Re: Help me get over my fear of LTTs
Posted: Mon Dec 16, 2019 2:04 am
no , a funds duration is the average of all the bonds traded or not ...
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https://gyroscopicinvesting.com/forum/viewtopic.php?f=3&t=10275
Pet Hog wrote: ↑Wed Dec 11, 2019 7:30 pmHi mdwilson1991
In my opinion, an important part of investing in the PP or GB is considering the performance of the total portfolio, as a whole, and not that of its individual components -- one or more of which will inevitably be sucking at any one time. Perhaps it will be LTTs that will suck in the next few years. Who knows? Try not to fall in or out of love with any of the assets.
Are we in a low-rate environment? Historically, yes. But in a few years we might look back fondly at LTT rates of 2.25% as the good old days. For decades people have been saying that LTT rates have nowhere to go but up. The "low" rates today reflect the consensus opinion of all the investors in the world. So that means rates are neither low nor high, but just right for today's economic conditions, as best as we can judge.
If, however, rates do go up, that means that the value of existing LTTs will go down, and the PP investor will be buying more of them as the lagging asset (either when adding new funds or rebalancing). The investor will now have LTTs earning a higher rate. That's a benefit going forward.
I like to consider the numbers when thinking about these things. Thirty-year treasuries have a yield of about 2.25% today. They have a duration of about 20 years. There's a rule of thumb that duration can be considered approximately equal to the percentage movement of bond value in response to a 1% move in interest rates. Let's say interest rates go up dramatically -- say by 4% in the next 12 months. That's four 1% moves, each time decreasing the bond value by about 20% (i.e., retaining only 80% of the value). That compounds to about 40% bond value after a year. If you have a PP originally worth $400,000, then the $100,000 in LTTs would go down to about $40,000 when the LTT rate reaches 6.25%. Total portfolio value would be $340,000 (assuming no responses from gold, stocks, and cash -- in actuality I'd expect them to soften the blow). That's a PP loss of 15%. Bad by PP standards, sure, but not that bad by traditional investing standards. You'd rebalance by buying $45,000 of new LTTs; you'd now own $85,000 in LTTs earning 6.25%. If rates go down from there, you'll do well; if they go up further, at least you'll be offset by those juicy coupon payments.
I don't think this is the first time I've read in the forum you advocating that.
Is this one of the Permanent Portfolio's "life lessons"?mdwilson1991 wrote: ↑Wed Dec 11, 2019 4:04 pmHi folks,
I've been reading here a while, read Best Laid Plans, Rowland's book. I've been trying to pull the trigger and move to the PP or a variation, like GB.
I can't seem to get past my fear (perhaps irrational ) of the long term treasuries.
I know stocks can crash and stay there for ages. But somehow the fact that bond returns are inverse to interest rate movements, coupled with us being in a low rate environment really makes long bonds scary.
I don't currently hold TLT or an equivalent, and the thought of dumping 20+% into it and watching it get crushed for the rest of my life if rates move up...
I try to think of it in terms of stocks - they can move rapidly down as well, but they don't have that direct tie to the interest rate environment we are in.
Can anyone offer some words to help me calm my fears? Thanks---
stuper1 wrote: ↑Thu Apr 23, 2020 8:33 pmIt certainly is one of the lessons. People now will look at the price today and say that it has only one direction to go -- down. However, the PP is agnostic and believes it has a 50/50 chance of going either direction. In other words, the market price is reasonably efficient. Half the market thinks it will go up; half thinks it will go down.
You are absolutely right it is a lesson. No one has any idea WTF will happen. Fortunately (at the moment ) I took the plunge and bought FNBGX,which is in my view pretty equivalent to TLT, before things started to blow up.vnatale wrote: ↑Thu Apr 23, 2020 7:09 pmIs this one of the Permanent Portfolio's "life lessons"?mdwilson1991 wrote: ↑Wed Dec 11, 2019 4:04 pmHi folks,
I've been reading here a while, read Best Laid Plans, Rowland's book. I've been trying to pull the trigger and move to the PP or a variation, like GB.
I can't seem to get past my fear (perhaps irrational ) of the long term treasuries.
I know stocks can crash and stay there for ages. But somehow the fact that bond returns are inverse to interest rate movements, coupled with us being in a low rate environment really makes long bonds scary.
I don't currently hold TLT or an equivalent, and the thought of dumping 20+% into it and watching it get crushed for the rest of my life if rates move up...
I try to think of it in terms of stocks - they can move rapidly down as well, but they don't have that direct tie to the interest rate environment we are in.
Can anyone offer some words to help me calm my fears? Thanks---
The day this post was written (December 11, 2019) TLT's price was: $139.75. Today 170.44. A 21% increase in four months!
Vinny