Long duration is the "Sharpe" choice for aggressively positioned portfolios

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vineviz
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Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by vineviz » Thu Sep 12, 2019 7:24 am

There's an article on Morningstar.com this morning that articulates the rationale for investors with equity-heavy portfolios to be using long-duration bonds as diversifiers.


How to Diversify Assets Like a Pro When You Own a Lot of Equities

Some excerpts:
Clearly, long duration has been as hot as the new Taylor Swift album this year, which may seem like a poor time to consider it for a portfolio. For investors with big equity allocations, however, long duration is one of the best diversifiers for a portfolio.
Image
When investors need their equity-heavy portfolios to calm down in a sell-off, long-duration bond funds have been the best ballast. Top allocation teams use this approach in their target-date funds when equities are near their peak allocations, and investors with similarly high equity allocations would do well to follow suit. Of course, there’s always the risk that historical correlations and relationships between asset classes will change in the future, especially over short time periods, but diversification remains investors’ best protection against the uncertainty of future returns.
"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: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by Horton » Thu Sep 12, 2019 8:07 am

vineviz wrote:
Thu Sep 12, 2019 7:24 am
When investors need their equity-heavy portfolios to calm down in a sell-off, long-duration bond funds have been the best ballast. Top allocation teams use this approach in their target-date funds when equities are near their peak allocations, and investors with similarly high equity allocations would do well to follow suit. Of course, there’s always the risk that historical correlations and relationships between asset classes will change in the future, especially over short time periods, but diversification remains investors’ best protection against the uncertainty of future returns.
Thanks for sharing.

The authors could have also mentioned DFA's Target Retirement Income Funds, which, in my opinion, do a better job at and near retirement than the other firms mentioned in the article.

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by nisiprius » Thu Sep 12, 2019 8:25 am

First of all, just to be perfectly clear about this... yes, if I force PortfolioVisualizer to use 30-31% stocks and allocate the rest to intermediate-term and long-term Treasuries, it tells me that the historical tangent portfolio (optimum by one set of criteria) was to use almost all intermediate-term Treasuries--65.15% intermediate and 3.85% long. And if I then insist on 70-71% stocks, it tells me that the tangent portfolio was zero intermediate-term, and all long-term--29.96% of portfolio. So this is consistent with what the article and by implication Vineviz are saying.

1) "When investors need their equity-heavy portfolios to calm down in a sell-off, long-duration bond funds have been the best ballast."

The most aggressive choice mentioned in the article is 70/30, so I'll use that. It's not important but circa 2008-2009 Vanguard I think was using 30% international within the equity allocation so I'll use that, too: 49% US stocks, 21% international stocks, 30% bonds.

Specifically: Portfolio 1 (blue)
VTSAX Vanguard Total Stock Mkt Idx Adm 42.00%
VGTSX Vanguard Total Intl Stock Index Inv 28.00%
VBTLX Vanguard Total Bond Market Index Adm 30.00%

and for Portfolio 2 (red) we will swap in
VUSUX Vanguard Long-Term Treasury Admiral 30.00%

Source

Image

Did using long-term Treasuries perform as advertised? I have two answers. First, yes, qualitatively, over this time period it did exactly what the article, and by implication Vineviz, suggested. Yes. It did. And specifically yes, it boosted the Sharpe ratio.

But, second, just how big a deal do you think this is? Remember, the specific pitch was "...need their equity-heavy portfolios to calm down in a sell-off..." Other things could be listed on the pro and con side, but the article is talking about downside protection.

So, during 2008-2009, would it have affected your mood or your financial decisions all that much to see your portfolio drop 35.71% instead of 38.58%?

During a sell-off, your primary protection is not to be equity-heavy in the first place. Having decided to be 70% equities, yes, most of us are going to feel great pain (kidney-stone level) during a real "sell-off," and fine-tuning the particular blend of pain is not going to move the needle much--not like having opted for a lower stock allocation in advance.
Last edited by nisiprius on Thu Sep 12, 2019 9:59 am, edited 5 times in total.
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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by nisiprius » Thu Sep 12, 2019 8:34 am

2) "Top allocation teams use this approach in their target-date funds when equities are near their peak allocations, and investors with similarly high equity allocations would do well to follow suit."

I'm prepared to believe that the funds the authors mentioned follow the strategy they say they follow. But how effective has it been in the real world?

Vanguard, presumably, not a "top allocation team," doesn't follow it. They just use Total Bond, one size fits all. The "top allocation teams" mentioned in the article are those who produced the Fidelity Freedom target-date series and the T. Rowe Price Retirement series. The 2055 funds are mentioned specifically, FNSDX and PAROX.

Target-date funds are unfortunately a zoo, with many companies offering more than one family and many with inception dates much later than 2008-2009. Unfortunately, the whole Fidelity Freedom K series had inception in July 2009! Therefore, this specific fund family that they point to, as an illustration of their recommended strategy, can't be evaluated against their particular claim ("calm down in a sell-off!")

The most aggressive Vanguard target retirement fund that existed on 12/31/2007 was Target Retirement 2050. PAROX had inception before 2008, but the 2050 fund did not.

It's a flawed comparison, but I will compare these funds:
Portfolio 1 (blue) VASGX Vanguard LifeStrategy Growth Inv 100.00%
Portfolio 2 (red) PAROX T. Rowe Price Retirement 2055 Advisor 100.00%
Portfolio 3 (yellow) VFIFX Vanguard Target Retirement 2050 Inv 100.00%

Source

Image

In this case, during a sell-off, T. Rowe Price's fund, cited by name the authors as appeal-to-authority illustration of their suggested strategy, had a deeper fall and a lower Sharpe ratio than the funds I choose for comparison. There could be many reasons for this, but whatever the merits of T. Rowe Price's strategy, during 2008-2009 it wasn't able to overcome whatever else was going on.
Last edited by nisiprius on Thu Sep 12, 2019 10:00 am, edited 1 time in total.
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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by nisiprius » Thu Sep 12, 2019 9:18 am

Horton wrote:
Thu Sep 12, 2019 8:07 am
The authors could have also mentioned DFA's Target Retirement Income Funds, which, in my opinion, do a better job at and near retirement than the other firms mentioned in the article.
Looking at the DFA funds is interesting.

The article suggests that aggressive investors should prefer longer durations in the bond component. So a question to be asked here is whether DFA's funds embody this approach, because if they don't then it doesn't support their contention that "the pros" and the "top allocation teams" do this.

So, at the quickest of quick peeks, using 2055 because that's the date they use for their illustrations, Dimensional 2055 Target Date Ret Income Fund, DRIKX, in the fact sheet, says that it is
Global Equity 95.01%
Global Fixed Income, 4.99%

So that is surely "a lot of equities."

Yet the average maturity is 1.50 years, average duration 1.46 years, and if I am reading the holdings list correctly, the longest bond in it matures in 3/11/2024, less than five years.

I'm not sure what to say about this beyond

1) "go figure," and that

2) perhaps "top allocation teams" do not have as much consensus as the article might suggest.
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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by HEDGEFUNDIE » Thu Sep 12, 2019 9:26 am

nisiprius wrote:
Thu Sep 12, 2019 8:25 am
1) "When investors need their equity-heavy portfolios to calm down in a sell-off, long-duration bond funds have been the best ballast."

The most aggressive choice mentioned in the article is 70/30, so I'll use that. It's not important but circa 2008-2009 Vanguard I think was using 30% international within the equity allocation so I'll use that, too: 49% US stocks, 21% international stocks, 30% bonds.

Specifically: Portfolio 1 (blue)
VTSAX Vanguard Total Stock Mkt Idx Adm 42.00%
VGTSX Vanguard Total Intl Stock Index Inv 28.00%
VBTLX Vanguard Total Bond Market Index Adm 30.00%

and for Portfolio 2 (red) we will swap in
VUSUX Vanguard Long-Term Treasury Admiral 30.00%

Source

Image

Did using long-term Treasuries perform as advertised? I have two answers. First, yes, qualitatively, over this time period it did exactly what the article, and by implication Vineviz, suggested. Yes. It did. And specifically yes, it boosted the Sharpe ratio.

But, second, just how big a deal do you think this is? Remember, the specific pitch was "...need their equity-heavy portfolios to calm down in a sell-off..." Other things could be listed on the pro and con side, but the article is talking about downside protection.

So, during 2008-2009, would it have affected your mood or your financial decisions all that much to see your portfolio drop 35.71% instead of 38.58%?

During a sell-off, your primary protection is not to be equity-heavy in the first place. Having decided to be 70% equities, yes, most of us are going to feel great pain (kidney-stone level) during a real "sell-off," and fine-tuning the particular blend of pain is not going to move the needle much--not like having opted for a lower stock allocation in advance.
Those of us who are serious about this use Extended Duration funds. Substitute PEDIX for VUSUX and the drawdown decreases to -31%.

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by EfficientInvestor » Thu Sep 12, 2019 9:46 am

Leveraged short term treasuries have been even sharper since 1991:

https://www.portfoliovisualizer.com/bac ... total3=100
Image

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by nisiprius » Thu Sep 12, 2019 10:10 am

HEDGEFUNDIE wrote:Those of us who are serious about this use Extended Duration funds. Substitute PEDIX for VUSUX and the drawdown decreases to -31%.
EfficientInvestor wrote:
Thu Sep 12, 2019 9:46 am
Leveraged short term treasuries have been even sharper since 1991:
And are the "top allocation teams" at Fidelity, T. Rowe Price, and elsewhere using STRIPS and leveraged short-term Treasurys? And, if not (Dimensional and Fidelity are not) why not?
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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by Angst » Thu Sep 12, 2019 10:14 am

nisiprius wrote:
Thu Sep 12, 2019 10:10 am
HEDGEFUNDIE wrote:Those of us who are serious about this use Extended Duration funds. Substitute PEDIX for VUSUX and the drawdown decreases to -31%.
EfficientInvestor wrote:
Thu Sep 12, 2019 9:46 am
Leveraged short term treasuries have been even sharper since 1991:
And are the "top allocation teams" at Fidelity, T. Rowe Price, and elsewhere using STRIPS and leveraged short-term Treasurys? And, if not (Dimensional and Fidelity are not) why not?
Maybe that's why they're only "Silver", not "Gold"? :D

The article clearly implies that Morningstar does not rate Vanguard or DFA among its "Top", "Highly rated", or "Silver" target-date funds portfolio managers. (I don't have the Premium membership to confirm that.) So, is the duration issue the reason why they don't?

[Edit] - Perhaps someone can ask Christine Benz at the Bogleheads Conference Experts Panel in October?

Morningstar wrote:Top allocation teams use this approach in their target-date funds...
Morningstar wrote:How Top Target-Date Fund Teams Use Long-Duration Funds
The trade-off of having the best returns when equities do their worst and vice
versa is why asset-allocation teams we rate highly from State Street, Fidelity,
and T. Rowe Price use long-duration fixed income in their target-date funds
when investors are furthest from retirement and the allocation to equities is at
its highest. Let's look first at State Street’s target-date series, which earns a
Morningstar Analyst Rating of Silver...
Last edited by Angst on Thu Sep 12, 2019 10:24 am, edited 1 time in total.

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by robertmcd » Thu Sep 12, 2019 10:19 am

nisiprius wrote:
Thu Sep 12, 2019 10:10 am
HEDGEFUNDIE wrote:Those of us who are serious about this use Extended Duration funds. Substitute PEDIX for VUSUX and the drawdown decreases to -31%.
EfficientInvestor wrote:
Thu Sep 12, 2019 9:46 am
Leveraged short term treasuries have been even sharper since 1991:
And are the "top allocation teams" at Fidelity, T. Rowe Price, and elsewhere using STRIPS and leveraged short-term Treasurys? And, if not (Dimensional and Fidelity are not) why not?
No, but Bridgewater has

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by azanon » Thu Sep 12, 2019 10:25 am

nisiprius wrote:
Thu Sep 12, 2019 10:10 am
HEDGEFUNDIE wrote:Those of us who are serious about this use Extended Duration funds. Substitute PEDIX for VUSUX and the drawdown decreases to -31%.
EfficientInvestor wrote:
Thu Sep 12, 2019 9:46 am
Leveraged short term treasuries have been even sharper since 1991:
And are the "top allocation teams" at Fidelity, T. Rowe Price, and elsewhere using STRIPS and leveraged short-term Treasurys? And, if not (Dimensional and Fidelity are not) why not?
Just a couple of quick things that come to mind:
1. The further you go out on the spectrum of duration, the more volatile that individual asset class is going to be. So investors holding these securities in "pieces" have to resist the temptation to analyze the performance of them in isolation, and not be occasionally dismayed when they're not doing well. Extended Duration treasuries can make you a little sick when they aren't doing so well if you critique their performance on a day-to-day basis.

So if big players use them, and there's a short-term under-performance (say because rates or unexpected inflation shows up) then they're going to encounter a lot of pressure by their customers to explain what's going on. I'm reminded of all of the pressure Wealthfront received when they added "risk parity" at a bad time.

2. Liquidity (and spreads) can be an issue for some of those unique investments, like EDV, at least in comparison to huge bond funds.

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by Horton » Thu Sep 12, 2019 10:29 am

nisiprius wrote:
Thu Sep 12, 2019 9:18 am
Horton wrote:
Thu Sep 12, 2019 8:07 am
The authors could have also mentioned DFA's Target Retirement Income Funds, which, in my opinion, do a better job at and near retirement than the other firms mentioned in the article.
Looking at the DFA funds is interesting.

The article suggests that aggressive investors should prefer longer durations in the bond component. So a question to be asked here is whether DFA's funds embody this approach, because if they don't then it doesn't support their contention that "the pros" and the "top allocation teams" do this.

So, at the quickest of quick peeks, using 2055 because that's the date they use for their illustrations, Dimensional 2055 Target Date Ret Income Fund, DRIKX, in the fact sheet, says that it is
Global Equity 95.01%
Global Fixed Income, 4.99%

So that is surely "a lot of equities."

Yet the average maturity is 1.50 years, average duration 1.46 years, and if I am reading the holdings list correctly, the longest bond in it matures in 3/11/2024, less than five years.

I'm not sure what to say about this beyond

1) "go figure," and that

2) perhaps "top allocation teams" do not have as much consensus as the article might suggest.
I’m more focused on the funds closer to retirement, than 2055. I know that’s what the article focuses on though. If you look at the DFA funds say 2020-2035, you will see a high allocation to long TIPS. The intent being to create a liability matching sleeve of the portfolio.

The State Street, TRP, and Fidelity funds mentioned in the article seem to do the opposite of the DFA funds - they use long maturity bonds for those far from retirement and transition to lower maturity bonds for those approaching or in retirement. That doesn’t make sense to me.

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by Elysium » Thu Sep 12, 2019 10:30 am

nisiprius wrote:
Thu Sep 12, 2019 9:18 am
Horton wrote:
Thu Sep 12, 2019 8:07 am
The authors could have also mentioned DFA's Target Retirement Income Funds, which, in my opinion, do a better job at and near retirement than the other firms mentioned in the article.
Looking at the DFA funds is interesting.

The article suggests that aggressive investors should prefer longer durations in the bond component. So a question to be asked here is whether DFA's funds embody this approach, because if they don't then it doesn't support their contention that "the pros" and the "top allocation teams" do this.

So, at the quickest of quick peeks, using 2055 because that's the date they use for their illustrations, Dimensional 2055 Target Date Ret Income Fund, DRIKX, in the fact sheet, says that it is
Global Equity 95.01%
Global Fixed Income, 4.99%

So that is surely "a lot of equities."

Yet the average maturity is 1.50 years, average duration 1.46 years, and if I am reading the holdings list correctly, the longest bond in it matures in 3/11/2024, less than five years.

I'm not sure what to say about this beyond

1) "go figure," and that

2) perhaps "top allocation teams" do not have as much consensus as the article might suggest.
DFA has always believed in keeping bond maturities short, that is what I remember.

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by firebirdparts » Thu Sep 12, 2019 10:36 am

I am no expert on portfoliovisualizer, but it seems to me that this stuff of leveraging up bonds using CASHX is really causing phony results in a big way. You be the judge.

CASHX is free, evidently. Am I wrong? If you do 10X short term bonds and -9X cash you earn 13% CAGR. It's just wrong.
A fool and your money are soon partners

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by EfficientInvestor » Thu Sep 12, 2019 10:46 am

firebirdparts wrote:
Thu Sep 12, 2019 10:36 am
I am no expert on portfoliovisualizer, but it seems to me that this stuff of leveraging up bonds using CASHX is really causing phony results in a big way. You be the judge.

CASHX is free, evidently. Am I wrong? If you do 10X short term bonds and -9X cash you earn 13% CAGR. It's just wrong.
CASHX in PV represents the risk-free rate. Therefore, by shorting CASHX, you can represent the theoretical borrowing of cash at the risk-free rate in order to invest in an asset. This follows the logic of the Capital Asset Pricing Model (https://www.investopedia.com/terms/c/capm.asp). The question that remains is whether you can really borrow money at the risk-free rate. The use of futures contracts will get you the closest. The use of leveraged ETFs has more inefficiencies due to volatility decay and expense ratios.

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by firebirdparts » Thu Sep 12, 2019 10:48 am

EfficientInvestor wrote:
Thu Sep 12, 2019 10:46 am

CASHX in PV represents the risk-free rate.
Something's wrong. It's wrong. if the risk free rate is zero percent, then obviously you want to borrow infinity dollars and put that in short term treasuries. Of course you do. If you can't actually do that, then we need to be careful about using it in portfolio demonstrations or arguments or mor complex situations if it's not real.
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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by vineviz » Thu Sep 12, 2019 10:52 am

nisiprius wrote:
Thu Sep 12, 2019 9:18 am
2) perhaps "top allocation teams" do not have as much consensus as the article might suggest.
First, I think it's important to note that the Morningstar article refers to State Street, Fidelity, and T. Rowe Price as being among the top allocation teams not as the top allocation teams. American Funds, BlackRock, JPMorgan, & Vanguard would be "top allocation teams" also since their TDFs are also ranked "Silver" or "Gold" by Morningstar analysts.

Second, I don't think there can be much doubt that the use of long-duration funds is NOT the consensus choice among "top allocation teams". Fidelity, Goldman Sachs, State Street, & T. Rowe Price are somewhat unusual in using any amount long-term bond: the vast majority of other TDFs use something akin to a total bond index for the fixed income allocation (with DFA, JPMorgan, and MFS being the other anomalies in favoring shorter duration bond).
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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by EfficientInvestor » Thu Sep 12, 2019 10:55 am

firebirdparts wrote:
Thu Sep 12, 2019 10:48 am
EfficientInvestor wrote:
Thu Sep 12, 2019 10:46 am

CASHX in PV represents the risk-free rate.
Something's wrong. It's wrong. if the risk free rate is zero percent, then obviously you want to borrow infinity dollars and put that in short term treasuries. Of course you do. If you can't actually do that, then we need to be careful about using it in portfolio demonstrations or arguments or mor complex situations if it's not real.
The risk-free rate (CASHX) is not zero percent. Over the time period (since 1991) it has been an average of ~2.5%.

https://www.portfoliovisualizer.com/bac ... 0&total3=0

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by vineviz » Thu Sep 12, 2019 10:56 am

firebirdparts wrote:
Thu Sep 12, 2019 10:48 am

Something's wrong. It's wrong. if the risk free rate is zero percent, then obviously you want to borrow infinity dollars and put that in short term treasuries. Of course you do. If you can't actually do that, then we need to be careful about using it in portfolio demonstrations or arguments or mor complex situations if it's not real.
The risk-free rate is not "zero percent" and that is not the return of CASHX in PortfolioVisualizer except for a few periods where the rate was so low that it rounds down.

Image
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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by Horton » Thu Sep 12, 2019 11:13 am

Elysium wrote:
Thu Sep 12, 2019 10:30 am
nisiprius wrote:
Thu Sep 12, 2019 9:18 am
Horton wrote:
Thu Sep 12, 2019 8:07 am
The authors could have also mentioned DFA's Target Retirement Income Funds, which, in my opinion, do a better job at and near retirement than the other firms mentioned in the article.
Looking at the DFA funds is interesting.

The article suggests that aggressive investors should prefer longer durations in the bond component. So a question to be asked here is whether DFA's funds embody this approach, because if they don't then it doesn't support their contention that "the pros" and the "top allocation teams" do this.

So, at the quickest of quick peeks, using 2055 because that's the date they use for their illustrations, Dimensional 2055 Target Date Ret Income Fund, DRIKX, in the fact sheet, says that it is
Global Equity 95.01%
Global Fixed Income, 4.99%

So that is surely "a lot of equities."

Yet the average maturity is 1.50 years, average duration 1.46 years, and if I am reading the holdings list correctly, the longest bond in it matures in 3/11/2024, less than five years.

I'm not sure what to say about this beyond

1) "go figure," and that

2) perhaps "top allocation teams" do not have as much consensus as the article might suggest.
DFA has always believed in keeping bond maturities short, that is what I remember.
See my post above. DFA uses a long TIPS fund for the TDFs near/at retirement.

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by hdas » Thu Sep 12, 2019 11:28 am

vineviz wrote:
Thu Sep 12, 2019 7:24 am
There's an article on Morningstar.com this morning that articulates the rationale for investors with equity-heavy portfolios to be using long-duration bonds as diversifiers.


How to Diversify Assets Like a Pro When You Own a Lot of Equities

Some excerpts:
Clearly, long duration has been as hot as the new Taylor Swift album this year, which may seem like a poor time to consider it for a portfolio. For investors with big equity allocations, however, long duration is one of the best diversifiers for a portfolio.
Image
When investors need their equity-heavy portfolios to calm down in a sell-off, long-duration bond funds have been the best ballast. Top allocation teams use this approach in their target-date funds when equities are near their peak allocations, and investors with similarly high equity allocations would do well to follow suit. Of course, there’s always the risk that historical correlations and relationships between asset classes will change in the future, especially over short time periods, but diversification remains investors’ best protection against the uncertainty of future returns.
My only quibble with this article, is the timing. After long bonds have rallied massively, the public is becoming aware of the anomaly. I do hold long treasuries in my allocation, but I switched from EDV to VGLT in the last two weeks, even a short position was sensible. Cheers :greedy
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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by robertmcd » Thu Sep 12, 2019 11:30 am

hdas wrote:
Thu Sep 12, 2019 11:28 am
vineviz wrote:
Thu Sep 12, 2019 7:24 am
There's an article on Morningstar.com this morning that articulates the rationale for investors with equity-heavy portfolios to be using long-duration bonds as diversifiers.


How to Diversify Assets Like a Pro When You Own a Lot of Equities

Some excerpts:
Clearly, long duration has been as hot as the new Taylor Swift album this year, which may seem like a poor time to consider it for a portfolio. For investors with big equity allocations, however, long duration is one of the best diversifiers for a portfolio.
Image
When investors need their equity-heavy portfolios to calm down in a sell-off, long-duration bond funds have been the best ballast. Top allocation teams use this approach in their target-date funds when equities are near their peak allocations, and investors with similarly high equity allocations would do well to follow suit. Of course, there’s always the risk that historical correlations and relationships between asset classes will change in the future, especially over short time periods, but diversification remains investors’ best protection against the uncertainty of future returns.
My only quibble with this article, is the timing. After long bonds have rallied massively, the public is becoming aware of the anomaly. I do hold long treasuries in my allocation, but I switched from EDV to VGLT in the last two weeks, even a short position was sensible. Cheers :greedy
Which is why the smart money rebalanced into stocks while the dumb money chased the recent outperformer

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by MotoTrojan » Thu Sep 12, 2019 11:40 am

firebirdparts wrote:
Thu Sep 12, 2019 10:48 am
EfficientInvestor wrote:
Thu Sep 12, 2019 10:46 am

CASHX in PV represents the risk-free rate.
Something's wrong. It's wrong. if the risk free rate is zero percent, then obviously you want to borrow infinity dollars and put that in short term treasuries. Of course you do. If you can't actually do that, then we need to be careful about using it in portfolio demonstrations or arguments or mor complex situations if it's not real.
This is a perfectly real calculation and quite a good way to represent rolling futures. Rates have been dropping, so yes you make a killer return holding leveraged short-term treasuries and being short cash (the risk-free rate, not 0%). If rates rise, this portfolio gets equally crushed.

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by MotoTrojan » Thu Sep 12, 2019 11:41 am

EfficientInvestor wrote:
Thu Sep 12, 2019 9:46 am
Leveraged short term treasuries have been even sharper since 1991:

https://www.portfoliovisualizer.com/bac ... total3=100
Image
Wow, I've heard about this but never seen a comparison this jarring... that is one smooth growth trend there.

Ah just kidding... I just saw you dropped equity down to 50%. It would be a much better comparison to maintain the 70% equity exposure and increase STT exposure until volatility aligns with the 70/30 S&P500/LTT allocation.

Here you go; still impressive outperformance but a better comparison IMHO:
https://www.portfoliovisualizer.com/bac ... total3=100

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by vineviz » Thu Sep 12, 2019 11:51 am

hdas wrote:
Thu Sep 12, 2019 11:28 am
My only quibble with this article, is the timing. After long bonds have rallied massively, the public is becoming aware of the anomaly.
What do you think is anomalous?
"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: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by EfficientInvestor » Thu Sep 12, 2019 11:53 am

MotoTrojan wrote:
Thu Sep 12, 2019 11:41 am
Wow, I've heard about this but never seen a comparison this jarring... that is one smooth growth trend there.

Ah just kidding... I just saw you dropped equity down to 50%. It would be a much better comparison to maintain the 70% equity exposure and increase STT exposure until volatility aligns with the 70/30 S&P500/LTT allocation.

Here you go; still impressive outperformance but a better comparison IMHO:
https://www.portfoliovisualizer.com/bac ... total3=100
If I was only trying to show the efficiency of leveraged STT over using LTT, I would agree with you. However, I was also trying to show the efficiency of using a more efficient overall allocation and then applying leverage. Therefore, I developed my efficient allocation of stock to STT bond (10/90) and then applied leverage until I matched the volatility of the other portfolios (~9.77%). This resulted in a 5X leverage of the 10/90 portfolio.

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by hdas » Thu Sep 12, 2019 12:11 pm

vineviz wrote:
Thu Sep 12, 2019 11:51 am
hdas wrote:
Thu Sep 12, 2019 11:28 am
My only quibble with this article, is the timing. After long bonds have rallied massively, the public is becoming aware of the anomaly.
What do you think is anomalous?
It's anomalous that Long Bonds offer you insurance like protection for equity crashes plus a positive expected return. h
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by MotoTrojan » Thu Sep 12, 2019 12:16 pm

hdas wrote:
Thu Sep 12, 2019 12:11 pm
vineviz wrote:
Thu Sep 12, 2019 11:51 am
hdas wrote:
Thu Sep 12, 2019 11:28 am
My only quibble with this article, is the timing. After long bonds have rallied massively, the public is becoming aware of the anomaly.
What do you think is anomalous?
It's anomalous that Long Bonds offer you insurance like protection for equity crashes plus a positive expected return. h
The positive expected return is clearly not anomalous, so you are saying the negative correlation during equity crashes is? Why doesn't it make sense that people would flee to long-term government bonds when afraid of the equity markets? The market goes down because money is being withdrawn; it has to go somewhere.

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by MotoTrojan » Thu Sep 12, 2019 12:17 pm

EfficientInvestor wrote:
Thu Sep 12, 2019 11:53 am
MotoTrojan wrote:
Thu Sep 12, 2019 11:41 am
Wow, I've heard about this but never seen a comparison this jarring... that is one smooth growth trend there.

Ah just kidding... I just saw you dropped equity down to 50%. It would be a much better comparison to maintain the 70% equity exposure and increase STT exposure until volatility aligns with the 70/30 S&P500/LTT allocation.

Here you go; still impressive outperformance but a better comparison IMHO:
https://www.portfoliovisualizer.com/bac ... total3=100
If I was only trying to show the efficiency of leveraged STT over using LTT, I would agree with you. However, I was also trying to show the efficiency of using a more efficient overall allocation and then applying leverage. Therefore, I developed my efficient allocation of stock to STT bond (10/90) and then applied leverage until I matched the volatility of the other portfolios (~9.77%). This resulted in a 5X leverage of the 10/90 portfolio.
I see, that makes sense but I still don't like the comparison, especially in a period where rates came down. It would be more fair if you used 50% equity in the other two cases; otherwise there is no link.
Last edited by MotoTrojan on Thu Sep 12, 2019 12:17 pm, edited 1 time in total.

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by vineviz » Thu Sep 12, 2019 12:17 pm

hdas wrote:
Thu Sep 12, 2019 12:11 pm
It's anomalous that Long Bonds offer you insurance like protection for equity crashes plus a positive expected return.
I'm still not clear on what you mean, specifically what you think "insurance like protection" looks like.

I can say that long-term Treasuries have always been best source of diversification for equity portfolios, and have always had positive expected returns (and certainly do a the present time).
"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: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by Tyler Aspect » Thu Sep 12, 2019 12:25 pm

As great as the Sharpe ratio is, it is still a measure about past performance. The standard investing disclaimer states that to invest in a way that solely looks at historical performance is not wise. If a portfolio composition has a higher Sharpe ratio, then all it can be stated is its historical property of risk adjusted return. You cannot infer by implication of its future superiority, particularly if the composition is highly sector based (highly selective, cherry picking the best historical performance).
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by EfficientInvestor » Thu Sep 12, 2019 12:40 pm

MotoTrojan wrote:
Thu Sep 12, 2019 12:17 pm
EfficientInvestor wrote:
Thu Sep 12, 2019 11:53 am
MotoTrojan wrote:
Thu Sep 12, 2019 11:41 am
Wow, I've heard about this but never seen a comparison this jarring... that is one smooth growth trend there.

Ah just kidding... I just saw you dropped equity down to 50%. It would be a much better comparison to maintain the 70% equity exposure and increase STT exposure until volatility aligns with the 70/30 S&P500/LTT allocation.

Here you go; still impressive outperformance but a better comparison IMHO:
https://www.portfoliovisualizer.com/bac ... total3=100
If I was only trying to show the efficiency of leveraged STT over using LTT, I would agree with you. However, I was also trying to show the efficiency of using a more efficient overall allocation and then applying leverage. Therefore, I developed my efficient allocation of stock to STT bond (10/90) and then applied leverage until I matched the volatility of the other portfolios (~9.77%). This resulted in a 5X leverage of the 10/90 portfolio.
I see, that makes sense but I still don't like the comparison, especially in a period where rates came down. It would be more fair if you used 50% equity in the other two cases; otherwise there is no link.
I guess I'm trying to say that the "link" is the green, vertical line in the image below.

Image

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by rich126 » Thu Sep 12, 2019 12:45 pm

Maybe this is discussed elsewhere and this location isn't the best for it, but people need to be concerned about having short/intermediate term bond funds in their portfolio if we have an extended period of time with 1% or lower interest rates. That means they will be getting a negative real return and a 60/40 portfolio with 40% returning negative real returns for 5-10 years is going to cause some real pain unless the portfolio is sizable (i.e., much more than the 25X).

Of course the longer low interest rates go on, eventually it will hit long duration bonds. For now, you can ride the appreciation of those funds.

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by hdas » Thu Sep 12, 2019 1:08 pm

MotoTrojan wrote:
Thu Sep 12, 2019 12:16 pm
hdas wrote:
Thu Sep 12, 2019 12:11 pm
vineviz wrote:
Thu Sep 12, 2019 11:51 am
hdas wrote:
Thu Sep 12, 2019 11:28 am
My only quibble with this article, is the timing. After long bonds have rallied massively, the public is becoming aware of the anomaly.
What do you think is anomalous?
It's anomalous that Long Bonds offer you insurance like protection for equity crashes plus a positive expected return. h
The positive expected return is clearly not anomalous, so you are saying the negative correlation during equity crashes is? Why doesn't it make sense that people would flee to long-term government bonds when afraid of the equity markets? The market goes down because money is being withdrawn; it has to go somewhere.
Look at the joint properties. When was the last time you got paid interest in your puts or in your home insurance?. Cheers :greedy
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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by retiringwhen » Thu Sep 12, 2019 1:11 pm

hdas wrote:
Thu Sep 12, 2019 1:08 pm
Look at the joint properties. When was the last time you got paid interest in your puts or in your home insurance?. Cheers :greedy
I get dividends every year from my mutually owned home insurance company :-)

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by hdas » Thu Sep 12, 2019 1:19 pm

vineviz wrote:
Thu Sep 12, 2019 12:17 pm
hdas wrote:
Thu Sep 12, 2019 12:11 pm
It's anomalous that Long Bonds offer you insurance like protection for equity crashes plus a positive expected return.
I'm still not clear on what you mean, specifically what you think "insurance like protection" looks like.
Looks like coterminous moves in opposite directions in stocks and bonds during times of stress for equities. It all started on a somber Monday afternoon.

Image
vineviz wrote:
Thu Sep 12, 2019 12:17 pm
I can say that long-term Treasuries have always been best source of diversification for equity portfolios, and have always had positive expected returns (and certainly do a the present time).
This we can agree.

Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by rascott » Thu Sep 12, 2019 1:39 pm

MotoTrojan wrote:
Thu Sep 12, 2019 11:40 am
firebirdparts wrote:
Thu Sep 12, 2019 10:48 am
EfficientInvestor wrote:
Thu Sep 12, 2019 10:46 am

CASHX in PV represents the risk-free rate.
Something's wrong. It's wrong. if the risk free rate is zero percent, then obviously you want to borrow infinity dollars and put that in short term treasuries. Of course you do. If you can't actually do that, then we need to be careful about using it in portfolio demonstrations or arguments or mor complex situations if it's not real.
This is a perfectly real calculation and quite a good way to represent rolling futures. Rates have been dropping, so yes you make a killer return holding leveraged short-term treasuries and being short cash (the risk-free rate, not 0%). If rates rise, this portfolio gets equally crushed.

Crushed is a bit extreme..... at 6:1 leverage (the long run leverage to equate to LTT volatility) back to 1955, the worst one year was a loss of 16%. It did have some big drawdowns in the late 70s (40%)... but it bounced back quite quickly..... since you are using STTs... you would quickly be back investing at the higher rate.

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by hdas » Thu Sep 12, 2019 1:54 pm

rascott wrote:
Thu Sep 12, 2019 1:39 pm
MotoTrojan wrote:
Thu Sep 12, 2019 11:40 am
firebirdparts wrote:
Thu Sep 12, 2019 10:48 am
EfficientInvestor wrote:
Thu Sep 12, 2019 10:46 am

CASHX in PV represents the risk-free rate.
Something's wrong. It's wrong. if the risk free rate is zero percent, then obviously you want to borrow infinity dollars and put that in short term treasuries. Of course you do. If you can't actually do that, then we need to be careful about using it in portfolio demonstrations or arguments or mor complex situations if it's not real.
This is a perfectly real calculation and quite a good way to represent rolling futures. Rates have been dropping, so yes you make a killer return holding leveraged short-term treasuries and being short cash (the risk-free rate, not 0%). If rates rise, this portfolio gets equally crushed.

Crushed is a bit extreme..... at 6:1 leverage (the long run leverage to equate to LTT volatility) back to 1955, the worst one year was a loss of 16%. It did have some big drawdowns in the late 70s (40%)... but it bounced back quite quickly..... since you are using STTs... you would quickly be back investing at the higher rate.
Check the bond massacre of 1994. Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by bgf » Thu Sep 12, 2019 1:58 pm

nisiprius wrote:
Thu Sep 12, 2019 8:25 am

So, during 2008-2009, would it have affected your mood or your financial decisions all that much to see your portfolio drop 35.71% instead of 38.58%?

During a sell-off, your primary protection is not to be equity-heavy in the first place. Having decided to be 70% equities, yes, most of us are going to feel great pain (kidney-stone level) during a real "sell-off," and fine-tuning the particular blend of pain is not going to move the needle much--not like having opted for a lower stock allocation in advance.
this is why i dont see the logic behind a 90-10 or 85-15 portfolio for investors with long time horizons. even an 80-20 portfolio isn't going to save you from a gunchwrenching market drop.

i am not going to invest 10-20% of my portfolio in low returning assets just to potentially save myself ~5% max draw down when im not even withdrawing money from my portfolio. in fact, im still adding to it.

you're still going to feel the pain, so all the bond allocation is doing is limiting your equity upside during all the times the market is not crashing.

a million dollar portfolio dropping to $600,000 hurts just as bad as one dropping to $650,000. your feelings arent calibrated to distinguish the difference. its a huge loss with both.
Last edited by bgf on Thu Sep 12, 2019 2:00 pm, edited 1 time in total.
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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by rascott » Thu Sep 12, 2019 1:59 pm

hdas wrote:
Thu Sep 12, 2019 1:54 pm
rascott wrote:
Thu Sep 12, 2019 1:39 pm
MotoTrojan wrote:
Thu Sep 12, 2019 11:40 am
firebirdparts wrote:
Thu Sep 12, 2019 10:48 am
EfficientInvestor wrote:
Thu Sep 12, 2019 10:46 am

CASHX in PV represents the risk-free rate.
Something's wrong. It's wrong. if the risk free rate is zero percent, then obviously you want to borrow infinity dollars and put that in short term treasuries. Of course you do. If you can't actually do that, then we need to be careful about using it in portfolio demonstrations or arguments or mor complex situations if it's not real.
This is a perfectly real calculation and quite a good way to represent rolling futures. Rates have been dropping, so yes you make a killer return holding leveraged short-term treasuries and being short cash (the risk-free rate, not 0%). If rates rise, this portfolio gets equally crushed.

Crushed is a bit extreme..... at 6:1 leverage (the long run leverage to equate to LTT volatility) back to 1955, the worst one year was a loss of 16%. It did have some big drawdowns in the late 70s (40%)... but it bounced back quite quickly..... since you are using STTs... you would quickly be back investing at the higher rate.
Check the bond massacre of 1994. Cheers :greedy


Yes, 94 was the 16% loss year. Likely would surprise people that year was worse than any year in the 70s for leveraged STTs.

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by watchnerd » Mon Jan 13, 2020 10:46 am

Horton wrote:
Thu Sep 12, 2019 8:07 am


The authors could have also mentioned DFA's Target Retirement Income Funds, which, in my opinion, do a better job at and near retirement than the other firms mentioned in the article.
I just looked at them and they seem lower in equities and higher in TIPS for a given date than the Vanguard funds.

Is this what you think makes them better, or is there something else?
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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by watchnerd » Mon Jan 13, 2020 11:04 am

hdas wrote:
Thu Sep 12, 2019 11:28 am

My only quibble with this article, is the timing. After long bonds have rallied massively, the public is becoming aware of the anomaly. I do hold long treasuries in my allocation, but I switched from EDV to VGLT in the last two weeks, even a short position was sensible. Cheers :greedy
If you're holding LTT or extended duration Treasuries for long-term risk parity matching versus equities over a decade or more, why respond to faddish short term sentiment?
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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by nisiprius » Mon Jan 13, 2020 11:24 am

watchnerd wrote:
Mon Jan 13, 2020 10:46 am
Horton wrote:
Thu Sep 12, 2019 8:07 am
The authors could have also mentioned DFA's Target Retirement Income Funds, which, in my opinion, do a better job at and near retirement than the other firms mentioned in the article.
I just looked at them and they seem lower in equities and higher in TIPS for a given date than the Vanguard funds.
Is this what you think makes them better, or is there something else?
I'm not Horton, but DFA's target-date funds were developed by Robert C. Merton as part of some coordinated total plan for life-cycle financial management, which I think is supposed to coordinate with other elements including an annuity. I'm not sure if DFA actually provides such an annuity yet, or how that is supposed to work, especially since inflation-linked annuities are hard to find nowadays.

It is presented as total strategy, not just another target-date fund.

I know that poster bobcat2, in this forum, thinks very highly of the approach.

I can't imagine how anybody could possibly form a judgement about whether funds founded in 2015 (DFA) are doing any better or worse job than competitors' funds founded in 2000 (Fidelity Freedom funds, original series) or 2003 (Vanguard target retirement funds for years ending in "5"). The DFA funds didn't go through 2008-2009, and anyone "at or near retirement" has only been saving money in them for less than five years and could hardly have saved up enough in them for retirement.
Last edited by nisiprius on Mon Jan 13, 2020 11:47 am, edited 1 time in total.
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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by hdas » Mon Jan 13, 2020 11:32 am

watchnerd wrote:
Mon Jan 13, 2020 11:04 am
hdas wrote:
Thu Sep 12, 2019 11:28 am

My only quibble with this article, is the timing. After long bonds have rallied massively, the public is becoming aware of the anomaly. I do hold long treasuries in my allocation, but I switched from EDV to VGLT in the last two weeks, even a short position was sensible. Cheers :greedy
If you're holding LTT or extended duration Treasuries for long-term risk parity matching versus equities over a decade or more, why respond to faddish short term sentiment?
I think the answer is in your own question. The August up-move in LTT was "faddish short term sentiment". I general, you want to be on the other side of those short term moves. Mind that a 20 point reversal in Ultra bond futures is not an insignificant chunk of cash. Conditional on the specific bet proposition, I'm ready to make some tactical adjustments. I believe that the higher volatility of LTT calls for more frequent rebalancing, specially in those instances where there's a nice opposite move in equities. That being said I have nothing against a 100% passive approach.

Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by Horton » Mon Jan 13, 2020 6:09 pm

nisiprius wrote:
Mon Jan 13, 2020 11:24 am
watchnerd wrote:
Mon Jan 13, 2020 10:46 am
Horton wrote:
Thu Sep 12, 2019 8:07 am
The authors could have also mentioned DFA's Target Retirement Income Funds, which, in my opinion, do a better job at and near retirement than the other firms mentioned in the article.
I just looked at them and they seem lower in equities and higher in TIPS for a given date than the Vanguard funds.
Is this what you think makes them better, or is there something else?
I'm not Horton, but DFA's target-date funds were developed by Robert C. Merton as part of some coordinated total plan for life-cycle financial management, which I think is supposed to coordinate with other elements including an annuity. I'm not sure if DFA actually provides such an annuity yet, or how that is supposed to work, especially since inflation-linked annuities are hard to find nowadays.

It is presented as total strategy, not just another target-date fund.

I know that poster bobcat2, in this forum, thinks very highly of the approach.

I can't imagine how anybody could possibly form a judgement about whether funds founded in 2015 (DFA) are doing any better or worse job than competitors' funds founded in 2000 (Fidelity Freedom funds, original series) or 2003 (Vanguard target retirement funds for years ending in "5"). The DFA funds didn't go through 2008-2009, and anyone "at or near retirement" has only been saving money in them for less than five years and could hardly have saved up enough in them for retirement.
I probably should have been more clear in my terminology. When I originally said “do a better job”, I meant it in terms of methodology consistent with the lifecycle finance framework rather than past performance.

Also, one doesn’t need to use DFA’s funds but can instead follow the glide path to construct their own. BobK describes a do-it-yourself approach here that is very similar to DFA’s.

P.S. - implicit in my edit here is that I’m trying to be less dogmatic. I like the lifecycle finance approach, but realize it’s not for everyone. Yesterday, I just so happened to have reread Vanguards white paper explaining the methodology behind their TDFs and think it’s a perfectly suitable approach for the masses. In fact, if someone walked up to me on the street and asked for retirement planning advice, my default would be to use the Vanguard TDFs.

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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by watchnerd » Mon Jan 13, 2020 6:36 pm

Horton wrote:
Mon Jan 13, 2020 6:09 pm
nisiprius wrote:
Mon Jan 13, 2020 11:24 am
watchnerd wrote:
Mon Jan 13, 2020 10:46 am
Horton wrote:
Thu Sep 12, 2019 8:07 am
The authors could have also mentioned DFA's Target Retirement Income Funds, which, in my opinion, do a better job at and near retirement than the other firms mentioned in the article.
I just looked at them and they seem lower in equities and higher in TIPS for a given date than the Vanguard funds.
Is this what you think makes them better, or is there something else?
I'm not Horton, but DFA's target-date funds were developed by Robert C. Merton as part of some coordinated total plan for life-cycle financial management, which I think is supposed to coordinate with other elements including an annuity. I'm not sure if DFA actually provides such an annuity yet, or how that is supposed to work, especially since inflation-linked annuities are hard to find nowadays.

It is presented as total strategy, not just another target-date fund.

I know that poster bobcat2, in this forum, thinks very highly of the approach.

I can't imagine how anybody could possibly form a judgement about whether funds founded in 2015 (DFA) are doing any better or worse job than competitors' funds founded in 2000 (Fidelity Freedom funds, original series) or 2003 (Vanguard target retirement funds for years ending in "5"). The DFA funds didn't go through 2008-2009, and anyone "at or near retirement" has only been saving money in them for less than five years and could hardly have saved up enough in them for retirement.
I probably should have been more clear in my terminology. When I originally said “do a better job”, I meant it in terms of methodology consistent with the lifecycle finance framework rather than past performance.

Also, one doesn’t need to use DFA’s funds but can instead follow the glide path to construct their own. BobK describes a do-it-yourself approach here that is very similar to DFA’s.

P.S. - implicit in my edit here is that I’m trying to be less dogmatic. I like the lifecycle finance approach, but realize it’s not for everyone. Yesterday, I just so happened to have reread Vanguards white paper explaining the methodology behind their TDFs and think it’s a perfectly suitable approach for the masses. In fact, if someone walked up to me on the street and asked for retirement planning advice, my default would be to use the Vanguard TDFs.

Here is a rub I see in the write-up:

"At that point the nominal bond fund in the portfolio following a LDI strategy is replaced long-term Treasury Inflation Protected (TIPS) bond fund"

That would be nice in theory, but I wish there was such a thing available at low cost.

The only one I know of is LTPZ, with an ER = .20, which is a heavy drag given current bond yields.

This leaves us with:

1. Use the PIMCO fund

2. Abandon the LT TIPS fund and use LTT nominals, barbelled by a short term TIPS fund (like VTIP).

Full disclosure, I do #2.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

Northern Flicker
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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by Northern Flicker » Mon Jan 13, 2020 6:53 pm

If I run a historical efficient frontier on PV for US stocks, intermediate treasuries, and LT treasuries with its full data set, and I’m not seeing it biased toward LT treasuries:

https://www.portfoliovisualizer.com/eff ... teTreasury

It only goes back to 1978 for LTT. Earlier end dates than 2019 are less favorable for LTT:

https://www.portfoliovisualizer.com/eff ... teTreasury

https://www.portfoliovisualizer.com/eff ... teTreasury

https://www.portfoliovisualizer.com/eff ... teTreasury

https://www.portfoliovisualizer.com/eff ... teTreasury

If the data for LT treasuries went back further, the rising rates and inflation of the 1970’s would be an even (much) bigger hurdle for LTT. I suspect you have to go back to the Great Depression era to favor LTT.

You definitely need a high equity allocation to consider them.
Last edited by Northern Flicker on Mon Jan 13, 2020 6:59 pm, edited 1 time in total.
Index fund investor since 1987.

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watchnerd
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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by watchnerd » Mon Jan 13, 2020 6:58 pm

Northern Flicker wrote:
Mon Jan 13, 2020 6:53 pm
If I run a historical efficient frontier on PV for US stocks, intermediate treasuries, and LT treasuries with its full data set, and I’m not seeing it biased toward LT treasuries:

https://www.portfoliovisualizer.com/eff ... teTreasury
I'm not understanding what you mean.

When I look at the tangency portfolio, I see ITT drop away completely in favor of LTT for equity allocations above 55%.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

Northern Flicker
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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by Northern Flicker » Mon Jan 13, 2020 7:03 pm

It is sensitive to time period:

https://www.portfoliovisualizer.com/eff ... teTreasury

https://www.portfoliovisualizer.com/eff ... teTreasury

1978 as a start date eliminates a substantial part of the inflationary 1970’s and favors the subsequent long bull market in bonds that started when rates peaked in 1981.

It is difficult to justify the idea that the optimal sharpe ratio portfolio for a period when interest rates and inflation went from double digit to below 2% will generalize to a period that starts with inflation and interest rates below 2%.
Last edited by Northern Flicker on Mon Jan 13, 2020 7:11 pm, edited 1 time in total.
Index fund investor since 1987.

columbia
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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by columbia » Mon Jan 13, 2020 7:09 pm

There are certainly some scenarios for human beings (ie not institutions or pension funds) to own long bonds; I strongly question whether it’s a good idea to get on the Internet and encourage strangers to do so.

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