Gyroscopic Investing

I am new to ETFs.  With bond funds, the interest payments typically would be automatically reinvested into the fund.  Does that happen with TLT as well?  If not, what is the recommended practice with respect to the interest payments.  Do they just sit in the brokerage cash account and then count as part of the cash component of the PP until rebalancing?  Or is there a way to have them automatically reinvested without paying transaction costs every time?  Thanks very much.  I have learned an awful lot between the bogleheads.org thread on the PP and this one.

With funds or ETFs you normally can do dividend re-investment or not. It's often an option you can select (a brokerage may call it DRIP - Dividend Reinvestment Program). The benefit of enrolling in the DRIP at a brokerage/mutual fund company is you can have the shares bought automatically with no commissions when the dividends are paid.

However, what I recommend is to NOT reinvest the dividends/interest. Have them all swept into your cash account. As the money accrues through the year you can use the proceeds to buy into the lagging assets at certain times. This makes bookkeeping a lot easier because you do not have a bunch of tiny share lot purchases going on and makes rebalancing more efficient (especially for taxable accounts). 

TLT pays a monthly dividend.  For some reason, the chart on Yahoo Finance sometimes doesn't show a dividend every month, but it pays one monthly.  It normally shows up in your account around the 11th of the month.

EDV pays a dividend quarterly (for anyone who is interested in zeroes).

For those who are kicking the tires on VUSTX and TLT, here is something to consider about VUSTX--I would imagine that one of the fund manager's goals at VUSTX is to minimize volatility while capturing a yield that is similar to 30 year treasuries.  It does a pretty good job at this, but as in the discussion of TIPS vs. gold, it is important to remember with the PP that we are not running from volatility, we are running to volatility.  We want as much volatility as we can get in each asset class, and that's why we seek the long end of the yield curve, because it is here that you get maximum volatility.

If grandma has 100% of her money in VUSTX, it might be foolish for her to go to TLT, since she would be getting a slightly higher yield, but a lot more volatility.  OTOH, in my view it isn't a good idea for the PP-er to go to VUSTX instead of TLT, because for PP purposes, VUSTX actually increases your risk as a result of its lower volatility.

It's counter-intuitive, but I hate to read of all these aspiring PP-ers modeling PP performance and setting up their own PP with VUSTX in the LT bond position, imagining that they are helping themselves when in fact they are actually increasing their risk through this approach.  Some will say, "come on MediumTex, it's not that big a difference.  What's the big deal?"  The big deal is that when you need the long bond exposure in the PP and the large gains it offers under some conditions, VUSTX is going to come up short (pardon the pun).  To those who would say "it only comes up a little short", I would say why not just use the 30 year bond and enjoy the full measure of safety offered by the PP?

Understood.  Thanks guys.  Very helpful.

is there a fund you recommend instead of VUSTX ? or is getting set up to buy TLT the only option?

l82start wrote: is there a fund you recommend instead of VUSTX ? or is getting set up to buy TLT the only option?

I think there may be a mutual fund that does zeroes (someone else may chime in), but I would say TLT, EDV or individual bonds are your choices for the LT bond part of the PP.

There are probably plenty of people using VUSTX for the PP, but that approach just looks to me like a motorcycle rider wearing a bicycle helmet--it's probably okay...until something bad happens.

Here's a zero coupon bond fund:

https://www.americancentury.com/funds/f ... p?fund=968

They have others, but the maturities are shorter. I think EDV is probably a better choice because it's more volatile.

John

thanks quasimodo
i put them (BTTRX VUSTX EDV) together to see what a chart would look like
http://finance.yahoo.com/echarts?s=BTTR ... =undefined  i dont entirely understand what i am seeing but it seems to be showing what you are saying about volatility

same chart max time
http://finance.yahoo.com/echarts?s=BTTR ... =undefined

One thing I have noticed when trying to chart BTTRX in comparison with other bond funds is that the net asset value of BTTRX grows because of "imputed" interest, where the regular bond funds just show NAV changes that don't reflect interest payments, so BTTRX looks dramatically better than it really is. At least I think that's what is happening.

Maybe charting BTTRX and EDV gives a fairer graphical comparison than including a regular bond fund such as VUSTX...

John

(edited to remove the word "payments" after ""imputed" interest". There aren't any BTTRX interest payments until the fund matures, then all the interest is paid at once.)

Idle thought.

Is not 80% of VUSTX long treasuries?

What would it hurt to hold VUSTX and consider 20% of it to be part of the Variable Portfolio?

Personally I don't think I'd do that but it's a thought.

VUSTX     Average maturity 20.4 years
             Average duration 12.0 years

BTTRX     Average maturity    ?? ??   ?? ??
             Average Duration 16.6 years

FLBIX     Average maturity      21.2 years
            Average Duration 12.8 years

TLT       weighted Average Maturity                27.61 yr    
           Effective Duration                             14.96

EDV      Average Maturity:      25 years
            Average Duration 25.6 years


"average maturity
An average of the maturity dates for all securities in a money market or bond fund. (The maturity date is the date that a bond or money market instrument buyer will be repaid by the security's issuer.) The longer the average maturity, the more a fund's share price will move up or down in response to changes in interest rates."

"Average Duration
A measure of the sensitivity of bond—and bond mutual fund—prices to interest rate movements. For example, if a bond has a duration of two years, its price would fall about 2% when interest rates rose one percentage point. On the other hand, the bond's price would rise by about 2% when interest rates fell by one percentage point."
in italics quoted from vanguard

craigr wrote: With funds or ETFs you normally can do dividend re-investment or not. It's often an option you can select (a brokerage may call it DRIP - Dividend Reinvestment Program). The benefit of enrolling in the DRIP at a brokerage/mutual fund company is you can have the shares bought automatically with no commissions when the dividends are paid.

However, what I recommend is to NOT reinvest the dividends/interest. Have them all swept into your cash account. As the money accrues through the year you can use the proceeds to buy into the lagging assets at certain times. This makes bookkeeping a lot easier because you do not have a bunch of tiny share lot purchases going on and makes rebalancing more efficient (especially for taxable accounts).  

craigr, do you think this also makes sense for IRAs?

foglifter wrote:

craigr wrote: With funds or ETFs you normally can do dividend re-investment or not. It's often an option you can select (a brokerage may call it DRIP - Dividend Reinvestment Program). The benefit of enrolling in the DRIP at a brokerage/mutual fund company is you can have the shares bought automatically with no commissions when the dividends are paid.

However, what I recommend is to NOT reinvest the dividends/interest. Have them all swept into your cash account. As the money accrues through the year you can use the proceeds to buy into the lagging assets at certain times. This makes bookkeeping a lot easier because you do not have a bunch of tiny share lot purchases going on and makes rebalancing more efficient (especially for taxable accounts).  

craigr, do you think this also makes sense for IRAs?

Possibly yes if you have multiple assets in your IRA. It may make sense to dump the payments into cash in the IRA and then redistribute it to the laggards manually.