The Less Pretty Bond Thread

Discussion of the Bond portion of the Permanent Portfolio

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Ad Orientem
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Re: The Bond Dream Room

Post by Ad Orientem » Wed May 06, 2020 10:12 am

sophie wrote:
Wed May 06, 2020 10:04 am
Ad Orientem wrote:
Tue May 05, 2020 7:47 pm
Wharton’s Jeremy Siegel declares end to the 40-year bull market in bonds

https://www.cnbc.com/2020/05/05/forty-y ... iegel.html
If I had a dime for every article published in the past 10 years saying exactly the same thing, I wouldn't have to buy any bonds.

LOL. I can remember similar predictions back in the 90s when yields fell all the way to 7%. In this case though, my gut says he is right. The bond market seems to have become divorced from economic reality. The world is drowning in debt and we are likely facing a wave of defaults and bankruptcies. The only thing preventing a bond market rout is the Fed and its printing press. How long can that can continue? For now it seems ok and maybe even necessary. But eventually they will have to slow the flow of free money or risk sparking inflation. Looking at this from a long term perspective I think bonds have become exactly what they are not supposed to be... high risk and very low return.
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Re: The Bond Dream Room

Post by bedraggled » Wed May 06, 2020 11:26 am

Could somebody or many of you comment on the bond structure collapsing. All those unpaid bonds and interest payments missed might manifest as deflation. Kinda reminds me of 1929-1932.

Interest rates did spike in 1930 as bankers only wanted to lend to the best borrowers; the bankers then found out there were no borrowers, so rates plummeted.

Bonds may be a great place to wallow.

Thanks.
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Re: The Bond Dream Room

Post by pmward » Wed May 06, 2020 11:36 am

bedraggled wrote:
Wed May 06, 2020 11:26 am
Could somebody or many of you comment on the bond structure collapsing. All those unpaid bonds and interest payments missed might manifest as deflation. Kinda reminds me of 1929-1932.

Interest rates did spike in 1930 as bankers only wanted to lend to the best borrowers; the bankers then found out there were no borrowers, so rates plummeted.

Bonds may be a great place to wallow.

Thanks.
Yes this is exactly how it works. Treasuries perform great in this scenario. Corporates, mortgage backed, junk bonds, ext will implode though. All the money coming out of those riskier bonds will wind up in treasuries, so there would be a massive bid.
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Re: The Bond Dream Room

Post by bedraggled » Wed May 06, 2020 11:47 am

Maybe this current interest rate increase leads to a significant increase in the prices of LTTs. This could be the first swoon in one of Harry's 4 categories for me... but maybe not. This ain't dull.
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Re: The Bond Dream Room

Post by Tortoise » Wed May 06, 2020 12:27 pm

Remember, the Fed recently announced that it would start buying corporate bonds if needed. So there's that.
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Re: The Bond Dream Room

Post by pmward » Wed May 06, 2020 12:53 pm

Tortoise wrote:
Wed May 06, 2020 12:27 pm
Remember, the Fed recently announced that it would start buying corporate bonds if needed. So there's that.
That doesn't necessarily stop what I've stated. If they buy those corporate bonds, they are buying them from institutions, and those institutions are likely to take the cash and funnel it into treasuries. It may place a floor on losses in the corporate/junk/mortgage backed bond markets, but it still juices the treasury market.
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Re: The Bond Dream Room

Post by mukramesh » Wed May 06, 2020 3:34 pm

Aren't low rates just the result of asset price inflation -> the same that has been seen in stocks, gold, real estate, etc.? Why should the bond bull market be over but bull markets?
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Re: The Bond Dream Room

Post by pmward » Wed May 06, 2020 3:45 pm

mukramesh wrote:
Wed May 06, 2020 3:34 pm
Aren't low rates just the result of asset price inflation -> the same that has been seen in stocks, gold, real estate, etc.? Why should the bond bull market be over but bull markets?
There are multiple factors that go into the price of bonds, but that certainly is a big one.
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Re: The Bond Dream Room

Post by Kevin K. » Fri May 08, 2020 10:16 am

So given all of these well-made points (and on the heels of the Dalio article I posted which goes into granular detail about money printing and fiat currencies in general) might a prudent "tweak" for these times be to maintain the PP bond barbell but with 15-20% in LTT's? At ~1.6% there's still a chance for them to give spectacular returns if rates drop to 0 or lower but conversely you limit the devastation that'd happen if rates spike by holding a lower percentage than the 25% the PP calls for.
Certainly seems like a better approach than going all ITT's.
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Re: The Bond Dream Room

Post by Vil » Sun May 10, 2020 8:19 am

pmward wrote:
Wed May 06, 2020 3:45 pm
There are multiple factors that go into the price of bonds
As I haven't received the notification email from Fed (they promised me, but anyway... :D ) and as certainly you have more information than me - what's going on with their plans to buy corporate bonds ? Is that only a word (even though widely spread) or any real actions taken ? Can see that HYG and HYLB has quite an increase of AUMs in the last week - 6.84% and 8.41% respectively.. how do you see things going with high yield bonds ?
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Re: The Bond Dream Room

Post by pmward » Sun May 10, 2020 8:32 am

Vil wrote:
Sun May 10, 2020 8:19 am
pmward wrote:
Wed May 06, 2020 3:45 pm
There are multiple factors that go into the price of bonds
As I haven't received the notification email from Fed (they promised me, but anyway... :D ) and as certainly you have more information than me - what's going on with their plans to buy corporate bonds ? Is that only a word (even though widely spread) or any real actions taken ? Can see that HYG and HYLB has quite an increase of AUMs in the last week - 6.84% and 8.41% respectively.. how do you see things going with high yield bonds ?
If what the stock market is telling us is true, and they provided enough stimulus to pull though this deep recession quickly, then I see no reason why high yield won't do well going forward (at least until the inevitable day we do finally get a real corporate debt deleveraging), especially with the backstop from the Fed. I have not looked at the exact purchase numbers from the Fed, I was listening to a podcast though where someone that works as a high yield market maker said the day the Fed announced they were buying high yield their phone was off the hook with institutions wanting to buy high yield as well. The Fed might not have to buy as much as we think, as just them announcing they are buying attracts money as institutions like to bet with the Fed.

This is also unprecedented here in the U.S. so who knows how it will play out in the end? Might be worthwhile seeing how they performed in Japan after the central bank started purchasing. We really are following the Japanese blueprint... and their yields are still low and bonds have still performed well for years. Why do we expect to be any different?
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Re: The Bond Dream Room

Post by boglerdude » Sat Aug 22, 2020 4:21 am

Why should I be buying EDV yielding 1.3% when I could pay down my 2% mortgage?
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Re: The Bond Dream Room

Post by mathjak107 » Sat Aug 22, 2020 6:04 am

boglerdude wrote:
Sat Aug 22, 2020 4:21 am
Why should I be buying EDV yielding 1.3% when I could pay down my 2% mortgage?
potential capital gains ..

look at TLT . .. yelds are tiny ... gains ytd and the last year are huge. interest on a mortgage is also on a declining balance getting less and less .

in the last 6 months someone made more than 15 years interest on that mortgage in tlt even with very low yields
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Re: The Bond Dream Room

Post by Kbg » Sat Aug 22, 2020 9:22 am

mathjak107 wrote:
Sat Aug 22, 2020 6:04 am
boglerdude wrote:
Sat Aug 22, 2020 4:21 am
Why should I be buying EDV yielding 1.3% when I could pay down my 2% mortgage?
potential capital gains ..

look at TLT . .. yelds are tiny ... gains ytd and the last year are huge. interest on a mortgage is also on a declining balance getting less and less .

in the last 6 months someone made more than 15 years interest on that mortgage in tlt even with very low yields
This one is easy. If we assume nothing, pay down/off the mortgage. It’s a no brainer with a .7% comparative profit.

Every other possible option requires assuming something. Two more no brainers.

Interest rates go down, keep TLT and refinance if they really go down again.

Interest rates go up, too late your TLT position got hammered, and you have very cheap mortgage and likely negative yielding for the life of the loan.
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Re: The Bond Dream Room

Post by mathjak107 » Sat Aug 22, 2020 1:10 pm

the problem most have who are trying to decide whether to invest or pay off the mortgage or even pay cash or take a mortgage is they fail to realize they are borrowing money in effect to invest .

there is a big difference in what i want as a risk premium over using my own money vs leveraging with borrowed money .

it is not just business as usual where if i beat the mortgage interest i am a head .

if a risk free treasury is paying 2% as an example i would want at least a 3% risk premium for using borrowed money via the mortgauge .

add on the interest from the mortgage and i would want 6-7% .......

so , would i invest in anything but 100% equities today ? nope ..... not enough risk premium long term in balanced portfolio's for my taste .

kitces did a good job bringing this risk premium to light and emphasizing this is not just investing . this is borrowing money to invest



https://www.kitces.com/blog/why-keeping ... -the-risk/
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Re: The Bond Dream Room

Post by Kbg » Sat Aug 22, 2020 2:47 pm

If we assume nothing is the operative phrase here.

The math is the math. Bond debates are stupid. Without fail they always end up with assumptions being made.

There is one big difference. You chose to buy a long bond or an ETF. If you don't pay your mortgage you get kicked out of the house and they take your equity.

So I made an unstated assumption as well...you have a job or the ability to pay off your mortgage.

Personally, I don't think there really is a right or wrong bonds/investments vs. your mortgage answer. There is some straight forward math that is easy enough to do and everyone should do. They should thoroughly understand the pros and cons of both and then make the choice that best fits their personal situation and psyche.
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Re: The Bond Dream Room

Post by Lonestar » Tue Sep 01, 2020 6:24 pm

Pardon me for kinda jumping off subject here, but what are some of the possible reasons that could cause short to intermediate term treasury rates to increase in the near term?

With the additional debt the government has amassed during the Covid pandemic, added to the already staggering national debt, it seems it would almost be impossible for them to service their debt obligation under higher rates.

Now I realize it's the Fed that influences the rates, not the U.S. government, but still, you know there has got to be some "collaboration".
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Re: The Bond Dream Room

Post by Smith1776 » Tue Sep 01, 2020 8:32 pm

It wouldn't surprise me if LTTs ended up being the best performing asset over the next 5 years.

I can easily see a scenario where a deflationary spiral causes LTTs to experience a modest nominal gain and impressive real gain as the other major asset classes collapse.

Even if LTTs have little upside left they can still be the winner if everything else in the portfolio crashes.

I'm not saying the above WILL happen of course, but it's always useful to paint a mental picture of all the things you imagine COULD happen. And ultimately I don't know which future will materialize, so I'm happy to continue holding the PP and go about my business.
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Re: The Bond Dream Room

Post by Xan » Tue Sep 01, 2020 9:31 pm

That could be, Smith.

It could be (either instead or also?) that LTTs are bounded on both sides for a long time: they can't go up because the government wouldn't want high interest payments, and they can't go down because zero is a boundary of some kind.

If that's the case, and it's MediumTex's game of ping-pong for a while where small changes in yield result in outsized (but not too huge) changes in value, then I'm considering doing a frequent (daily? weekly?) rebalance between cash and LTTs. Every day (or whenever), make it so your cash and LTTs have the same value as each other. That would allow you to capture the gains from the range-bound volatility.
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Re: The Bond Dream Room

Post by modeljc » Wed Sep 02, 2020 3:58 pm

Xan wrote:
Tue Sep 01, 2020 9:31 pm
That could be, Smith.

It could be (either instead or also?) that LTTs are bounded on both sides for a long time: they can't go up because the government wouldn't want high interest payments, and they can't go down because zero is a boundary of some kind.

If that's the case, and it's MediumTex's game of ping-pong for a while where small changes in yield result in outsized (but not too huge) changes in value, then I'm considering doing a frequent (daily? weekly?) rebalance between cash and LTTs. Every day (or whenever), make it so your cash and LTTs have the same value as each other. That would allow you to capture the gains from the range-bound volatility.
Thanks! I like the idea. I'm a little low on Cash and would love to add to it little by little. Let's do this weekly so how do you implement a plan. Can you give the board an example. Let's start with $100,000 in Cash and $100,000 in LTTs. If LTTs go down 2% for the week do you take cash and buy enought to equal your cash? Or do you only sell LTTs when they are above your cash level. I'm a little fuzzy pls. help.
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Re: The Bond Dream Room

Post by Xan » Wed Sep 02, 2020 8:47 pm

modeljc wrote:
Wed Sep 02, 2020 3:58 pm
Xan wrote:
Tue Sep 01, 2020 9:31 pm
That could be, Smith.

It could be (either instead or also?) that LTTs are bounded on both sides for a long time: they can't go up because the government wouldn't want high interest payments, and they can't go down because zero is a boundary of some kind.

If that's the case, and it's MediumTex's game of ping-pong for a while where small changes in yield result in outsized (but not too huge) changes in value, then I'm considering doing a frequent (daily? weekly?) rebalance between cash and LTTs. Every day (or whenever), make it so your cash and LTTs have the same value as each other. That would allow you to capture the gains from the range-bound volatility.
Thanks! I like the idea. I'm a little low on Cash and would love to add to it little by little. Let's do this weekly so how do you implement a plan. Can you give the board an example. Let's start with $100,000 in Cash and $100,000 in LTTs. If LTTs go down 2% for the week do you take cash and buy enought to equal your cash? Or do you only sell LTTs when they are above your cash level. I'm a little fuzzy pls. help.
I'm not actually doing it; it's just an idea I've kicked around a little.

You could do it any which way, but the way I envision, each week (or whenever), you would buy or sell enough LTTs such that your cash and LTTs were the same as each other. Then normal "rebalance everything" rules would apply if stocks or gold (or I suppose both cash and LTT at the same time) hit a normal rebalancing band.

Of course this would not be very tax-friendly: the gains would be short-term gains. That's better than no gains, of course. Before doing it, I'd want to do some more modeling on what happens if I'm wrong, and LTTs either go way up or way down rather than being range-bound.
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Re: The Bond Dream Room

Post by dualstow » Thu Sep 03, 2020 8:36 am

{from a Stock thread}
sophie wrote:
Thu Sep 03, 2020 8:25 am
Guess I should keep an eye on the allocations if you guys are all rebalancing. I'm within a couple percentage points of bonds crossing the low end of the band.
Do you know what you’re going to buy, Sophie? Bonds or bond ETFs?
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Re: The Bond Dream Room

Post by modeljc » Sat Sep 05, 2020 3:10 pm

Xan wrote:
Wed Sep 02, 2020 8:47 pm
modeljc wrote:
Wed Sep 02, 2020 3:58 pm
Xan wrote:
Tue Sep 01, 2020 9:31 pm
That could be, Smith.

It could be (either instead or also?) that LTTs are bounded on both sides for a long time: they can't go up because the government wouldn't want high interest payments, and they can't go down because zero is a boundary of some kind.

If that's the case, and it's MediumTex's game of ping-pong for a while where small changes in yield result in outsized (but not too huge) changes in value, then I'm considering doing a frequent (daily? weekly?) rebalance between cash and LTTs. Every day (or whenever), make it so your cash and LTTs have the same value as each other. That would allow you to capture the gains from the range-bound volatility.
Thanks! I like the idea. I'm a little low on Cash and would love to add to it little by little. Let's do this weekly so how do you implement a plan. Can you give the board an example. Let's start with $100,000 in Cash and $100,000 in LTTs. If LTTs go down 2% for the week do you take cash and buy enought to equal your cash? Or do you only sell LTTs when they are above your cash level. I'm a little fuzzy pls. help.
I'm not actually doing it; it's just an idea I've kicked around a little.

You could do it any which way, but the way I envision, each week (or whenever), you would buy or sell enough LTTs such that your cash and LTTs were the same as each other. Then normal "rebalance everything" rules would apply if stocks or gold (or I suppose both cash and LTT at the same time) hit a normal rebalancing band.

Of course this would not be very tax-friendly: the gains would be short-term gains. That's better than no gains, of course. Before doing it, I'd want to do some more modeling on what happens if I'm wrong, and LTTs either go way up or way down rather than being range-bound.
I did a six month, weekly paper trade starting with $100,000 in Cash and $100,000 in TLT. I did not change if the week did not produce at least 1%. Lots of price change ranging from 1.0% to 7.3% per week. 42.7% total up or down. But I did not make but $176 or .17% over buy and hold. The shares in TLT went down from 686 to 643 or -6.3%. Started Sept 2, 2019 to Feb 28, 2020. This seemed to hold a lot of promise for a tax free account and pick up a lot of action if TLT is range bound. It seems the number of shares involved are to small to make much difference. Buying or selling between 1.47 shares and 11.46 shares. Any ideas to cpature more Dollar action?
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Re: The Bond Dream Room

Post by Xan » Sat Sep 05, 2020 3:19 pm

modeljc wrote:
Sat Sep 05, 2020 3:10 pm
Xan wrote:
Wed Sep 02, 2020 8:47 pm
modeljc wrote:
Wed Sep 02, 2020 3:58 pm
Xan wrote:
Tue Sep 01, 2020 9:31 pm
That could be, Smith.

It could be (either instead or also?) that LTTs are bounded on both sides for a long time: they can't go up because the government wouldn't want high interest payments, and they can't go down because zero is a boundary of some kind.

If that's the case, and it's MediumTex's game of ping-pong for a while where small changes in yield result in outsized (but not too huge) changes in value, then I'm considering doing a frequent (daily? weekly?) rebalance between cash and LTTs. Every day (or whenever), make it so your cash and LTTs have the same value as each other. That would allow you to capture the gains from the range-bound volatility.
Thanks! I like the idea. I'm a little low on Cash and would love to add to it little by little. Let's do this weekly so how do you implement a plan. Can you give the board an example. Let's start with $100,000 in Cash and $100,000 in LTTs. If LTTs go down 2% for the week do you take cash and buy enought to equal your cash? Or do you only sell LTTs when they are above your cash level. I'm a little fuzzy pls. help.
I'm not actually doing it; it's just an idea I've kicked around a little.

You could do it any which way, but the way I envision, each week (or whenever), you would buy or sell enough LTTs such that your cash and LTTs were the same as each other. Then normal "rebalance everything" rules would apply if stocks or gold (or I suppose both cash and LTT at the same time) hit a normal rebalancing band.

Of course this would not be very tax-friendly: the gains would be short-term gains. That's better than no gains, of course. Before doing it, I'd want to do some more modeling on what happens if I'm wrong, and LTTs either go way up or way down rather than being range-bound.
I did a six month, weekly paper trade starting with $100,000 in Cash and $100,000 in TLT. I did not change if the week did not produce at least 1%. Lots of price change ranging from 1.0% to 7.3% per week. 42.7% total up or down. But I did not make but $176 or .17% over buy and hold. The shares in TLT went down from 686 to 643 or -6.3%. Started Sept 2, 2019 to Feb 28, 2020. This seemed to hold a lot of promise for a tax free account and pick up a lot of action if TLT is range bound. It seems the number of shares involved are to small to make much difference. Buying or selling between 1.47 shares and 11.46 shares. Any ideas to cpature more Dollar action?
Very informative, thanks!

What if instead of doing the mini-rebalance (that is, the cash/bonds rebalance) weekly, you check weekly, and only execute if they're out of proportion by some amount. A rebalancing band for this mini-rebalance, if you will.
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Re: The Bond Dream Room

Post by modeljc » Sat Sep 05, 2020 6:35 pm

Xan wrote:
Sat Sep 05, 2020 3:19 pm
modeljc wrote:
Sat Sep 05, 2020 3:10 pm
Xan wrote:
Wed Sep 02, 2020 8:47 pm
modeljc wrote:
Wed Sep 02, 2020 3:58 pm
Xan wrote:
Tue Sep 01, 2020 9:31 pm
That could be, Smith.

It could be (either instead or also?) that LTTs are bounded on both sides for a long time: they can't go up because the government wouldn't want high interest payments, and they can't go down because zero is a boundary of some kind.

If that's the case, and it's MediumTex's game of ping-pong for a while where small changes in yield result in outsized (but not too huge) changes in value, then I'm considering doing a frequent (daily? weekly?) rebalance between cash and LTTs. Every day (or whenever), make it so your cash and LTTs have the same value as each other. That would allow you to capture the gains from the range-bound volatility.
Thanks! I like the idea. I'm a little low on Cash and would love to add to it little by little. Let's do this weekly so how do you implement a plan. Can you give the board an example. Let's start with $100,000 in Cash and $100,000 in LTTs. If LTTs go down 2% for the week do you take cash and buy enought to equal your cash? Or do you only sell LTTs when they are above your cash level. I'm a little fuzzy pls. help.
I'm not actually doing it; it's just an idea I've kicked around a little.

You could do it any which way, but the way I envision, each week (or whenever), you would buy or sell enough LTTs such that your cash and LTTs were the same as each other. Then normal "rebalance everything" rules would apply if stocks or gold (or I suppose both cash and LTT at the same time) hit a normal rebalancing band.

Of course this would not be very tax-friendly: the gains would be short-term gains. That's better than no gains, of course. Before doing it, I'd want to do some more modeling on what happens if I'm wrong, and LTTs either go way up or way down rather than being range-bound.
I did a six month, weekly paper trade starting with $100,000 in Cash and $100,000 in TLT. I did not change if the week did not produce at least 1%. Lots of price change ranging from 1.0% to 7.3% per week. 42.7% total up or down. But I did not make but $176 or .17% over buy and hold. The shares in TLT went down from 686 to 643 or -6.3%. Started Sept 2, 2019 to Feb 28, 2020. This seemed to hold a lot of promise for a tax free account and pick up a lot of action if TLT is range bound. It seems the number of shares involved are to small to make much difference. Buying or selling between 1.47 shares and 11.46 shares. Any ideas to cpature more Dollar action?
Very informative, thanks!

What if instead of doing the mini-rebalance (that is, the cash/bonds rebalance) weekly, you check weekly, and only execute if they're out of proportion by some amount. A rebalancing band for this mini-rebalance, if you will.
There were 8weeks that did not change 1.0% so I did nothing until the next week. The changes per week averaged 2.5% and there was 17 trades. The money invoved ranged $505 to $3815. To small to move the needle. Even if you play like you do 20 times more than the signals I don't think you can make this work. But I like this concept. Wish I could program this so the work would be quicker. I may have some errors at age 83! Thanks as I have been thinking along the same lines. 25% waiting for a buy oppuntornity and 25% in a ping- pong game. 50% that may be bounded for 5+ years or more.
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