First 20% of bonds in long-term Treasuries

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

Post by RubyTuesday »

skierincolorado wrote: Wed Aug 18, 2021 4:56 pm
RubyTuesday wrote: Wed Aug 18, 2021 4:46 pm
skierincolorado wrote: Wed Aug 18, 2021 4:42 pm
secondopinion wrote: Wed Aug 18, 2021 4:00 pm
skierincolorado wrote: Wed Aug 18, 2021 2:31 pm

One can borrow at less than the 3-mo T-bill rate using futures (currently near 0%). LETFs also have low borrowing rates near the 3-mo T-Bill.
I guess one can. Good to know that.

When I saw the chart with the leveraged leveraged examples, I had to think why in the world this is not being taken advantage of in the market in the extreme. However, I am seeing a critical problem that could be costly to leverage the ITT: what if the yield curve is inverted (and possibly steeply)? You pay more to borrow than what you would get in yield (and rolling returns would also be negative); hence, you lose money (and probably rather quickly from all the leverage). In the LTT case, you are not going to lose money given that curve because you have not borrowed at a worse rate than the bond gives (albeit total returns are probably not impressive).

Of course, steep yield curves that are not inverted will be golden to your proposed strategy.

Answer: LTT are safer than leveraged ITT despite the short term volatility equivalence.
The yield curve has gone inverted a number of times during the period I posted backtested. And yet the ITT win substantially. The reason for this is that 1) usually the yield curve is not inverted and 2) when it is inverted, it usually precedes a drop in interest rates that increases the price of bonds

#2 is the whole reason the yield curve goes inverted.. investors are predicting a drop in interest rates and are thus fine accepting lower rates on ITT than STT, because they want to lock in some decent rates for 5-7 years.

I plan to continue buying ITT on leverage when the yield curve is inverted. Historically these have been profitable times to buy (see 2007 for example).
Does the simulation with CASHX use current cost of leverage for entire term or is using historically accurate / estimates of borrowing costs?
Historically accurate. You can plot CASHX as if you owned it and see it goes up faster during periods of high rates. For example, if it has an annual return of 4% in 2003, then shorting it (-100) would mean you had a -4% return / borrowing cost.
That’s good to know.

I guess the bottom line(s) for me are:
- I have long term retirement liabilities
- I believe the appropriate risk free asset is a duration matched treasury (or inflation protected treasury security)
- to adjust my overall risk tolerance, it makes sense to me to manage my stock exposure
- to provide better risk adjusted returns (my risk is long term and real), to the extent i will use leverage it will be to leverage the risk free asset

Something like 50/35/35/20/-40 (stock, LTT, LTTIPS, BND, cash) makes more sense to me than something like 80/60/-40 (stock, ITT, cash).

Better CAGR, lower Std Dev, higher Sharpe, better manages my long term real risks.

Portfolio Visualizer
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
skierincolorado
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Re: First 20% of bonds in long-term Treasuries

Post by skierincolorado »

RubyTuesday wrote: Wed Aug 18, 2021 5:53 pm
skierincolorado wrote: Wed Aug 18, 2021 4:56 pm
RubyTuesday wrote: Wed Aug 18, 2021 4:46 pm
skierincolorado wrote: Wed Aug 18, 2021 4:42 pm
secondopinion wrote: Wed Aug 18, 2021 4:00 pm

I guess one can. Good to know that.

When I saw the chart with the leveraged leveraged examples, I had to think why in the world this is not being taken advantage of in the market in the extreme. However, I am seeing a critical problem that could be costly to leverage the ITT: what if the yield curve is inverted (and possibly steeply)? You pay more to borrow than what you would get in yield (and rolling returns would also be negative); hence, you lose money (and probably rather quickly from all the leverage). In the LTT case, you are not going to lose money given that curve because you have not borrowed at a worse rate than the bond gives (albeit total returns are probably not impressive).

Of course, steep yield curves that are not inverted will be golden to your proposed strategy.

Answer: LTT are safer than leveraged ITT despite the short term volatility equivalence.
The yield curve has gone inverted a number of times during the period I posted backtested. And yet the ITT win substantially. The reason for this is that 1) usually the yield curve is not inverted and 2) when it is inverted, it usually precedes a drop in interest rates that increases the price of bonds

#2 is the whole reason the yield curve goes inverted.. investors are predicting a drop in interest rates and are thus fine accepting lower rates on ITT than STT, because they want to lock in some decent rates for 5-7 years.

I plan to continue buying ITT on leverage when the yield curve is inverted. Historically these have been profitable times to buy (see 2007 for example).
Does the simulation with CASHX use current cost of leverage for entire term or is using historically accurate / estimates of borrowing costs?
Historically accurate. You can plot CASHX as if you owned it and see it goes up faster during periods of high rates. For example, if it has an annual return of 4% in 2003, then shorting it (-100) would mean you had a -4% return / borrowing cost.
That’s good to know.

I guess the bottom line(s) for me are:
- I have long term retirement liabilities
- I believe the appropriate risk free asset is a duration matched treasury (or inflation protected treasury security)
- to adjust my overall risk tolerance, it makes sense to me to manage my stock exposure
- to provide better risk adjusted returns (my risk is long term and real), to the extent i will use leverage it will be to leverage the risk free asset

Something like 50/35/35/20/-40 (stock, LTT, LTTIPS, BND, cash) makes more sense to me than something like 80/60/-40 (stock, ITT, cash).

Better CAGR, lower Std Dev, higher Sharpe, better manages my long term real risks.

Portfolio Visualizer
It doesn't make sense to me at all to pursue a risk-free asset with poor returns while simultaneously investing in a very risky asset like stock. Also, your returns won't be as good as the backtest unless you keep rolling back into the long-duration. Rolling like that opens you up to exactly the kind of risk we were trying to avoid by duration matching and was really the only legitimate objection to rolling 5-yr bonds.

The PV you posted has better risk-adjusted returns because it has a lot more bonds than anything else we've looked at so far. It's down to a 50% stock allocation with a LOT of risk in long-bonds. If you ran something like this through the early 80s, it would do very poorly. For that much risk in bonds, you could own a lot more ITT than you've used in your comparison. The following is a more equivalent amount of bond risk, and has much lower max-drawdown and much higher returns. It would have also faired better during the 1980 bond crash, both during the crash itself and in terms of the final portfolio value. Any backtest you do, if you do it properly with equal risk in ITT as LTT, ITT will win, usually by a very large margin. The one argument for LTT is a period where ITT interest rates drop at the start of the period and then stay low but don't drop any further, which has never happened before but could theoretically happen.

I've added an equivalent amount of ITT risk to your PV:

https://www.portfoliovisualizer.com/bac ... ion6_3=250
euler
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Re: First 20% of bonds in long-term Treasuries

Post by euler »

skierincolorado wrote: Wed Aug 18, 2021 2:49 pm In the context of a whole portfolio is in the link below. Replacing LTT with 3x ITT in an 80/20 portfolio has greater returns and lower drawdowns. It is possible to borrow at less than the 3-mo T-bill rate using futures contracts (~0.0%). Leveraged ETFs also have borrowing costs near the 3-mo T-Bill rate and do the borrowing for you. I prefer using futures, but NTSX is a 90/60 fund with a 0.2% ER. The treasury allocation has an average duration of 7 years.

https://www.portfoliovisualizer.com/bac ... ion3_2=100
This is interesting, but is 3x ITT an actionable strategy for the typical Boglehead without an advanced understanding of futures markets? (assuming they want just the leveraged treasuries and not the leveraged equities in something like NTSX)

Searching in some of the other threads on the topic, it sounds extremely complicated unless you are a day trader familiar with this stuff.
skierincolorado
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Re: First 20% of bonds in long-term Treasuries

Post by skierincolorado »

euler wrote: Wed Aug 18, 2021 6:15 pm
skierincolorado wrote: Wed Aug 18, 2021 2:49 pm In the context of a whole portfolio is in the link below. Replacing LTT with 3x ITT in an 80/20 portfolio has greater returns and lower drawdowns. It is possible to borrow at less than the 3-mo T-bill rate using futures contracts (~0.0%). Leveraged ETFs also have borrowing costs near the 3-mo T-Bill rate and do the borrowing for you. I prefer using futures, but NTSX is a 90/60 fund with a 0.2% ER. The treasury allocation has an average duration of 7 years.

https://www.portfoliovisualizer.com/bac ... ion3_2=100
This is interesting, but is 3x ITT an actionable strategy for the typical Boglehead without an advanced understanding of futures markets? (assuming they want just the leveraged treasuries and not the leveraged equities in something like NTSX)

Searching in some of the other threads on the topic, it sounds extremely complicated unless you are a day trader familiar with this stuff.
Many people probably would be better off without the complexity of futures, then again many people would be better off without some of the long bond strategies in this thread and just go with total stock and total bond as the stickies thread recommends. It was stickied for a reason right, it really is the best for most people without a deep understanding and conviction to act on. People end up making mistakes, like investing in overpriced underperforming assets like LTT.

In terms of NTSX, the equities aren’t leveraged. It’s 90% equities and 60% bonds. I guess it’s semantics which one you say is leveraged, but it’s less stock than 100%. It’s very similar to the 80/60 backtests I posted. One could modify the risk by holding bonds alongside NTSX. For example 80/20 NTSX/Bnd would be 72/68 stock/bond overall. That would be decent for someone in their 50s probably.
Last edited by skierincolorado on Wed Aug 18, 2021 6:49 pm, edited 1 time in total.
euler
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Re: First 20% of bonds in long-term Treasuries

Post by euler »

skierincolorado wrote: Wed Aug 18, 2021 6:33 pm
euler wrote: Wed Aug 18, 2021 6:15 pm This is interesting, but is 3x ITT an actionable strategy for the typical Boglehead without an advanced understanding of futures markets? (assuming they want just the leveraged treasuries and not the leveraged equities in something like NTSX)

Searching in some of the other threads on the topic, it sounds extremely complicated unless you are a day trader familiar with this stuff.
Many people probably would be better off without the complexity of futures, then again many people would be better off without some of the long bond strategies in this thread and just go with total stock and total bond as the stickies thread recommends. It was stickied for a reason right, it really is the best for most people without a deep understanding and conviction to act on.

In terms of NTSX, the equities aren’t leveraged. It’s 90% equities and 60% bonds. I guess it’s semantics which one you say is leveraged, but it’s less stock than 100%. It’s very similar to the 80/60 backtests I posted. One could modify the risk by holding bonds alongside NTSX. For example 80/20 NTSX/Bnd would be 72/68 stock/bond overall. That would be decent for someone in their 50s probably.
Speaking personally, my aversion to NTSX is more that it holds equities at all; thus, in order to make use of it I would need to hold most/all of my equity exposure there. If I buy into the idea of leveraged ITT as a drop-in substitute for the "first 20% of bonds in LTT" proposed by the OP, I would much rather keep my existing stock index funds and build the leveraged ITT position separately. (I suspect this would also be the case for most BHs.) But I don't have a good feel for how difficult is it to get, say, $100k of 3x leveraged ITT all by itself, via your methods.
skierincolorado
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Re: First 20% of bonds in long-term Treasuries

Post by skierincolorado »

euler wrote: Wed Aug 18, 2021 6:49 pm
skierincolorado wrote: Wed Aug 18, 2021 6:33 pm
euler wrote: Wed Aug 18, 2021 6:15 pm This is interesting, but is 3x ITT an actionable strategy for the typical Boglehead without an advanced understanding of futures markets? (assuming they want just the leveraged treasuries and not the leveraged equities in something like NTSX)

Searching in some of the other threads on the topic, it sounds extremely complicated unless you are a day trader familiar with this stuff.
Many people probably would be better off without the complexity of futures, then again many people would be better off without some of the long bond strategies in this thread and just go with total stock and total bond as the stickies thread recommends. It was stickied for a reason right, it really is the best for most people without a deep understanding and conviction to act on.

In terms of NTSX, the equities aren’t leveraged. It’s 90% equities and 60% bonds. I guess it’s semantics which one you say is leveraged, but it’s less stock than 100%. It’s very similar to the 80/60 backtests I posted. One could modify the risk by holding bonds alongside NTSX. For example 80/20 NTSX/Bnd would be 72/68 stock/bond overall. That would be decent for someone in their 50s probably.
Speaking personally, my aversion to NTSX is more that it holds equities at all; thus, in order to make use of it I would need to hold most/all of my equity exposure there. If I buy into the idea of leveraged ITT as a drop-in substitute for the "first 20% of bonds in LTT" proposed by the OP, I would much rather keep my existing stock index funds and build the leveraged ITT position separately. (I suspect this would also be the case for most BHs.) But I don't have a good feel for how difficult is it to get, say, $100k of 3x leveraged ITT all by itself, via your methods.
Personally, I found buying a few ITT futures contracts on IB pretty easy. Another option would be TYD which is a leveraged ETF of ITT, but it has only 20M in assets which could mean it is not well-managed, although it's historical performance is good. Maybe there is another larger LETF of ITT. UST has 30M of AUM.

Without leverage, LTT is probably no better than unleveraged ITT and holding a smidge more risk in stock, except in some specific applications. With LTT, one would need to be careful to gradually role into shorter durations over time. One wouldn't want to end up holding a bunch of LTT at age 75 right before a crash in LTT prices. Holding individual bonds to maturity mitigates that risk, but I find buying individual bonds about as comlex as buying futures. The 3-fund portfolio recommends against LTT for good reason.
euler
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Re: First 20% of bonds in long-term Treasuries

Post by euler »

skierincolorado wrote: Wed Aug 18, 2021 6:54 pm
euler wrote: Wed Aug 18, 2021 6:49 pm Speaking personally, my aversion to NTSX is more that it holds equities at all; thus, in order to make use of it I would need to hold most/all of my equity exposure there. If I buy into the idea of leveraged ITT as a drop-in substitute for the "first 20% of bonds in LTT" proposed by the OP, I would much rather keep my existing stock index funds and build the leveraged ITT position separately. (I suspect this would also be the case for most BHs.) But I don't have a good feel for how difficult is it to get, say, $100k of 3x leveraged ITT all by itself, via your methods.
Personally, I found buying a few ITT futures contracts on IB pretty easy. Another option would be TYD which is a leveraged ETF of ITT, but it has only 20M in assets which could mean it is not well-managed, although it's historical performance is good. Maybe there is another larger LETF of ITT. UST has 30M of AUM.

Without leverage, LTT is probably no better than unleveraged ITT except in some specific applications. One would need to be careful to gradually role into shorter durations over time. One wouldn't want to end up holding a bunch of LTT at age 75. The 3-fund portfolio recommends against LTT for good reason.
Hmmm, something like TYD could be helpful except the ER is really high (1%), besides the small size you mentioned. I'm not averse to learning about futures but it would be useful to see the mechanics laid out in greater detail than I have seen in threads here. I know you didn't volunteer for that but I imagine some readers would at least find it educational.
skierincolorado
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Re: First 20% of bonds in long-term Treasuries

Post by skierincolorado »

euler wrote: Wed Aug 18, 2021 7:07 pm
skierincolorado wrote: Wed Aug 18, 2021 6:54 pm
euler wrote: Wed Aug 18, 2021 6:49 pm Speaking personally, my aversion to NTSX is more that it holds equities at all; thus, in order to make use of it I would need to hold most/all of my equity exposure there. If I buy into the idea of leveraged ITT as a drop-in substitute for the "first 20% of bonds in LTT" proposed by the OP, I would much rather keep my existing stock index funds and build the leveraged ITT position separately. (I suspect this would also be the case for most BHs.) But I don't have a good feel for how difficult is it to get, say, $100k of 3x leveraged ITT all by itself, via your methods.
Personally, I found buying a few ITT futures contracts on IB pretty easy. Another option would be TYD which is a leveraged ETF of ITT, but it has only 20M in assets which could mean it is not well-managed, although it's historical performance is good. Maybe there is another larger LETF of ITT. UST has 30M of AUM.

Without leverage, LTT is probably no better than unleveraged ITT except in some specific applications. One would need to be careful to gradually role into shorter durations over time. One wouldn't want to end up holding a bunch of LTT at age 75. The 3-fund portfolio recommends against LTT for good reason.
Hmmm, something like TYD could be helpful except the ER is really high (1%), besides the small size you mentioned. I'm not averse to learning about futures but it would be useful to see the mechanics laid out in greater detail than I have seen in threads here. I know you didn't volunteer for that but I imagine some readers would at least find it educational.
Searching through the lifecycle investing thread had some helpful posts for me. I have a recent post in that thread in the last couple days with some basics. Could be good to consolidate there, I'm happy to answer any questions there. Also, the fees on LETF are high, but the fee is on the equity amount not the leveraged amount. So a 1% fee on 10k invested would give ownership of 30k of ITT with a 0.33% fee. Still high, but not outrageous and more than made up for by the superior performance of ITT relative to LTT. Still, I much prefer futures.

One thing that might cement your aversion to LTT is reading the "Bet Against Beta" paper. It explains empirically and theoretically why LTT are overpriced for structural reasons, and why they are likely to remain overpriced (and thus lower yielding).
james22
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Re: First 20% of bonds in long-term Treasuries

Post by james22 »

skierincolorado wrote: Wed Aug 18, 2021 6:05 pmIt doesn't make sense to me at all to pursue a risk-free asset with poor returns while simultaneously investing in a very risky asset like stock.
Newly retired, I'm not worried about meeting my expenses twenty years out - I've 80% stocks for that.

I do worry about sequence of returns risk. What I want is an asset I can expect will hold up (and can withdraw from) if/when those stocks fall in the next five to ten years.

LTT seem to do that better than anything else. Possibly in combination with TIPS.
When people say things are different, 20 percent of the time they are right. John Templeton
skierincolorado
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Re: First 20% of bonds in long-term Treasuries

Post by skierincolorado »

james22 wrote: Thu Aug 19, 2021 11:08 am
skierincolorado wrote: Wed Aug 18, 2021 6:05 pmIt doesn't make sense to me at all to pursue a risk-free asset with poor returns while simultaneously investing in a very risky asset like stock.
Newly retired, I'm not worried about meeting my expenses twenty years out - I've 80% stocks for that.

I do worry about sequence of returns risk. What I want is an asset I can expect will hold up (and can withdraw from) if/when those stocks fall in the next five to ten years.

LTT seem to do that better than anything else. Possibly in combination with TIPS.
80% stock and TLT makes no sense. The only legitimate use of a high risk/low return asset like TLT is duration matching your liabilities. And even then, only if you are holding bonds to maturity. Holding 80% stock completely negates the idea of duration matching liabilities. If the stocks do a bit worse or a bit better than expected the whole plan is blown out of the water.

There's a high probability that owning an asset with much better risk adjusted returns will allow one to adapt to changes in one's original plan. If spending is higher than expected, there's a very high probability that ITT will provide superior returns required to help make up the differnce. If spending is lower than expected or the stock market does great, one is very likely to enjoy the additional returns and spending allowed for by ITT.

You have to look at the portfolio as a whole and your lifespan as a whole. Life is not as simple as "I need to spend x dollars in z years so I will own LTT with z duration." OK you've met your x dollars in z year estimate, what about after that? Or what if you need or want to spend more and needed or wanted more return, or spend less and didn't need the security of duration-matched LTT? Owning an asset with much higher risk-adjusted returns is going to perform much better across all of life's complexities because it has vastly superior risk-adjusted returns. Which is why total bond (which is mostly STT and ITT) is what is recomended in the boglehead philosophy.
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Re: First 20% of bonds in long-term Treasuries

Post by james22 »

skierincolorado wrote: Thu Aug 19, 2021 12:40 pm80% stock and TLT makes no sense.
Nothing other than LTT makes sense given 80% stocks as the equity risk dominates.
skierincolorado wrote: Thu Aug 19, 2021 12:40 pmThe only legitimate use of a high risk/low return asset like TLT is duration matching your liabilities. And even then, only if you are holding bonds to maturity. Holding 80% stock completely negates the idea of duration matching liabilities. If the stocks do a bit worse or a bit better than expected the whole plan is blown out of the water.
I'm in the camp that stock risk decreases over time. I'm far more comfortable my stocks will support me in twenty year's time than bonds held to maturity.
skierincolorado wrote: Thu Aug 19, 2021 12:40 pmYou have to look at the portfolio as a whole...
Sure. And at that level, you want an asset most uncorrelated (and highly volatile) with the 80% stock. No asset is more so than LTT.
skierincolorado wrote: Thu Aug 19, 2021 12:40 pm...and your lifespan as a whole.
Nah. I worry about sequence of returns only through the first five to ten years of my retirement.
When people say things are different, 20 percent of the time they are right. John Templeton
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imak
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Re: First 20% of bonds in long-term Treasuries

Post by imak »

One of my favorite backtest (cherry picked) for long-term treasuries as an equity diversifier is the decade of 2009-2018.

90% VTI & 10% treasury portfolios:
https://www.portfoliovisualizer.com/bac ... tion4_3=90

During this decade, the CAGR / Stdev for intermediate, long and extended duration treasury ETFs:
IEF: 2.91% / 5.92%
TLT: 3.27% / 13.23%
EDV: 3.37% / 20.77%

Even though treasury ETFs' CAGR returns are nearly same, the Sharpe ratio and rolling average return (annual) for longer duration treasuries portfolios increases steadily:
90% VTI / 10% IEF : 0.97 Sharpe / 14.51% avg return
90% VTI / 10% TLT : 1.00 Sharpe / 14.84% avg return
90% VTI / 10% EDV : 1.03 Sharpe / 15.23% avg return

In this decade, negatively correlation and high volatility of EDV with equities was extremely valuable for rebalancing and diversification, especially in crisis periods (such as 2011).
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Re: First 20% of bonds in long-term Treasuries

Post by skierincolorado »

james22 wrote: Thu Aug 19, 2021 4:15 pm
skierincolorado wrote: Thu Aug 19, 2021 12:40 pm80% stock and TLT makes no sense.
Nothing other than LTT makes sense given 80% stocks as the equity risk dominates.
skierincolorado wrote: Thu Aug 19, 2021 12:40 pmThe only legitimate use of a high risk/low return asset like TLT is duration matching your liabilities. And even then, only if you are holding bonds to maturity. Holding 80% stock completely negates the idea of duration matching liabilities. If the stocks do a bit worse or a bit better than expected the whole plan is blown out of the water.
I'm in the camp that stock risk decreases over time. I'm far more comfortable my stocks will support me in twenty year's time than bonds held to maturity.
skierincolorado wrote: Thu Aug 19, 2021 12:40 pmYou have to look at the portfolio as a whole...
Sure. And at that level, you want an asset most uncorrelated (and highly volatile) with the 80% stock. No asset is more so than LTT.
skierincolorado wrote: Thu Aug 19, 2021 12:40 pm...and your lifespan as a whole.
Nah. I worry about sequence of returns only through the first five to ten years of my retirement.
Leveraged itt provides the same anti correlation with much more return. There hasn’t been a period in history (yet) where one would have been better off holding LTT vs 2x more ITT.
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LTCM
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Re: First 20% of bonds in long-term Treasuries

Post by LTCM »

Vineviz mentions in this thread how corporate bonds or bond funds are effectively a mix of treasuries and equity. We also know LTT or EDV are comparable to leveraged ITT. If I’m 80/20 stock/EDV and I wanted to estimate my holdings in a standard boglehead total stock market/total bond market how would I do that?

60/40 stock/bond is heavier on stock than it appears compared to government bonds. Less credit. Medium duration.
EDV is heavier on bonds than a typical bond fund because of both extra duration and credit.

Am I pretty close to a standard boglehead 50/50 split with the extra leverage(duration) and credit on my bonds? Perhaps effectively 80/80 or so?

It seems LTT or longer are imperative to get the most bang for your buck if you want to hold bonds without leverage in a retirement account.
60% VUG - 20% VEA - 20% EDV
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Re: First 20% of bonds in long-term Treasuries

Post by Lock »

LTCM wrote: Mon Aug 23, 2021 2:48 am Vineviz mentions in this thread how corporate bonds or bond funds are effectively a mix of treasuries and equity. We also know LTT or EDV are comparable to leveraged ITT. If I’m 80/20 stock/EDV and I wanted to estimate my holdings in a standard boglehead total stock market/total bond market how would I do that?

60/40 stock/bond is heavier on stock than it appears compared to government bonds. Less credit. Medium duration.
EDV is heavier on bonds than a typical bond fund because of both extra duration and credit.

Am I pretty close to a standard boglehead 50/50 split with the extra leverage(duration) and credit on my bonds? Perhaps effectively 80/80 or so?

It seems LTT or longer are imperative to get the most bang for your buck if you want to hold bonds without leverage in a retirement account.
You’re effectively 80% equity / 56% ITT.
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LTCM
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Re: First 20% of bonds in long-term Treasuries

Post by LTCM »

Lock wrote: Mon Aug 23, 2021 6:59 am You’re effectively 80% equity / 56% ITT.
And do you have an opinion how to convert total bond market to an equity/treasury split? TBM has approx the same duration as ITT so if standard boglehead is 60/40 stock/TBM how would you convert that to equity/ITT? 70/30? I’m just guessing but there must be a formula somewhere.
60% VUG - 20% VEA - 20% EDV
PennyWise7
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Re: First 20% of bonds in long-term Treasuries

Post by PennyWise7 »

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.
This sounds much like the right approach today for an investor with a long investment horizon and concerns about short term inflation: 20% LTT / 10+% VTIP. 👍 I found this on page 5 of this 25 page thread. Will keep reading to see what happens next. Anyone agree or disagree with this allocation, please share.
hudson
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Re: First 20% of bonds in long-term Treasuries

Post by hudson »

PennyWise7,
VTIP's average duration is 2.6 years; I would only go with VTIP if that fit my duration needs.
It's duration is too short.
UpperNwGuy
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Re: First 20% of bonds in long-term Treasuries

Post by UpperNwGuy »

hudson wrote: Sat Nov 20, 2021 5:14 am PennyWise7,
VTIP's average duration is 2.6 years; I would only go with VTIP if that fit my duration needs.
It's duration is too short.
Hudson is right. VTIP has too short a duration for a person with a long investment horizon.
PennyWise7
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Re: First 20% of bonds in long-term Treasuries

Post by PennyWise7 »

So then 20% LTT 10% LTPZ is appropriate? And I need to just sit back an watch as the fed raises rates half a percent next year and my bond funds lose 10%? Under the theory that its no biggie I have a long term investment horizon, in the end I will make more? I mean really...this is a hard concept, bonds are supposed to be for ballast. Take the risk on the equity side is easier to accept. I will keep reading, I m on page 7 of this tome of a thread....
Elysium
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Re: First 20% of bonds in long-term Treasuries

Post by Elysium »

PennyWise7 wrote: Fri Nov 19, 2021 10:23 pm
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.
This sounds much like the right approach today for an investor with a long investment horizon and concerns about short term inflation: 20% LTT / 10+% VTIP. 👍 I found this on page 5 of this 25 page thread. Will keep reading to see what happens next. Anyone agree or disagree with this allocation, please share.
VTIP is only good for holding immediate 4-5 rolling years living expenses in a retiree portfolio, to protect the cashflow you need to live off in case of unexpected high inflation. I've written about this before on the forum.

In this instance, you leave the other assets untouched and withdraw from Short TIPS, using it as your immediate living expense fund, while waiting out high inflation to abate, and you can re-fill this later from switching other assets as they recover and/or inflation abates. The expectation is that there is some equity exposure, but you can't bet on them being positive always combined with high inflation, so you need sort of an emergency fund that is also protected against high inflation. You can do with IBonds in addition to this, but they are limited to $10K per year. Retirees can keep 4-5 years living expenses in Short TIPS, and they will be covered against temporary inflation shocks. While a fair amount of equities, say 30%, and another decent chunk of longer/intermediate TIPS, should protect it for longer term.
Elysium
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Re: First 20% of bonds in long-term Treasuries

Post by Elysium »

PennyWise7 wrote: Sat Nov 20, 2021 9:48 am So then 20% LTT 10% LTPZ is appropriate? And I need to just sit back an watch as the fed raises rates half a percent next year and my bond funds lose 10%? Under the theory that its no biggie I have a long term investment horizon, in the end I will make more? I mean really...this is a hard concept, bonds are supposed to be for ballast. Take the risk on the equity side is easier to accept. I will keep reading, I m on page 7 of this tome of a thread....
There is no guarantee you will not lose money with LTT or Long TIPS, in fact, if rates rise steadily then you will lose steadily. But, we don't know that, no one does. Rates don't go up in a linear fashion like that, LTT also hedges against equity drawdowns, which are inevitable, and then rates may in fact drop allowing you to recover some or all of what you lost from rate hikes. This cycle may repeat with rates actually going no where too high, but staying up/down in a range for a while, so in that instance you get the coupon rates more or less, minus inflation. You may still lose in real purchasing power, but the point of this asset is all about hedging against equity drops. That scenario may play out with equities dropping a lot and rates falling back to zero or negative, then LTT will provide maximum ballast, and you win. It's sort of like insurance, you don't expect to collect the premium but it's there if you ever needed it. To fight inflation you need other real assets. Every asset should have a role in the overall portfolio, no single asset can do everything.
hudson
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Re: First 20% of bonds in long-term Treasuries

Post by hudson »

PennyWise7 wrote: Sat Nov 20, 2021 9:48 am So then 20% LTT 10% LTPZ is appropriate? And I need to just sit back an watch as the fed raises rates half a percent next year and my bond funds lose 10%? Under the theory that its no biggie I have a long term investment horizon, in the end I will make more? I mean really...this is a hard concept, bonds are supposed to be for ballast. Take the risk on the equity side is easier to accept. I will keep reading, I m on page 7 of this tome of a thread....
20% long treasuries and 10% long TIPS OK?

I know that 30 year treasuries were paying 1.91% on Nov. 19th. Would I buy say $100K worth of those bonds that pay 1.91% until Nov. 19th 2051? No, because I would be 104 years old. That doesn't match my duration. I might go with the long treasury if my asset allocation was very high on the stock side....maybe not. I think that long treasuries are for the advanced investor. Maybe consult Larry Swedroe's bond book?

What about LTPZ? I could warm up to LTPZ (long TIPS). The expense ratio is a little high. I could use that with a shorter TIPS fund or ETF to duration match. In fact, I plan to do just that. (Or I might go with a non-rolling TIPS ladder) Again, I wouldn't go with LTPZ just because somebody on the internet said it was a good choice. I would do my homework by reading Swedroe, W. Bernstein, and vineviz.

Take risk on the equity side? That doesn't work for me. The reason stocks pay out so well is because they are volatile.
PennyWise7
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Re: First 20% of bonds in long-term Treasuries

Post by PennyWise7 »

Appreciate the replies, after additional reading I feel that intermediate term treasuries /TIPS are a good choice for my bond allocation because they will capture some upside in a stock crash/deflation and protect a portion of the portfolio from inflation. I am setting up a bucket portfolio 60/40 or so. This is not an aggressive bucket. I have a long horizon.

I realize many of you are certain that duration should match horizon, but I tend to agree with those who believe that shorter/intermediate term treasuries provides more ballast and safety esp. in a low rate environment and are not comfortable with big swings of the NAV in their bonds.

I am debating whether
50% VGIT/50% SCHP
OR
50% VGIT /25% SCHP/ 25% VTIP
would be smarter inflation protection since short term TIPS are more sensitive to CPI changes. But, it seems like overkill. Your thoughts?
prioritarian
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Re: First 20% of bonds in long-term Treasuries

Post by prioritarian »

skierincolorado wrote: Thu Aug 19, 2021 7:45 pm
james22 wrote: Thu Aug 19, 2021 4:15 pm
skierincolorado wrote: Thu Aug 19, 2021 12:40 pm80% stock and TLT makes no sense.
Nothing other than LTT makes sense given 80% stocks as the equity risk dominates.
skierincolorado wrote: Thu Aug 19, 2021 12:40 pmThe only legitimate use of a high risk/low return asset like TLT is duration matching your liabilities. And even then, only if you are holding bonds to maturity. Holding 80% stock completely negates the idea of duration matching liabilities. If the stocks do a bit worse or a bit better than expected the whole plan is blown out of the water.
I'm in the camp that stock risk decreases over time. I'm far more comfortable my stocks will support me in twenty year's time than bonds held to maturity.
skierincolorado wrote: Thu Aug 19, 2021 12:40 pmYou have to look at the portfolio as a whole...
Sure. And at that level, you want an asset most uncorrelated (and highly volatile) with the 80% stock. No asset is more so than LTT.
skierincolorado wrote: Thu Aug 19, 2021 12:40 pm...and your lifespan as a whole.
Nah. I worry about sequence of returns only through the first five to ten years of my retirement.
Leveraged itt provides the same anti correlation with much more return. There hasn’t been a period in history (yet) where one would have been better off holding LTT vs 2x more ITT.
not sure i agree with the "much" part of the your comment but (as i recall) leveraged itts do have somewhat higher returns and lower volatility than duration-matched ltt positions.

a leveraged itt position requires the use of synthetic assets. ltt or a futures bond ladders (ntsx) are often better options for people who want to approximate leveraged itt without spending the mental effort and time needed to roll futures (and especially those who do not have hundreds of thousands of assets to allocate).
hudson
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Re: First 20% of bonds in long-term Treasuries

Post by hudson »

PennyWise7 wrote: Sun Nov 21, 2021 2:37 pm I am debating whether
50% VGIT/50% SCHP
OR
50% VGIT /25% SCHP/ 25% VTIP
VGIT is intermediate treasuries
SCHP is average duration 7.5 year TIPS
VTIP is average duration 3 year TIPS

I would not go short.
TIPS are expensive...but...
My vote includes all TIPS and no regular treasuries.
50% SCHP
50% LTPZ Pimco long TIPS 21.6 year effective duration https://www.pimco.com/en-us/investments ... aded-fund/
or maybe some or all individual TIPS.
What would vineviz say?
muffins14
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Re: First 20% of bonds in long-term Treasuries

Post by muffins14 »

You can probably just ask him — he’s quite active on the rational reminder forum, actually
hudson
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Re: First 20% of bonds in long-term Treasuries

Post by hudson »

muffins14 wrote: Mon Nov 22, 2021 8:13 am You can probably just ask him — he’s quite active on the rational reminder forum, actually
Thanks muffins14!
PennyWise7
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Re: First 20% of bonds in long-term Treasuries

Post by PennyWise7 »

hudson wrote: Mon Nov 22, 2021 5:04 am
PennyWise7 wrote: Sun Nov 21, 2021 2:37 pm I am debating whether
50% VGIT/50% SCHP
OR
50% VGIT /25% SCHP/ 25% VTIP
VGIT is intermediate treasuries
SCHP is average duration 7.5 year TIPS
VTIP is average duration 3 year TIPS

I would not go short.
TIPS are expensive...but...
My vote includes all TIPS and no regular treasuries.
50% SCHP
50% LTPZ Pimco long TIPS 21.6 year effective duration https://www.pimco.com/en-us/investments ... aded-fund/
or maybe some or all individual TIPS.
What would vineviz say?
Thanks Hudson, decent idea!
chrisdds98
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Re: First 20% of bonds in long-term Treasuries

Post by chrisdds98 »

PennyWise7 wrote: Wed Nov 24, 2021 11:09 am
hudson wrote: Mon Nov 22, 2021 5:04 am
PennyWise7 wrote: Sun Nov 21, 2021 2:37 pm I am debating whether
50% VGIT/50% SCHP
OR
50% VGIT /25% SCHP/ 25% VTIP
VGIT is intermediate treasuries
SCHP is average duration 7.5 year TIPS
VTIP is average duration 3 year TIPS

I would not go short.
TIPS are expensive...but...
My vote includes all TIPS and no regular treasuries.
50% SCHP
50% LTPZ Pimco long TIPS 21.6 year effective duration https://www.pimco.com/en-us/investments ... aded-fund/
or maybe some or all individual TIPS.
What would vineviz say?
Thanks Hudson, decent idea!
nominals are great in deflationary crashes, like 2008.
international001
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Re: First 20% of bonds in long-term Treasuries

Post by international001 »

chrisdds98 wrote: Thu Nov 25, 2021 12:05 am
nominals are great in deflationary crashes, like 2008.
Because inflation goes down?

LTPZ, SCHP were not around on 2008. Do you have any ETF I can check?
muffins14
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Re: First 20% of bonds in long-term Treasuries

Post by muffins14 »

Deflation implies rates go down, which implies prices go up, and your coupon payments are worth more in real value
chrisdds98
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Re: First 20% of bonds in long-term Treasuries

Post by chrisdds98 »

muffins14 wrote: Thu Nov 25, 2021 1:03 pm Deflation implies rates go down, which implies prices go up, and your coupon payments are worth more in real value
relative to nominal bonds they underperform as we would expect them to. I like having ballast when stocks crash so half of my bonds are LTT to be used to rebalance into cheap stocks.
chrisdds98
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Re: First 20% of bonds in long-term Treasuries

Post by chrisdds98 »

international001 wrote: Thu Nov 25, 2021 11:01 am
chrisdds98 wrote: Thu Nov 25, 2021 12:05 am
nominals are great in deflationary crashes, like 2008.
Because inflation goes down?

LTPZ, SCHP were not around on 2008. Do you have any ETF I can check?
https://www.portfoliovisualizer.com/bac ... ion3_3=100
muffins14
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Re: First 20% of bonds in long-term Treasuries

Post by muffins14 »

chrisdds98 wrote: Thu Nov 25, 2021 1:37 pm
muffins14 wrote: Thu Nov 25, 2021 1:03 pm Deflation implies rates go down, which implies prices go up, and your coupon payments are worth more in real value
relative to nominal bonds they underperform as we would expect them to. I like having ballast when stocks crash so half of my bonds are LTT to be used to rebalance into cheap stocks.
Correct, I was referring to nominal
hudson
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Re: First 20% of bonds in long-term Treasuries

Post by hudson »

international001 wrote: Thu Nov 25, 2021 11:01 am
chrisdds98 wrote: Thu Nov 25, 2021 12:05 am
nominals are great in deflationary crashes, like 2008.
Because inflation goes down?

LTPZ, SCHP were not around on 2008. Do you have any ETF I can check?
In 2008, I held a Vanguard TIPS mutual fund (VIPSX or VAIPX?). It dropped noticeably.
Why?
Several large financial institutions were getting ready to default. I speculate that they dumped TIPS to try and recover. When the price dropped others panicked and also sold. I knew that the holdings of the fund were solid because they were treasuries. I held on; the fund bounced back.
Elysium
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Re: First 20% of bonds in long-term Treasuries

Post by Elysium »

hudson wrote: Fri Nov 26, 2021 7:48 am
international001 wrote: Thu Nov 25, 2021 11:01 am
chrisdds98 wrote: Thu Nov 25, 2021 12:05 am
nominals are great in deflationary crashes, like 2008.
Because inflation goes down?

LTPZ, SCHP were not around on 2008. Do you have any ETF I can check?
In 2008, I held a Vanguard TIPS mutual fund (VIPSX or VAIPX?). It dropped noticeably.
Why?
Several large financial institutions were getting ready to default. I speculate that they dumped TIPS to try and recover. When the price dropped others panicked and also sold. I knew that the holdings of the fund were solid because they were treasuries. I held on; the fund bounced back.
TIPS won't save in flight to safety crisis like that, they didn't in 2008 and they didn't in March 2020. Nominal treasuries will do that much better than anything else. TIPS face liquidity issues during crisis times like this, it shouldn't be for hedging against equity drawdown but rather for protection against unexpected inflation. Each asset has a role, and no one asset can should be expected to do all. Holding LTT and TIPS will not protect the portfolio from a severe downturn since the LTT allocation is likely not enough, but it'll at least ensure you aren't losing as much as other options, and that does matter. Same about inflation, while TIPS allocation won't help the entire portfolio (unless everything is TIPS), it will ensure you lose less than other options. That's the whole idea.
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