First 20% of bonds in long-term Treasuries

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

Post by Elysium »

MotoTrojan wrote: Sat Sep 14, 2019 1:53 pm
Elysium wrote: Sat Sep 14, 2019 1:50 pm
MotoTrojan wrote: Sat Sep 14, 2019 1:45 pm
Elysium wrote: Sat Sep 14, 2019 1:41 pm
MotoTrojan wrote: Sat Sep 14, 2019 1:31 pm

Some people are better at avoiding market timing than others I guess. Even if you didn’t rebalance your drawdown was drastically reduced.
Did you live through 2008 as an investor? Then you will know that people had real existential issues, some of which I listed above. I had a steady job and an income which allowed me to continue buying equities through regular new contributions, however I didn't consider buying more from whatever little bonds I had because that was possibly the last money you expected to have if your equities went down -80% as they did during Great Depression and then took 10-12 years to break even. Yes, for drawdown, and what is the point of a slightly smaller drawdown when you can't really sell the equities that are down 50%, only to lock in losses? so you just keep holding them and hope they recover, and you keep your bonds. Of course everyone wished they had LT Treasuries in their portfolio back then. I will be lying if I said that, but there is a price to that insurance, otherwise it would be a free lunch.
Some people (or situations) are better at avoiding market timing.
Yes, when there is no Great Depression or Great Recession we all can sell bonds and buy more equities.
I will rebalance regardless of conditions, per my IPS. Good luck.
You can say that when you have done that in real life. In fact it may even be foolish to throw money into stocks from your safe bonds, when they are down -50% with possibility to go down further, and have no speedy recovery promised.
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Re: First 20% of bonds in long-term Treasuries

Post by MotoTrojan »

Elysium wrote: Sat Sep 14, 2019 2:01 pm
MotoTrojan wrote: Sat Sep 14, 2019 1:53 pm
Elysium wrote: Sat Sep 14, 2019 1:50 pm
MotoTrojan wrote: Sat Sep 14, 2019 1:45 pm
Elysium wrote: Sat Sep 14, 2019 1:41 pm
Did you live through 2008 as an investor? Then you will know that people had real existential issues, some of which I listed above. I had a steady job and an income which allowed me to continue buying equities through regular new contributions, however I didn't consider buying more from whatever little bonds I had because that was possibly the last money you expected to have if your equities went down -80% as they did during Great Depression and then took 10-12 years to break even. Yes, for drawdown, and what is the point of a slightly smaller drawdown when you can't really sell the equities that are down 50%, only to lock in losses? so you just keep holding them and hope they recover, and you keep your bonds. Of course everyone wished they had LT Treasuries in their portfolio back then. I will be lying if I said that, but there is a price to that insurance, otherwise it would be a free lunch.
Some people (or situations) are better at avoiding market timing.
Yes, when there is no Great Depression or Great Recession we all can sell bonds and buy more equities.
I will rebalance regardless of conditions, per my IPS. Good luck.
You can say that when you have done that in real life. In fact it may even be foolish to throw money into stocks from your safe bonds, when they are down -50% with possibility to go down further, and have no speedy recovery promised.
Let’s agree to disagree on my ability to follow my IPS. If you want the truth I’d be ecstatic to have an opportunity to buy a bunch of equity that was down 50% using bonds that popped nearly that much.

And bonds up 38% wouldn’t feel safe.
Last edited by MotoTrojan on Sat Sep 14, 2019 2:07 pm, edited 1 time in total.
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Re: First 20% of bonds in long-term Treasuries

Post by willthrill81 »

Elysium wrote: Sat Sep 14, 2019 2:01 pm
MotoTrojan wrote: Sat Sep 14, 2019 1:53 pm
Elysium wrote: Sat Sep 14, 2019 1:50 pm
MotoTrojan wrote: Sat Sep 14, 2019 1:45 pm
Elysium wrote: Sat Sep 14, 2019 1:41 pm
Did you live through 2008 as an investor? Then you will know that people had real existential issues, some of which I listed above. I had a steady job and an income which allowed me to continue buying equities through regular new contributions, however I didn't consider buying more from whatever little bonds I had because that was possibly the last money you expected to have if your equities went down -80% as they did during Great Depression and then took 10-12 years to break even. Yes, for drawdown, and what is the point of a slightly smaller drawdown when you can't really sell the equities that are down 50%, only to lock in losses? so you just keep holding them and hope they recover, and you keep your bonds. Of course everyone wished they had LT Treasuries in their portfolio back then. I will be lying if I said that, but there is a price to that insurance, otherwise it would be a free lunch.
Some people (or situations) are better at avoiding market timing.
Yes, when there is no Great Depression or Great Recession we all can sell bonds and buy more equities.
I will rebalance regardless of conditions, per my IPS. Good luck.
You can say that when you have done that in real life. In fact it may even be foolish to throw money into stocks from your safe bonds, when they are down -50% with possibility to go down further, and have no speedy recovery promised.
That's what it means to not market time. Boglehead philosophy is to 'stay the course', regardless of market conditions. I don't personally trust myself to do that, which is why I adopted a trend following strategy.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
MotoTrojan
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Re: First 20% of bonds in long-term Treasuries

Post by MotoTrojan »

willthrill81 wrote: Sat Sep 14, 2019 2:05 pm
Elysium wrote: Sat Sep 14, 2019 2:01 pm
MotoTrojan wrote: Sat Sep 14, 2019 1:53 pm
Elysium wrote: Sat Sep 14, 2019 1:50 pm
MotoTrojan wrote: Sat Sep 14, 2019 1:45 pm

Some people (or situations) are better at avoiding market timing.
Yes, when there is no Great Depression or Great Recession we all can sell bonds and buy more equities.
I will rebalance regardless of conditions, per my IPS. Good luck.
You can say that when you have done that in real life. In fact it may even be foolish to throw money into stocks from your safe bonds, when they are down -50% with possibility to go down further, and have no speedy recovery promised.
That's what it means to not market time. Boglehead philosophy is to 'stay the course', regardless of market conditions. I don't personally trust myself to do that, which is why I adopted a trend following strategy.
Interesting. Trend following still requires dedication to a strict plan even if it seems like the wrong move, plus it adds tracking error. Why do you see this differently?
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willthrill81
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Re: First 20% of bonds in long-term Treasuries

Post by willthrill81 »

MotoTrojan wrote: Sat Sep 14, 2019 2:06 pm
willthrill81 wrote: Sat Sep 14, 2019 2:05 pm
Elysium wrote: Sat Sep 14, 2019 2:01 pm
MotoTrojan wrote: Sat Sep 14, 2019 1:53 pm
Elysium wrote: Sat Sep 14, 2019 1:50 pm
Yes, when there is no Great Depression or Great Recession we all can sell bonds and buy more equities.
I will rebalance regardless of conditions, per my IPS. Good luck.
You can say that when you have done that in real life. In fact it may even be foolish to throw money into stocks from your safe bonds, when they are down -50% with possibility to go down further, and have no speedy recovery promised.
That's what it means to not market time. Boglehead philosophy is to 'stay the course', regardless of market conditions. I don't personally trust myself to do that, which is why I adopted a trend following strategy.
Interesting. Trend following still requires dedication to a strict plan even if it seems like the wrong move, plus it adds tracking error. Why do you see this differently?
Yes, any strategy requires dedication. But I believe that I will be able to stick with this strategy knowing that I have some downside protection (beyond a fixed allocation to bonds).

In this strategy, tracking error isn't necessarily a bug. For me, it's a feature.

Buying stock throughout 2008 sure seemed like a bad move at the time. Several of the die-hard folks around here were very skittish back then and talking about plan B and being unsure of how much more they could take.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Horton
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Re: First 20% of bonds in long-term Treasuries

Post by Horton »

CULater wrote: Sat Sep 14, 2019 1:15 pm I hope someone sees the irony of suggesting that only long term investors should buy long term treasuries, since it makes mores sense for them to invest as little in bonds as possible; whereas, it is the people who have a shorter horizon who should be investing more into bonds in order to diversify their investment portfolios and the best diversifier has historically been long term treasuries.
This is an example of the “Fallacy of Time Diversification”:
For example, one often hears advice like the following: "At your young age, you have enough time to recover from any dips in the market, so you can safely ignore bonds and go with an all stock retirement portfolio." This kind of statement makes the implicit assumption that given enough time good returns will cancel out any possible bad returns. This is nothing more than a popular version of the supposed "principle" of time diversification. It is usually accepted without question as an obvious fact, made true simply because it is repeated so often, a kind of mean reversion with a vengeance.
The common perception is that young people have a long time for equities to generate excess returns over safe investments, but capacity for risk, not time, should determine asset allocation.

It should be noted, that the practical implication is often something akin to the asset allocation you might see in Vanguard Target Date Fund substituting LT TIPS in place of the shorter term bond fund.
Elysium
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Re: First 20% of bonds in long-term Treasuries

Post by Elysium »

willthrill81 wrote: Sat Sep 14, 2019 2:05 pm
Elysium wrote: Sat Sep 14, 2019 2:01 pm
MotoTrojan wrote: Sat Sep 14, 2019 1:53 pm
Elysium wrote: Sat Sep 14, 2019 1:50 pm
MotoTrojan wrote: Sat Sep 14, 2019 1:45 pm

Some people (or situations) are better at avoiding market timing.
Yes, when there is no Great Depression or Great Recession we all can sell bonds and buy more equities.
I will rebalance regardless of conditions, per my IPS. Good luck.
You can say that when you have done that in real life. In fact it may even be foolish to throw money into stocks from your safe bonds, when they are down -50% with possibility to go down further, and have no speedy recovery promised.
That's what it means to not market time. Boglehead philosophy is to 'stay the course', regardless of market conditions. I don't personally trust myself to do that, which is why I adopted a trend following strategy.
Stay the course means follow your plan no matter what, whatever that plan may be. That plan may include a policy for extreme market conditions that says you will not sell bonds to buy more equities if they are down more than x% or you don't have a job, etc. It may include other condition that says in normal circumstances you will re-balance back to your original allocation even if that means selling bonds to buy equities.

Stay the course is not meant to say you must always re-balance back to your original allocation, in fact your plan may not even have a re-balance to original allocation included. You may never sell bonds to buy equities according to your plan, just new money.

So yes, agree, we have to follow our plan.
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Re: First 20% of bonds in long-term Treasuries

Post by willthrill81 »

Horton wrote: Sat Sep 14, 2019 2:22 pm
CULater wrote: Sat Sep 14, 2019 1:15 pm I hope someone sees the irony of suggesting that only long term investors should buy long term treasuries, since it makes mores sense for them to invest as little in bonds as possible; whereas, it is the people who have a shorter horizon who should be investing more into bonds in order to diversify their investment portfolios and the best diversifier has historically been long term treasuries.
This is an example of the “Fallacy of Time Diversification”:
For example, one often hears advice like the following: "At your young age, you have enough time to recover from any dips in the market, so you can safely ignore bonds and go with an all stock retirement portfolio." This kind of statement makes the implicit assumption that given enough time good returns will cancel out any possible bad returns. This is nothing more than a popular version of the supposed "principle" of time diversification. It is usually accepted without question as an obvious fact, made true simply because it is repeated so often, a kind of mean reversion with a vengeance.
The common perception is that young people have a long time for equities to generate excess returns over safe investments, but capacity for risk, not time, should determine asset allocation.

It should be noted, that the practical implication is often something akin to the asset allocation you might see in Vanguard Target Date Fund substituting LT TIPS in place of the shorter term bond fund.
Time diversification is not entirely fallacious though. The historic probability of stocks' having a positive return has increased as the holding period lengthened (e.g. the probability of losing real dollars in a given year in the U.S. has been about 28%, but 0% of 30 year or longer periods have experienced a real loss).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
Elysium
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Re: First 20% of bonds in long-term Treasuries

Post by Elysium »

MotoTrojan wrote: Sat Sep 14, 2019 2:03 pm
Elysium wrote: Sat Sep 14, 2019 2:01 pm
MotoTrojan wrote: Sat Sep 14, 2019 1:53 pm
Elysium wrote: Sat Sep 14, 2019 1:50 pm
MotoTrojan wrote: Sat Sep 14, 2019 1:45 pm

Some people (or situations) are better at avoiding market timing.
Yes, when there is no Great Depression or Great Recession we all can sell bonds and buy more equities.
I will rebalance regardless of conditions, per my IPS. Good luck.
You can say that when you have done that in real life. In fact it may even be foolish to throw money into stocks from your safe bonds, when they are down -50% with possibility to go down further, and have no speedy recovery promised.
Let’s agree to disagree on my ability to follow my IPS. If you want the truth I’d be ecstatic to have an opportunity to buy a bunch of equity that was down 50% using bonds that popped nearly that much.

And bonds up 38% wouldn’t feel safe.
Don't you think that would totally depend on the individuals situation otherwise? For instance, if they had lost a high paying job, cannot find something quickly, they also lost half of their home value, owe bank more money than the house is worth, have a family to feed, banks are failing, three large automobile companies have nearly gone bankrupt, two large mortgage giants have gone under conservatorship, treasury secretary is under panic, and in general there is gloom and doom, under that would you think this person would be ecstatic to buy more stocks with the bonds they have left over. It is not hypothetical situation, we know this happened to many people.
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Re: First 20% of bonds in long-term Treasuries

Post by MotoTrojan »

Elysium wrote: Sat Sep 14, 2019 2:32 pm
MotoTrojan wrote: Sat Sep 14, 2019 2:03 pm
Elysium wrote: Sat Sep 14, 2019 2:01 pm
MotoTrojan wrote: Sat Sep 14, 2019 1:53 pm
Elysium wrote: Sat Sep 14, 2019 1:50 pm
Yes, when there is no Great Depression or Great Recession we all can sell bonds and buy more equities.
I will rebalance regardless of conditions, per my IPS. Good luck.
You can say that when you have done that in real life. In fact it may even be foolish to throw money into stocks from your safe bonds, when they are down -50% with possibility to go down further, and have no speedy recovery promised.
Let’s agree to disagree on my ability to follow my IPS. If you want the truth I’d be ecstatic to have an opportunity to buy a bunch of equity that was down 50% using bonds that popped nearly that much.

And bonds up 38% wouldn’t feel safe.
Don't you think that would totally depend on the individuals situation otherwise? For instance, if they had lost a high paying job, cannot find something quickly, they also lost half of their home value, owe bank more money than the house is worth, have a family to feed, banks are failing, three large automobile companies have nearly gone bankrupt, two large mortgage giants have gone under conservatorship, treasury secretary is under panic, and in general there is gloom and doom, under that would you think this person would be ecstatic to buy more stocks with the bonds they have left over. It is not hypothetical situation, we know this happened to many people.
Note my addendum use of the word “situations”.
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Re: First 20% of bonds in long-term Treasuries

Post by abuss368 »

Elysium wrote: Sat Sep 14, 2019 2:32 pm Don't you think that would totally depend on the individuals situation otherwise? For instance, if they had lost a high paying job, cannot find something quickly, they also lost half of their home value, owe bank more money than the house is worth, have a family to feed, banks are failing, three large automobile companies have nearly gone bankrupt, two large mortgage giants have gone under conservatorship, treasury secretary is under panic, and in general there is gloom and doom, under that would you think this person would be ecstatic to buy more stocks with the bonds they have left over. It is not hypothetical situation, we know this happened to many people.
Hard to imagine and understand. That is why I have been in awe of stories from the great depression.
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Re: First 20% of bonds in long-term Treasuries

Post by Dude2 »

vineviz wrote: Sat Sep 14, 2019 12:32 pm
cresive wrote: Sat Sep 14, 2019 11:01 am I understand your argument, but I have one caveat: If we get hit with rising inflation, with associated rising interest rates, where does that leave you in 5 years? Wouldn't having short-term bonds be more advisable?
If your investment horizon is only 5 years, you definitely don’t want long-term bonds. And if your horizon is longer term, I’m not sure that what happens in the first five years is very material.

More importantly, I think it’s important to treat interest rate risk and inflation risk as the separate forces that they are.
In addition, please take into account liquidity risk. Longer terms TIPS fund was hit with what many believe was a liquidity risk issue in 2008. The thinking is you won't see that with nominals. I'm a short TIPS (fund) guy for this reason and the others mentioned above, better tracking of expected/unexpected inflation. If buying individual long term TIPS, not an issue.
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Re: First 20% of bonds in long-term Treasuries

Post by james22 »

Historically, the optimized portfolio of choice, and the one beloved of quant analysts everywhere, has been a balanced portfolio comprising 60% growth stocks and 40% long-dated bonds. Yet recently, this has come to look less and less like an optimized portfolio, and more and more like a “dumbbell portfolio,” in which investors hedge overvalued growth stocks with overvalued bonds.

At current valuations, such a portfolio no longer offers diversification. Instead, it is a portfolio betting outright on continued central bank intervention and ever-lower interest rates. Given some of the rhetoric coming from central bankers recently, this is a bet which could now be getting increasingly dangerous.


https://www.mauldineconomics.com/frontl ... -investing
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Re: First 20% of bonds in long-term Treasuries

Post by james22 »

willthrill81 wrote: Sat Sep 14, 2019 2:26 pmTime diversification is not entirely fallacious though.
Duration of Savings

To put the short time horizon of DC participants into perspective, we can analyze savings as we would a bond: as a series of annual cash flows with a maturity date.

For example, consider the scenario of a 25 year-old plan participant who earns $50,000 in her first year, gets a 1% real raise every year, and gradually increases her 401(k) contributions from 9.5% of salary in the first year to 13.3%3 of salary in the final year. As Table 1 shows, the “duration of savings” which represents the time- and dollar-weighted investment horizon of a 25 year-old participant is actually only about 12 years, not 40.

Participants who begin contributing later in life will have an even shorter effective time horizon. These individuals have a shorter, effective time horizon to “ride out” unfavorable volatility in their investments. Conventional wisdom of “buy and hold” therefore poses significant risks in a DC context.


http://www.pimco.com/LeftNav/Viewpoints ... 8-2007.htm
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

james22 wrote: Sun Sep 15, 2019 5:39 am For example, consider the scenario of a 25 year-old plan participant who earns $50,000 in her first year, gets a 1% real raise every year, and gradually increases her 401(k) contributions from 9.5% of salary in the first year to 13.3%3 of salary in the final year. As Table 1 shows, the “duration of savings” which represents the time- and dollar-weighted investment horizon of a 25 year-old participant is actually only about 12 years, not 40.
PIMCO is using some very non-standard definitions in this paper, many of which make them inapplicable to the context in which we are discussing long-term bonds.

For one thing, the use of dollar-weighted duration for young investors is only applicable under the assumption that investors must choose a single immutable asset allocation for their entire career. Clearly that's not an assumption that holds true.

For another thing, PIMCO is calculating the investment horizon as being fixed as a singe point at age 65 (presumably to facilitate annuitization comparisons) when in reality the investment horizon stretches well past that for retirees.

This makes the statement highlighted in red misleading at best and possibly outright untrue.
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Re: First 20% of bonds in long-term Treasuries

Post by Lee_WSP »

The problem of being time rich & resource poor when young and time poor, but resource rich when near death is a real problem, but I'm not sure what the solution is.
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Re: First 20% of bonds in long-term Treasuries

Post by Doc »

Dude2 wrote: Sat Sep 14, 2019 10:19 pm In addition, please take into account liquidity risk. Longer terms TIPS fund was hit with what many believe was a liquidity risk issue in 2008. The thinking is you won't see that with nominals.
Right. In the fall of 2007 I completed my 10 year liability matching TIPS ladder portfolio for my retirement. By the end of December 2008 my entire TIPS ladder was gone.

I completely agree with vineviz on the 20% Treasury recommendation. But I think the duration of those Treasuries is very dependent on ones retirement needs and life expectancy.
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

Dude2 wrote: Sat Sep 14, 2019 10:19 pm In addition, please take into account liquidity risk. Longer terms TIPS fund was hit with what many believe was a liquidity risk issue in 2008. The thinking is you won't see that with nominals. I'm a short TIPS (fund) guy for this reason and the others mentioned above, better tracking of expected/unexpected inflation. If buying individual long term TIPS, not an issue.
People believe lots of things that aren't actually true, and I suspect this "liquidity risk issue" is one of them.

But whatever anyone thinks would explain the price volatility of long-term TIPS in 2008, the've got a very easy solution for guarding against it: match the duration of their bonds to their investment horizon.
"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 CULater »

vineviz wrote: Sun Sep 15, 2019 12:27 pm
Dude2 wrote: Sat Sep 14, 2019 10:19 pm In addition, please take into account liquidity risk. Longer terms TIPS fund was hit with what many believe was a liquidity risk issue in 2008. The thinking is you won't see that with nominals. I'm a short TIPS (fund) guy for this reason and the others mentioned above, better tracking of expected/unexpected inflation. If buying individual long term TIPS, not an issue.
People believe lots of things that aren't actually true, and I suspect this "liquidity risk issue" is one of them.

But whatever anyone thinks would explain the price volatility of long-term TIPS in 2008, the've got a very easy solution for guarding against it: match the duration of their bonds to their investment horizon.
If you said that to a 70-year old investor, what would that person's "investment horizon" actually be? And what about the matter that this person is continually taking portfolio withdrawals for living expenses? Should such a person ever consider long term bonds?
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Re: First 20% of bonds in long-term Treasuries

Post by Doc »

vineviz wrote: Sun Sep 15, 2019 12:27 pm
People believe lots of things that aren't actually true, and I suspect this "liquidity risk issue" is one of them.

But whatever anyone thinks would explain the price volatility of long-term TIPS in 2008, the've got a very easy solution for guarding against it: match the duration of their bonds to their investment horizon.
vineviz wrote: in the OP"] 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:
I have trouble reconciling these two statements.

I have to admit that I bought into the "TIPS are just like nominals except for the inflation protection" in the early 2000's. And then along came Lehman.

I guess the answer lies on whether or not the individual is going to buy equities when the stock market goes down 40% or just turns off the TV and has another glass of Jack.
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Re: First 20% of bonds in long-term Treasuries

Post by Angst »

Doc wrote: Sun Sep 15, 2019 11:27 am
Dude2 wrote: Sat Sep 14, 2019 10:19 pm In addition, please take into account liquidity risk. Longer terms TIPS fund was hit with what many believe was a liquidity risk issue in 2008. The thinking is you won't see that with nominals.
Right. In the fall of 2007 I completed my 10 year liability matching TIPS ladder portfolio for my retirement. By the end of December 2008 my entire TIPS ladder was gone.

Dude2 wrote: Sat Sep 14, 2019 10:19 pm
In addition, please take into account liquidity risk. Longer terms TIPS fund was hit with what many believe was a liquidity risk issue in 2008. The thinking is you won't see that with nominals. I'm a short TIPS (fund) guy for this reason and the others mentioned above, better tracking of expected/unexpected inflation. If buying individual long term TIPS, not an issue.
Doc, perhaps you missed the last line of Dude2's post. An LMP is a good example of when fear of a repeat of this liquidity issue we saw with TIPS during the GFC/Lehman collapse should not be a factor. You may have called it your "liability matching TIPS ladder portfolio" back in 2007 but you treated it only as part of your fixed income, not an LMP. It's almost kinda like buying a homeowner's insurance policy but later when rates for some reason plummet you feel cheated and sell your policy back at a discount, but now you no longer have home owner's insurance.
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Re: First 20% of bonds in long-term Treasuries

Post by Horton »

Doc wrote: Sun Sep 15, 2019 11:27 am
Dude2 wrote: Sat Sep 14, 2019 10:19 pm In addition, please take into account liquidity risk. Longer terms TIPS fund was hit with what many believe was a liquidity risk issue in 2008. The thinking is you won't see that with nominals.
Right. In the fall of 2007 I completed my 10 year liability matching TIPS ladder portfolio for my retirement. By the end of December 2008 my entire TIPS ladder was gone.

I completely agree with vineviz on the 20% Treasury recommendation. But I think the duration of those Treasuries is very dependent on ones retirement needs and life expectancy.
I don’t understand how this is possible. Looking at the Vanguard TIPS fund, 2008 return was only down about 3%. How did 10 years worth of income evaporate?

https://investor.vanguard.com/mutual-fu ... ve-returns
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Re: First 20% of bonds in long-term Treasuries

Post by willthrill81 »

Horton wrote: Sun Sep 15, 2019 2:54 pm
Doc wrote: Sun Sep 15, 2019 11:27 am
Dude2 wrote: Sat Sep 14, 2019 10:19 pm In addition, please take into account liquidity risk. Longer terms TIPS fund was hit with what many believe was a liquidity risk issue in 2008. The thinking is you won't see that with nominals.
Right. In the fall of 2007 I completed my 10 year liability matching TIPS ladder portfolio for my retirement. By the end of December 2008 my entire TIPS ladder was gone.

I completely agree with vineviz on the 20% Treasury recommendation. But I think the duration of those Treasuries is very dependent on ones retirement needs and life expectancy.
I don’t understand how this is possible. Looking at the Vanguard TIPS fund, 2008 return was only down about 3%. How did 10 years worth of income evaporate?

https://investor.vanguard.com/mutual-fu ... ve-returns
Because, as Angst pointed out, he apparently used those funds to rebalance into stocks, but such a move seems antithetical to a TIPS laddering approach.
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Re: First 20% of bonds in long-term Treasuries

Post by Doc »

willthrill81 wrote: Sun Sep 15, 2019 3:02 pm Because, as Angst pointed out, he apparently used those funds to rebalance into stocks, but such a move seems antithetical to a TIPS laddering approach.
Exactly. Vineviz started this thread using long nominal Treasuries as a balance to the equity portfolio. Now some people have morphed that long nominal Treasury to a liability matching portfolio. If you want to have a counter to equities tanking then nominals are the way to go (assuming that '08 was not a "one off"). If you want to have a liability matching portfolio then TIPS is the way to go.

You just can't have your cake and eat it too.

For those of you that still belive the TIPS are just like nominals except for the inflation protection see:

Image

http://quotes.morningstar.com/chart/fun ... 2SNG%22%7D

That a 20%+ difference if you want to rebalnce.
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Re: First 20% of bonds in long-term Treasuries

Post by Lee_WSP »

willthrill81 wrote: Sun Sep 15, 2019 3:02 pm
Horton wrote: Sun Sep 15, 2019 2:54 pm
Doc wrote: Sun Sep 15, 2019 11:27 am
Dude2 wrote: Sat Sep 14, 2019 10:19 pm In addition, please take into account liquidity risk. Longer terms TIPS fund was hit with what many believe was a liquidity risk issue in 2008. The thinking is you won't see that with nominals.
Right. In the fall of 2007 I completed my 10 year liability matching TIPS ladder portfolio for my retirement. By the end of December 2008 my entire TIPS ladder was gone.

I completely agree with vineviz on the 20% Treasury recommendation. But I think the duration of those Treasuries is very dependent on ones retirement needs and life expectancy.
I don’t understand how this is possible. Looking at the Vanguard TIPS fund, 2008 return was only down about 3%. How did 10 years worth of income evaporate?

https://investor.vanguard.com/mutual-fu ... ve-returns
Because, as Angst pointed out, he apparently used those funds to rebalance into stocks, but such a move seems antithetical to a TIPS laddering approach.
This question is not necessarily to you Will, but why on Earth are the tips to blame?
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Re: First 20% of bonds in long-term Treasuries

Post by willthrill81 »

Lee_WSP wrote: Sun Sep 15, 2019 5:05 pm
willthrill81 wrote: Sun Sep 15, 2019 3:02 pm Because, as Angst pointed out, he apparently used those funds to rebalance into stocks, but such a move seems antithetical to a TIPS laddering approach.
This question is not necessarily to you Will, but why on Earth are the tips to blame?
They aren't. The move was entirely due to a precipitous fall in stocks and a desire to rebalance the portfolio according to a set AA.
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Re: First 20% of bonds in long-term Treasuries

Post by Lee_WSP »

willthrill81 wrote: Sun Sep 15, 2019 5:10 pm
Lee_WSP wrote: Sun Sep 15, 2019 5:05 pm
willthrill81 wrote: Sun Sep 15, 2019 3:02 pm Because, as Angst pointed out, he apparently used those funds to rebalance into stocks, but such a move seems antithetical to a TIPS laddering approach.
This question is not necessarily to you Will, but why on Earth are the tips to blame?
They aren't. The move was entirely due to a precipitous fall in stocks and a desire to rebalance the portfolio according to a set AA.
Just making sure my rhetorical question was rhetorical.

Actual question, did he say that the stocks he rebalanced into did not then recover by 2013 or so?
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Re: First 20% of bonds in long-term Treasuries

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Lee_WSP wrote: Sun Sep 15, 2019 5:15 pm Actual question, did he say that the stocks he rebalanced into did not then recover by 2013 or so?
No, I do not believe that he ever said that.
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Re: First 20% of bonds in long-term Treasuries

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willthrill81 wrote: Sun Sep 15, 2019 5:19 pm
Lee_WSP wrote: Sun Sep 15, 2019 5:15 pm Actual question, did he say that the stocks he rebalanced into did not then recover by 2013 or so?
No, I do not believe that he ever said that.
Not only did they recover but I had some 40% more shares because I rebalanced. Since my T's were in TIPS that rebalancing cost me mo than if they were nominals.

I am not criticizing using TIPS as a LMP. That's fine for those that need that kind of insurance. But this thread started out as Treasuries as protection from equity underperformance.

The thread morphed.
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Re: First 20% of bonds in long-term Treasuries

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Doc wrote: Mon Sep 16, 2019 9:42 am
willthrill81 wrote: Sun Sep 15, 2019 5:19 pm
Lee_WSP wrote: Sun Sep 15, 2019 5:15 pm Actual question, did he say that the stocks he rebalanced into did not then recover by 2013 or so?
No, I do not believe that he ever said that.
Not only did they recover but I had some 40% more shares because I rebalanced. Since my T's were in TIPS that rebalancing cost me mo than if they were nominals.
TIPS being down compared to nominals at the end of 2008 seems to me to be indicative of the market anticipating deflation on the horizon, where nominals would be more valuable than TIPS. If that explanation is more or less accurate, then it does beg the question whether a similar move might be seen again in the future if stocks tank (e.g. TIPS fall in value due to expected deflation or just lower inflation expectations).
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Re: First 20% of bonds in long-term Treasuries

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willthrill81 wrote: Mon Sep 16, 2019 9:50 am TIPS being down compared to nominals at the end of 2008 seems to me to be indicative of the market anticipating deflation on the horizon, where nominals would be more valuable than TIPS
It isn't the end that is the issue. It was in September/October when the stock market crashed. My IPS tells me to rebalnce based on 5% bands. I did that. Unfortunately my Treasuries were in TIPs not nominals so I got some 20% less bang for my bucks.
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Re: First 20% of bonds in long-term Treasuries

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Doc wrote: Mon Sep 16, 2019 10:16 am
willthrill81 wrote: Mon Sep 16, 2019 9:50 am TIPS being down compared to nominals at the end of 2008 seems to me to be indicative of the market anticipating deflation on the horizon, where nominals would be more valuable than TIPS
It isn't the end that is the issue. It was in September/October when the stock market crashed. My IPS tells me to rebalnce based on 5% bands. I did that. Unfortunately my Treasuries were in TIPs not nominals so I got some 20% less bang for my bucks.
I understand that. My question is whether we should expect similar movements in the future (i.e. in times of substantial uncertainty, significant drops in stocks accompany drops in TIPS' market value).
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Re: First 20% of bonds in long-term Treasuries

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willthrill81 wrote: Mon Sep 16, 2019 10:18 am I understand that. My question is whether we should expect similar movements in the future (i.e. in times of substantial uncertainty, significant drops in stocks accompany drops in TIPS' market value).
We don't know. That's a question each of us has to decide for themselves. If you are not going to buy stocks when the market crashes then TIPS are fine in either case. And maybe they will be fine in the next crash. TIPS have insufficient history for us to make any kind of rational decision.

I'm using nominals but I don't have unexpected inflation concerns. If I did need or want an inflation adjusted LMP I would use both TIPS and nominals and just have less in corporates if necessary.
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Re: First 20% of bonds in long-term Treasuries

Post by Lee_WSP »

Doc wrote: Mon Sep 16, 2019 9:42 am
willthrill81 wrote: Sun Sep 15, 2019 5:19 pm
Lee_WSP wrote: Sun Sep 15, 2019 5:15 pm Actual question, did he say that the stocks he rebalanced into did not then recover by 2013 or so?
No, I do not believe that he ever said that.
Not only did they recover but I had some 40% more shares because I rebalanced. Since my T's were in TIPS that rebalancing cost me mo than if they were nominals.

I am not criticizing using TIPS as a LMP. That's fine for those that need that kind of insurance. But this thread started out as Treasuries as protection from equity underperformance.

The thread morphed.
I understand now. Yes, this thread seems to be going into TIPS vs nominal. I don't know enough to join in.
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Re: First 20% of bonds in long-term Treasuries

Post by Angst »

Doc wrote: Mon Sep 16, 2019 9:42 am
willthrill81 wrote: Sun Sep 15, 2019 5:19 pm
Lee_WSP wrote: Sun Sep 15, 2019 5:15 pm Actual question, did he say that the stocks he rebalanced into did not then recover by 2013 or so?
No, I do not believe that he ever said that.
Not only did they recover but I had some 40% more shares because I rebalanced. Since my T's were in TIPS that rebalancing cost me mo than if they were nominals.

I am not criticizing using TIPS as a LMP. That's fine for those that need that kind of insurance. But this thread started out as Treasuries as protection from equity underperformance.

The thread morphed.

My point was simply that back in 2007, what morphed then was your IPS. A TIPS laddered LMP is not meant to be used for rebalancing when needed, it's meant to be like an insurance product which is cashed in at maturity. But you chose to abandon your LMP insurance and treat the ladder as part of your fixed income. It's a roundabout way of highlighting the issues TIPS had with liquidity back then. Personally, I've attributed the majority of the TIPS 2007 liquidity crisis to Lehman and the relative newness of the TIPS market back then. Has not most of the academic literature done the same? If so, we ought to be able to return to the basic premise of the thread.
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Re: First 20% of bonds in long-term Treasuries

Post by Doc »

Angst wrote: Mon Sep 16, 2019 11:34 am My point was simply that back in 2007, what morphed then was your IPS. A TIPS laddered LMP is not meant to be used for rebalancing when needed, it's meant to be like an insurance product which is cashed in at maturity. But you chose to abandon your LMP insurance and treat the ladder as part of your fixed income.
No. The "word" back in 2005-2007 was that TIPS were just like nominal Treasuries except for the inflation protection. The word turned out not to be true presumably because of TIPS liquidity issues.

This thread started with having 20% Treasuries to offset equities. It morphed into TIPS. Which means the the "word" may have returned. :(

Maybe the TIPS market is now big enough so that liquidity issues won't materialized in the next stock market correction. Maybe.

I would agree with you that today a laddered TIPS is not meant to be used for rebalancing at least if you assume that that ladder is meant as a LMP.
Personally, I've attributed the majority of the TIPS 2007 liquidity crisis to Lehman and the relative newness of the TIPS market back then.
You could very well be right. Maybe we'll know in the next 12 months. Hopefully the stock market will not crash but then we still won't know.

Edit: I found an article from the Fed which addresses the issue for anyone that is interested. But it's from 2012. (I didn't read actual article because I'm not interested in a LMP.)

ECONOMIC POLICY REVIEW EXECUTIVE SUMMARY
The Microstructure of the TIPS Market
Recapping an article from the March 2012 issue of the Economic Policy Review, Volume 18, Number 1

https://www.newyorkfed.org/research/epr ... _flem.html

"In 2011, there is still little quantitative evidence on TIPS liquidity. "
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Re: First 20% of bonds in long-term Treasuries

Post by Angst »

^ I'm good with you here Doc. Don't really disagree with anything you say.
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

Doc wrote: Mon Sep 16, 2019 12:15 pm No. The "word" back in 2005-2007 was that TIPS were just like nominal Treasuries except for the inflation protection. The word turned out not to be true presumably because of TIPS liquidity issues.
I can't vouch for how well people were explaining TIPS or how how well people understood them in 2005.

I can say that "TIPS [are] just like nominal Treasuries except for the inflation protection" sounds like a pretty solid first-order approximation of the reality, and nothing that's happened since 2005 has changed that.

TIPS provide the return of similar nominal bonds +/- changes in expected inflation and the difference between realized and expected inflation. I suspect a lot of Bogleheads discounting the very real possibility that inflation expectations could drop, and were therefore ignoring the "minus" part of "plus or minus".

Part of the value that nominal long-term Treasuries offer equity-heavy younger investors is their low correlation with stocks. TIPS, with their inflation-linked component, obviously offset that low correlation to some degree. And that effect is magnified when the durations of the bonds mismatch the investor horizon.

Doc wrote: Mon Sep 16, 2019 12:15 pm Maybe the TIPS market is now big enough so that liquidity issues won't materialized in the next stock market correction. Maybe.


It's far more likely there were not actually any "liquidity issues" to begin with.
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Re: First 20% of bonds in long-term Treasuries

Post by Doc »

vineviz wrote: Mon Sep 16, 2019 2:55 pm It's far more likely there were not actually any "liquidity issues" to begin with.
The Federal Reserve Bank of San Francisco apparently doesn't agree with you.

November 21, 2016
https://www.frbsf.org/economic-research ... inflation/

Figure 1
Average estimated TIPS liquidity premium

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

Post by retiringwhen »

Doc wrote: Mon Sep 16, 2019 3:29 pm
vineviz wrote: Mon Sep 16, 2019 2:55 pm It's far more likely there were not actually any "liquidity issues" to begin with.

Bugs
The Federal Reserve Bank of San Francisco apparently doesn't agree with you.
Well there was a disappearance of the Liquidity premium because the market got a fat whale of a market maker in the Federal Reserve. Basically, they soaked up any available TIPS for sale and that arbitraged away the liquidity PREMIUM because there was a lot of LIQUIDITY!

The only problem (realized risk?) was some folks considered that the premium was permanent, but the market had a short-term improvement in liquidity making it disappear temporarily....

Edit: Of course, I was focussed on the text of the paper, They didn't really discuss how TIPS nearly froze up in bottom of the crisis..... The graph does show that with a short, sharp spike in the premium.
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Re: First 20% of bonds in long-term Treasuries

Post by Doc »

retiringwhen wrote: Mon Sep 16, 2019 4:03 pm Well there was a disappearance of the Liquidity premium because the market got a fat whale of a market maker in the Federal Reserve.
No argument. But we do not know if that fat whale will continue forever.

A quick look has $140 billion in Inflation Indexed securities on its balance sheet in July 2019, $114 B in Feb 2016 ad $82 B in October 2012.
https://www.federalreserve.gov/monetary ... report.htm (Open several reports.) I didn't bother to try to find anything back around '08.

edit: I was just looking at the spike in the graph. Didn't bother with the text myself.
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Re: First 20% of bonds in long-term Treasuries

Post by watchnerd »

vineviz wrote: Wed Aug 07, 2019 7:24 pm

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.

I'm going to agree on the first 20% should be long part. But I'm going to disagree that then next X% should necessarily be intermediate, until you get to 40/60 ports.

By barbelling with short, you can achieve a weighted duration close to the market average. And if you make those short bonds also TIPS (e.g. VTIP, 2.5 year duration), you're getting almost pure CPI exposure on the short end of the barbell, with very little duration risk, and the long nominal end is the opposite.
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Re: First 20% of bonds in long-term Treasuries

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Slightly off topic but related since he started this thread, I wonder where vineviz went? I haven’t seen him post in a long time. I miss his insights and hope to see him back eventually.
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Re: First 20% of bonds in long-term Treasuries

Post by puc_ytpme »

Horton wrote: Sat Jan 04, 2020 11:47 am Slightly off topic but related since he started this thread, I wonder where vineviz went? I haven’t seen him post in a long time. I miss his insights and hope to see him back eventually.
+1

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

Post by MotoTrojan »

Horton wrote: Sat Jan 04, 2020 11:47 am Slightly off topic but related since he started this thread, I wonder where vineviz went? I haven’t seen him post in a long time. I miss his insights and hope to see him back eventually.
Hope all is well. I actually tagged him in a post he had discussing his portfolio, asking his thoughts on my proposed idea (he has given awesome similar insight in the past).

Hope you're just enjoying the fruits of your investment labor vineviz :sharebeer .
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Re: First 20% of bonds in long-term Treasuries

Post by willthrill81 »

MotoTrojan wrote: Sat Jan 04, 2020 1:52 pm
Horton wrote: Sat Jan 04, 2020 11:47 am Slightly off topic but related since he started this thread, I wonder where vineviz went? I haven’t seen him post in a long time. I miss his insights and hope to see him back eventually.
Hope all is well. I actually tagged him in a post he had discussing his portfolio, asking his thoughts on my proposed idea (he has given awesome similar insight in the past).

Hope you're just enjoying the fruits of your investment labor vineviz :sharebeer .
Me too. vineviz and I didn't always see eye to eye, but I believe that we both benefited from our discussions. That sort of interaction is a big reason why I stick around here myself.
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Re: First 20% of bonds in long-term Treasuries

Post by S_Track »

willthrill81 wrote: Sat Jan 04, 2020 4:25 pm
MotoTrojan wrote: Sat Jan 04, 2020 1:52 pm
Horton wrote: Sat Jan 04, 2020 11:47 am Slightly off topic but related since he started this thread, I wonder where vineviz went? I haven’t seen him post in a long time. I miss his insights and hope to see him back eventually.
Hope all is well. I actually tagged him in a post he had discussing his portfolio, asking his thoughts on my proposed idea (he has given awesome similar insight in the past).

Hope you're just enjoying the fruits of your investment labor vineviz :sharebeer .
Me too. vineviz and I didn't always see eye to eye, but I believe that we both benefited from our discussions. That sort of interaction is a big reason why I stick around here myself.
I enjoyed reading commentary from you both. Hope all is well with him.
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Re: First 20% of bonds in long-term Treasuries

Post by rich126 »

Horton wrote: Sat Jan 04, 2020 11:47 am Slightly off topic but related since he started this thread, I wonder where vineviz went? I haven’t seen him post in a long time. I miss his insights and hope to see him back eventually.
Hasn’t posted since 12/11 and had averaged 9 posts a day. Hopefully just a nice vacation.
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Re: First 20% of bonds in long-term Treasuries

Post by Lee_WSP »

watchnerd wrote: Sat Jan 04, 2020 10:17 am
vineviz wrote: Wed Aug 07, 2019 7:24 pm

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.

I'm going to agree on the first 20% should be long part. But I'm going to disagree that then next X% should necessarily be intermediate, until you get to 40/60 ports.

By barbelling with short, you can achieve a weighted duration close to the market average. And if you make those short bonds also TIPS (e.g. VTIP, 2.5 year duration), you're getting almost pure CPI exposure on the short end of the barbell, with very little duration risk, and the long nominal end is the opposite.
Is there a premium for short tips vs money market? Is it big enough to make a noticeable difference?
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Re: First 20% of bonds in long-term Treasuries

Post by watchnerd »

Lee_WSP wrote: Sat Jan 04, 2020 11:09 pm

Is there a premium for short tips vs money market? Is it big enough to make a noticeable difference?
What sort of premium do you mean?

Interest rate? NAV of a fund?
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