The Bond Dream Room

[Reub]

funny stuff!

[barrett]

barrett, what, if anything, are you doing with your long-term treasury holdings? I have been tempted 6 out of the last 5 trading sessions to sell a portion and harvest some gains. I continue to sit tight as reducing my exposure to less than 25% could strain the performance of the PP if equities and/or gold declines.

Thanks for thinking of me, Budd! I am tempted but sitting tight as well. I did sell a few late last year to come back to 4X25 but I wasn't very heavy in long bonds to begin with. It's a case of where letting momentum ride would have been a plus but I am still learning.

I understand risk parity better than I used to and it seems that fiddling with PP doesn't really help much.

[dualstow]

I understand risk parity better than I used to and it seems that fiddling with PP doesn't really help much.

It's like Contact when they made Jodie Foster sit in that ridiculous safety chair with a harness, when all the while the aliens had prepared everything for her safe travel, no chair needed.

[moda0306]

I understand risk parity better than I used to and it seems that fiddling with PP doesn't really help much.

It's like Contact when they made Jodie Foster sit in that ridiculous safety chair with a harness, when all the while the aliens had prepared everything for her safe travel, no chair needed.

Wow.  That's quite the analogy.  And I like it.

[Reub]

I'll say it once again. Long term bonds are something that I probably never would have owned before learning of the HBPP. And to paraphrase an old Saturday Night Live skit:

"Bonds be berry berry goood to me!"

[dualstow]

It's like Contact when they made Jodie Foster sit in that ridiculous safety chair~
...

Wow.  That's quite the analogy.  And I like it.

Thanks.  That always sticks in my mind.

"Bonds be berry berry goood to me!"

I remember that skit! Baseball's been beddy beddy good to me.
If I were Victoria F on bogleheads I'd be making some joke like baseball -> bonds been berry good -> Barry Bonds!

[moda0306]

I'll say it once again. Long term bonds are something that I probably never would have owned before learning of the HBPP. And to paraphrase an old Saturday Night Live skit:

"Bonds be berry berry goood to me!"

No kidding. Long term treasury bonds, especially. They just feeeel so idiotic to own until you see how they work as part of the machine. 

After seeing ltt performance in 2008 I was a bit flabbergasted (even though I should have known that's what they'd do if interest rates fell). Really is one of the biggest "aha" moments of my life, as it lead me here and to Harry Browne.

[Lang]

The market seems scared shitless. It's like it doesn't believe the US recovery is genuine and sustainable. Good for long-term bond investors, bad for...everyone else?

[MachineGhost]

I understand risk parity better than I used to and it seems that fiddling with PP doesn't really help much.

Depends on what the definition of "much" is.

[MachineGhost]

No kidding. Long term treasury bonds, especially. They just feeeel so idiotic to own until you see how they work as part of the machine. 

After seeing ltt performance in 2008 I was a bit flabbergasted (even though I should have known that's what they'd do if interest rates fell). Really is one of the biggest "aha" moments of my life, as it lead me here and to Harry Browne.

Just remember, bonds don't always pull a 2008.  That's what that gold is for!

[bedraggled]

I just read barrette's post on January 23 where he wonders if I will forgive.  I'm just looking to survive and hope we don't end up like 25 years of Japan.  Much great insight from all of you.

Reflecting on 2015 and the markets, when I read Craig R's book, I was reminded that infrequent rebalancing caused fewer taxable events.  Has this been minimized in discussions?  I.e., if an asset category stands at 34.9% and then recedes, I perceive this as a relief (no taxes), rather than a rejection of an opportunity to take profits.  To see the PP stay within the 35/15 bands and slowly increase seems a thing of beauty.

Please check my post in the Japan-style deflation.  I suggested the HBPP only decreases 16% over 3 years which is relatively good news.

I was told after 30 posts. open season starts on the one submitting  comments.  Alas. 

[bedraggled]

Another thought, please!

Is there a benefit in letting an asset category increase to 37% before rebalancing- all to avoid a capital gains tax event.  I am thinking presently of TLT.  Is this heresy?  Because if I allowed 37%, it is slippery slope to 38%…and so on.  I ask as I would want the asset to fade to less than 35% to skip the tax tab and the opportunity to submit Form 1040, Schedule D.  We all agree taxes are significant.

The real head-scratcher is if I waited and TLT increased to 39% of the HBPP, I would definitly want to rebalance as I am attuned to the HBPP philosophy.  I would be "penalized" with an extra profit in the asset category.  Could be worse!  What do you kind folks think?

Can anyone show that the 35/15 bands  provide the best capital gains tax benefit?  Any personal experiences regarding tax and rebalancing activities?

Thanks,
Bedraggled

[bedraggled]

TennPaGa,

I not only think of an asset declining to and within the35/15 bands, I contemplate short-term vs. long-term gains.  Curious, to an extent but the beauty of that slow, steady increase over the years….

Do PP participants let a category rise to near 40% before rebalancing, though.  I imagine those who rebalance once per year experience this.  That also allows for only long-term gains.  I like infrequent taxable events, though.  So I am not inclined to rebalance once per year.  No offense intended.

Thanks,
Bedraggled

[barrett]

Bedraggled,

Read around a bit more on this forum and you will see lots of discussions about taxes and the PP. Many folks construct a PP that is spread across different types of accounts. I personally believe that if you can set it up so that it is spread out over taxable, tax-deferred and tax-free, you then have lots of options. In your scenario where LTTs are up to over 35% of your total PP, and everything is held in a taxable account, a common course of action is to split up the rebalance over two calendar years. Everyone's situation is different though depending on income and other factors. Another possible strategy in a taxable account is to offset some gains by tax-loss-harvesting on an asset that is down.

There are also scads of threads about what the ideal rebalancing bands are (tax considerations not taken into consideration), and the amazing thing - at least to me - about the PP is that it performs well with wide bands (35/15) and also very narrow bands. The general consensus is that by letting an asset ride for a bit, you get some extra juice because of momentum. In other words, when an asset is going up, it can go up for a long time. If that is the case (and remember, that we NEVER know this in advance), you actually want to own more of it because that gives an overall net positive jolt to the PP. I think the reason very narrow bands also work is because they allow a PP investor to capture lots of relatively minor gains. For example, I don't think too many people were rebalancing out of gold in 2014 but there was a brief period in late February where the price had moved from $1200 to $1390.

Many people seem to just split the difference between over managing their money and never checking their balances. In that case a good strategy is to just rebalance annually and be done with it. Hope that helps.

[bedraggled]

barrett,

Thanks, as usual.

Quite the little storm.  Hope you are not in far Eastern Connecticut

bedraggled

[MachineGhost]

Can anyone show that the 35/15 bands  provide the best capital gains tax benefit?  Any personal experiences regarding tax and rebalancing activities?

I don't believe taxes have been considered in any backtests yet.  Correct me if I'm wrong, but if you have a 25% cost basis and sell it at 35%, then 20% of that is 2%, so you're losing that much taxes, leaving you with a 8% net gain?  Why is that a problem?  I understand taxes kill the compounding more than anything else over time, but ... its on a gain compared to expense ratios which is on everything.

[bedraggled]

MG,

Thanks, good point.

Anyone care to address the temptation to let a winner rise to 40% before rebalancing?

You folks are a big help,
Bedraggled

[barrett]

Anyone care to address the temptation to let a winner rise to 40% before rebalancing?

Yes, but remember that I am the guy who was against over indulging in LTTs when rates were at 3%!

The problem with letting a winner rise to 40% is that you are almost for sure underweighted in at least one of the other three assets. I guess this would not be the case if you are implementing a cashless 3X33 PP, but that is only for young people who are accumulating very quickly and who also have an emergency fund outside of their PP.

Rebalancing, either annually or using certain bands, both removes a bias toward one asset AND forces you to sell high and buy low. A basic tenet of the PP is that it is future agnostic toward any of the four assets. If you have listened to any of the Harry Browne podcasts, you should have the words "we just don't know" plastered to the interior wall of your skull. That was a pretty remarkable insight for someone who had correctly called the gold bull market of the 1970s. Most prognosticators who really nail ONE damn prediction get all full of themselves and keep on dishing out advice on what is bound to go up or bound to go down. Browne realized that even thought there were underlying fundamentals that pointed toward a gold bull, that he had gotten really lucky in terms of the timing... and that what was true in hindsight would not always be true going forward.

[stuper1]

peaktotrough.com lets you backtest with different rebalancing strategies (20/30, 15/35, 10/40).  I believe backtesting shows that 10/40 has provided the best CAGR in the past.  Of course, that is no guarantee for the future, but it is interesting.

[bedraggled]

Barrett,

Good point about a person getting full of oneself.

Bedraggled

[dualstow]

Barrett,

Good point about a person getting full of oneself.

Bedraggled

At that point, you have to rebalance into other people's opinions. 

[l82start]

Barrett,

Good point about a person getting full of oneself.

Bedraggled

At that point, you have to rebalance into other people's opinions. 

LOL nice 

[moda0306]

Part of the reason I think fixing your bands and PRE-deciding an environment where you'd rethink it (hyperinflation, re-link currency to gold, Rand Paul as president, etc) is that as human beings, I'm utterly convinced (me included) that we hard wired to make decisions based on emotions, and back into the usually flawed or inconsistently-applied logic to get there.

Furthermore, it relieves a lot of stress by removing "noise" from my life and lets me focus on other things that really improve my happiness more.

But obviously, all this is easier said than done, especially for a guy arrogant enough who thinks he knows economics better than the market, sometimes .

(I'm talking about me)

[barrett]

Barrett,

Good point about a person getting full of oneself.

Bedraggled

At that point, you have to rebalance into other people's opinions. 

Dualstow, you are in peak to trough form!

[Kbg]

There are lots of good academic and industry papers on rebalancing. Just invoke the Google gods and they will enlighten you greatly. I would narrow down all of them to three things...

1. Tracking error (the more you rebalance, the closer you are to whatever it is your are tracking). Thus, if you wan't expected PP returns, then you should rebalance according to how they were tested. Anything outside of that is a departure from the expected and may or may not work out for you because of my favorite two words - path dependency.

2. Taxes

3. #1 with regard to performance is unknowable really. #2 is fixed, certain and calculable.

Snap Quiz Question: Which one should you pay most attention to in your decision?