First 20% of bonds in long-term Treasuries

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

Post by vineviz »

Northern Flicker wrote: Sat Nov 19, 2022 3:43 pm
vineviz wrote: Sat Nov 19, 2022 2:49 pm
Northern Flicker wrote: Sat Nov 19, 2022 2:19 pm
vineviz wrote: Sat Nov 19, 2022 1:45 pm
Northern Flicker wrote: Sat Nov 19, 2022 1:28 pm How do know know your time horizon will be long?
Every investor knows more about their expected time horizon than just about any other factor relevant to financial planning.
There is an asymmetry. If horizon goes as planned, the saver has control over how long he or she will work, which can be used to compensate for a duration mismatch of fixed income assets and horizon outcome. Scenarios when horizon turns out to be much shorter are often associated with significant impact to career trajectory, and an inability to compensate by working longer.
Again, these are all things an investor is in a unique position to know about their own situation.
Not everyone is good at predicting the future.
No one is good at predicting the future.

Nothing being discussed here requires having that skill.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
CletusCaddy
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Re: First 20% of bonds in long-term Treasuries

Post by CletusCaddy »

Northern Flicker wrote: Sat Nov 19, 2022 2:19 pm
vineviz wrote: Sat Nov 19, 2022 1:45 pm
Northern Flicker wrote: Sat Nov 19, 2022 1:28 pm How do know know your time horizon will be long?
Every investor knows more about their expected time horizon than just about any other factor relevant to financial planning.
There is an asymmetry. If horizon goes as planned, the saver has control over how long he or she will work, which can be used to compensate for a duration mismatch of fixed income assets and horizon outcome. Scenarios when horizon turns out to be much shorter are often associated with significant impact to career trajectory, and an inability to compensate by working longer.
Would you also eschew stocks because your time horizon might be unexpectedly shortened? If not, why would you eschew long term bonds?

The answer to unexpected life events is insurance and emergency funds. Not suboptimal AA choice.
er999
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Re: First 20% of bonds in long-term Treasuries

Post by er999 »

Vineviz do you think for someone still in the accumulation phase a portfolio with 20% long term treasuries / 80% stocks will ever outperform a 100% stock portfolio over a 10+ year duration?

It seems to me that bonds are for people who are already rich (so don’t mind giving up gains for more stability and are looking for more preservation and slow growth), old (not just chronological but close to or already withdrawing from their portfolio so don’t have time to recover from market crashes, so a 40 yo retiree could be consider old if not longer working), or anxious (don’t like to see their portfolio go down in the short term). For people using bonds for anxiety long term treasuries aren’t the way to go, for the other two groups they may be.
Northern Flicker
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Re: First 20% of bonds in long-term Treasuries

Post by Northern Flicker »

CletusCaddy wrote: Sat Nov 19, 2022 4:17 pm
Northern Flicker wrote: Sat Nov 19, 2022 2:19 pm
vineviz wrote: Sat Nov 19, 2022 1:45 pm
Northern Flicker wrote: Sat Nov 19, 2022 1:28 pm How do know know your time horizon will be long?
Every investor knows more about their expected time horizon than just about any other factor relevant to financial planning.
There is an asymmetry. If horizon goes as planned, the saver has control over how long he or she will work, which can be used to compensate for a duration mismatch of fixed income assets and horizon outcome. Scenarios when horizon turns out to be much shorter are often associated with significant impact to career trajectory, and an inability to compensate by working longer.
Would you also eschew stocks because your time horizon might be unexpectedly shortened? If not, why would you eschew long term bonds?

The answer to unexpected life events is insurance and emergency funds. Not suboptimal AA choice.
Emergency funds reduce the duration of fixed income assets, so they should not be described as a way to preserve the viability of holding a longer duration fixed income portfolio.

Temporary unemployment from job loss is one shorter horizon loss to protect against. Career-ending job loss is another (changes in viability of career, disability, etc.)
My postings represent my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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vineviz
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

Northern Flicker wrote: Sat Nov 19, 2022 5:49 pm
Emergency funds reduce the duration of fixed income assets, so they should not be described as a way to preserve the viability of holding a longer duration fixed income portfolio.
Yet that’s exactly the purpose of an emergency fund.

It exists in conjunction with the REST of a household’s balance sheet to help manage the overall risks the household faces.

The stated topic of this thread is asset allocation for long-term investors who are specifically saving for retirement and other long-term goals.

Your observation that investors might have other financial goals is as incontrovertible as it is off-topic.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
SnowBog
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Re: First 20% of bonds in long-term Treasuries

Post by SnowBog »

Northern Flicker wrote: Sat Nov 19, 2022 3:43 pm
vineviz wrote: Sat Nov 19, 2022 2:49 pm
Northern Flicker wrote: Sat Nov 19, 2022 2:19 pm
vineviz wrote: Sat Nov 19, 2022 1:45 pm
Northern Flicker wrote: Sat Nov 19, 2022 1:28 pm How do know know your time horizon will be long?
Every investor knows more about their expected time horizon than just about any other factor relevant to financial planning.
There is an asymmetry. If horizon goes as planned, the saver has control over how long he or she will work, which can be used to compensate for a duration mismatch of fixed income assets and horizon outcome. Scenarios when horizon turns out to be much shorter are often associated with significant impact to career trajectory, and an inability to compensate by working longer.
Again, these are all things an investor is in a unique position to know about their own situation.
Not everyone is good at predicting the future.
I don't think it's about "predicting" the future. It's about "planning" for the future.

I'm 46, plan to be able to retire by early 50's, and "planning" for at least one of us to be alive until 95. According to the "plan", LTT makes sense.

Granted, we could both die in a car wreck tomorrow. In which case, our child would inherit the bulk of our estate, which again would ideally be setup to reflect they potentially have 70+ years ahead of them. If all of us are dead, not my problem anymore... But if our assets went to our elderly parents, they'd presumably sell any LTT as they are past the point it makes sense for their plan.
Northern Flicker
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Re: First 20% of bonds in long-term Treasuries

Post by Northern Flicker »

Investing at 50 to cover expenses uniformly distributed out to age 95 works well for one life outcome. There are other outcomes that have a much more accelerated set of cash flows, such as one member of a couple needing 5 years of long-term/memory care starting at age 60.
My postings represent my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
SnowBog
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Re: First 20% of bonds in long-term Treasuries

Post by SnowBog »

Northern Flicker wrote: Sat Nov 19, 2022 7:50 pm Investing at 50 to cover expenses uniformly distributed out to age 95 works well for one life outcome. There are other outcomes that have a much more accelerated set of cash flows, such as one member of a couple needing 5 years of long-term/memory care starting at age 60.
But it need not be "all or nothing"...

Again, this thread isn't 100% of your savings in LTT, it's not even 100% of your bonds in LTT, nor is it "everyone must have" LTT. It's a recommendation that for most accumulators (aka likely have a long investing horizon), the first 20% of bonds likely make sense to be in LTT.

Expanding on my example above, my LTT is approximately 20% of my 40% of bonds, or about 8% of my total portfolio. If our circumstances change, and we need to deal with accelerated expenses (and a shortened life span), we have 92% of our portfolio which can easily be adapted.
Trance
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Re: First 20% of bonds in long-term Treasuries

Post by Trance »

rockstar wrote: Sat Nov 19, 2022 2:30 pm
Trance wrote: Sat Nov 19, 2022 11:28 am
rockstar wrote: Fri Nov 18, 2022 4:43 pm
Trance wrote: Fri Nov 18, 2022 4:28 pm
er999 wrote: Fri Nov 18, 2022 4:05 pm

Your chart started in 2010 when the 30 year treasury yield was 3.6 - 4.5% in 2010 according to the Fred data (on the fed website) and basically declined through 2020 (not sure how to embed the graph but you can look up on their website https://fred.stlouisfed.org/series/DGS30).

I doubt that if you compare long term treasuries bought in 2020 with rates in the 1.5% range to BND for the following 10 years (through 2030) you’ll see the same advantage of long term treasuries purchased at that price but time will tell, I’m sure this thread will continue for 10 more years.

With rates up now though likely you’ll see the same advantage of VGLT over for BND bought 11/2022 where VGLT returns more than BND over the next 10 years.
I fail to see your logic here. While there are periods of time where the 30 year bonds are lower (which mind you the long term bond index includes a spread from 15 years to 30) they are still higher than shorter term bonds. The principles don't change.
You also get to experience equity like volatility without equity like returns. And your reward is roughly the spread between the short end of the curve versus the long end. Is that a large enough return for the added risk? I don’t get it.
Again though, the risk and volatility you have only increases if you are going for bonds shorter or longer than your time horizon.

EDIT: I am going to expand on this a little more again.

To better understand this situation, let's break a cardinal boglehead rule and look at timing the market. With rising inflation an investor could have made a prediction that the fed was going to raise rates. As we all know, this causes bond prices to fall. With this having a greater impact on the bonds with longer duration.

An investor, knowing that, could have sold their long term bonds before their predicted crash and bought either short term bonds or gone straight crash. They would be timing the market that rates would rise and so were holding bonds that were shorter than their time horizon.

At the same time, if someone were to believe the fed wasn't going to raise rates, they might stay with investing in long term bonds. Betting that there would be rising interest rate and corresponding bond crash. They were investing beyond their time horizon.

BUT the investor who simply bought the bonds that most closely aligned with their time horizon wouldn't care. They wouldn't be trying to time the market and so not exposing themselves to unrewarded, market timing risk. They would always come out on top by buying the bonds that most closely matched their time horizon. As such, their long term bonds bought long ago had the most payout, then their intermediate, then their short term ones.
In order this to work out, you need to buy bonds with maturities matching your investment horizon. And you can't screw this up. A bond fund with a constant duration doesn't accomplish this.
It can! You can achieve this very accurately by combining more than 1 fund even.
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Re: First 20% of bonds in long-term Treasuries

Post by jeffyscott »

SnowBog wrote: Sat Nov 19, 2022 8:02 pm Again, this thread isn't 100% of your savings in LTT, it's not even 100% of your bonds in LTT, nor is it "everyone must have" LTT. It's a recommendation that for most accumulators (aka likely have a long investing horizon), the first 20% of bonds likely make sense to be in LTT.

Expanding on my example above, my LTT is approximately 20% of my 40% of bonds, or about 8% of my total portfolio. If our circumstances change, and we need to deal with accelerated expenses (and a shortened life span), we have 92% of our portfolio which can easily be adapted.
Well, I guess that's a possible interpretation of the unclearly worded title, but it's not at all what the thread proposes. The first post explains it:

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...
And so it goes, And so it goes, And so it goes, And so it goes, But where it's goin' no one knows
Northern Flicker
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Re: First 20% of bonds in long-term Treasuries

Post by Northern Flicker »

SnowBog wrote: Sat Nov 19, 2022 8:02 pm
Northern Flicker wrote: Sat Nov 19, 2022 7:50 pm Investing at 50 to cover expenses uniformly distributed out to age 95 works well for one life outcome. There are other outcomes that have a much more accelerated set of cash flows, such as one member of a couple needing 5 years of long-term/memory care starting at age 60.
But it need not be "all or nothing"...

Again, this thread isn't 100% of your savings in LTT, it's not even 100% of your bonds in LTT, nor is it "everyone must have" LTT. It's a recommendation that for most accumulators (aka likely have a long investing horizon), the first 20% of bonds likely make sense to be in LTT.

Expanding on my example above, my LTT is approximately 20% of my 40% of bonds, or about 8% of my total portfolio. If our circumstances change, and we need to deal with accelerated expenses (and a shortened life span), we have 92% of our portfolio which can easily be adapted.
The individual matching buckets are useful to establish duration, but once that is done, it can be just 1 or 2 fund products. I prefer that simplicity, but one motivation for barbelling instead can be liquidity management-- holding shorter duration in a taxable account and longer duration in a tax-qualified account so that liquidity is realized without the tax consequences of a tax-qualified account. This is essentially what an emergency fund does.
My postings represent my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: First 20% of bonds in long-term Treasuries

Post by sycamore »

jeffyscott wrote: Sat Nov 19, 2022 9:19 pm
SnowBog wrote: Sat Nov 19, 2022 8:02 pm Again, this thread isn't 100% of your savings in LTT, it's not even 100% of your bonds in LTT, nor is it "everyone must have" LTT. It's a recommendation that for most accumulators (aka likely have a long investing horizon), the first 20% of bonds likely make sense to be in LTT.

Expanding on my example above, my LTT is approximately 20% of my 40% of bonds, or about 8% of my total portfolio. If our circumstances change, and we need to deal with accelerated expenses (and a shortened life span), we have 92% of our portfolio which can easily be adapted.
Well, I guess that's a possible interpretation of the unclearly worded title, but it's not at all what the thread proposes. The first post explains it:

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...
The OP also indicates it's for some (not all) investors:
for investors with long-term investment horizons
This rule is designed specifically for retirement portfolios that are in their accumulation phase (i.e. pre-retirement)...
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whodidntante
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Re: First 20% of bonds in long-term Treasuries

Post by whodidntante »

@vineviz, I bought long-term TIPS today. This may be a sign of the apocalypse. I don't know.
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Re: First 20% of bonds in long-term Treasuries

Post by Trance »

Are LTT etfs fine in a taxable account?
SafeBonds
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Re: First 20% of bonds in long-term Treasuries

Post by SafeBonds »

Trance wrote: Mon Nov 21, 2022 8:50 pm Are LTT etfs fine in a taxable account?
Here is our wiki page on the matter: https://www.bogleheads.org/wiki/Tax-eff ... _placement

The old wisdom was to place bonds in tax advantaged accounts because the coupons are taxed as income, unlike stocks whose qualified dividends are taxed at a lower rate. The more recent but perhaps now outdated wisdom was that bond yields are too low for this to really matter so it's better to place them in taxable.

But that is just one thing to consider. Other things to consider are:
  • Stocks have higher expected return so perhaps Roth tax advantaged space is better used for higher expected return investments
  • Treasury interest is taxed at the federal level only and are exempt from state and local tax. This may not matter if you live in a no-income tax state like Florida, or it may be an important point if you live in a high state income tax like California
  • Perhaps you can do better tax-loss harvesting by having diverse investments in your taxable account. For example, if stocks go down and bonds go up or vise versa, this could be a tax loss harvest opportunity.
I'm sure there are more things to consider that I have not listed. Good luck!
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Re: First 20% of bonds in long-term Treasuries

Post by international001 »

SafeBonds wrote: Tue Nov 22, 2022 1:49 pm
Trance wrote: Mon Nov 21, 2022 8:50 pm Are LTT etfs fine in a taxable account?
Here is our wiki page on the matter: https://www.bogleheads.org/wiki/Tax-eff ... _placement

The old wisdom was to place bonds in tax advantaged accounts because the coupons are taxed as income, unlike stocks whose qualified dividends are taxed at a lower rate. The more recent but perhaps now outdated wisdom was that bond yields are too low for this to really matter so it's better to place them in taxable.

But that is just one thing to consider. Other things to consider are:
  • Stocks have higher expected return so perhaps Roth tax advantaged space is better used for higher expected return investments
  • Treasury interest is taxed at the federal level only and are exempt from state and local tax. This may not matter if you live in a no-income tax state like Florida, or it may be an important point if you live in a high state income tax like California
  • Perhaps you can do better tax-loss harvesting by having diverse investments in your taxable account. For example, if stocks go down and bonds go up or vise versa, this could be a tax loss harvest opportunity.
I'm sure there are more things to consider that I have not listed. Good luck!
If I plan to use some money in 10 years (before retirement), I need to use taxable, so some bonds there are good to mitigate the risk.

Why would Roth IRA (vs pre-tax IRA/401k) matter?
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Re: First 20% of bonds in long-term Treasuries

Post by sycamore »

international001 wrote: Tue Nov 22, 2022 6:31 pm If I plan to use some money in 10 years (before retirement), I need to use taxable, so some bonds there are good to mitigate the risk.
Maybe you don't need to put bonds in taxable -- see the wiki article Placing cash needs in a tax-advantaged account. It's not a slam-dunk choice, but you may find the idea helpful.
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Re: First 20% of bonds in long-term Treasuries

Post by bugday »

Hi first time long time. I've been moving my meager bond holdings from total bond to long term Treasuries over the past months, in part due to inspiration from this thread.

I know there has been a lot of discussion, direct and indirect, regarding the choice between long term TIPS and nominal Treasuries. I'd like to make sure my understanding is correct. Assuming you're in the demographic targeted by the "First 20% of bonds in long-term Treasuries" rule of thumb, the following is my understanding of the benefits of choosing long term nominal Treasuries over TIPS:

-If you're a young accumulator with a lot of working years ahead of you and most of your portfolio is invested in stocks, unexpected inflation is less of a concern
-Nominals are less correlated with stocks than TIPS, so you may get a diversification benefit with nominals
-As far as mutual funds and ETFs, LPTZ is the best option for long duration TIPS and the expense ratio is relatively high
-Some future liabilities for some investors may be nominal

Does that cover it? Anything I'm missing?

Bonus question: What are some examples of nominal liabilities in retirement other than a mortgage?

hey look I made it through my first post and didn't capitalize Roth (!!!)
rockAction
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Re: First 20% of bonds in long-term Treasuries

Post by rockAction »

That all seems about right to me. I would just add that portfolios with a higher equity allocation, whether in accumulation or retirement, tend to need less TIPS since stocks tend to keep up with inflation over the long term. Portfolios with higher bond allocations require more TIPS. Vineviz did a post on this:

viewtopic.php?t=376740&sid=7dc8f6359195 ... 56328f191c
65/35 AA | 55/30/15 US/Int/EM | 25% SCV tilt | FI: 2/3 TIPS. 1/3 Treasuries. Intermediate duration
evelynmanley
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Re: First 20% of bonds in long-term Treasuries

Post by evelynmanley »

bugday wrote: Thu Nov 24, 2022 9:41 am Hi first time long time. I've been moving my meager bond holdings from total bond to long term Treasuries over the past months, in part due to inspiration from this thread.

I know there has been a lot of discussion, direct and indirect, regarding the choice between long term TIPS and nominal Treasuries. I'd like to make sure my understanding is correct. Assuming you're in the demographic targeted by the "First 20% of bonds in long-term Treasuries" rule of thumb, the following is my understanding of the benefits of choosing long term nominal Treasuries over TIPS:

-If you're a young accumulator with a lot of working years ahead of you and most of your portfolio is invested in stocks, unexpected inflation is less of a concern
-Nominals are less correlated with stocks than TIPS, so you may get a diversification benefit with nominals
-As far as mutual funds and ETFs, LPTZ is the best option for long duration TIPS and the expense ratio is relatively high
-Some future liabilities for some investors may be nominal

Does that cover it? Anything I'm missing?

Bonus question: What are some examples of nominal liabilities in retirement other than a mortgage?

hey look I made it through my first post and didn't capitalize Roth (!!!)
Not sure if this addresses your specific situation, but David Enna (Tipswatch) has a very interesting article:

https://tipswatch.com/2022/11/20/i-bond ... tage-tips/
Prudence
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Re: First 20% of bonds in long-term Treasuries

Post by Prudence »

whodidntante wrote: Mon Nov 21, 2022 6:26 pm @vineviz, I bought long-term TIPS today. This may be a sign of the apocalypse. I don't know.
Individual bonds or a fund? How did you choose?
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whodidntante
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Re: First 20% of bonds in long-term Treasuries

Post by whodidntante »

Prudence wrote: Thu Nov 24, 2022 11:11 am
whodidntante wrote: Mon Nov 21, 2022 6:26 pm @vineviz, I bought long-term TIPS today. This may be a sign of the apocalypse. I don't know.
Individual bonds or a fund? How did you choose?
LTPZ. Chosen because I'm lazy.
bugday
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Re: First 20% of bonds in long-term Treasuries

Post by bugday »

I fear that I, too, am lazy enough to subjugate myself to the tyranny of LTPZ's 0.2% ER
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