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

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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 7:18 pm

Northern Flicker wrote:
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.
All reasonably complex efficient frontier tests are sensitive to time periods.

If you change the timeframe to the last 20 years (1999-2019) things look really weird, but if you choose the last 10 years (2009-2019), things look more 'normal'.

If you want to really go crazy, throw gold into the above portfolios as a 4th asset and see what insane ports pops out.

To me, this is just highlighting the limits of dorking around with EF too much. Lots of data, not nearly as much actionable data as one would hope.
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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 7:20 pm

columbia wrote:
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.
Is there something other than duration risk you're worried about?
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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 7:37 pm

All reasonably complex efficient frontier tests are sensitive to time periods.
Yes. But in the case of 70% stocks plus some optimized mix of IT and LT treasuries, it is easy to understand the impact of interest rates and inflation. I was able to predict reliably that shortening the time period with earlier end dates would favor IT treasuries because of the changes in inflation and interest rates.

I think long duration nominal bonds should only be held by investors matching long duration nominal liabilities. Mismatches there would result in uncompensated risk because valuations are driven by market participants who do match to nominal liabilities, so they do not need to be compensated for the risk.
Index fund investor since 1987.

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

Post by Northern Flicker » Mon Jan 13, 2020 8:22 pm

watchnerd wrote:
Mon Jan 13, 2020 7:20 pm
columbia wrote:
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.
Is there something other than duration risk you're worried about?
It is highly unlikely that inflation risk is fully compensated for LT treasuries. You may have a long horizon, but unless your liabilities at the end of that horizon are nominal liabilities, you are not eliminating inflation risk by matching duration to your time horizon.
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 10:37 pm

Northern Flicker wrote:
Mon Jan 13, 2020 8:22 pm

It is highly unlikely that inflation risk is fully compensated for LT treasuries. You may have a long horizon, but unless your liabilities at the end of that horizon are nominal liabilities, you are not eliminating inflation risk by matching duration to your time horizon.
Indeed, but that's what LT TIPS are for, if you want that.

Personally, I barbell nominal LTT with short TIPS.

I don't hold LTT to make money, and my return expectation for them is in the range of -1% - 0 - +1%. It's an insurance policy for bad stock markets and deflation. Insurance costs money.

I get my returns on the equity side, as it doesn't matter whether I pick LTT, ITT, or STT, the yields and returns suck so bad it doesn't move the needle on the port much.
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Re: Long duration is the "Sharpe" choice for aggressively positioned portfolios

Post by Angst » Tue Jan 14, 2020 12:29 am

watchnerd wrote:
Mon Jan 13, 2020 6:36 pm
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.

3. Buy 30 Year TIPS annually at auction, with an ER = 0.00

I do #3.

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

Post by Northern Flicker » Tue Jan 14, 2020 12:56 am

I try to avoid asset classes for which I don’t believe risks are fully rewarded. I don’t make exceptions based on diversification benefits, so the diversification benefits of LT treasuries are irrelevant to me.
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 » Tue Jan 14, 2020 2:37 pm

Northern Flicker wrote:
Tue Jan 14, 2020 12:56 am
I try to avoid asset classes for which I don’t believe risks are fully rewarded. I don’t make exceptions based on diversification benefits, so the diversification benefits of LT treasuries are irrelevant to me.
I get it.

But if I followed that rule strictly, I probably wouldn't hold any fixed income other than Short TIPS / MM.

Such is the sorry state of the yield curve now....
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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