First 20% of bonds in long-term Treasuries

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

Post by jeffyscott »

watchnerd wrote: Tue Apr 20, 2021 10:07 am
jeffyscott wrote: Tue Apr 20, 2021 8:32 am I'd prefer the certainty of a higher yield, rather than hoping that there will be a rebalancing benefit that exceeds the benefit of the higher yields.
I think trading off some equity portion for junk bonds is a rational choice if one has concerns about low Treasury yields and/or correlation persistence.

Where people get into hot water is keeping a high equity allocation and holding junk.
Do have some riskier bonds and a low equity allocation (40-45%, currently), so do accept some credit risk in exchange for higher yield. But I wasn't really referring to junk (or credit risk, in general) there there, just EE bonds vs. long term treasuries. And the same would go for taking CDs over treasuries when there is a yield advantage for the former, but that's not really pertinent here since there are no long term CDs, AFAIK.
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Re: First 20% of bonds in long-term Treasuries

Post by jeffyscott »

anon_investor wrote: Tue Apr 20, 2021 9:43 am
jeffyscott wrote: Tue Apr 20, 2021 8:32 am
Baconator wrote: Sun Apr 18, 2021 4:51 pm I’m interested in potentially adding long term treasuries but I have the following mental problems I can’t seem to get over:

1). I’m not convinced the negative correlations vs. equities will hold because it seems like it’s different this time with rates so low.

2). It doesn’t seem like a smart investment to me on its face when you think about lending the government money for 25+ years for 2.25%

Has anyone been able to get over these and how do you rationalize these away?
I'm not interested in long term treasuries, in any case, but correlations change and have changed over time. I would not rely on them to make up for the low yields. Other than whatever may be in our bond and balanced funds, I am not lending money to the government for 25+ years, but if I were, it'd be done by buying EE bonds to cover at least the first 20. I'd prefer the certainty of a higher yield, rather than hoping that there will be a rebalancing benefit that exceeds the benefit of the higher yields.
Would your mind change if LTT offered a higher interest rate (e.g. 4%)?
In a decision between EE bonds (with guaranteed doubling in 20 years) and LTT at 4%, I would take the LTT.
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Re: First 20% of bonds in long-term Treasuries

Post by invest4 »

vineviz wrote: Sun Apr 18, 2021 5:50 pm
Baconator wrote: Sun Apr 18, 2021 4:51 pm I’m interested in potentially adding long term treasuries but I have the following mental problems I can’t seem to get over:

1). I’m not convinced the negative correlations vs. equities will hold because it seems like it’s different this time with rates so low.

2). It doesn’t seem like a smart investment to me on its face when you think about lending the government money for 25+ years for 2.25%

Has anyone been able to get over these and how do you rationalize these away?
I’m with watchnerd on this .

I think concern about correlations is unfounded, and not only because it’s not likely they’ll turn positive. More importantly, it doesn’t matter if they do. They’re still the best way to diversify an equity portfolio eleven with positive correlations.

Treasury bond yields are always lower than expected stock returns. It’s no different now than it ever had been. You buy bonds because you want more certainty about your portfolio returns, not because you want higher returns.
I agree with vineviz in regard to bonds and more certainty about portfolio returns. However, when I consider the allocation of bonds, I definitely think about how I might achieve a solid return on the bonds / duration I select. I have only invested in bonds during the last couple of years and while I was very tempted by the returns of LTT, I decided i had already 'missed the boat' (performance chasing) and did not invest in them (stayed with BND and BNDX). During the recent concerns about inflation, etc. I was not unhappy to suffer the change in BND vs LTT for example. However, I am still interested in LTT as a potentially more significant portion of my allocation for the long run, but remain very uncertain when it would really worthwhile to do so (if at all).
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Re: First 20% of bonds in long-term Treasuries

Post by watchnerd »

jeffyscott wrote: Tue Apr 20, 2021 10:52 am just EE bonds vs. long term treasuries. And the same would go for taking CDs over treasuries when there is a yield advantage for the former, but that's not really pertinent here since there are no long term CDs, AFAIK.
EE bonds are nice, but also pretty irrelevant to larger portfolios.

I can't meaningfully mitigate 7 figures of stock risk exposure with $20K per year in EE / I bonds.
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Re: First 20% of bonds in long-term Treasuries

Post by jeffyscott »

watchnerd wrote: Tue Apr 20, 2021 11:59 am
jeffyscott wrote: Tue Apr 20, 2021 10:52 am just EE bonds vs. long term treasuries. And the same would go for taking CDs over treasuries when there is a yield advantage for the former, but that's not really pertinent here since there are no long term CDs, AFAIK.
EE bonds are nice, but also pretty irrelevant to larger portfolios.

I can't meaningfully mitigate 7 figures of stock risk exposure with $20K per year in EE / I bonds.
Sure, not after you have already accumulated it, but it can be meaningful in the accumulation stage. Someone maxing out their 401K with $19,500 per year and Roth IRA with $6K, and still able to save another $10K in EE bonds would be putting 28% into the EEs. And then there are those with bad 401Ks, who only put in enough to get a match. I was almost never in either category and then did I before EE during the few years where we saved beyond tax deferred, so would not be meaningful for me either.
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Re: First 20% of bonds in long-term Treasuries

Post by Tingting1013 »

watchnerd wrote: Tue Apr 20, 2021 11:59 am
jeffyscott wrote: Tue Apr 20, 2021 10:52 am just EE bonds vs. long term treasuries. And the same would go for taking CDs over treasuries when there is a yield advantage for the former, but that's not really pertinent here since there are no long term CDs, AFAIK.
EE bonds are nice, but also pretty irrelevant to larger portfolios.

I can't meaningfully mitigate 7 figures of stock risk exposure with $20K per year in EE / I bonds.
This is why I will be liquidating my EEs this year
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Re: First 20% of bonds in long-term Treasuries

Post by anon_investor »

watchnerd wrote: Tue Apr 20, 2021 11:59 am
jeffyscott wrote: Tue Apr 20, 2021 10:52 am just EE bonds vs. long term treasuries. And the same would go for taking CDs over treasuries when there is a yield advantage for the former, but that's not really pertinent here since there are no long term CDs, AFAIK.
EE bonds are nice, but also pretty irrelevant to larger portfolios.

I can't meaningfully mitigate 7 figures of stock risk exposure with $20K per year in EE / I bonds.
I tend to agree. I have been buying I Bonds but only to use as part of an EF.
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Re: First 20% of bonds in long-term Treasuries

Post by invest4 »

jeffyscott wrote: Tue Apr 20, 2021 1:14 pm
watchnerd wrote: Tue Apr 20, 2021 11:59 am
jeffyscott wrote: Tue Apr 20, 2021 10:52 am just EE bonds vs. long term treasuries. And the same would go for taking CDs over treasuries when there is a yield advantage for the former, but that's not really pertinent here since there are no long term CDs, AFAIK.
EE bonds are nice, but also pretty irrelevant to larger portfolios.

I can't meaningfully mitigate 7 figures of stock risk exposure with $20K per year in EE / I bonds.
Sure, not after you have already accumulated it, but it can be meaningful in the accumulation stage. Someone maxing out their 401K with $19,500 per year and Roth IRA with $6K, and still able to save another $10K in EE bonds would be putting 28% into the EEs. And then there are those with bad 401Ks, who only put in enough to get a match. I was almost never in either category and then did I before EE during the few years where we saved beyond tax deferred, so would not be meaningful for me either.
I imagine most people have already accumulated quite a bit by the time they start looking at bonds? During the phase before I am thinking about those, EEs are unlikely to be on my list of potential investments given so many other needs or options including HSA, 529s, backdoor or mega back door. etc.
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Re: First 20% of bonds in long-term Treasuries

Post by LTCM »

I don't have a problem with it, but to clarify, EDV is one holding that is unusually crushed by inflation/inflation worries right?
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

LTCM wrote: Fri May 21, 2021 2:23 pm I don't have a problem with it, but to clarify, EDV is one holding that is unusually crushed by inflation/inflation worries right?
I suppose the answer depends on what exactly the worries are.

Worries about short term inflation should not have much impact, but a shift on long run inflation expectations would have a bigger effect.
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Re: First 20% of bonds in long-term Treasuries

Post by LTCM »

I googled EDV inflation and this was the first hit:
https://seekingalpha.com/article/431830 ... rdly-hedge

Estimated 50% loss on EDV if inflation gets to 5%. Spicy!
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Re: First 20% of bonds in long-term Treasuries

Post by watchnerd »

LTCM wrote: Fri May 21, 2021 4:53 pm I googled EDV inflation and this was the first hit:
https://seekingalpha.com/article/431830 ... rdly-hedge

Estimated 50% loss on EDV if inflation gets to 5%. Spicy!
Doubly spicy if stocks are sliding down at the same time and you were hoping LTT would go up to counter that.
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Re: First 20% of bonds in long-term Treasuries

Post by okwriter »

LTCM wrote: Fri May 21, 2021 4:53 pm I googled EDV inflation and this was the first hit:
https://seekingalpha.com/article/431830 ... rdly-hedge

Estimated 50% loss on EDV if inflation gets to 5%. Spicy!
I find it funny that this article, posted in January 2020, made a prediction that was proven wrong just 2 months later. Must be a record.
Seeking Alpha wrote: While the fund has been a great risk-hedge, its low yield today means it is likely to be more highly correlated to equity valuations.
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Re: First 20% of bonds in long-term Treasuries

Post by anon_investor »

watchnerd wrote: Fri May 21, 2021 5:07 pm
LTCM wrote: Fri May 21, 2021 4:53 pm I googled EDV inflation and this was the first hit:
https://seekingalpha.com/article/431830 ... rdly-hedge

Estimated 50% loss on EDV if inflation gets to 5%. Spicy!
Doubly spicy if stocks are sliding down at the same time and you were hoping LTT would go up to counter that.
I Bonds > EDV right now...
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Re: First 20% of bonds in long-term Treasuries

Post by Elysium »

LTCM wrote: Fri May 21, 2021 4:53 pm I googled EDV inflation and this was the first hit:
https://seekingalpha.com/article/431830 ... rdly-hedge

Estimated 50% loss on EDV if inflation gets to 5%. Spicy!
Why would anyone buy LT and extended duration for inflation protection when everyone knows the opposite is true, that high inflation will kill them. They are a hedge against deflation and flight to safety when equities sell off, and when rates get cut as a result of economic weakness. Hedges have to be for specific purposes in a portfolio. No one can or should buy an investment to protect against all kinds of events, they don't exist. Buy TIPS for inflation protection, and buy LT/ED bonds for other risks mentioned above. At any point in time, some component will not do well, that's how it is supposed to work.
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Re: First 20% of bonds in long-term Treasuries

Post by whereskyle »

okwriter wrote: Fri May 21, 2021 6:52 pm
LTCM wrote: Fri May 21, 2021 4:53 pm I googled EDV inflation and this was the first hit:
https://seekingalpha.com/article/431830 ... rdly-hedge

Estimated 50% loss on EDV if inflation gets to 5%. Spicy!
I find it funny that this article, posted in January 2020, made a prediction that was proven wrong just 2 months later. Must be a record.
Seeking Alpha wrote: While the fund has been a great risk-hedge, its low yield today means it is likely to be more highly correlated to equity valuations.
And now the 30-year yield is exactly where it was to start 2020.
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

LTCM wrote: Fri May 21, 2021 4:53 pm I googled EDV inflation and this was the first hit:
https://seekingalpha.com/article/431830 ... rdly-hedge

Estimated 50% loss on EDV if inflation gets to 5%. Spicy!
There’s a 100% chance that reading articles in Seeking Alpha will make you less well informed about investing.
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Re: First 20% of bonds in long-term Treasuries

Post by marky2kk »

vineviz wrote: Sun Apr 18, 2021 5:50 pm
Baconator wrote: Sun Apr 18, 2021 4:51 pm I’m interested in potentially adding long term treasuries but I have the following mental problems I can’t seem to get over:

1). I’m not convinced the negative correlations vs. equities will hold because it seems like it’s different this time with rates so low.

2). It doesn’t seem like a smart investment to me on its face when you think about lending the government money for 25+ years for 2.25%

Has anyone been able to get over these and how do you rationalize these away?
I’m with watchnerd on this .

I think concern about correlations is unfounded, and not only because it’s not likely they’ll turn positive. More importantly, it doesn’t matter if they do. They’re still the best way to diversify an equity portfolio eleven with positive correlations.

Treasury bond yields are always lower than expected stock returns. It’s no different now than it ever had been. You buy bonds because you want more certainty about your portfolio returns, not because you want higher returns.
https://www.bloomberg.com/news/articles ... since-1999

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

Post by muffins14 »

Per the chart in the article, there have been many other times the 60-day correlation flipped positive. No big deal. Focus on the long-term
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Re: First 20% of bonds in long-term Treasuries

Post by drk »

FWIW, that article uses 10-year futures, while this thread recommends funds with ~20-year duration.
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Re: First 20% of bonds in long-term Treasuries

Post by BHawks87 »

I am considering adding LTT's into my asset allocation but have a question:

1.) I am hoping to retire in about 10 years but (hopefully) have 40 years of life left in me. Does that mean I would want the longest possible duration (EDV) to match my life expectancy or would I want a duration around 10 years that matches when I will start drawing from the bonds?

2.) When I do actually retire and am drawing from my portfolio, do I want my duration to match my life expectancy still or do I want short term treasuries?
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

BHawks87 wrote: Wed May 26, 2021 12:34 pm I am considering adding LTT's into my asset allocation but have a question:

1.) I am hoping to retire in about 10 years but (hopefully) have 40 years of life left in me. Does that mean I would want the longest possible duration (EDV) to match my life expectancy or would I want a duration around 10 years that matches when I will start drawing from the bonds?
I typically recommend that people plan for a retirement that lasts until age 95 (longer if they want to be even more conservative).

So if you're age 55 and planning a retirement that starts now and lasts for 40 more years, your investment horizon is roughly 20 years (the midpoint between the start and end of retirement). Starting retirement with an average bond duration of roughly 20 years, then, would be about right.

EDV could certainly fit into a portfolio in a circumstance like this, but much depends on the overall asset allocation and what the other holdings are. Hypothetically, a 60/40 portfolio with the 40% in bonds split between Vanguard Extended Duration Trs ETF (EDV) and Schwab US TIPS ETF (SCHP) would be one approach but there are other possibilities.

BHawks87 wrote: Wed May 26, 2021 12:34 pm 2.) When I do actually retire and am drawing from my portfolio, do I want my duration to match my life expectancy still or do I want short term treasuries?
Assuming you are planning a retirement that could last until age 95, you can figure our your remaining investment horizon by simply subtracting your (then) current age from 95 and dividing by two.

So at age 65 you want your average duration to be roughly ((95 - 65) /2)) = 15 years.

Don't obsess over trying to get a precise match: being anywhere in the ballpark is all that is needed.
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Re: First 20% of bonds in long-term Treasuries

Post by BHawks87 »

vineviz wrote: Wed May 26, 2021 2:27 pm
BHawks87 wrote: Wed May 26, 2021 12:34 pm I am considering adding LTT's into my asset allocation but have a question:

1.) I am hoping to retire in about 10 years but (hopefully) have 40 years of life left in me. Does that mean I would want the longest possible duration (EDV) to match my life expectancy or would I want a duration around 10 years that matches when I will start drawing from the bonds?
I typically recommend that people plan for a retirement that lasts until age 95 (longer if they want to be even more conservative).

So if you're age 55 and planning a retirement that starts now and lasts for 40 more years, your investment horizon is roughly 20 years (the midpoint between the start and end of retirement). Starting retirement with an average bond duration of roughly 20 years, then, would be about right.

EDV could certainly fit into a portfolio in a circumstance like this, but much depends on the overall asset allocation and what the other holdings are. Hypothetically, a 60/40 portfolio with the 40% in bonds split between Vanguard Extended Duration Trs ETF (EDV) and Schwab US TIPS ETF (SCHP) would be one approach but there are other possibilities.

BHawks87 wrote: Wed May 26, 2021 12:34 pm 2.) When I do actually retire and am drawing from my portfolio, do I want my duration to match my life expectancy still or do I want short term treasuries?
Assuming you are planning a retirement that could last until age 95, you can figure our your remaining investment horizon by simply subtracting your (then) current age from 95 and dividing by two.

So at age 65 you want your average duration to be roughly ((95 - 65) /2)) = 15 years.

Don't obsess over trying to get a precise match: being anywhere in the ballpark is all that is needed.
Awesome, thanks for the advice.

I am hopefully going to retire relatively early and was thinking I should keep my stocks a little higher, perhaps 70/30. If I retired at 50 for instance and planned on being alive until 95 then 95-50/2 = 22.5. Would I want 20% in long bonds still and 10% in TIPS?
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Re: First 20% of bonds in long-term Treasuries

Post by Carol88888 »

vineviz wrote: Sat May 22, 2021 5:46 am
LTCM wrote: Fri May 21, 2021 4:53 pm I googled EDV inflation and this was the first hit:
https://seekingalpha.com/article/431830 ... rdly-hedge

Estimated 50% loss on EDV if inflation gets to 5%. Spicy!
There’s a 100% chance that reading articles in Seeking Alpha will make you less well informed about investing.
Maybe that's why it is called "seekingalpha" and not "gettingalpha".
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

BHawks87 wrote: Wed May 26, 2021 4:22 pm I am hopefully going to retire relatively early and was thinking I should keep my stocks a little higher, perhaps 70/30. If I retired at 50 for instance and planned on being alive until 95 then 95-50/2 = 22.5. Would I want 20% in long bonds still and 10% in TIPS?
I think that’s a very reasonable approach.
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Re: First 20% of bonds in long-term Treasuries

Post by Fat-Tailed Contagion »

Seems like First 20% of Bonds in LTT transitioned to First 20% of Bonds in TIPs/I-Bonds in about a year.

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

Post by spdoublebass »

Fat-Tailed Contagion wrote: Thu May 27, 2021 10:26 am Seems like First 20% of Bonds in LTT transitioned to First 20% of Bonds in TIPs/I-Bonds in about a year.

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

Post by Beensabu »

spdoublebass wrote: Thu May 27, 2021 10:41 am
Fat-Tailed Contagion wrote: Thu May 27, 2021 10:26 am Seems like First 20% of Bonds in LTT transitioned to First 20% of Bonds in TIPs/I-Bonds in about a year.

Amazin'!
Why?
Inflation fear mostly. Plus the high volatility of LTT isn't for everyone.
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Re: First 20% of bonds in long-term Treasuries

Post by spdoublebass »

Beensabu wrote: Thu May 27, 2021 10:15 pm
spdoublebass wrote: Thu May 27, 2021 10:41 am
Fat-Tailed Contagion wrote: Thu May 27, 2021 10:26 am Seems like First 20% of Bonds in LTT transitioned to First 20% of Bonds in TIPs/I-Bonds in about a year.

Amazin'!
Why?
Inflation fear mostly. Plus the high volatility of LTT isn't for everyone.
Matching your horizon makes sense. I didn’t see the OP back pedaling at all.
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Re: First 20% of bonds in long-term Treasuries

Post by Beensabu »

spdoublebass wrote: Thu May 27, 2021 10:47 pm
Beensabu wrote: Thu May 27, 2021 10:15 pm
spdoublebass wrote: Thu May 27, 2021 10:41 am
Fat-Tailed Contagion wrote: Thu May 27, 2021 10:26 am Seems like First 20% of Bonds in LTT transitioned to First 20% of Bonds in TIPs/I-Bonds in about a year.

Amazin'!
Why?
Inflation fear mostly. Plus the high volatility of LTT isn't for everyone.
Matching your horizon makes sense. I didn’t see the OP back pedaling at all.
He's not. It's other people that have been doing that.
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Re: First 20% of bonds in long-term Treasuries

Post by bog007 »

hard to admit wrongness
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Re: First 20% of bonds in long-term Treasuries

Post by drk »

bog007 wrote: Thu May 27, 2021 11:40 pm hard to admit wrongness
What does this mean?
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What is one's average duration?

Post by hudson »

vineviz wrote: Wed May 26, 2021 2:27 pm Assuming you are planning a retirement that could last until age 95, you can figure our your remaining investment horizon by simply subtracting your (then) current age from 95 and dividing by two.

So at age 65 you want your average duration to be roughly ((95 - 65) /2)) = 15 years.

Don't obsess over trying to get a precise match: being anywhere in the ballpark is all that is needed.
Thanks! You posted this before...but the review helps! The way to figure average duration when doing duration matching.
For me, (95-73)/2 = 11 years
Therefore, I can see that long duration fixed income fits my situation.
I speculate that I could buy a non rolling 22 year ladder of fixed income....and forget about it.
Or I could buy funds/ETFs that average out to 11 years and adjust every year or two.
Bookmarked!
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Re: First 20% of bonds in long-term Treasuries

Post by SafeBonds »

vineviz wrote: Wed May 26, 2021 2:27 pm
BHawks87 wrote: Wed May 26, 2021 12:34 pm I am considering adding LTT's into my asset allocation but have a question:

1.) I am hoping to retire in about 10 years but (hopefully) have 40 years of life left in me. Does that mean I would want the longest possible duration (EDV) to match my life expectancy or would I want a duration around 10 years that matches when I will start drawing from the bonds?
I typically recommend that people plan for a retirement that lasts until age 95 (longer if they want to be even more conservative).

So if you're age 55 and planning a retirement that starts now and lasts for 40 more years, your investment horizon is roughly 20 years (the midpoint between the start and end of retirement). Starting retirement with an average bond duration of roughly 20 years, then, would be about right.

EDV could certainly fit into a portfolio in a circumstance like this, but much depends on the overall asset allocation and what the other holdings are. Hypothetically, a 60/40 portfolio with the 40% in bonds split between Vanguard Extended Duration Trs ETF (EDV) and Schwab US TIPS ETF (SCHP) would be one approach but there are other possibilities.

BHawks87 wrote: Wed May 26, 2021 12:34 pm 2.) When I do actually retire and am drawing from my portfolio, do I want my duration to match my life expectancy still or do I want short term treasuries?
Assuming you are planning a retirement that could last until age 95, you can figure our your remaining investment horizon by simply subtracting your (then) current age from 95 and dividing by two.

So at age 65 you want your average duration to be roughly ((95 - 65) /2)) = 15 years.

Don't obsess over trying to get a precise match: being anywhere in the ballpark is all that is needed.
So if you are 49 and you are planning to retire at 65 for a retirement that will last until you are 95, your bond portfolio duration would be ((95-49)+(65-49))/2 = 31

31??

That's longer than if your whole portfolio is 30 year individual treasury STRIPS!

I plugged in a lot of reasonable scenarios and many of them lead to someone's whole bond portfolio being EDV or a big chunk of 30 year STRIPS. For example, consider a 33 year old investor who wants to retire at 50 but instead of going to your proposed 95, will plug in 70 in the formula and delay social security until that age. ((70-33)+(50-33))/2 = 27. EDV's duration is only 24.5. I know you said not to be too precise and ballpark is fine.

These are pretty interesting results. Maybe the duration of most retirement investors' bond portfolios are too short! I don't recall, are you one of the people who say retirement investors should hold no bonds at all until they are 40 or 50 years old? Maybe if you make that assumption your duration methodology yields more orthodox results.
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drumboy256
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Re: First 20% of bonds in long-term Treasuries

Post by drumboy256 »

SafeBonds wrote: Wed Jun 09, 2021 9:50 pm
vineviz wrote: Wed May 26, 2021 2:27 pm
BHawks87 wrote: Wed May 26, 2021 12:34 pm I am considering adding LTT's into my asset allocation but have a question:

1.) I am hoping to retire in about 10 years but (hopefully) have 40 years of life left in me. Does that mean I would want the longest possible duration (EDV) to match my life expectancy or would I want a duration around 10 years that matches when I will start drawing from the bonds?
I typically recommend that people plan for a retirement that lasts until age 95 (longer if they want to be even more conservative).

So if you're age 55 and planning a retirement that starts now and lasts for 40 more years, your investment horizon is roughly 20 years (the midpoint between the start and end of retirement). Starting retirement with an average bond duration of roughly 20 years, then, would be about right.

EDV could certainly fit into a portfolio in a circumstance like this, but much depends on the overall asset allocation and what the other holdings are. Hypothetically, a 60/40 portfolio with the 40% in bonds split between Vanguard Extended Duration Trs ETF (EDV) and Schwab US TIPS ETF (SCHP) would be one approach but there are other possibilities.

BHawks87 wrote: Wed May 26, 2021 12:34 pm 2.) When I do actually retire and am drawing from my portfolio, do I want my duration to match my life expectancy still or do I want short term treasuries?
Assuming you are planning a retirement that could last until age 95, you can figure our your remaining investment horizon by simply subtracting your (then) current age from 95 and dividing by two.

So at age 65 you want your average duration to be roughly ((95 - 65) /2)) = 15 years.

Don't obsess over trying to get a precise match: being anywhere in the ballpark is all that is needed.
So if you are 49 and you are planning to retire at 65 for a retirement that will last until you are 95, your bond portfolio duration would be ((95-49)+(65-49))/2 = 31

31??

That's longer than if your whole portfolio is 30 year individual treasury STRIPS!

I plugged in a lot of reasonable scenarios and many of them lead to someone's whole bond portfolio being EDV or a big chunk of 30 year STRIPS. For example, consider a 33 year old investor who wants to retire at 50 but instead of going to your proposed 95, will plug in 70 in the formula and delay social security until that age. ((70-33)+(50-33))/2 = 27. EDV's duration is only 24.5. I know you said not to be too precise and ballpark is fine.

These are pretty interesting results. Maybe the duration of most retirement investors' bond portfolios are too short! I don't recall, are you one of the people who say retirement investors should hold no bonds at all until they are 40 or 50 years old? Maybe if you make that assumption your duration methodology yields more orthodox results.
The math I'm using is retiring at let's say----- 60 (insert KlangFool joke here), the math would be 95-60 = 35 yr. VineViz's suggestion (which I think is correct) is at a minimum 20% should be LTT as part of your overall bond allocation because your expectation is you'll live to 95. The practical piece of that is "but doesn't that complicate the 3-fund portfolio?" Sure, it could.... but did Jack expect these whacked out times we live in? Signs point to probably not. In order to best allocate your position for return on your overall positions, LTT make sense inside of a 20-50% Bond allocation depending on your risk tolerance. I think where people complicate the strategy is by using TIPS which (imo) are worthless since I'd rather be invested in either equities or bonds or better yet, spend the cash and not worry about inflation.
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Re: First 20% of bonds in long-term Treasuries

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SafeBonds wrote: Wed Jun 09, 2021 9:50 pm So if you are 49 and you are planning to retire at 65 for a retirement that will last until you are 95, your bond portfolio duration would be ((95-49)+(65-49))/2 = 31
Yep, that sounds about right.
SafeBonds wrote: Wed Jun 09, 2021 9:50 pm These are pretty interesting results. Maybe the duration of most retirement investors' bond portfolios are too short! I don't recall, are you one of the people who say retirement investors should hold no bonds at all until they are 40 or 50 years old? Maybe if you make that assumption your duration methodology yields more orthodox results.
I'm pretty sure that most investors do invest in bonds with much shorter durations than are appropriate. In my opinion it's a combination of financial miseducation about bonds and some behavioral biases (e.g. myopic loss aversion) that lead to this outcome. Also the Vanguard marketing machine has created an outsized demand for so-called "total bond market" funds as a one-size-fits-all solution among retail investors and advisors.

And most investors who are planning on a conventional retirement age (i.e. 60 to 70 years old) will indeed hold minimal amounts of bonds until they are in their 40s if they are both rational and have typical amounts of risk aversion.

The average target date 2040 fund, for instance, only allocates about 15% to bonds.
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Re: First 20% of bonds in long-term Treasuries

Post by SafeBonds »

OK Thank you. The last think I want to mention is TLT has duration of 18.8, a fresh 30 year treasury bond bought today would have duration of 22, EDV has duration of 24, and of course a fresh 30 year treasury STRIP has duration of 30. And a fresh Series EE savings bond would have a duration of 20.

You mentioned you don't have to be precise but in some combinations of current age/retirement start age/retirement end age the result will be a number greater than 30 so in those cases we would use 30 year treasury STRIPS.

I've considered buying such an investment but chickened out from doing so in a taxable account because I did not know if my vangaurd brokerage would compute the phantom interest for me automatically on tax forms, and I did not want to use precious Roth IRA space on it. Recently I have a Rollover Traditional IRA which would be the perfect place for it, especially if I intend to roll it every few years and sell it to buy a fresh 30 year STRIP if my plan demands it.

I recall a Boglehead saying Harry Browne of the permanent portfolio suggested buying 30 year treasury bonds, then after 10 years sell them and buy fresh 30's. That matches your attitude of not being too precise and exact with bond duration, ballpark is fine.
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Re: First 20% of bonds in long-term Treasuries

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SafeBonds wrote: Thu Jun 10, 2021 7:18 am I recall a Boglehead saying Harry Browne of the permanent portfolio suggested buying 30 year treasury bonds, then after 10 years sell them and buy fresh 30's. That matches your attitude of not being too precise and exact with bond duration, ballpark is fine.
Sure, though it woul'd arguably be easier to simply use a fund like EDV or GOVZ to hold any bond allocation until you're ready to purchase a new 30-year bond.
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Re: First 20% of bonds in long-term Treasuries

Post by garlandwhizzer »

vineviz wrote:

I'm pretty sure that most investors do invest in bonds with much shorter durations than are appropriate.
Perhaps it's most appropriate for each individual investor to choose the average duration that is appropriate to his/her own particular circumstances rather than suggesting a ground rule that is appropriate for the majority. Bernstein and Buffett prefer short duration, Bogle and Swedroe preferred intermediate, and I don't believe any of the four are in need of advice or knowledge about how to invest in fixed income. It seems to me the best approach is to know yourself and your financial goals and circumstances well and then to tailor your average bond duration to your own specifics.

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

Post by muffins14 »

Sure, but I think the whole point here is that some investors usually do this incorrectly based on a "feeling" about bonds or a hunch that "rates can only go up" rather than on actual analysis of how long-term bonds fit into a portfolio
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Re: First 20% of bonds in long-term Treasuries

Post by anon_investor »

vineviz wrote: Thu Jun 10, 2021 8:43 am
SafeBonds wrote: Thu Jun 10, 2021 7:18 am I recall a Boglehead saying Harry Browne of the permanent portfolio suggested buying 30 year treasury bonds, then after 10 years sell them and buy fresh 30's. That matches your attitude of not being too precise and exact with bond duration, ballpark is fine.
Sure, though it woul'd arguably be easier to simply use a fund like EDV or GOVZ to hold any bond allocation until you're ready to purchase a new 30-year bond.
Do we know yet it GOVZ will be more tax efficient than EDV, which always seems to have capital gains distributions. I think ZROZ has not had capital gains distributions the last couple of years.
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