Currency risk goes on the stock side of the portfolio for me. Long bonds are volatile enough without adding currency risk. I'm trying to imagine myself living in, say, Europe, and deciding to buy dismal 1%-yielding US long bonds ... and can't picture it. Seems wild. Maybe some US bonds if you have currency-hedged fund/ETF options, but outside of that, the currency fluctuations will dominate the situation.

More broadly (and I'm open to better rules of thumb) I think having at least 50% of portfolio assets denominated in your home-country currency is wise. Usually, the easiest way to get there is through bonds. E.g. A European with a 70/30 portfolio could be 50% ex-Europe stocks, 20% European stocks, 30% European bonds. If you start to switch out the bonds for Treasuries you start to up volatility a lot in Euro-denominated terms.

It's easy for US-based investors to forget currency risks, because for most of us it's just not a big deal. I'm 60/40 stocks/bonds, 50/50 US/international in stocks, for example, which means in total 70% of my portfolio is in USD (30% stocks, 40% bonds). No real issue there. For someone living in a country with a much smaller stock market cap, currency can be a harder thing to balance w/o hedged funds.
But wouldn't LT US government bonds be on the "other side" of a global portfolio? Maybe you're right, but I'm looking at it in terms of hedging global stocks. If US LT bonds are selling off, volatile in their own right, that would imply the global stock leg of the portfolio is probably doing OK.
The key to this is to think in REAL (after inflation) terms. The exception to your post is a stagflation scenario like the 70s where there is high inflation yet the stock market is not going up.
I know but I'm looking at this in terms of US bonds vs (for example) Euro denominated bonds.

Risk/quality pyramid

US or Japanese bonds
European & other developed bonds
Emerging bonds & developed equities
Emerging equities

Investor wherever they reside in the world should barbell their global equities mostly with US LT bonds (and a smaller amount of bonds denominated in local currency).

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

Post by international001 » Sun Jun 07, 2020 7:32 pm

Noobvestor wrote:
Wed May 20, 2020 5:01 am
Forester wrote:
Mon May 18, 2020 6:18 pm
Should non-Americans have the bulk of their bonds in LT treasuries?
I wouldn't personally. Currency risk goes on the stock side of the portfolio for me. Long bonds are volatile enough without adding currency risk. I'm trying to imagine myself living in, say, Europe, and deciding to buy dismal 1%-yielding US long bonds ... and can't picture it. Seems wild. Maybe some US bonds if you have currency-hedged fund/ETF options, but outside of that, the currency fluctuations will dominate the situation.
Why not? Usually the overall AA of your portfolio (like a 60/40) has higher volatility than currency exchange. So you can forget about it.
If you only have bonds, or a CD, then it's a different issue.

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

Post by Noobvestor » Mon Jun 08, 2020 3:37 am

international001 wrote:
Sun Jun 07, 2020 7:32 pm
Noobvestor wrote:
Wed May 20, 2020 5:01 am
Forester wrote:
Mon May 18, 2020 6:18 pm
Should non-Americans have the bulk of their bonds in LT treasuries?
I wouldn't personally. Currency risk goes on the stock side of the portfolio for me. Long bonds are volatile enough without adding currency risk. I'm trying to imagine myself living in, say, Europe, and deciding to buy dismal 1%-yielding US long bonds ... and can't picture it. Seems wild. Maybe some US bonds if you have currency-hedged fund/ETF options, but outside of that, the currency fluctuations will dominate the situation.
Why not? Usually the overall AA of your portfolio (like a 60/40) has higher volatility than currency exchange. So you can forget about it.
If you only have bonds, or a CD, then it's a different issue.
Having all your bonds in a foreign currency is going to add volatility on the bond side, where ideally you want things safe and stable for future spending (presumably) in your home-country currency - I'm not sure I understand your point, but pretty sure there is broad consensus on this.

Even if (and I don't advocate this) someone is entirely in long bonds, which are high-volatility in the short run, the whole point that the long-bond advocates have been trying to make is that they're predictable in the long run. Add currency fluctuations and they no longer are.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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

Post by international001 » Mon Jun 08, 2020 5:48 pm

Noobvestor wrote:
Mon Jun 08, 2020 3:37 am

Having all your bonds in a foreign currency is going to add volatility on the bond side, where ideally you want things safe and stable for future spending (presumably) in your home-country currency - I'm not sure I understand your point, but pretty sure there is broad consensus on this.

Even if (and I don't advocate this) someone is entirely in long bonds, which are high-volatility in the short run, the whole point that the long-bond advocates have been trying to make is that they're predictable in the long run. Add currency fluctuations and they no longer are.
Two wrong things with your arguments

- All recommendations for USD hedge bonds are for the bonds alone. They don't mention a portfolio that is a mix of stocks and bonds
- Currency fluctuations are as predictable as stocks. Some expectation and some variance. For 'serious' currencies, like USD, EURO, the expectation is 0% return and about 8% volatility

If you have : RET-in-your-currency = EXCH-RATE * RET-in-USD

In a simplified mathematical model, the stdev(RET-in-your-currency) is max(stdev(EXCH-RATE), stdev(RET-in-USD)). So as long as RET-in-USD of your overall portfolio is > 10% (think about 60/40) you shouldn't have to worry to much about EXCH-RATE

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

Post by Noobvestor » Mon Jun 08, 2020 6:22 pm

international001 wrote:
Mon Jun 08, 2020 5:48 pm
Noobvestor wrote:
Mon Jun 08, 2020 3:37 am

Having all your bonds in a foreign currency is going to add volatility on the bond side, where ideally you want things safe and stable for future spending (presumably) in your home-country currency - I'm not sure I understand your point, but pretty sure there is broad consensus on this.

Even if (and I don't advocate this) someone is entirely in long bonds, which are high-volatility in the short run, the whole point that the long-bond advocates have been trying to make is that they're predictable in the long run. Add currency fluctuations and they no longer are.
Two wrong things with your arguments

- All recommendations for USD hedge bonds are for the bonds alone. They don't mention a portfolio that is a mix of stocks and bonds
- Currency fluctuations are as predictable as stocks. Some expectation and some variance. For 'serious' currencies, like USD, EURO, the expectation is 0% return and about 8% volatility

If you have : RET-in-your-currency = EXCH-RATE * RET-in-USD

In a simplified mathematical model, the stdev(RET-in-your-currency) is max(stdev(EXCH-RATE), stdev(RET-in-USD)). So as long as RET-in-USD of your overall portfolio is > 10% (think about 60/40) you shouldn't have to worry to much about EXCH-RATE
A lot depends on how you view bonds. There is the 'duration matching' argument a lot of people in this thread have advocated, but if you're matching future expected liabilities, then long-term drift in relative currency valuations could have a huge impact.

Let's take a simple, real-world example. Over the past ten years, the Euro has lost around 20% of its value against the dollar. Project that forward with current rates: you, a European, buy a ten-year USD bond today at less than 1%. In 10 years, your return in USD will be around 10%. But if you add in a 20% shift in relative currency valuations, you could end up with anywhere from -10% to +30%. Currency swamps interest either way.

All of this smells a bit like investing in the rear-view mirror, regardless. The strong dollar makes it attractive, but if you believe (as you stated) that the expected return on currency is 0% then I would think a foreign investor would be (rightly) concerned with mean reversion. Especially if inflation shows up and it's country-specific to (for instance) a nation printing a lot of money, that could really bite foreign investors IMHO.
Currency fluctuations are as predictable as stocks
I am not sure I know what you mean by this, but it sure sets off some alarm bells for me, personally. Stocks are anything but predictable, which is part of the reason I hold bonds, which are much more predictable. I don't want to add stock-like unpredictability to my fixed income. Really, though, without a thorough analysis (study, whitepaper, etc... ) spanning a long period of history this all feels rather academic.
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Re: First 20% of bonds in long-term Treasuries

Post by Forester » Tue Jun 09, 2020 6:53 am

This interview spooked me a bit https://youtu.be/yfVIZN8VrEQ

Who knows what will happen. I do think the USD will cede a little ground + every major economy will have 3% to 4% inflation in the 2020s. That must be more than what the market expects.

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

Post by international001 » Tue Jun 09, 2020 10:52 am

Noobvestor wrote:
Mon Jun 08, 2020 6:22 pm


All of this smells a bit like investing in the rear-view mirror, regardless. The strong dollar makes it attractive, but if you believe (as you stated) that the expected return on currency is 0% then I would think a foreign investor would be (rightly) concerned with mean reversion. Especially if inflation shows up and it's country-specific to (for instance) a nation printing a lot of money, that could really bite foreign investors IMHO.


I am not sure I know what you mean by this, but it sure sets off some alarm bells for me, personally. Stocks are anything but predictable, which is part of the reason I hold bonds, which are much more predictable. I don't want to add stock-like unpredictability to my fixed income. Really, though, without a thorough analysis (study, whitepaper, etc... ) spanning a long period of history this all feels rather academic.
Imagine stocks give you 6% return with 15 stdev
investing in a currency gives you 0% return with 8% stdev

You could argue academically that the numbers are not exactly right, they are not independent variables with independent annual returns, etc. But take it as a simplification.

There is reversion to the mean over then long term. both for stocks and currency exchange. This doesn't mean you should try to time it, because you cannot predict it.

The point is that you are *multiplying* 2 random variables, so the largest stdev dominates. This is why it hardly matters currency exchange when you invest in stocks, it matters much when you invest in bonds, and with 60/40 portfolio (stdev ~10%) perhaps it just matters slightly

If you run 100 years data, you'll find that the data follows about what the model says

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

Post by statefan03 » Tue Jun 09, 2020 11:03 am

I used to be all in on the LTT approach, because who could argue with the returns?

But after doing more research, I'd rather just own a Total Bond fund which has various durations, a mix of Treasuries and Corporate Bonds, and even around 10% foreign bonds. One fund, so much easier, and helps with the sleep factor!

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

Post by muffins14 » Tue Jun 09, 2020 1:37 pm

On the contrary, EDV is also only one holding, very easy, and I sleep well at night knowing it has a better anti-correlation with my stock holdings than total bond

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

Post by Forester » Wed Jun 10, 2020 3:32 pm

Hope this isn't seen as overly off-topic; benefit of US Treasury bonds for non-Americans https://monevator.com/do-us-treasury-bo ... han-gilts/

I think the article supports OP's first post, in a roundabout way.

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

Post by jolmscheid » Wed Jun 10, 2020 7:41 pm

vineviz wrote:
Wed Aug 07, 2019 7:24 pm
From my observations, many Bogleheads do a reasonably good job of constructing the equity portion of their portfolio. A simple globally diversified mix of US and non-US total stock market funds accomplishes the majority of diversification benefits available to an equity investor.

However, it seems to me that precious few of these same Bogleheads are allocating their fixed income allocations in a manner congruent with modern financial knowledge. This is especially true for young accumulators, who seem just as prone as retirees to rely on milquetoast short- and intermediate-term bond funds when they should almost certainly be favoring long-term bonds instead.

Long-term bond funds not only offer superior diversification, but they also minimize interest rate risk for investors with long-term investment horizons (including virtually all investors who are currently accumulating retirement savings).

Leaving aside any question of what the stock/bond allocation should be for an investor, I propose a simple rule of thumb that gets the bond allocation in the right ballpark. This rule is designed specifically for retirement portfolios that are in their accumulation phase (i.e. pre-retirement), and while it may not be strictly optimal in every regard it is easy to remember and to codify into an IPS:

The first 20% of a portfolio allocated to bonds should be allocated to long-term US Treasury bonds.

If your portfolio is 90% stocks, then the other 10% should be long-term Treasuries.

If your portfolio is 80% stocks, then the other 20% should be long-term Treasuries.

If your portfolio is 70% stocks, then 20% should be long-term Treasuries and 10% in intermediate bonds (e.g. total bond market or intermediate-term Treasuries).

If your portfolio is 60% stocks, then 20% should be long-term Treasuries and 20% in intermediate bonds (e.g. total bond market or intermediate-term Treasuries).

And so on.


There are a number of low-cost ETFs and mutual funds that hold long-term Treasuries, including:
• SPDR Portfolio Long Term Treasury ETF (SPTL)
• Vanguard Long-Term Treasury ETF (VGLT)
• iShares 20+ Year Treasury Bond ETF (TLT)
• Vanguard Extended Duration Treasury ETF (EDV)
• Fidelity Long-Term Treasury Bond Index (FNBGX)
• Vanguard Long-Term Treasury Index (VLGSX)
• T. Rowe Price US Treasury Long-Term Index (PRUUX)

I know that few 401k and 403b plans include a decent long-term Treasury fund, and I would encourage people in those plans to simply choose a low-cost long-term or intermediate-term bond fund instead.
According to Portfolio Visualizer, this strategy does outperform a total bond allocation for each and every stock/bond allocation with less drawdowns. Is there any reason not to utilize long term treasuries for the first 20%?

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

Post by Noobvestor » Thu Jun 11, 2020 3:18 am

jolmscheid wrote:
Wed Jun 10, 2020 7:41 pm
According to Portfolio Visualizer, this strategy does outperform a total bond allocation for each and every stock/bond allocation with less drawdowns. Is there any reason not to utilize long term treasuries for the first 20%?
PortfolioVisualizer data only goes back to 1972. You can probably read upthread to find some comments about why this is problematic, but in a nutshell: rates hit record highs that decade and have been slowly falling in the half-century since. High initial rates provided higher long-term returns, and declining rates provided an extra tailwind as older, higher-rate bonds become more valuable. Point being: it's serious shortcoming of the data set, because the half-century before that had rising rates and at times quite high inflation. That prior period's data is sobering. In hindsight, locking into long-term bonds at 15% rates would have been an amazingly profitable decision. Now, though, they're around 1%.

Image

Some will argue that we're on a trend toward ever-lower rates forever, but ... who knows. I'm agnostic and prefer to hedge both rising and falling rate scenarios. Thus, for me, intermediate duration works well. Your mileage may vary. But you asked for a reason one might not go long, so let me be clear: in a rising-rate environment, long bonds can (as they have before) lag shorter bonds for years or decades. On top of that, we're at record-low rates now, and there is no historical precedent for rates going substantially sub-zero. Regardless, 1972-now will not repeat. Even advocates of long-term Treasuries will agree with me on this one - there is no way for that scenario to play out again starting where we are now.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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

Post by Forester » Thu Jun 11, 2020 6:42 am

Does anyone have the summary of;

1950 to 1980. 60/40 with intermediate bonds vs 60/40 with long bonds.

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

Post by international001 » Thu Jun 11, 2020 7:34 am

I'd love to see more long term data.
But I think it's clear that w/o runaway inflation, there are not this unexpected interest rates increases

Then, LTT is the best diversifie\r for a portfolio with heavy percentage of stocks. It's just basic random variable stuff. It's the only asset that is uncorrelated to US stocks as has high volatility

Others would argue that Gold has this same characteristics, high volatility (more than stocks) and lots of uncorrelation with stocks. Even if you expect long term return of gold to be 0%, it may make also a good diversifier and improve your portfolio

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

Post by vineviz » Thu Jun 11, 2020 7:42 am

Forester wrote:
Thu Jun 11, 2020 6:42 am
Does anyone have the summary of;

1950 to 1980. 60/40 with intermediate bonds vs 60/40 with long bonds.
I'll present the summary below, but it is important to understand that the comparison (1950-1980 vs 1981-present) doesn't represent an apples-to-apples comparison. If the ONLY difference between the periods was the inflationary trend (rising in the former period and declining in the latter period), the comparison would be a simple one. However, the Federal Reserve was operating with VERY different goals and policies in the two periods which seriously distorts the comparison. Moreover, the nature of the Treasury bonds themselves are different: bonds were typically callable in the earlier period and no longer are; the Treasury suspended offerings of 20- and 30-year bonds during portions of the 1960s and 1970s; etc. Furthermore, the data we have are not official data: they are post-hoc reconstructions that generally haven't been peer-reviewed.

Caveat emptor, in other words.

That said, here you go:

Image
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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

Post by tommyt » Thu Jun 11, 2020 9:57 am

Hey vineviz,

I just wanted to thank you for your hard work and effort in explaining the benefits of long term treasuries. I am an investor in my early 20s, and was considering upping my asset allocation to 100% equities from 90/10 since I stayed the course just fine after the recent crash. However, I was wary of getting rid of bonds altogether due to them being such a great diversifier, and greatly increasing risk adjusted return. I have settled on an allocation of 5% LTT since even that small allocation adds a lot of risk adjusted punch to my portfolio.

To all others who are trying to understand the benefits of longer duration bonds, what helped me was playing around with short-term vs long-term fixed income assets in portfoliovisualizer. For instance, it is easy to see that while a 90/10 stocks/cash allocation reduces the volatility of the portfolio compared to a 100/0 allocation, the 90/10 stocks/cash allocation also has the same exact correlation with the total market as 100/0 allocation and with worse returns. As you increase the length of the fixed income asset for the 10% part of the portfolio in portfoliovisualizer from cash to short-term bonds to intermediate-term bonds to long-term bonds, the correlation with the stock market generally goes down and the returns modestly increase.

Essentially, as I understand it, you are paying a price for liquidity with shorter term fixed income instruments BUT if you don't need that liquidity, then you might as well go with the better diversifiers - long term bonds.

Thanks again, vineviz. I look forward to your future replies in this thread.

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

Post by international001 » Thu Jun 11, 2020 4:26 pm

For those afraid of inflation, what about adding some TIPS?

stocks 60%
VGLT 20%
LTPZ 20%

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

Post by Noobvestor » Thu Jun 11, 2020 6:58 pm

tommyt wrote:
Thu Jun 11, 2020 9:57 am
To all others who are trying to understand the benefits of longer duration bonds, what helped me was playing around with short-term vs long-term fixed income assets in portfoliovisualize
As I wrote above: PortfolioVisualizer data only goes back to 1972, so it presents a very limited picture of a falling-rate environment.

So, here's a chart of nominal return for different bond types starting in the 1920s. What I find notable is that when long-term outperformed, it did so modestly most decades, so a lot of duration risk yielded a little extra return. Then there are the decades where it underpeformed even cash.

Image

But that's just part of the picture. For that period of undperformance, LTTs also lost to inflation - TIPS would have been helpful:

Image

So during the once-in-a-lifetime fall of rates from the late 70s to the present, long won by a landslide. That's the problem with PortfolioVisualizer I was talking about above. It has data for the second row of this chart, but doesn't capture the first, in which LTTs lost 50% in real-dollar terms:

Image

So we know the first row is possible to repeat, the second isn't - we've already ridden the rate roller coaster back down to the bottom (and beyond all previous bottoms). So to get returns like those shown in PortfolioVisualizer, we'd first have to see rates rise and LTTS lose a lot of value.

We also know both rates and inflation are low but can go up, which would look more like that first row (long losing over intermediate). My own solution to this is to hold a combination of intermediate-term Treasuries and TIPS. What others do with that info is up to them. Source:

https://awealthofcommonsense.com/2020/0 ... thing-new/

All of that being said, for someone holding 90/10, which is a stock-heavy allocation I wouldn't recommend (diminished free lunch from diversification), sure, might as well hold long for possible correlation benefits. It really isn't going to make a huge difference either way.
Last edited by Noobvestor on Thu Jun 11, 2020 7:30 pm, edited 2 times in total.
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Re: First 20% of bonds in long-term Treasuries

Post by anon_investor » Thu Jun 11, 2020 7:07 pm

international001 wrote:
Thu Jun 11, 2020 4:26 pm
For those afraid of inflation, what about adding some TIPS?

stocks 60%
VGLT 20%
LTPZ 20%
I am adding I Bonds for inflation protection. I would add EE Bonds instead of LTT, but I need some bonds for rebalancing.

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

Post by Noobvestor » Thu Jun 11, 2020 7:20 pm

anon_investor wrote:
Thu Jun 11, 2020 7:07 pm
international001 wrote:
Thu Jun 11, 2020 4:26 pm
For those afraid of inflation, what about adding some TIPS?

stocks 60%
VGLT 20%
LTPZ 20%
I am adding I Bonds for inflation protection. I would add EE Bonds instead of LTT, but I need some bonds for rebalancing.
I don't disagree with keeping some balance of bonds liquid for rebalancing purposes, but to put things in perspective:

I Bonds yield ~0% (real) for up to 30 years. They beat 30-year TIPS by only ~0.1% (I still like them for various reasons, though)
EE Bonds double (nominal) at 20 years for a ~3.5% annualized effective rate. They beat 20-year Treasuries by ~2.6%/year.

So one needs to weigh the pros and cons. On the one hand, a $10,0000 20-year Treasury bought today will generate slightly less than $2,500 over the next 20 years. On the other hand, a $10,000 EE bond bought today will generate $10,000. Is rebalancing worth 75% of expected return?

What one does with this information is personal. It involves weighing the pros/cons of liquidity, taxes, annual limits and other factors. I just wanted to point out that the free lunch of EE bonds (over Treasuries) is significantly more attractive than that of I bonds (over TIPS) right now.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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

Post by anon_investor » Thu Jun 11, 2020 7:30 pm

Noobvestor wrote:
Thu Jun 11, 2020 7:20 pm
anon_investor wrote:
Thu Jun 11, 2020 7:07 pm
international001 wrote:
Thu Jun 11, 2020 4:26 pm
For those afraid of inflation, what about adding some TIPS?

stocks 60%
VGLT 20%
LTPZ 20%
I am adding I Bonds for inflation protection. I would add EE Bonds instead of LTT, but I need some bonds for rebalancing.
I don't disagree with keeping some balance of bonds liquid for rebalancing purposes, but to put things in perspective:

I Bonds yield ~0% (real) for up to 30 years. They beat 30-year TIPS by only ~0.1% (I still like and prefer them for various reasons, though)
EE Bonds double (nominal) at 20 years for a ~3.5% annualized effective rate. They beat 20-year Treasuries by ~2.6%.

What one does with this information is personal. It involves weighing the pros/cons of liquidity, taxes, annual limits and other factors. I just wanted to point out that the free lunch of EE bonds (over Treasuries) is significantly more attractive than that of I bonds (over TIPS) right now.
Thanks I know EE Bonds are probably better than LTTs. I may actually buy some EE Bonds before the end of the year. But I am still a little hesitant because of the effective illiquidity and the fact the 20 year doubling period will likely be while I am still in my prime earning years and still in a high tax bracket. Also a crazy day like today make me want to have some bonds to rebalance.

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

Post by columbia » Thu Jun 11, 2020 7:37 pm


What one does with this information is personal.
Highly important point for investing in general. Everyone’s situation and need for risk is different.
If you leave your head in the sand for too long, you might get run over by a Jeep.

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

Post by Noobvestor » Thu Jun 11, 2020 10:15 pm

anon_investor wrote:
Thu Jun 11, 2020 7:30 pm
Thanks I know EE Bonds are probably better than LTTs. I may actually buy some EE Bonds before the end of the year. But I am still a little hesitant because of the effective illiquidity and the fact the 20 year doubling period will likely be while I am still in my prime earning years and still in a high tax bracket. Also a crazy day like today make me want to have some bonds to rebalance.
I suggest running a tax-equivalent yield calculation assuming a high tax bracket in 20 years and see how much of a difference it makes. I have a hard time imagining that 25% returns (taxed annually) will ever be preferable strictly for tax reasons to 100% returns (taxed at a future peak). I don't know your present or future earnings, but for the sake of illustration, imagine you're making $100,000/year now, marginal tax rate: 24%. Now imagine you really kick things into high gear and 20 years from now you're making $1,000,000/year, marginal tax rate: 37%. So even in this incredibly extreme scenario, you're paying 13% more in taxes on 75% in excess returns. EE bonds are the winner by a really big landslide. But let's take it a step further: let's say you keep your bonds in tax-advantaged and so avoid paying some taxes on them while still working. Even if LTTs were tax-free, EE bonds would win! Finally: if your income gets really high, EE bonds won't be much of your portfolio anyway, so NBD. If for some reason your income isn't that high, or you retire early (a lot can happen in 20 years) the EE bonds could prove really valuable. Win-win-win.

Meanwhile, LTTs in taxable will still be eroded by taxes, just slightly less than EE bonds if you're right about your peak earning years. The difference in the amount being taxed, however, is massive - we're talking about slightly higher taxes on four times the returns. Historically, rebalancing has smoothed the ride but not led to those kinds of excess returns, so I would be really wary of assigning a high value to that flexibility. And if as you say you're a few decades away from peak earning years, you can also 'rebalance' with new money, too. Plus (not knowing precisely which assets you hold where) you might incur taxes when rebalancing, which will further add tax burdens for LTTs.

All that being said, keeping some liquid bonds to rebalance makes sense. So much of this is hard to talk about in general terms because of different portfolio sizes, ages, and where different asset classes are held. But in general, EE bonds look vastly more attractive to me than LTTs. I continue to max out EE bonds annually, and keep other bonds to rebalance with, but every situation is different. YMMV.
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Re: First 20% of bonds in long-term Treasuries

Post by anon_investor » Fri Jun 12, 2020 12:21 am

Noobvestor wrote:
Thu Jun 11, 2020 10:15 pm
anon_investor wrote:
Thu Jun 11, 2020 7:30 pm
Thanks I know EE Bonds are probably better than LTTs. I may actually buy some EE Bonds before the end of the year. But I am still a little hesitant because of the effective illiquidity and the fact the 20 year doubling period will likely be while I am still in my prime earning years and still in a high tax bracket. Also a crazy day like today make me want to have some bonds to rebalance.
I suggest running a tax-equivalent yield calculation assuming a high tax bracket in 20 years and see how much of a difference it makes. I have a hard time imagining that 25% returns (taxed annually) will ever be preferable strictly for tax reasons to 100% returns (taxed at a future peak). I don't know your present or future earnings, but for the sake of illustration, imagine you're making $100,000/year now, marginal tax rate: 24%. Now imagine you really kick things into high gear and 20 years from now you're making $1,000,000/year, marginal tax rate: 37%. So even in this incredibly extreme scenario, you're paying 13% more in taxes on 75% in excess returns. EE bonds are the winner by a really big landslide. But let's take it a step further: let's say you keep your bonds in tax-advantaged and so avoid paying some taxes on them while still working. Even if LTTs were tax-free, EE bonds would win! Finally: if your income gets really high, EE bonds won't be much of your portfolio anyway, so NBD. If for some reason your income isn't that high, or you retire early (a lot can happen in 20 years) the EE bonds could prove really valuable. Win-win-win.

Meanwhile, LTTs in taxable will still be eroded by taxes, just slightly less than EE bonds if you're right about your peak earning years. The difference in the amount being taxed, however, is massive - we're talking about slightly higher taxes on four times the returns. Historically, rebalancing has smoothed the ride but not led to those kinds of excess returns, so I would be really wary of assigning a high value to that flexibility. And if as you say you're a few decades away from peak earning years, you can also 'rebalance' with new money, too. Plus (not knowing precisely which assets you hold where) you might incur taxes when rebalancing, which will further add tax burdens for LTTs.

All that being said, keeping some liquid bonds to rebalance makes sense. So much of this is hard to talk about in general terms because of different portfolio sizes, ages, and where different asset classes are held. But in general, EE bonds look vastly more attractive to me than LTTs. I continue to max out EE bonds annually, and keep other bonds to rebalance with, but every situation is different. YMMV.
EE Bonds do make more sense if I know I can leave them untouched, but the extreme effective interest rate penalty if redeemed before 20 years makes me uncomfortable. I know it is a mental crutch, but I like how I can redeem I Bonds and not suffer such a severe penalty. That being said, I may still buy some EE Bonds, but probably not $20k worth. It is kind of funny my spouse is usually the more conservative investor and thinks the required 20 year holding period for EE Bonds to double makes them worse than a simple S&P500 index fund...

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

Post by Noobvestor » Fri Jun 12, 2020 3:09 am

anon_investor wrote:
Fri Jun 12, 2020 12:21 am
EE Bonds do make more sense if I know I can leave them untouched, but the extreme effective interest rate penalty if redeemed before 20 years makes me uncomfortable. I know it is a mental crutch, but I like how I can redeem I Bonds and not suffer such a severe penalty. That being said, I may still buy some EE Bonds, but probably not $20k worth. It is kind of funny my spouse is usually the more conservative investor and thinks the required 20 year holding period for EE Bonds to double makes them worse than a simple S&P500 index fund...
I mean, if you buy the 'over 20 years stocks are sure to win' argument, no real need to hold bonds at all. I don't subscribe to that belief. Clearly you don't either, since we're talking about weighing different long-term bond options.

I think sometimes people trip over that holding period because it's just so unusual and exceptional. And I get it - committing to an investment course long-term is challenging, but it being forced (due to rules) or by choice doesn't really matter if it's your plan. Here's how I think it through:

1) I plan to hold bonds for 20+ years - it doesn't matter how well or poorly they do, I'm going to do that. Long, short, whatever - bonds.
2) I may need to rebalance at points, but I'm never going to be 100/0 stocks/bonds - there will always be some bonds I'm still holding.
3) It makes sense that the ones I would save to last would be the highest YTM ones, which are EE by a landslide.

I assume you're in the same boat - you plan to hold bonds long-term, regardless - if you're buying LTTs at 1%, that seems safe to assume. So the question is less 'Should I hold EE bonds?' it's more 'How much do I want to hold given the liquidity restriction?' It sounds like you're already doing some of that thinking, but I'd suggest mathing it all out rigorously. Again, not knowing your situation, it's hard to say for sure as an outsider.

For fun: my back-of-napkin maths tells me that with a 60/40 portfolio, even if stocks crashed by 75% (!!!) I wouldn't even have to use half my bonds to rebalance back into stocks to get back to 60/40. Again, situations are different - I just suggest running your own similar calculation.

For me, EE bonds represent around 1/4 of my bonds. It's a no-brainer. I can rebalance with Treasuries, TIPS, I Bonds, etc... before touching EE bonds, and if the market gets that bad, well, I might stop rebalancing anyway. If I were in a position where EEs could represent more like 3/4 of bonds, I'd have to do some calculations and figure out how deep the market can go before I'd need to rebalance EE bonds. Basically, I would recommend assuming a worst-case scenario for stocks given your stock/bond ratio, then figure out how much bond liquidity you need. On top of all of that, consider the role of new contributions - you plan to be an accumulator for decades to come, and new money can be used to rebalance.

You could also run some forward-test scenarios to see if there are outcomes for you in which LTTs + rebalancing could come out significantly ahead of EE bonds + only rebalancing with new money. Too many variables for me to run that for you, but it might be illuminating.
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz » Fri Jun 12, 2020 5:51 am

international001 wrote:
Thu Jun 11, 2020 4:26 pm
For those afraid of inflation, what about adding some TIPS?

stocks 60%
VGLT 20%
LTPZ 20%
Imminently reasonable.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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

Post by nps » Fri Jun 12, 2020 6:03 am

vineviz wrote:
Fri Jun 12, 2020 5:51 am
international001 wrote:
Thu Jun 11, 2020 4:26 pm
For those afraid of inflation, what about adding some TIPS?

stocks 60%
VGLT 20%
LTPZ 20%
Imminently reasonable.
Also eminently reasonable!

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

Post by vineviz » Fri Jun 12, 2020 6:48 am

nps wrote:
Fri Jun 12, 2020 6:03 am
vineviz wrote:
Fri Jun 12, 2020 5:51 am
international001 wrote:
Thu Jun 11, 2020 4:26 pm
For those afraid of inflation, what about adding some TIPS?

stocks 60%
VGLT 20%
LTPZ 20%
Imminently reasonable.
Also eminently reasonable!
Touché. I (and apparently my autocorrect feature) should not use such language on less than a cup of coffee.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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

Post by 17outs » Tue Jun 30, 2020 7:58 pm

Shall we play a game? (in my best WOPR computer voice)

I am out of tax advantaged space and only have a taxable account left at Fidelity. I am 75/25 with a 10 year horizon (2030).

2020
75 stock/Intl stock mix
20% TLT
5% STIP

2025
70 stock/Intl stock mix
20 TLT
10 STIP

2030
65 stock/Intl stock mix
18 TLT
17 STIP

Does this seem reasonable? Do I stay at this ratio throughout retirement?

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

Post by jolmscheid » Wed Jul 01, 2020 7:21 am

With this strategy, it seems that the consensus is this could be utilized well during accumulation. Does this strategy still hold water during withdrawal phase?

Example, if one is at 40/60 stocks/bonds ratio at retirement, are LT treasuries at 20% still advised here?

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

Post by 17outs » Wed Jul 01, 2020 8:22 am

jolmscheid wrote:
Wed Jul 01, 2020 7:21 am
With this strategy, it seems that the consensus is this could be utilized well during accumulation. Does this strategy still hold water during withdrawal phase?

Example, if one is at 40/60 stocks/bonds ratio at retirement, are LT treasuries at 20% still advised here?
I remember the OP mentioning that he didn't recommend this action in richer bond ratios than 60/40. But if you are 60/40 in retirement should have you still have 20%?

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

Post by atdharris » Wed Jul 01, 2020 9:41 am

I'm still holding LTT (TLT) as a hedge against my equity positions, but I am not sure how much longer their run can go. Obviously, they have performed very well this year with all the market volatility.

Anyone with a nice position in LTT rethinking their ownership? Or stay the course?

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

Post by vineviz » Wed Jul 01, 2020 10:04 am

17outs wrote:
Tue Jun 30, 2020 7:58 pm
Shall we play a game? (in my best WOPR computer voice)

I am out of tax advantaged space and only have a taxable account left at Fidelity. I am 75/25 with a 10 year horizon (2030).
Keep in mind that if you are planning to retire in 2030 at age 65 you have a time horizon that more like 20 to 25 years, not 10 years.

Given that, I'd say that if you replace STIP with Schwab US TIPS ETF (SCHP) in the allocations you posted that'd you'd be right on track.

17outs wrote:
Tue Jun 30, 2020 7:58 pm
Does this seem reasonable? Do I stay at this ratio throughout retirement?

You will want to continue shortening the duration of your portfolio throughout retirement. Assuming you stay at 35% bonds, that'd look something like this:

2035: 65% stock 10% TLT, 25% SCHP
2040: 65% stock, 35% SCHP
2045: 65% stock, 20% SCHP, 15% VTIP

etc.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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

Post by vineviz » Wed Jul 01, 2020 10:23 am

17outs wrote:
Wed Jul 01, 2020 8:22 am
jolmscheid wrote:
Wed Jul 01, 2020 7:21 am
With this strategy, it seems that the consensus is this could be utilized well during accumulation. Does this strategy still hold water during withdrawal phase?

Example, if one is at 40/60 stocks/bonds ratio at retirement, are LT treasuries at 20% still advised here?
I remember the OP mentioning that he didn't recommend this action in richer bond ratios than 60/40. But if you are 60/40 in retirement should have you still have 20%?
I'd say there are two guiding principles in retirement:

1) Try to make sure that the average duration of your bond funds is approximately equal to your remaining life expectancy.
2) Try to make sure that your portfolio doesn't leave you more exposed to inflation risk than you are comfortable being.

With those two concerns addressed, there's certainly no problem continuing to have 20% of your portfolio in LTTs even if bonds are 50% or even 60% of the portfolio.

In practice this means that most investors can probably keep at least some allocation to long-term bonds until they reach age 75 or so, with the rest of their bonds in an intermediate inflation-adjusted bond fund or TIPS ladder.

Just by way of example, the following might be entirely appropriate for a retiree in their early to mid 70s:

40% Vanguard Total World Stock Index Fund (VTWAX)
20% Vanguard Long-Term Treasury Index Fund (VLGSX)
20% Vanguard Inflation-Protected Securities Fund (VAIPX)
20% Vanguard Intermediate-Term Corporate Bond Index Fund (VICSX)
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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

Post by DB2 » Wed Jul 01, 2020 10:35 am

atdharris wrote:
Wed Jul 01, 2020 9:41 am
I'm still holding LTT (TLT) as a hedge against my equity positions, but I am not sure how much longer their run can go. Obviously, they have performed very well this year with all the market volatility.

Anyone with a nice position in LTT rethinking their ownership? Or stay the course?
LTT have performed pretty well since the 1980s. It's been a long term bond bull market since inflation has come down over the last ~40 yrs.

But I've wondered about this myself. I think they can run higher especially with the Fed and until if/when we get more notable inflation.

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

Post by atdharris » Wed Jul 01, 2020 10:39 am

DB2 wrote:
Wed Jul 01, 2020 10:35 am
atdharris wrote:
Wed Jul 01, 2020 9:41 am
I'm still holding LTT (TLT) as a hedge against my equity positions, but I am not sure how much longer their run can go. Obviously, they have performed very well this year with all the market volatility.

Anyone with a nice position in LTT rethinking their ownership? Or stay the course?
LTT have performed pretty well since the 1980s. It's been a long term bond bull market since inflation has come down over the last ~40 yrs.

But I've wondered about this myself. I think they can run higher especially with the Fed and until if/when we get more notable inflation.
I kept my position in TLT as of now because of the Fed saying we won't see rates rise until 2023. I understand inflation could be an issue, but I don't see inflation ticking up substantially given the state of the world. As of now, they seem to still be the best hedge against a heavy equity position.

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

Post by andrew99999 » Wed Jul 01, 2020 10:57 am

vineviz wrote:
Wed Jul 01, 2020 10:23 am
Just by way of example, the following might be entirely appropriate for a retiree in their early to mid 70s:

40% Vanguard Total World Stock Index Fund (VTWAX)
20% Vanguard Long-Term Treasury Index Fund (VLGSX)
20% Vanguard Inflation-Protected Securities Fund (VAIPX)
20% Vanguard Intermediate-Term Corporate Bond Index Fund (VICSX)
How would a corporate bond fund be more useful than just having a higher and equivalent amount of stocks and government bonds?

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

Post by DB2 » Wed Jul 01, 2020 10:58 am

atdharris wrote:
Wed Jul 01, 2020 10:39 am
DB2 wrote:
Wed Jul 01, 2020 10:35 am
atdharris wrote:
Wed Jul 01, 2020 9:41 am
I'm still holding LTT (TLT) as a hedge against my equity positions, but I am not sure how much longer their run can go. Obviously, they have performed very well this year with all the market volatility.

Anyone with a nice position in LTT rethinking their ownership? Or stay the course?
LTT have performed pretty well since the 1980s. It's been a long term bond bull market since inflation has come down over the last ~40 yrs.

But I've wondered about this myself. I think they can run higher especially with the Fed and until if/when we get more notable inflation.
I kept my position in TLT as of now because of the Fed saying we won't see rates rise until 2023. I understand inflation could be an issue, but I don't see inflation ticking up substantially given the state of the world. As of now, they seem to still be the best hedge against a heavy equity position.
Agreed. My concerns about inflation are a little more down the road and/or if we get 'velocity' at some point. Still, if my bond allocation was 100% LTT, I would keep a close eye on it just in case.

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

Post by vineviz » Wed Jul 01, 2020 12:25 pm

andrew99999 wrote:
Wed Jul 01, 2020 10:57 am
vineviz wrote:
Wed Jul 01, 2020 10:23 am
Just by way of example, the following might be entirely appropriate for a retiree in their early to mid 70s:

40% Vanguard Total World Stock Index Fund (VTWAX)
20% Vanguard Long-Term Treasury Index Fund (VLGSX)
20% Vanguard Inflation-Protected Securities Fund (VAIPX)
20% Vanguard Intermediate-Term Corporate Bond Index Fund (VICSX)
How would a corporate bond fund be more useful than just having a higher and equivalent amount of stocks and government bonds?
The end result is almost surely going to about the same, but some people mentioned having 40% stock portfolios so I wanted to show what that might look like.

Personally, I’d stick with stocks and sovereign bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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

Post by andrew99999 » Wed Jul 01, 2020 9:57 pm

vineviz wrote:
Wed Jul 01, 2020 12:25 pm
The end result is almost surely going to about the same, but some people mentioned having 40% stock portfolios so I wanted to show what that might look like.

Personally, I’d stick with stocks and sovereign bonds.
Ah right, cheers for the clarification.

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

Post by international001 » Thu Jul 02, 2020 12:20 pm

atdharris wrote:
Wed Jul 01, 2020 10:39 am
DB2 wrote:
Wed Jul 01, 2020 10:35 am
atdharris wrote:
Wed Jul 01, 2020 9:41 am
I'm still holding LTT (TLT) as a hedge against my equity positions, but I am not sure how much longer their run can go. Obviously, they have performed very well this year with all the market volatility.

Anyone with a nice position in LTT rethinking their ownership? Or stay the course?
LTT have performed pretty well since the 1980s. It's been a long term bond bull market since inflation has come down over the last ~40 yrs.

But I've wondered about this myself. I think they can run higher especially with the Fed and until if/when we get more notable inflation.
I kept my position in TLT as of now because of the Fed saying we won't see rates rise until 2023. I understand inflation could be an issue, but I don't see inflation ticking up substantially given the state of the world. As of now, they seem to still be the best hedge against a heavy equity position.
I think many are missing the point that if rates increase, that's probably good for stocks. The point of LT is to 'compensate' the stocks.
Also, when LT did bad in the 70s, wasn't it because some unorthodox political Fed decisions that caused inflation. Should be afraid of inflation itself or of unexpected inflation? I guess it's hard to tell if you believe Fed is independent an will keep inflation under 2%. If politics get a hold of the Fed, then it would be a reason to get away from LT.

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

Post by vineviz » Thu Jul 02, 2020 12:26 pm

international001 wrote:
Thu Jul 02, 2020 12:20 pm
Also, when LT did bad in the 70s, wasn't it because some unorthodox political Fed decisions that caused inflation. Should be afraid of inflation itself or of unexpected inflation? I guess it's hard to tell if you believe Fed is independent an will keep inflation under 2%. If politics get a hold of the Fed, then it would be a reason to get away from LT.
There were many factors that make it hard to compare the behavior of long-term Treasuries before 1980 with their behavior today: the Treasury wasn't consistently issuing 20- and 30-year bonds, Treasury bonds were callable, the Federal Reserve wasn't attempting to manage inflation (or even acknowledge the difference between nominal yields and real yields), the Federal Reserve was routinely and silently suppressing long-term yields by purchasing Treasury bonds, etc.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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

Post by TaxingAccount » Fri Jul 03, 2020 10:30 am

aj76er wrote:
Mon Apr 27, 2020 2:19 pm
I'm trying to understand and properly apply the duration formula used in this thread:
vineviz wrote:
Thu Apr 23, 2020 2:33 pm
using the simple formula provided upthread of

Code: Select all

(((age at start of retirement + age at end of retirement)/2) - current age)
So, as an example, for a 45 yr old with a planned life expectancy of 95yrs, the optimal bond duration today would be :

((45 + 95)/2) - 45 = 25 yrs

Is this correct? So using EDV for this person's entire bond allocation (today) would be reasonable?

Also, moving forward, I assume the duration should then be recalculated, and short-term bonds added (though rebalancing and/or additional funds) to slowly bring down the duration?
Does EDV and new issued 30 year treasury bonds both have a duration of 24.5?

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