POLL: How did you overcome the fear of tracking error?

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mathjak107
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Re: POLL: How did you overcome the fear of tracking error?

Post by mathjak107 » Sun Aug 16, 2020 10:12 am

the cpi is really not reflective of anyone's lifestyle . it merely checks the temperature of the economy over the 1500 mini economies that we consist of .

it is a price index and not a cost of living index which takes in a whole lot more in factors .

nominal rates are much more meaningful since a 4% interest rate ina 5% cpi is not going to be reflective as negative for everyone .


for the last 5 years we had quite a bit drop in our lives even though the cpi didn't so we have not taken our first inflation raise yet in retirement 5 years later .

so the effect of nominal rates can be a lot different than real returns on our lives
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Re: POLL: How did you overcome the fear of tracking error?

Post by glennds » Sun Aug 16, 2020 1:19 pm

mathjak107 wrote:
Sun Aug 16, 2020 10:12 am
the cpi is really not reflective of anyone's lifestyle . it merely checks the temperature of the economy over the 1500 mini economies that we consist of .

it is a price index and not a cost of living index which takes in a whole lot more in factors .

nominal rates are much more meaningful since a 4% interest rate ina 5% cpi is not going to be reflective as negative for everyone .


for the last 5 years we had quite a bit drop in our lives even though the cpi didn't so we have not taken our first inflation raise yet in retirement 5 years later .

so the effect of nominal rates can be a lot different than real returns on our lives
So then based on that logic, the calculation of a real return is highly personal?

I can see what you're saying in terms of consumer spending. But I would say that there has been a meaningful amount of asset price inflation in terms of what your dollar can buy. I'm thinking about property, rent, travel, even cars whether leased or owned.
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Re: POLL: How did you overcome the fear of tracking error?

Post by mathjak107 » Sun Aug 16, 2020 2:05 pm

a cost of living index is unique to us ...

a cost of living index takes in to consideration the price change , plus how many times we buy it . which is a huge factor . we all buy things different amounts of time .

plus we have to adjust for 'quality too. higher priced goods tend to see bigger price increases but last a lot longer .

i spent 1k in 1993 on a north face shell , ski pants and liner ... i am still wearing them decades later .

plus we all tend to sub out of class where as a price index can't .


if i cant get the ice cream i like on sale i will buy a jar of grape fruit instead .

so a cost of living index is different than just price changes on goods and services we dont use much of .

seniors tend to see a lot less inflation than those raising a family .

we tend to spend as seniors in a smile shape when you have discretionary spending . we spend more in the early go go years , less in the slow go years , until health care ramps up in the no go years . what we no longer buy and do , tends to offset price increases in what we continue to do and buy .
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Re: POLL: How did you overcome the fear of tracking error?

Post by Kriegsspiel » Sun Aug 16, 2020 4:10 pm

glennds wrote:
Sun Aug 16, 2020 1:19 pm
So then based on that logic, the calculation of a real return is highly personal?

I can see what you're saying in terms of consumer spending. But I would say that there has been a meaningful amount of asset price inflation in terms of what your dollar can buy. I'm thinking about property, rent, travel, even cars whether leased or owned.
We can all use the same returns calculations to see what asset did better at what time, but I think mathjak has made the point before that the returns we individually get are going to be different too. Like, when the big gold decline happened back in 2013, I wasn't personally affected too much because I just didn't own that much gold.

I think CPIs are the same deal. Due to technological advances, more efficient commerce, and personally becoming more skillful/mindful in buying things over the years, I am getting some things for cheaper than I used to.
  • I looked at the pricing at my old apartment complex in Texas, and it's gone up 128% in the 6 years since I lived there. I'm now living in a house with a garage and a yard for less expense than that apartment 6 years ago.
  • My internet connection costs the same as it did back then but it's far faster now.
  • Food costs have been pretty stable for me. I have price records of my protein powder that I'd gotten off Amazon for the past 10 years, and the price is basically unchanged (I got a years supply of the same stuff from Costco for 61% of what I'd been buying it for).
  • I bought beds and mattresses for about 1/3 of what I spent about 8 years ago. Different materials and mattress type, I don't know if they even existed back then.
  • Gasoline has been crazy-cheap, as we all know
  • The quality of the used car market is ever-increasing, and the prices are still pretty low (although from what I've read, the Cash For Clunkers program was artificially propping up the cost of used cars for most of my adult life).
  • I hadn't played any computer games more recent than 2005 or so, so I got a fairly cheap computer, and I've picked up a few older games on sale. Riding years behind the technology wave lets you save lots of money.
  • I did the same thing with smartphones, using old iPhones for years while the technology advanced by leaps and bounds. My "budget phone" Moto G6 still feels absurdly amazing to me.
One thing that is currently much more expensive is ammunition. I bought a lot of it when it was cheaper, and I'm rationing my range time while prices are this high. If I was choosing to expose myself to the areas that have seen high inflation (like rent/real estate in a lot of cities or college tuition) I might be a little miffed about it, but the information on how to extract more value out of your money is still freely available to everybody.
You there, Ephialtes. May you live forever.
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Re: POLL: How did you overcome the fear of tracking error?

Post by glennds » Sun Aug 16, 2020 6:03 pm

mathjak107 wrote:
Sun Aug 16, 2020 2:05 pm
a cost of living index is unique to us ...


seniors tend to see a lot less inflation than those raising a family .

You've got that right. If I were single and frugal it would be a different story. But with two kids, helping them with first cars, college in the not too distant future, weddings, it sounds like inflation is a different matter for me than it is for you. I think time horizon is a factor too. Depending on how far away the future is and the unknowns.....
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Re: POLL: How did you overcome the fear of tracking error?

Post by ppnewbie » Sun Aug 16, 2020 7:46 pm

It’s tough - if I were to start right now. I am not sure I would buy in. One of my investment thesis is to buy things that are cheap. Right now nothing in the PP is cheap. It’s the opposite - very expensive.
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Re: POLL: How did you overcome the fear of tracking error?

Post by vnatale » Sun Aug 16, 2020 8:36 pm

Kriegsspiel wrote:
Sun Aug 16, 2020 4:10 pm

[*]I hadn't played any computer games more recent than 2005 or so, so I got a fairly cheap computer, and I've picked up a few older games on sale. Riding years behind the technology wave lets you save lots of money.
[*]I did the same thing with smartphones, using old iPhones for years while the technology advanced by leaps and bounds. My "budget phone" Moto G6 still feels absurdly amazing to me.
[/list]

Totally agree with buying older technology. Also, applies to books where you can buy them so cheaply when they are old and used.

And, we use the same phone! I got mine to use with GoogleFi. What motivated you to buy that particular phone?

Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Re: POLL: How did you overcome the fear of tracking error?

Post by vnatale » Sun Aug 16, 2020 8:38 pm

ppnewbie wrote:
Sun Aug 16, 2020 7:46 pm
It’s tough - if I were to start right now. I am not sure I would buy in. One of my investment thesis is to buy things that are cheap. Right now nothing in the PP is cheap. It’s the opposite - very expensive.

It definitely does pose a dilemma to your excellent investment thesis.

Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Re: POLL: How did you overcome the fear of tracking error?

Post by Kriegsspiel » Sun Aug 16, 2020 8:58 pm

vnatale wrote:
Sun Aug 16, 2020 8:36 pm
Also, applies to books where you can buy them so cheaply when they are old and used.
I've probably only bought 2 or 3 books in the past 7 years or so. I've done most of my reading for $1.50 in late charges at the public library, as Will Hunting would say.
And, we use the same phone! I got mine to use with GoogleFi. What motivated you to buy that particular phone?
I was trying to find the cheapest Android phone with a good camera, decent battery life, a small amount of storage, and a middling to decent processor. It was pretty easy to disregard the phones with extraneous features I wasn't planning on taking advantage of, and the G6 had a better camera than the other ones I was looking at. The battery can last like 3 days with my normal use, I'm not even close to using up the 32GB of storage, and the processor exceeds my needs too. I could have bought a cheaper phone, but the G6 was much better for only a few dollars more.
You there, Ephialtes. May you live forever.
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Re: POLL: How did you overcome the fear of tracking error?

Post by Tyler » Mon Aug 17, 2020 11:20 pm

Henryinroad wrote:
Sun Aug 16, 2020 7:50 am
Though I have one question:
1) For longer duration bonds, once the interest rate is getting lower and negative , their values can appreciate at a much greater pace, and act as a nice protection to the portfolio.

But one concern raised by some investors like Ray Dalio is more about how low the yield could go...

What are your point of view with regard to the lowest limit of the yield?

2) Aside from GOLD, do you think TIPs are good diversifiers we could consider as inflation-hedge assets?
I think the idea that people will eventually look elsewhere if yields get too low is a legit observation. But I'd argue that's exactly what gold is for. So by holding both bonds and gold you prepare yourself for all outcomes. The best portfolios don't fold in adversity -- they thrive in it.

I think TIPS are good inflation hedges by definition, although I also think they're overrated because the tradeoff is accepting even lower yields than on nominal bonds. And personally, I think the most underrated inflation hedge is good old TBills.
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Re: POLL: How did you overcome the fear of tracking error?

Post by mathjak107 » Tue Aug 18, 2020 5:01 am

t-bills had negative real returns during the high inflation periods right up until inflation fell ... i would say in order to be a high inflation hedge you need positive real returns when called upon . big difference in being an inflation hedge vs a high or hyper inflation hedge .


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Re: POLL: How did you overcome the fear of tracking error?

Post by Kbg » Tue Aug 18, 2020 2:19 pm

Tyler wrote:
Mon Aug 17, 2020 11:20 pm
I think TIPS are good inflation hedges by definition, although I also think they're overrated because the tradeoff is accepting even lower yields than on nominal bonds. And personally, I think the most underrated inflation hedge is good old TBills.
One of my favorite investment quotes is one you see from the folks at thinknewfound.com..."Risk can not be destroyed, only transformed."

On the whole TIPS thing...as Tyler noted, you swap some actual interest received for some inflation protection.

Just a quick data point...in the last 5 year auctions the median interest rates (July) were as follows:

-.96% 5yr TIPS (negative not a dash)

.28% 5yr Notes

1.0% July CPI

30 year .2% vs. 1.32%...and yes, no typos. These are the median auction rates for 30 years TIPS/Bonds.

4-52 week bills....08% to .14%

The above are as they say the facts. Not sure where the cutoff line is but the math says LTTs are not super attractive. To each his own, but I think it is hard to blame someone if they go short term only. Not advocating it, but I wouldn't try to dissuade someone from doing it either.

Back to the TIPS thing...none of these interests rates are hardly enough to matter. But let's assume everything just does nothing...at the end of the year your principal is going up 1% for a net nominal of .04% on the 30 year TIPS and 1.32% on the nominal bonds. Let's say we get a very modest 2% CPI then it's 1.04, 3% and it's 2.04 for TIPs. Probably at 3% everyone (TIPS/nominal B) is looking at duration related losses as bonds reprice...however, this simple math exercise should illustrate Bridgewater's basic argument. With TIPs flat interest rates and no CPI increases or deflation are the only losing scenarios comparatively speaking. Every other scenario you will do better with TIPS.

I'm not arguing for or against their advice, just explaining with some simple math why they are arguing what they are.
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Re: POLL: How did you overcome the fear of tracking error?

Post by Xan » Tue Aug 18, 2020 2:43 pm

Many are (quite reasonably) down on LTTs right now. Can anyone shed any light on why the yield is so low, if these things are so unpopular?

Isn't the market saying that the current price is fair? I mean, if it weren't, it would be something different, right?
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Re: POLL: How did you overcome the fear of tracking error?

Post by Kbg » Tue Aug 18, 2020 10:23 pm

Xan wrote:
Tue Aug 18, 2020 2:43 pm
Many are (quite reasonably) down on LTTs right now. Can anyone shed any light on why the yield is so low, if these things are so unpopular?

Isn't the market saying that the current price is fair? I mean, if it weren't, it would be something different, right?
Xan,

The market is doing what markets do and the sum total of all knowledge (with a gigantic assist on the short end of the yield curve from the Fed) says these yields are fair. In this respect, it really doesn't matter what any of us individually think...that's the price we are going to get.

The argument for those making a case for whatever it is they are making a case for are saying the market is wrong. For those making the case against LTTs right now, the basic argument is the reward is in no way commensurate with the risk being taken.

Moving on to my personal opinion, to someone open minded, it is an argument I believe has some merit. Let's just do some simplified math, use 1.36% as the LTT interest rate and throw out 24.5 years as the duration of an LTT (24.5 is roughly the duration of TLT) and then freeze everything to keep the example straight forward.

Interest rates go up .5%, LTTs decline by 12.25% while +1% results in a 24.5% decrease. It now takes 9 and 18 years of interest respectively from those bonds to simply get back to even.

In reality it's not going to be that bad over time as these things smooth out as bonds are being replaced at higher interest rates...but at an individual bond level the above math is what is going to be the end result. There's no guess work, that's the result, period.

So logically to hold an LTT you need to believe one of a couple of things. A) Bonds i-rates could go lower (and hopefully there isn't some natural floor to negative interest rates or B) that 1.36% is an acceptable reward for the risks you are taking that "A" is wrong...which I spelled out in the example.

Given the above, some have decided that they will go super short in maturity and accept the .0X return because if interest rates go up shorter maturities either don't take a hit (super short term) or it's a greatly mitigated hit.

Now let's do the short term math...duration is say 1 year on a .08% bond. Irates go up 1% my EOY return is -.92% and next year I replace with a bond that is making 1.08%. It will take a little less than 1 year's interest to make up the .92% hit.

There you have it. What will happen with LTTs and what will happen with STTs in the case of a 1% rise in interest.

None of us know which is going to be the best choice. I'm completely with HB on assuming I don't know the future. None of us do. But, the beauty of bonds is you can run a couple of scenarios and know exactly what will happen at least in nominal terms and then pick your poison.
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Re: POLL: How did you overcome the fear of tracking error?

Post by Henryinroad » Thu Aug 20, 2020 10:58 pm

Tyler wrote:
Mon Aug 17, 2020 11:20 pm
I think the idea that people will eventually look elsewhere if yields get too low is a legit observation. But I'd argue that's exactly what gold is for. So by holding both bonds and gold you prepare yourself for all outcomes. The best portfolios don't fold in adversity -- they thrive in it.

I think TIPS are good inflation hedges by definition, although I also think they're overrated because the tradeoff is accepting even lower yields than on nominal bonds. And personally, I think the most underrated inflation hedge is good old TBills.
Hi Tyler, these days keep reading ur pages and comtemplating what is most optimal asset mix for low risk and good return, and I came across a strategy that is quite different and seems to be doing a really good job (so far), and would really appreciate it if you could share ur view on this different strategy.

1) What is this strategy about?
This is a ETF called SWAN:
https://amplifyetfs.com/swan.html
https://amplifyetfs.com/Data/Sites/6/me ... N_faqs.pdf

Its strategy is simple: 90% in government bond in different durations, 10% in in the money S&P 500 LEAP option.

They called this stock replacement: replace the risk of stock by government bond while capture (most, 70%) return of stock market by the use of LEAP option (built in leverage: small amount of option premium to get exposure of the stock market)

2) What seems good about it?
No frequent rebalancing:
" At each semi-annual reconstitution date, the fund will rebalance the LEAP allocation that is expiring and purchase
an allocation equal to 5% of the portfolio in the following year (for instance, June 2019 calls move to June 2020 calls). "


Laddered U.S. Treasuries constructed:
UNITED STATES TREAS BDS 2% 02/15/2050 18.14%
UNITED STATES TREAS NTS 1.5% 02/15/2030 16.32%
UNITED STATES TREAS NTS 0.5% 04/30/2027 16.21%
UNITED STATES TREAS NTS 0.375% 04/30/2025 16.12%
UNITED STATES TREAS NTS 0.25% 04/15/2023 16.05%

It seems the "bond" part is the most important part of this strategy, this is what concerns the investors most.

Because if "bond" tumbles a lot, the whole strategy will crumble. As heavy use of bond is designated to "replace and reduce" the risk of 100% stock. Only when the bond part can remain stable, the whole strategy can provide an exceptional risk-reward ratio.

So on your page about convexity, one of the main idea is short and intermediate term bonds are much less sensitive to interest rates at all levels than long term bonds.

My first question is, do you think this laddered structure will survive any huge changes in interest environment?

3)Recent performance:

Pls click here

Despite the fact its a new etf only launched in 2019,
it seems that it has been doing quite well so far.

Monthly drawdown: -19.43% vs -2.34%
Return: 20.85% vs 20.6%
Sharpe ratio: 0.96 vs 2.71
Sortino Ratio: 1.47 vs 7.53

WHY it can have the same return as SP500, when it is said to only capture 70% changes of SPY?
Part of the reasons can be attributed to the risk control built in the use of option.

In the event of huge stock market crash,
the option it holds turns to be "rubbish paper" at worst.
The maximum temporary loss would be 10% of their capital
(while that if huge crash happens, holding market index directly will hurn badly more than 10%).

And while the stock market recovers,
the option become valuable again,
capturing most of the market gain,
outperforming market index which, at the same time, still recovering the "previous huge loss".

In general, it seems that this strategy have really limited downside, while it gets hold of most upside potential stock market can provide. which explain the sharpe ratio (regretfully this is a new etf) looks really good.

My second question, what is your overall opinion /impression of this strategy?

Thank you very much for you insight in advance.
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Re: POLL: How did you overcome the fear of tracking error?

Post by Kbg » Fri Aug 21, 2020 9:41 am

This is well known strategy and has been around for a long time. Things very similar are the basic strategy for annuities. It works pretty well when markets are moving and will lose money when markets are flat.

It works way better when internet rates real and nominal are high. The bond component is very important.
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Re: POLL: How did you overcome the fear of tracking error?

Post by ppnewbie » Wed Aug 26, 2020 3:47 pm

vnatale wrote:
Sun Aug 16, 2020 8:38 pm
ppnewbie wrote:
Sun Aug 16, 2020 7:46 pm
It’s tough - if I were to start right now. I am not sure I would buy in. One of my investment thesis is to buy things that are cheap. Right now nothing in the PP is cheap. It’s the opposite - very expensive.

It definitely does pose a dilemma to your excellent investment thesis.

Vinny
One thing I really like about this forum is that there is an abundance of very helpful people on the forum and an absence of rudeness and sarcasm. I am hoping this response from vnatale was not meant to be rude or sarcastic.

I simply wanted to provide my perspective to Henryinroad that SPY is possibly highly overvalued and that TLT is potentially dangerously overvalued as well, and GLD is also at near all time highs. Even cash may be overvalued. Also all of these asset classes are positively correlating, which is at the very least unusual and at worst a massive bubble.

I know Tyler has written a article about bond convexity in a negative interest rate environment. Personally, I don't think negative interest rates are possible in the US. An entire consumer and debt based economy reversing so that banks start paying people to take money and depositors start paying banks. The system will freeze unless the government forces people to hold money in the banking system.

https://www.youtube.com/watch?v=4u5Ns4bdTYE - George Gammon discusses this starting at minute 5.

One way I used my "excellent" investment thesis of buying something that is cheap recently is to rebalance a bit into Silver instead of gold. So far so good.
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Re: POLL: How did you overcome the fear of tracking error?

Post by buddtholomew » Wed Aug 26, 2020 4:04 pm

None of the assets have a theoretical ceiling so expensive is subjective. I recall thinking SPY at 190 was expensive and today it closed at 347. Same applies to Gold at 1150 and TLT at 100. Today’s high is tomorrow’s low 8)
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Re: POLL: How did you overcome the fear of tracking error?

Post by vnatale » Wed Aug 26, 2020 4:58 pm

ppnewbie wrote:
Wed Aug 26, 2020 3:47 pm
vnatale wrote:
Sun Aug 16, 2020 8:38 pm
ppnewbie wrote:
Sun Aug 16, 2020 7:46 pm
It’s tough - if I were to start right now. I am not sure I would buy in. One of my investment thesis is to buy things that are cheap. Right now nothing in the PP is cheap. It’s the opposite - very expensive.

It definitely does pose a dilemma to your excellent investment thesis.

Vinny
One thing I really like about this forum is that there is an abundance of very helpful people on the forum and an absence of rudeness and sarcasm. I am hoping this response from vnatale was not meant to be rude or sarcastic.

I simply wanted to provide my perspective to Henryinroad that SPY is possibly highly overvalued and that TLT is potentially dangerously overvalued as well, and GLD is also at near all time highs. Even cash may be overvalued. Also all of these asset classes are positively correlating, which is at the very least unusual and at worst a massive bubble.

I know Tyler has written a article about bond convexity in a negative interest rate environment. Personally, I don't think negative interest rates are possible in the US. An entire consumer and debt based economy reversing so that banks start paying people to take money and depositors start paying banks. The system will freeze unless the government forces people to hold money in the banking system.

https://www.youtube.com/watch?v=4u5Ns4bdTYE - George Gammon discusses this starting at minute 5.

One way I used my "excellent" investment thesis of buying something that is cheap recently is to rebalance a bit into Silver instead of gold. So far so good.
Not at all being sarcastic. Take my words literally. I started a topic asking the same question as you. At some point I find it and point you to it.

Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Re: POLL: How did you overcome the fear of tracking error?

Post by vnatale » Wed Aug 26, 2020 5:02 pm

ppnewbie wrote:
Wed Aug 26, 2020 3:47 pm
vnatale wrote:
Sun Aug 16, 2020 8:38 pm
ppnewbie wrote:
Sun Aug 16, 2020 7:46 pm
It’s tough - if I were to start right now. I am not sure I would buy in. One of my investment thesis is to buy things that are cheap. Right now nothing in the PP is cheap. It’s the opposite - very expensive.

It definitely does pose a dilemma to your excellent investment thesis.

Vinny
One thing I really like about this forum is that there is an abundance of very helpful people on the forum and an absence of rudeness and sarcasm. I am hoping this response from vnatale was not meant to be rude or sarcastic.

I simply wanted to provide my perspective to Henryinroad that SPY is possibly highly overvalued and that TLT is potentially dangerously overvalued as well, and GLD is also at near all time highs. Even cash may be overvalued. Also all of these asset classes are positively correlating, which is at the very least unusual and at worst a massive bubble.

I know Tyler has written a article about bond convexity in a negative interest rate environment. Personally, I don't think negative interest rates are possible in the US. An entire consumer and debt based economy reversing so that banks start paying people to take money and depositors start paying banks. The system will freeze unless the government forces people to hold money in the banking system.

https://www.youtube.com/watch?v=4u5Ns4bdTYE - George Gammon discusses this starting at minute 5.

One way I used my "excellent" investment thesis of buying something that is cheap recently is to rebalance a bit into Silver instead of gold. So far so good.
Here it is. I think I asked essentially the same question. Generated 9 pages of responses. It'd be worth your while to read them.

VInny

viewtopic.php?f=1&t=10129
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Re: POLL: How did you overcome the fear of tracking error?

Post by ppnewbie » Wed Aug 26, 2020 6:36 pm

vnatale wrote:
Wed Aug 26, 2020 5:02 pm
ppnewbie wrote:
Wed Aug 26, 2020 3:47 pm
vnatale wrote:
Sun Aug 16, 2020 8:38 pm
ppnewbie wrote:
Sun Aug 16, 2020 7:46 pm
It’s tough - if I were to start right now. I am not sure I would buy in. One of my investment thesis is to buy things that are cheap. Right now nothing in the PP is cheap. It’s the opposite - very expensive.

It definitely does pose a dilemma to your excellent investment thesis.

Vinny
One thing I really like about this forum is that there is an abundance of very helpful people on the forum and an absence of rudeness and sarcasm. I am hoping this response from vnatale was not meant to be rude or sarcastic.

I simply wanted to provide my perspective to Henryinroad that SPY is possibly highly overvalued and that TLT is potentially dangerously overvalued as well, and GLD is also at near all time highs. Even cash may be overvalued. Also all of these asset classes are positively correlating, which is at the very least unusual and at worst a massive bubble.

I know Tyler has written a article about bond convexity in a negative interest rate environment. Personally, I don't think negative interest rates are possible in the US. An entire consumer and debt based economy reversing so that banks start paying people to take money and depositors start paying banks. The system will freeze unless the government forces people to hold money in the banking system.

https://www.youtube.com/watch?v=4u5Ns4bdTYE - George Gammon discusses this starting at minute 5.

One way I used my "excellent" investment thesis of buying something that is cheap recently is to rebalance a bit into Silver instead of gold. So far so good.
Here it is. I think I asked essentially the same question. Generated 9 pages of responses. It'd be worth your while to read them.

VInny

viewtopic.php?f=1&t=10129
Thanks Vinny! - Read the thread you pointed out. Also got some good perspective in the thread you pointed out about cash actually being the down and out cheap asset at the moment from jhogue.
glennds
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Re: POLL: How did you overcome the fear of tracking error?

Post by glennds » Thu Aug 27, 2020 4:52 am

ppnewbie wrote:
Sun Aug 16, 2020 7:46 pm
It’s tough - if I were to start right now. I am not sure I would buy in. One of my investment thesis is to buy things that are cheap. Right now nothing in the PP is cheap. It’s the opposite - very expensive.
Cheap (or expensive) in relation to what? What it once cost?

I remember meeting a gentleman who said he stopped buying real estate in So Cal in 1967 because it became too expensive.
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jhogue
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Re: POLL: How did you overcome the fear of tracking error?

Post by jhogue » Thu Aug 27, 2020 7:55 am

@ ppnewbie:

Please note that negative interest rates ARE possible in the US. As I write, a 3 month Zero is going for a nominal rate of -0.02%. Real interest rates are actually lower than that (depending how you choose to measure inflation, of course.)

What is a prudent investor to do? One way to hedge against the Fed’s ZIRP is to diversify some of your LTT holdings into EE bonds, which currently carry an astounding 3.53% interest rate (federally guaranteed, federally tax deferred, and state and local tax exempt.)

I note in passing that Warren Buffet can't buy enough EE bonds to make a material difference in his enormous pile of T-bills, but your average investor can. I also think that ZIRP probably explains his recent about-face and sudden interest in Barrick Gold.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: POLL: How did you overcome the fear of tracking error?

Post by PrimalToker » Thu Aug 27, 2020 12:12 pm

glennds wrote:
Thu Aug 27, 2020 4:52 am
ppnewbie wrote:
Sun Aug 16, 2020 7:46 pm
It’s tough - if I were to start right now. I am not sure I would buy in. One of my investment thesis is to buy things that are cheap. Right now nothing in the PP is cheap. It’s the opposite - very expensive.
Cheap (or expensive) in relation to what? What it once cost?

I remember meeting a gentleman who said he stopped buying real estate in So Cal in 1967 because it became too expensive.
People always say the same thing. What I've noticed that although some parts of the PP could be expensive, one part is always inexpensive. That's how it works, non-correlated assets. It's just a guess on which one that is... If I had to pick right now it would be gold as the inexpensive asset. When it's $15,000 an ounce $2000 will seem cheap.
glennds
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Re: POLL: How did you overcome the fear of tracking error?

Post by glennds » Thu Aug 27, 2020 12:43 pm

PrimalToker wrote:
Thu Aug 27, 2020 12:12 pm
glennds wrote:
Thu Aug 27, 2020 4:52 am
ppnewbie wrote:
Sun Aug 16, 2020 7:46 pm
It’s tough - if I were to start right now. I am not sure I would buy in. One of my investment thesis is to buy things that are cheap. Right now nothing in the PP is cheap. It’s the opposite - very expensive.
Cheap (or expensive) in relation to what? What it once cost?

I remember meeting a gentleman who said he stopped buying real estate in So Cal in 1967 because it became too expensive.
People always say the same thing. What I've noticed that although some parts of the PP could be expensive, one part is always inexpensive. That's how it works, non-correlated assets. It's just a guess on which one that is... If I had to pick right now it would be gold as the inexpensive asset. When it's $15,000 an ounce $2000 will seem cheap.
Well I suppose the act of re-balancing forces you to sell the expensive asset(s) that have run up in price and buy the inexpensive asset(s) that is probably out of favor. Unless of course, all of the assets are moving up together which has happened before, in which case you would not be re-balancing.
With a strategy like the Permanent Portfolio, I'm not quite sure how the concept of expensive is relevant. The idea is to have 25% =/- exposure to all four asset classes all the time. Unless I'm missing something, performing an analysis and making a decision about what is and is not expensive is not part of the process.

On the other hand, if you think something has fundamentally changed about one or more of the assets, and as a result the premise underlying the PP is no longer sound, then it seems to me you would be searching for a new strategy entirely and at that point it's a whole new ball game.
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