New to PP - concerned about LT bonds

[ljensen1]

Hello. I have been studied PP and considering moving to this asset allocation. My husband and I currently have our retirement savings in index funds with Vanguard, everything in a Roth IRA. It's not a lot of money - about $100,000. We want a "safe" investment strategy - one that will make sure our money keeps up with inflation and, ideally, makes reasonable returns beyond inflation.

Right now, I'm having a really hard time with the idea of putting 25% of our money into long term bonds, especially when gold is quite high and stocks aren't exactly cheap. It seems that LTB are really high right now and the yield is low. To purchase so much, in these circumstances, seems to be a recipe for losing a great deal of money as soon as interest rates go up. Would the other asset categories truly make up for that? Would it be better to keep that portion of our money in cash or something else and wait until bond prices fall before purchasing them?

This is where our money is now:
25% VBTLX (Total Bond Market)
25% VTSAX (Total Stock Market)
20% VIPSX (TIPS)
17% VTSAX (Short Term Bonds)
8% VGXIX (REIT)

[AdamA]

Welcome!

Right now, I'm having a really hard time with the idea of putting 25% of our money into long term bonds, especially when gold is quite high and stocks aren't exactly cheap. It seems that LTB are really high right now and the yield is low. To purchase so much, in these circumstances, seems to be a recipe for losing a great deal of money as soon as interest rates go up. Would the other asset categories truly make up for that? Would it be better to keep that portion of our money in cash or something else and wait until bond prices fall before purchasing them?

This is a psychological issue (low yields on LTT's and high price of gold) for almost everyone these days when they start to think about the PP. 

My advice would be to just bite the bullet and do it.  You'll see after a few months that you start to feel much less anxious about it. 

If you're too uneasy to do that, you could maintain a large cash position, say 50%, and with the other 50% try out the PP.  Once you're comfortable, you can rebalance. 

Does that make sense?

[MediumTex]

I appreciate how you feel, but if you listen to Harry Browne's old radio shows people have been feeling exactly the same way for many years, regardless of where yields were on LT treasuries.  It seems like no matter where yields are at, some people are certain that they are about to start rising, even though in recent years exactly the opposite has actually happened.

I would just buy the whole package and start enjoying the safety and security right away.  From my perspective, about the only thing that could really get interest rates rising in the current economic environment would be a stock market that was performing well, and I think we would all be happy to see that.

[ljensen1]

Thanks for the responses. I have considered trying out the PP with just part of our assets. On the other hand, the simplicity of just getting it all done is very attractive.

If the stock market does rise, and brings up interest rates, that means gold would go down, too, right?  Would the stocks make up for both LTBs and gold going down? Has this type of situation (high LTBs and high gold prices) occurred before historically?

Do you know if there are any statistics showing whether there is a better or worse time (in terms of what the assets are doing) to get into PP?

Thanks for you patience. I know these are probably pretty basic questions, but I'm trying to learn as much as I can before making such as important decision.

[craigr]

The portfolio is like a rudder on a ship. So asset prices can fall in the short-term and you could take a loss initially. But over time the ship starts to turn and the losses get overtaken by the winners.

So far this year the LT bonds are down almost -4%. But the overall portfolio is up +4% thanks to the gold and stocks.

Nobody can make promises to you of course. But this is often how it goes.

However if you are nervous, you can just put part of the money into the portfolio to see how it goes and park the rest in a very safe Treasury money market fund. It's just hard to do this though and not turn it into market timing. So that's the only caution.

[MediumTex]

Thanks for the responses. I have considered trying out the PP with just part of our assets. On the other hand, the simplicity of just getting it all done is very attractive.

If the stock market does rise, and brings up interest rates, that means gold would go down, too, right?

That's not what has happened since the spring of 2009.  Since then stocks have risen and so has gold, while interest rates have gone up and then back down.  It's impossible to predict how all of this will unfold.  No one knows, though many think they do.

Would the stocks make up for both LTBs and gold going down? Has this type of situation (high LTBs and high gold prices) occurred before historically?

The PP is tied to underlying economic conditions, not historical asset correlations.  With the PP you are protected in any conceivable economic condition.  This is a better way of thinking about it IMHO than focusing on asset correlations.  Any situation you can imagine still comes down to prosperity or economic contraction and inflation or deflation.  Those are the only options.

Do you know if there are any statistics showing whether there is a better or worse time (in terms of what the assets are doing) to get into PP?

I would say right now is pretty good because the portfolio has been relatively flat for several months now.  Historically, buying the PP when it has just seen an aggressive move upward often results in a pullback or a few months of flat returns before it starts upward again.  Really, though, almost any time is a good time to buy the PP, since it is rarely more than a few months removed from its all-time high.

Thanks for you patience. I know these are probably pretty basic questions, but I'm trying to learn as much as I can before making such as important decision.

By all means.  As the carpenters say, "measure twice, cut once."

[ljensen1]

Thanks for the explanation and encouragement. I think I'll probably just move everything over at once.

I can buy the bonds through Vanguard. I'm been in contact with them because I wanted to make sure they couldn't "lend" my securities. I found out they do not lend out any securities that are in an IRA account. However, it's different for mutual funds or ETFs:

"Generally, an investor will consent to lending his or her securities in his
nonretirement Vanguard Brokerage account when completing the Margin Account
Agreement for margin trading approval. Currently, you do not have a
nonretirement brokerage account at Vanguard that has been approved for
margin trading; therefore, your brokerage holdings cannot be borrowed or
loaned out. In addition margin trading is not permitted in your Roth IRA
brokerage account.

A Vanguard(R) mutual fund or exchange-traded fund (ETF) may lend its
investment securities to qualified institutional investors (typically
brokers, dealers, banks, or other financial institutions) who may need to
borrow securities in order to complete certain transactions, such as
covering short sales, avoiding failures to deliver securities, or
completing arbitrage operations"

In another message, Vanguard said, "Vanguard does not currently lend our mutual funds, exchange-traded funds
(ETFs), or non-Vanguard securities to external investors," but it seems that could change at any time.

Is this why it is suggested to have accounts with more than one firm? I really like the convenience of having everything through Vanguard. Is there a real risk to this?

[Alanw]

Thanks for the responses. I have considered trying out the PP with just part of our assets. On the other hand, the simplicity of just getting it all done is very attractive.

If the stock market does rise, and brings up interest rates, that means gold would go down, too, right?  Would the stocks make up for both LTBs and gold going down? Has this type of situation (high LTBs and high gold prices) occurred before historically?

Do you know if there are any statistics showing whether there is a better or worse time (in terms of what the assets are doing) to get into PP?

Thanks for you patience. I know these are probably pretty basic questions, but I'm trying to learn as much as I can before making such as important decision.

Being relatively new to the PP (July, 2011 after a few months of research), I had the same reservations as you have.  What I found to be really helpful was the Historical Returns page on Craig's Crawling Road website (thank you Craig).

When these questions came up about the price of an asset class, I would refer to that page and review the annual return for the PP in various years.  1981 was the worst year at a -4% when gold fell 33%.  I did not find a year that I could not live with.

That being said, I invested all of my PP funds at once and got it overwith.  I was still very apprehensive about LTT's but that is what has carried the portfolio since I invested.

Goes to show, you just never know.

[AdamA]

I did not find a year that I could not live with.

'nuff said. 

[ljensen1]

Thanks for the encouragement, Alanw. The historical returns look very good.

Did you invest in the LTBs directly, or through a fund?

[Alanw]

Thanks for the encouragement, Alanw. The historical returns look very good.

Did you invest in the LTBs directly, or through a fund?

I purchased TLT through my IRA at TD Ameritrade.  Gold is held in ETF's of GLD and IAU in both IRA account and outside account.  VTI is held in IRA and outside account.  SHY is held in outside account.  I also have a small savings account that I use to fund my checking account quarterly; however, I include SHY, savings account and checking account totals as all part of my cash holdings.

As of today, I have not purchased LTT's direct or have no direct gold holdings but am considering it.

[Reub]

AlanW, I have recently started purchasing physical gold and I strongly recommend it. There is no feeling quite like it!

[Alanw]

AlanW, I have recently started purchasing physical gold and I strongly recommend it. There is no feeling quite like it!

Do you store it in a safe deposit box?  If not, where is it stored?

[Reub]

Safe deposit box at an undisclosed location. I have read on this site that you can buy insurance on the contents of the box. However, I have not looked into that yet. Does anyone know what that would cost?

[MediumTex]

Safe deposit box at an undisclosed location. I have read on this site that you can buy insurance on the contents of the box, however, I have not looked into that yet. Does anyone know what that would cost?

I think Gumby posted that it was .5% or so a year.

[cabronjames]

as of now (Feb-20 eve), here's the latest 30-yr Sovereign Bond yields, from bloomberg.com

USA 3.18%
Japan 1.91%
UK 3.39%
Germany 2.55% (note: Germany is not a pure sovereign fiat currency like the others, as they're part of the Eurozone/currency)

Note the Japan yield.  I don't completely understand the approximate relation between change in the 30 yr US T-Bond yield, & its div-reinvested return, but afaict if yield lowered to match Japan, it would mean a div-reinvested return of 30+%.

I'm not saying that will happen, I don't know what will happen (hence I'm a PPer).  Just noting some historical & global context that refutes the simplistic 30 yr T-Bond bears' notion that "yields must rise & cannot possibly get lower, T-Bonds will certainly fall".

[AdamA]

I'm not saying that will happen, I don't know what will happen (hence I'm a PPer).  Just noting some historical & global context that refutes the simplistic 30 yr T-Bond bears' notion that "yields must rise & cannot possibly get lower, T-Bonds will certainly fall".

Absolutely. 

[alvinroast]

Here's a slightly different view of how to look at LT bonds. I don't agree with the author about everything, but he provides a slightly more conventional, but clear explanation for anyone trying to get their head around lending money to the government.

http://seekingalpha.com/article/372301- ... -less-risk

From personal experience in the brief period I've been using bonds I can now say that LTT have worked much better for me than any short ETFs.