Why not AGG or BND instead of TLT???????????

Discussion of the Bond portion of the Permanent Portfolio

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lauberge49
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Why not AGG or BND instead of TLT???????????

Post by lauberge49 » Sun Jun 13, 2010 12:15 pm

These two ETF's would give more exposure to the total bond market...................
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KevinW
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Re: Why not AGG or BND instead of TLT???????????

Post by KevinW » Sun Jun 13, 2010 3:33 pm

From the Bond FAQ: You only want to own the highest quality long term bonds you can buy.  By definition, total bond market funds such as BND and AGG have intermediate duration and include bonds with credit and/or call risk.  The FAQ goes into a great deal of depth on why this is bad in the context of a Permanent Portfolio.
pplooker

Re: Why not AGG or BND instead of TLT???????????

Post by pplooker » Tue Jun 15, 2010 4:23 pm

That's not the point of the strategy.

With something like BND, imho, the investor is saying "I have no idea what fixed income product is currently the 'best' on the market, for whatever that means, so I'm approximating buying the whole fixed income market".  That's a fine and valid approach, however, the Permanent Portfolio concept is based on the idea that one part of the portfolio zigs while another one zags.

So for a variety of reasons, but mostly volatility, you need something like TLT.

I had a really hard time with this concept too initially, trying to look at each component as its own thing and going "man that's a terrible investment why would you buy that when X is so much better".

Then again I split the difference with my own approach to things, so there you are.
nomamesbuey

Re: Why not AGG or BND instead of TLT???????????

Post by nomamesbuey » Mon Aug 16, 2010 11:14 pm

KevinW wrote: From the Bond FAQ: You only want to own the highest quality long term bonds you can buy.  By definition, total bond market funds such as BND and AGG have intermediate duration and include bonds with credit and/or call risk.  The FAQ goes into a great deal of depth on why this is bad in the context of a Permanent Portfolio.
to add to this good reply.  The longer term the bond fund is in terms of duration, a measure of interest rate sensitivity, the better it will perform/higher percentage it will return in a DEFLATION scenario.  Per the Harry Browne approach, the whole rationale the HBPP includes LT bonds, is to have an asset that will perform great in a DEFLATION scenario.

Goto Google Finance, put in TLT, BND, AGG & change the timescale to get calendar 2008.  TLT 25.8%, BND 2.54%, AGG 2.37%.  (Note: IIRC these Google Finance numbers ignore dividends' positive effect on the returns for the 3 non-gold assets).

TLT carried the HBPP in 2008, gold (GLD 3.89%) & cash (SHY 2.62%) had minor gains, stock (VTI -36.89%) had major loss.
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