Bond barbell vs. other options

Discussion of the Bond portion of the Permanent Portfolio

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Kevin K.
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Bond barbell vs. other options

Post by Kevin K. » Fri Nov 11, 2022 6:21 pm

I'm interested in revisiting the classic long-term Treasury/money market barbell. I don't mean to incur the wrath of any "stay the course no matter what" purists but I'm under the impression that many of us "fudge" these allocations to some degree anyway.

Way back when the permissible level of fudging (per Mssrs. Rowland and Lawson) was switching out the MM fund for short-term Treasuries. Next level fudging would be substituting intermediate-term Treasuries for all or nearly all of the barbell, which historically yielded essentially identical returns but with a lot less volatility.

We seem to be at or past the end of the ~40 year tailwind for bonds that benefitted not just the PP but most other portfolios. And 2022 has certainly shown - with a vengeance - that those who thought LTT's would zig when equities zagged didn't know their market history.

Personally I tend to think the barbell recommendation reflected what made sense in Browne's time - or indeed in any "normal" timeframe for bonds. But we haven't been there since the great financial crisis and with TBills paying better than 30 year bonds and long-term TIPS offering better risk-adjusted returns than not just nominals but the entire PP it would appear the world has changed.
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Re: Bond barbell vs. other options

Post by Hal » Sat Nov 12, 2022 12:25 am

Kevin K. wrote:
Fri Nov 11, 2022 6:21 pm
And 2022 has certainly shown - with a vengeance - that those who thought LTT's would zig when equities zagged didn't know their market history.
Hi Kevin,
Let me pose this question. Do you think the premise the PP was founded on is still valid? That is, LTT's do well in deflation/Gold in Inflation/Cash in Tight Money recession and Shares for prosperity.

So "down under", I would say we are entering a tight money scenario, and the bond barbell is acting as expected. What are your/forum members experiences in the USA?
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Re: Bond barbell vs. other options

Post by Kevin K. » Sat Nov 12, 2022 9:12 am

Hal wrote:
Sat Nov 12, 2022 12:25 am
Kevin K. wrote:
Fri Nov 11, 2022 6:21 pm
And 2022 has certainly shown - with a vengeance - that those who thought LTT's would zig when equities zagged didn't know their market history.
Hi Kevin,
Let me pose this question. Do you think the premise the PP was founded on is still valid? That is, LTT's do well in deflation/Gold in Inflation/Cash in Tight Money recession and Shares for prosperity.

So "down under", I would say we are entering a tight money scenario, and the bond barbell is acting as expected. What are your/forum members experiences in the USA?
Hi Hal,

I'm sure others here will have more insightful things to share but here's my answer to those very good questions:

1. I don't dispute that LTT's are good for deflation but deflation is (as William Bernstein goes to great pains to explain in his book "Deep Risk") a rare and short-lived event, historically and probabilistically. It makes no sense to dedicate a full 25% of one's assets to insuring against it. And as we've seen this year, the downside potential of LTT's with coupons so tiny to begin with in a rising interest rate environment is huge. Personally I don't think Browne would ever have advocated owning LTT's with negative real returns - meaning they'd have been excluded from the PP for many years now.

2. Browne was flat-out wrong in claiming that gold is an inflation hedge. It is however a currency-debasement and SHTF hedge and a uniquely, truly uncorrelated asset. Tyler @ Portfolio Charts wrote the best article I've seen for showing why it's still such a useful asset even if not for Browne's stated reasons:

https://portfoliocharts.com/2020/08/21/ ... e-of-gold/

3. Cash for "tight money"? Sure but as Tyler showed in another article it's also a reasonably-good inflation hedge and invaluable for rebalancing and living expenses. Not, however, to the tune of a full 25% of a portfolio - which is why most PP'ers have largely or totally replaces the money market specified by Browne with short-term Treasuries.

4. Shares for prosperity? Absolutely, though Total Stock Market is way too dominated by the FAANG stocks and I'd bet Browne would've enthusiastically endorsed diversifying it with small-cap value as Tyler does in the Golden Butterfly.

IMHO the principles that Browne offered that are not just sound but brilliant are those related to truly diversifying one's assets beyond stocks and bonds, not investing in things one doesn't understand, being conservative with money one can't afford to lose while also having play money and so on. But the specific PP assets and percentages, in my opinion anyway, were very much a product of the times he lived in and so are subject to change and improvement. Which is to say I don't think "Permanent" applies to anything but some of the principles.
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Re: Bond barbell vs. other options

Post by welderwannabe » Sat Nov 12, 2022 12:04 pm

Its been a rough year for LTTs. It makes my stock losses look small.

However, in march of 2020 when the pandemic panic was at its peak (with people sanitizing their mail) I really liked how the LTTs performed. Their performance allowed me to rebalance into the stock downturn and I made some good money.

Personally, im a fake PPer. My cash is my cash, I keep what I need to feel comfortable and dont keep it strictly at 25%. My non cash portion is 60% stocks, 20% gold, 20% LTT. Thats what works for me.

You have had to have balls of steel to stick with LTT's this last year. Especially in my case, since I started the PP about 5 years ago and started buying 10 year Treasurys then, so my average maturity is about 27.5 years...my moves have been more than someone just in TLT. Painful for everyone nonetheless.
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Re: Bond barbell vs. other options

Post by vnatale » Sat Nov 12, 2022 5:24 pm

welderwannabe wrote:
Sat Nov 12, 2022 12:04 pm

Its been a rough year for LTTs. It makes my stock losses look small.

However, in march of 2020 when the pandemic panic was at its peak (with people sanitizing their mail) I really liked how the LTTs performed. Their performance allowed me to rebalance into the stock downturn and I made some good money.

Personally, im a fake PPer. My cash is my cash, I keep what I need to feel comfortable and dont keep it strictly at 25%. My non cash portion is 60% stocks, 20% gold, 20% LTT. Thats what works for me.

You have had to have balls of steel to stick with LTT's this last year. Especially in my case, since I started the PP about 5 years ago and started buying 10 year Treasurys then, so my average maturity is about 27.5 years...my moves have been more than someone just in TLT. Painful for everyone nonetheless.


That is SOME statement!
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: Bond barbell vs. other options

Post by Hal » Sun Nov 13, 2022 1:20 am

Kevin K. wrote:
Sat Nov 12, 2022 9:12 am
IMHO the principles that Browne offered that are not just sound but brilliant are those related to truly diversifying one's assets beyond stocks and bonds, not investing in things one doesn't understand, being conservative with money one can't afford to lose while also having play money and so on. But the specific PP assets and percentages, in my opinion anyway, were very much a product of the times he lived in and so are subject to change and improvement. Which is to say I don't think "Permanent" applies to anything but some of the principles.
Thanks for your detailed post Kevin,

Here's some random thoughts from an Aussie perspective.

LTT's. For the money supply to decrease, hence increasing the LTT value, a lot of credit would have to be destroyed. What is the likelihood the Reserve Bank would not start the money printer and just let a large share of the bond market default. Remote I suspect.... Also in Australia, I have not found an ETF of currency hedged, LT US treasuries.... I am not going to rely on Aussie LTT's since we only constitute about 2% of the worlds GDP.

Secondly, according to these two links, bonds and shares "are not" negatively correlated over longer timeframes.
https://www.idiosyncraticwhisk.com/2014 ... ation.html
https://www.youtube.com/watch?v=rUJbORKUwvs

Gold. Agreed. It offers very little inflation protection. If Australia's inflation rate went to 1000% our economy is so small it would not affect the gold price. I think of gold as just another currency. I do like its long term negative correlation to shares as well.

Cash. Agreed. There are no treasury money market funds down here. The only option is short term AUD treasuries. Or rely on the totally unfunded bank deposit guarantee insurance..... If you believe that, I have a bridge down here I would like to sell to you! 25% Cash - way to high of an allocation in my opinion.

Shares. Once again, little choice down here. It is getting better though. I use the etf's integrated in VDCO for greater diversification.

Summing up, I could be easily convinced to implement a portfolio of say 50% International Shares, 30% Gold, 20% or less Short Term AUD treasuries. The main reason being the long term correlation between stocks and bonds,

PS: thanks to welderwannabe for his comments as well.
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Re: Bond barbell vs. other options

Post by welderwannabe » Sun Nov 13, 2022 6:34 am

Hal wrote:
Sun Nov 13, 2022 1:20 am
Gold. Agreed. It offers very little inflation protection. If Australia's inflation rate went to 1000% our economy is so small it would not affect the gold price. I think of gold as just another currency. I do like its long term negative correlation to shares as well.
I know this is in the bond section but...

I feel what kept gold from performing as well this cycle was the US dollar strength relative to other currencies. If that happens every time, you're going to be right.
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Re: Bond barbell vs. other options

Post by Kevin K. » Sun Nov 13, 2022 9:12 am

welderwannabe wrote:
Sun Nov 13, 2022 6:34 am
Hal wrote:
Sun Nov 13, 2022 1:20 am
Gold. Agreed. It offers very little inflation protection. If Australia's inflation rate went to 1000% our economy is so small it would not affect the gold price. I think of gold as just another currency. I do like its long term negative correlation to shares as well.
I know this is in the bond section but...

I feel what kept gold from performing as well this cycle was the US dollar strength relative to other currencies. If that happens every time, you're going to be right.
That's a really good point welderwannabe and I appreciate you bringing it up. I've seen a few people pointing out that gold has actually been one of the better-performing assets this year if one takes into account the U.S. dollar's rapid ascent in value on the Bogleheads forums where gold-bashing is par for the course and.....crickets.

Thanks also Hal for sharing your thoughts and giving us all a sense of just how challenging it is to implement the PP and indeed many other portfolios overseas. Everything you're doing makes sense to me. And I can see where real assets other than gold - say rental real estate or the right kind of REITs, or farmland (especially if it's being used to grow weed?) - might make sense. Wonder what an Aussie version of the Talmud portfolio would look like - or for that matter Tyler's Pinwheel portfolio, which is super diversified.
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Re: Bond barbell vs. other options

Post by Kbg » Tue Nov 15, 2022 11:27 am

Kevin K. wrote:
Fri Nov 11, 2022 6:21 pm
I'm interested in revisiting the classic long-term Treasury/money market barbell. I don't mean to incur the wrath of any "stay the course no matter what" purists but I'm under the impression that many of us "fudge" these allocations to some degree anyway.

Way back when the permissible level of fudging (per Mssrs. Rowland and Lawson) was switching out the MM fund for short-term Treasuries. Next level fudging would be substituting intermediate-term Treasuries for all or nearly all of the barbell, which historically yielded essentially identical returns but with a lot less volatility.

We seem to be at or past the end of the ~40 year tailwind for bonds that benefitted not just the PP but most other portfolios. And 2022 has certainly shown - with a vengeance - that those who thought LTT's would zig when equities zagged didn't know their market history.

Personally I tend to think the barbell recommendation reflected what made sense in Browne's time - or indeed in any "normal" timeframe for bonds. But we haven't been there since the great financial crisis and with TBills paying better than 30 year bonds and long-term TIPS offering better risk-adjusted returns than not just nominals but the entire PP it would appear the world has changed.
I'm trying to figure out how to say this concisely...but the main point is that when you do the math it doesn't really matter.

https://analystprep.com/cfa-level-1-exa ... mitations/

Roughly 50% TLT/50% SHV = 100% IEF because that's the math.

It's important to be familiar with how bonds work and the various measurements used to analyze them. Matching duration to when you need the proceeds from the maturing bond is the best way to maximize your "bond potential."

The rest is completely timing (luck) as to whether you profit or lose trying to adjust your bond mix.

The practical implication...if you are youngish and have a long horizon ITT vs. the split is going to end up pretty much in the same place. If you are olderish, personally I'd be more inclined to go with the ITT version because your ITT portfolio will recover at twice the speed of the LTT component and on most metrics is less risky (but not hugely so).

One thing that is rock solid when it comes to bonds...the interest rate the day you buy the bond is what your return is going to be. Full stop, no exceptions (well bankruptcy would be one ::) ).
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Re: Bond barbell vs. other options

Post by seajay » Tue Nov 15, 2022 2:21 pm

Kbg wrote:
Tue Nov 15, 2022 11:27 am
Roughly 50% TLT/50% SHV = 100% IEF because that's the math.
Broadly also = 10 year ladder not marked to market.

Of the three the ladder has the lowest deviations so in that respect might be considered as the better risk adjusted reward. Somewhat like each years gain being the rolling average of the prior ten years 10 year treasury yields.
https://fred.stlouisfed.org/series/DGS10/

Assuming equal loading into each rung, 50% loading = 5% of total portfolio value maturing each year. If that's not enough for rebalancing purposes then selling the bond with a year remaining until maturity will be close to par value/price that in combination = 10% of portfolio value.

Or at times when a sale is desirable, you can sell whichever is the better valued of the ten rungs at that time.

Code: Select all

Tbill/LTT PP	Ladder PP	Since 1978
8.10%              8.13%              Avg
8.89%              7.79%              Stdev
-15.38%           -6.43%             Min
Same CAGR
I suspect many might feel more comfortable maintaining a ladder rather than the barbell, especially if you don't mark to market as then each year 50% of the portfolio (in the ladder) will yield a positive nominal return and feel more of a combination of high (stock and gold) and low volatility assets rather than 75% high volatility, 25% low volatility when (high volatility) LTT is included as part of the portfolio.

A follow on from that is to perhaps hold a 10 year TIPS ladder instead of nominal bonds. Where with each rung when held to maturity you know exactly what the rewards will be in real terms from the day you buy the bond.

But once you're that far removed from the PP, then you might as well do the Larry tilt but where you include gold as a element, thirds each SCV, TIPS, Gold. Up to recently that did have worst bad years, with the PP not losing much even in its bad years. The year to date has put that to bed however such that a bad year for the PP (at least for year to date data) can be as comparably bad.
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Re: Bond barbell vs. other options

Post by Kevin K. » Tue Nov 15, 2022 3:52 pm

Kbg wrote:
Tue Nov 15, 2022 11:27 am
Kevin K. wrote:
Fri Nov 11, 2022 6:21 pm
I'm interested in revisiting the classic long-term Treasury/money market barbell. I don't mean to incur the wrath of any "stay the course no matter what" purists but I'm under the impression that many of us "fudge" these allocations to some degree anyway.

Way back when the permissible level of fudging (per Mssrs. Rowland and Lawson) was switching out the MM fund for short-term Treasuries. Next level fudging would be substituting intermediate-term Treasuries for all or nearly all of the barbell, which historically yielded essentially identical returns but with a lot less volatility.

We seem to be at or past the end of the ~40 year tailwind for bonds that benefitted not just the PP but most other portfolios. And 2022 has certainly shown - with a vengeance - that those who thought LTT's would zig when equities zagged didn't know their market history.

Personally I tend to think the barbell recommendation reflected what made sense in Browne's time - or indeed in any "normal" timeframe for bonds. But we haven't been there since the great financial crisis and with TBills paying better than 30 year bonds and long-term TIPS offering better risk-adjusted returns than not just nominals but the entire PP it would appear the world has changed.
I'm trying to figure out how to say this concisely...but the main point is that when you do the math it doesn't really matter.

https://analystprep.com/cfa-level-1-exa ... mitations/

Roughly 50% TLT/50% SHV = 100% IEF because that's the math.

It's important to be familiar with how bonds work and the various measurements used to analyze them. Matching duration to when you need the proceeds from the maturing bond is the best way to maximize your "bond potential."

The rest is completely timing (luck) as to whether you profit or lose trying to adjust your bond mix.

The practical implication...if you are youngish and have a long horizon ITT vs. the split is going to end up pretty much in the same place. If you are olderish, personally I'd be more inclined to go with the ITT version because your ITT portfolio will recover at twice the speed of the LTT component and on most metrics is less risky (but not hugely so).

One thing that is rock solid when it comes to bonds...the interest rate the day you buy the bond is what your return is going to be. Full stop, no exceptions (well bankruptcy would be one ::) ).
Yeah, I understand that the PP's LTT/ST barbell has the same effective duration as IEF. But my definition of intermediate-term Treasuries is that of Annette Thai and Larry Swedroe: 5 years, not 7-10. So I'd use VGIT in lieu of the barbell in either the PP or GB.

I can see why you'd say the barbell is more appropriate for youngish investors but personally I don't see a 30 year bond with the same coupon as a 5 year being something Harry Browne or anyone else with basic math skills would buy. If a barbell does make sense it's probably more along what Schwab just recommended in their newsletter today: 1-3 year and 7-10.

In thinking about matching duration not just of bonds but of the whole portfolio I've really been appreciating this paper from Cullen Roche:

https://disciplinefunds.com/wp-content/ ... ting-1.pdf

If you look at the chart in it it speaks to some of the investor behavior errors seajay is talking about and why having a bond ladder rather than a fund, for example, makes it easier for most of us to stay the course.

The one thing I do like about the original PP allocation is having cash explicitly included in the portfolio rather than keeping x months or years worth "off to the side" as Bogleheads-type portfolios do.
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Re: Bond barbell vs. other options

Post by Kbg » Tue Nov 15, 2022 6:41 pm

The psychology aspect is a thing for sure.

Really though, one should not isolate assets when thinking about the PP. Way too many folks do that. What matters, truly matters, is how the assets work together. We humans like to tinker though. :D

The HBPP was designed explicitly to have assets that were very volatile and would "move" when the time was right for that asset cash excepted. In bond language, convexity is a feature not a bug of the HBPP.
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Re: Bond barbell vs. other options

Post by mathjak107 » Sat Jun 17, 2023 5:10 am

interestingly i found that over most time frames i looked at IEF beat the barbell of tlt and cash or tlt and shy .

i would have expected the extra volatility in tlt would have given it an edge but it was consistently slightly behind with a few exceptions
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