Good idea investing now in long term funds?

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GodelianKnot
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Re: Good idea investing now in long term funds?

Post by GodelianKnot » Thu May 17, 2018 2:17 pm

international001 wrote:
Thu May 17, 2018 1:01 pm
GodelianKnot wrote:
Wed May 16, 2018 6:53 pm
No, the point remains. When you are constructing an SP500 + bonds portfolio, you'll need a higher bonds percentage to reach the same level of overall risk if you're using long term bonds, compared to short term. Thus your total returns (at the same level of risk) will be better with the stocks + short-term bonds portfolio, when the yield curve is flat.

Well, in theory anyway. In reality, it's tough to do this back-test because a flat yield curve almost always results in a stock market crash, so you end up actually doing better with fewer stocks for the years when the yield curve is flat. But that doesn't negate the bond term preference (it just maybe means you should also prefer to not be in stocks).
No, because long term bonds typically balance better a heavy stock portofolio. Even if LT are worse in isolation

You can test it in portfoliovisualizer
By "better balance" do you mean have a negative correlation to stocks? Because, yes, that's generally been true. But that's actually not what you want in a portfolio. You should rather have uncorrelated assets, not negatively correlated ones.

So, if your long term bonds offset x% of your stocks by their negative correlation, then you're better off selling that x% of your stocks as well as your long term bonds (since they balance each other anyway), and replacing them with an equivalent amount of short term bonds (assuming a flat yield curve).

I want to reiterate that I'm not saying that short term bonds are always better than long term bonds. This is only really true when the yield curve is very flat (and especially so when it's very low and very flat). Otherwise, there are plenty of good reasons to have long term bonds in your portfolio. That is, the term-premium of long term bonds is typically what compensates you for having more risk with them.

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spdoublebass
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Re: Good idea investing now in long term funds?

Post by spdoublebass » Thu May 17, 2018 2:26 pm

aristotelian wrote:
Thu May 17, 2018 1:33 pm
The argument that you have to be able to hold LT bonds for X number of year would also seem to apply to stocks. I think I would be Ok holding a certain allocation in LT bonds, but it should be regarded more like "alternatives" that have the same risk profile as stocks but aren't correlated to the market. In other words, LT bonds shouldn't be part of your traditional bond allocation but rather should substitute for a portion of stocks.
I only brought that argument up because I read it on the forum and still don't really understand how to implement it.

Take BLV/VBLTX vanguard LT bond index. It has a duration of 14.9 years.

I've read here that you should at least hold this fund for 14.9 years, because of interest rates etc.
I've also read here that a safer bet is to hold it for twice the duration.

What I've never been able to wrap my head around is if you hold it for the duration, in year 13, you still have a LT duration. Even if you hold it for twice the duration, in year 28 you still have the same duration you started with. Maybe I'm missing something obvious, I"m not advanced in this at all, but I do read my fair share of the forum.

The other option is to just do what you said. Could the LT bonds as part of your stock side instead of FI. That makes sense to me, hold X% and just hold it forever.

As for myself, I stick to IT bonds because they make the most sense to me. For what I need from bonds, I think holding less over all, with a ST/IT mix, and taking a few extra % in stocks is a better option.
I'm trying to think, but nothing happens

aristotelian
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Re: Good idea investing now in long term funds?

Post by aristotelian » Thu May 17, 2018 2:34 pm

spdoublebass wrote:
Thu May 17, 2018 2:26 pm
aristotelian wrote:
Thu May 17, 2018 1:33 pm
The argument that you have to be able to hold LT bonds for X number of year would also seem to apply to stocks. I think I would be Ok holding a certain allocation in LT bonds, but it should be regarded more like "alternatives" that have the same risk profile as stocks but aren't correlated to the market. In other words, LT bonds shouldn't be part of your traditional bond allocation but rather should substitute for a portion of stocks.
I only brought that argument up because I read it on the forum and still don't really understand how to implement it.

Take BLV/VBLTX vanguard LT bond index. It has a duration of 14.9 years.

I've read here that you should at least hold this fund for 14.9 years, because of interest rates etc.
I've also read here that a safer bet is to hold it for twice the duration.

What I've never been able to wrap my head around is if you hold it for the duration, in year 13, you still have a LT duration. Even if you hold it for twice the duration, in year 28 you still have the same duration you started with. Maybe I'm missing something obvious, I"m not advanced in this at all, but I do read my fair share of the forum.

The other option is to just do what you said. Could the LT bonds as part of your stock side instead of FI. That makes sense to me, hold X% and just hold it forever.

As for myself, I stick to IT bonds because they make the most sense to me. For what I need from bonds, I think holding less over all, with a ST/IT mix, and taking a few extra % in stocks is a better option.
I guess if you are going with the duration-based approach, you would start to sell it as soon as you have less than 13 years to wait. If you are looking to eliminate any term risk in retirement, and retirement is 30 years off, you would want to liquidate it by year 17.

But that would not be my approach. My approach would be to simply assume the risk just as one does with stocks.

Another option is just to buy individual long term bonds and hold until either you or the bonds mature.

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international001
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Re: Good idea investing now in long term funds?

Post by international001 » Thu May 17, 2018 3:12 pm

GodelianKnot wrote:
Thu May 17, 2018 2:17 pm
By "better balance" do you mean have a negative correlation to stocks? Because, yes, that's generally been true. But that's actually not what you want in a portfolio. You should rather have uncorrelated assets, not negatively correlated ones.

So, if your long term bonds offset x% of your stocks by their negative correlation, then you're better off selling that x% of your stocks as well as your long term bonds (since they balance each other anyway), and replacing them with an equivalent amount of short term bonds (assuming a flat yield curve).

I want to reiterate that I'm not saying that short term bonds are always better than long term bonds. This is only really true when the yield curve is very flat (and especially so when it's very low and very flat). Otherwise, there are plenty of good reasons to have long term bonds in your portfolio. That is, the term-premium of long term bonds is typically what compensates you for having more risk with them.
negative correlation even better than negative correlation . I don't understand the x% offset you mention. You see the uncorrelation effects at different percentage of stocks and bonds. At some optimal percentage, the effects are maxium (bump in the efficient frontier)

Again, you can test all this in portfoliovisualizer

GodelianKnot
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Re: Good idea investing now in long term funds?

Post by GodelianKnot » Thu May 17, 2018 3:35 pm

international001 wrote:
Thu May 17, 2018 3:12 pm
GodelianKnot wrote:
Thu May 17, 2018 2:17 pm
By "better balance" do you mean have a negative correlation to stocks? Because, yes, that's generally been true. But that's actually not what you want in a portfolio. You should rather have uncorrelated assets, not negatively correlated ones.

So, if your long term bonds offset x% of your stocks by their negative correlation, then you're better off selling that x% of your stocks as well as your long term bonds (since they balance each other anyway), and replacing them with an equivalent amount of short term bonds (assuming a flat yield curve).

I want to reiterate that I'm not saying that short term bonds are always better than long term bonds. This is only really true when the yield curve is very flat (and especially so when it's very low and very flat). Otherwise, there are plenty of good reasons to have long term bonds in your portfolio. That is, the term-premium of long term bonds is typically what compensates you for having more risk with them.
negative correlation even better than negative correlation . I don't understand the x% offset you mention. You see the uncorrelation effects at different percentage of stocks and bonds. At some optimal percentage, the effects are maxium (bump in the efficient frontier)

Again, you can test all this in portfoliovisualizer
You can't test it in portfoliovisualizer, because flat yield curves are rare and have historically always led to stock market declines. So, please show what portfoliovisualizer test you're running to come to your conclusions.

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international001
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Re: Good idea investing now in long term funds?

Post by international001 » Thu May 17, 2018 4:12 pm

GodelianKnot wrote:
Thu May 17, 2018 3:35 pm
You can't test it in portfoliovisualizer, because flat yield curves are rare and have historically always led to stock market declines. So, please show what portfoliovisualizer test you're running to come to your conclusions.
Well, sure you have to consider market declines. But consider the period 2007-2009

IT(100) wins LT/CASH (50/50)
TOTM/LT (60/40) wins TOTM/IM (67/33)

If we are considering that we are not going to have a recession in a few years, I guess it might be different

GodelianKnot
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Re: Good idea investing now in long term funds?

Post by GodelianKnot » Thu May 17, 2018 9:13 pm

international001 wrote:
Thu May 17, 2018 4:12 pm
GodelianKnot wrote:
Thu May 17, 2018 3:35 pm
You can't test it in portfoliovisualizer, because flat yield curves are rare and have historically always led to stock market declines. So, please show what portfoliovisualizer test you're running to come to your conclusions.
Well, sure you have to consider market declines. But consider the period 2007-2009

IT(100) wins LT/CASH (50/50)
TOTM/LT (60/40) wins TOTM/IM (67/33)

If we are considering that we are not going to have a recession in a few years, I guess it might be different
Yeah, this is what I'm saying. TOTM/LT only beats TOTM/IT because stocks also declined (dramatically) during that period. If you could somehow take an average 2 years of stocks + those 2 years of LT vs IT, the TOTM/IT would win. Otherwise, if you go down this path, you might as well say you should own only ST/IT bonds during a flat yield curve. I'm not sure I'd go that far, but it sure would test well historically.

Topic Author
international001
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Re: Good idea investing now in long term funds?

Post by international001 » Fri May 18, 2018 6:11 am

GodelianKnot wrote:
Thu May 17, 2018 9:13 pm

Yeah, this is what I'm saying. TOTM/LT only beats TOTM/IT because stocks also declined (dramatically) during that period. If you could somehow take an average 2 years of stocks + those 2 years of LT vs IT, the TOTM/IT would win. Otherwise, if you go down this path, you might as well say you should own only ST/IT bonds during a flat yield curve. I'm not sure I'd go that far, but it sure would test well historically.
You can look at 1995 (flat curve without recession)
Interestingly, LT does better than ST/IT *very* slighty
ST/IT+stocks does better than LT+stocks slightly

But at the end there is not much difference. So probably everything tends to follow expectations. But, gain, there is an asymmetrical risk of IT/ST yields going higher than expected. And since LT better diversify stocks, their value for reducing stocks risk may compensate *some* of that asymmetrical risk.

But not enough data points to know which risk is worse. Let's talk again in another 50 recessions and 100 flat yield curves ;-)

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