5 year ladder vs Cash and 30 year barbell

Discussion of the Bond portion of the Permanent Portfolio

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whatchamacallit
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Re: 5 year ladder vs Cash and 30 year barbell

Post by whatchamacallit » Sun Aug 06, 2017 2:06 pm

Kbg wrote:To make it simple...is $700 annually worth it to pay Vanguard (VGSH) to manage a $100k portfolio of STTs...a good simple clarifying question.
Would that not be $70 a year? Expense ratio of VGSH is 0.07 %
7% would be $7,000
0.7% would be $700
0.07% would be $70


$70 probably a good deal. I am not sure if there is a commission on the agency bonds this fund if you bought them directly.
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Re: 5 year ladder vs Cash and 30 year barbell

Post by Kbg » Sun Aug 06, 2017 2:09 pm

Oops...I'm sure I meant another zero ;)
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Re: 5 year ladder vs Cash and 30 year barbell

Post by barrett » Sun Aug 06, 2017 7:11 pm

doodle wrote:Is there a calculator out there that is good to calculate yield vs price changes for various duration bonds?
doodle,

Try this tool:

http://www.free-online-calculator-use.c ... calculator

I haven't used a calculator like this before but this one seems to work fairly well. Note that I am basing that conclusion on the fact that when I input numbers for bonds I actually own, the price comes out correct.

What it doesn't seem to take into account is total return including interest payments. It just allows you to calculate the price movement of a bond based on its par value, coupon rate, compounding interval, current interest rate and years to maturity. It doesn't seem to be able to accept a yield of 0% but you can input, for example .1% or .01, etc. You can even plug in negative numbers, just not zero for some reason.

It shows about what one would expect... not a very dramatic ride with five-year issues and huge swings with 30-years issues.

Note that it doesn't allow one to input actual duration but I believe it still works.

If anyone else has a better calculator they use, please share. Thanks.
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Re: 5 year ladder vs Cash and 30 year barbell

Post by doodle » Mon Aug 07, 2017 5:39 pm

Thanks! I'll give it a try. As far as holding cash, I don't see how 1 and 2 year bonds as they would be held in a five year ladder differ greatly from cash...

I can envision a scenario where 30 year rates dip below 2 percent in some market crash but at some point holding them makes increasingly less sense given the potential downside vs upside especially for someone trying to simply preserve capital.
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Re: 5 year ladder vs Cash and 30 year barbell

Post by barrett » Mon Aug 07, 2017 8:02 pm

doodle wrote:I can envision a scenario where 30 year rates dip below 2 percent in some market crash but at some point holding them makes increasingly less sense given the potential downside vs upside especially for someone trying to simply preserve capital.
I am struggling with this as well. On my 30-year bonds that mature 11/15/43, if the yield dropped to zero, that would give me a return of about 72% from the current rate of about 2.82% (convexity kicks in when rates gets super low). Some 30-year European debt got close to zero last year but I would think the odds of it happening here are rather low.

What I keep coming back to with bonds is that we know gold can increase seven-fold in value because we saw that in the 2000s. We know stocks can triple in price because we've seen that over the last eight years. From these levels bonds just don't have the necessary oomph to carry the portfolio in the same way that gold and stocks can. My understanding with the PP is that stocks bonds and gold are supposed to have similar volatility. From my three plus years invested this way, that seems to be the case. But from 2.8% most of the potential volatility would seem to be on the downside. Someone please point out the flaw in my thinking here!

I'd be curious to know what you come up with, doodle.
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Re: 5 year ladder vs Cash and 30 year barbell

Post by Lonestar » Thu Aug 10, 2017 12:14 pm

This may be a terribly elementary question, but how does one hold a ladder of intermediate term (5yr) treasury bonds? Looks like you would either have to have equal amounts in treasuries maturing in years 1 through ten to equate a 5yr duration. Or, start purchasing a 5yr maturity treasuries each year for 5 consecutive years. I'm sure I'm missing something here....................
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Re: 5 year ladder vs Cash and 30 year barbell

Post by mukramesh » Thu Aug 10, 2017 2:27 pm

Lonestar wrote:Or, start purchasing a 5yr maturity treasuries each year for 5 consecutive years.
@Lonestar: This statement is correct.
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Re: 5 year ladder vs Cash and 30 year barbell

Post by Kbg » Thu Aug 10, 2017 7:42 pm

mukramesh wrote:
Lonestar wrote:Or, start purchasing a 5yr maturity treasuries each year for 5 consecutive years.
@Lonestar: This statement is correct.
Or stagger with various lengths to start out (i.e. the 2 and 3 year notes and 52wk bill) until you can get into the 5/1yr rhythm.
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Re: 5 year ladder vs Cash and 30 year barbell

Post by Lonestar » Thu Aug 10, 2017 9:30 pm

OK.......just classic "ladder building". I've been going with intermediate funds and ETF's but am very interested in a T bond or secondary CD ladder. guess I need to just jump in an start the process.
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Re: 5 year ladder vs Cash and 30 year barbell

Post by Mr Vacuum » Fri Aug 11, 2017 12:06 am

Lonestar, it sounds like you understand how to build the ladder, but the question is what average duration you really want. If you're trying to replace an intermediate fund, look up the duration of the fund for comparison. Your earlier example of the 1..10 ladder may be closer to what you need (or some less tedious version with fewer rungs spaced farther apart, like 3,6,9 or 2,4,6,8). The 1,2,3,4,5 ladder averages out to a shorter 2-3 year duration.
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Re: 5 year ladder vs Cash and 30 year barbell

Post by Lonestar » Fri Aug 11, 2017 8:21 am

Mr Vacuum wrote:Lonestar, it sounds like you understand how to build the ladder, but the question is what average duration you really want. If you're trying to replace an intermediate fund, look up the duration of the fund for comparison. Your earlier example of the 1..10 ladder may be closer to what you need (or some less tedious version with fewer rungs spaced farther apart, like 3,6,9 or 2,4,6,8). The 1,2,3,4,5 ladder averages out to a shorter 2-3 year duration.
I'm not trying to replace an intermediate fund, I'm looking for additional ways to maintain fixed income at around a 5 year duration (probably using secondary market CD's). I'm currently using individual treasuries and CD's of various maturities. My objective is to try to get more organized with these so, all combined, will hit that 5 year duration and be in a ladder format.

You mention the 3,6,9. Are you suggesting purchasing these maturities and actually holding to the maturity date? i.e. on maturity of the 3 year repurchasing a 9 year? If so, I could do the same with a 4,5,6.
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Re: 5 year ladder vs Cash and 30 year barbell

Post by sophie » Fri Aug 11, 2017 11:24 am

How do you all use the ladder in your cash allocation? Whether for the PP, emergency fund, or other portfolio.

I figure that some portion of the cash allocation needs to be ready to be dipped into at any time. I'd be afraid of busting up a ladder by having to sell lower rungs early, leaving a suddenly longer duration holding. That could happen during a rebalance, or just because there's an emergency like you suddenly need a $20,000 home repair.

I have sort of a multi-tiered cash structure in mind:

Tier 1 - bank savings account
Tier 2 - T bills < 1 year, 1 year CDs, treasury money market
Tier 3 - 1-3 year treasuries typically held to maturity
Tier 4 - savings bonds, longer treasuries held to maturity, 5 year CDs

If tiers 1 and 2 are at least 1/3 of your cash holding, I think you're safe for rebalancing. A ladder could work for Tiers 3 and 4. That would be up to 2/3 of cash allocation, minus whatever you choose to put into savings bonds.

Thoughts?
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Re: 5 year ladder vs Cash and 30 year barbell

Post by buddtholomew » Fri Aug 11, 2017 12:54 pm

Doodle, I personally manage fixed income duration to a precise 5.62 (BND equivalent) using a combination of LTT's (TLT ~17.6) and a Savings account (0 duration, 1.15%). Controlling the amount of cash in or out of the savings account and updating effective duration in my spreadsheet weekly enables me to be as anal as I want >:D

Its simple, elegant and competitive to a 5-year treasury. I still hold LTT's and also hold more cash than most but it serves the purpose of lowering overall fixed income duration to more comfortable levels and helps with the SWAN factor too.
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Re: 5 year ladder vs Cash and 30 year barbell

Post by grapesofwrath » Sat Aug 12, 2017 9:25 am

sophie wrote:How do you all use the ladder in your cash allocation?
I actually buy T-notes at auction every month - extra grief but that fine granularity insures the coupon payments are evenly distributed, rate fluctuations are well averaged, and a maturing rung is only a month away if I need.

To start in the first year buy 1,2,3 and 5 year notes (you could double the amount in 1 yr rung), then in second year wit the maturing 1 year notes buy the 3yr (to fill on the hole from previous year) and the 5 year notes, then the following years the intermediate rungs are full so just need to keep buying the 5yr with maturing rungs.
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Re: 5 year ladder vs Cash and 30 year barbell

Post by sophie » Sat Aug 12, 2017 10:12 am

grapesofwrath wrote:
sophie wrote:How do you all use the ladder in your cash allocation?
I actually buy T-notes at auction every month - extra grief but that fine granularity insures the coupon payments are evenly distributed, rate fluctuations are well averaged, and a maturing rung is only a month away if I need.

To start in the first year buy 1,2,3 and 5 year notes (you could double the amount in 1 yr rung), then in second year wit the maturing 1 year notes buy the 3yr (to fill on the hole from previous year) and the 5 year notes, then the following years the intermediate rungs are full so just need to keep buying the 5yr with maturing rungs.
So what happens if you suddenly need to access a large chunk of cash, e.g. due to rebalancing or to meet a major expense? Your ladder suddenly becomes an intermediate bond fund. Not the end of the world as if you need more cash I guess you'd sell bonds and take the gain/loss, but that's not ideal.

I like the idea of a ladder but just trying to get my head around this possible wrinkle.

Another issue with a ladder: who knows where rates are headed. I'm assuming that until the Fed calls it quits on interest rate increases, I should stick with short durations.
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Re: 5 year ladder vs Cash and 30 year barbell

Post by grapesofwrath » Sat Aug 12, 2017 10:57 am

sophie wrote:Another issue with a ladder: who knows where rates are headed. I'm assuming that until the Fed calls it quits on interest rate increases, I should stick with short durations.
Exactly, since I don't where rates are going I will sit in the middle. I figure a 5(/7)yr ladder will keep track with inflation and its average maturity is short enough to track a moderate rate rise : eg. two or three 25 point rises a year. I could loose a couple percent, big deal. But I'm certainly not tempted to go to 20/30 years for only 1% extra at several times the vulnerability. So I don't hold long bonds. I wouldn't be able to sleep at night.

If stocks crashed I would be more than happy to feed the lower rungs into equities. Thats my dream. (and probably rates would come down then anyway). Alternatively, if rates and inflation improved at a healthy rate my alternative hope is real rates on TIPS improved I would start feeding buy some of those and get some rational/safe inflation protection. Basically my 5yr bond ladder is a holding pattern....

Rebalancing:
Coupons from the notes in my TD account just accumulate in 30 day bills or its 0% cash account (proper cash) and dividends from stock just go into (Vanguard) money market account. After while I will push accumulated cash to either equity and/or new bond rungs for rebalancing.
I'm not overly worried about "emergency cash" : I (currently) have an OK job, no mortgage/debt, decent insurance.
My coupon payments/dividends over a few months are OK. Anyway, whats the worst that would happen ? - I don't reinvest a few rungs (I have monthly granularity; I don't/won't/can't sell actual note because they purposely in TD to prevent me from doing this; which I might be tempted to do in a fund if I could see its value), better than having that pure cash sitting there indefinitely at half the interest waiting for disaster.
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Re: 5 year ladder vs Cash and 30 year barbell

Post by buddtholomew » Sat Aug 12, 2017 11:03 am

grapesofwrath wrote:
sophie wrote:Another issue with a ladder: who knows where rates are headed. I'm assuming that until the Fed calls it quits on interest rate increases, I should stick with short durations.
Exactly, since I don't where rates are going I will sit in the middle. I figure a 5(/7)yr ladder will keep track with inflation and its average maturity is short enough to track a moderate rate rise : eg. two or three 25 point rises a year. I could loose a couple percent, big deal. But I'm certainly not tempted to go to 20/30 years for only 1% extra at several times the vulnerability. So I don't hold long bonds. I wouldn't be able to sleep at night.

If stocks crashed I would be more than happy to feed the lower rungs into equities. Thats my dream. (and probably rates would come down then anyway). Alternatively, if rates and inflation improved at a healthy rate my alternative hope is real rates on TIPS improved I would start feeding buy some of those and get some rational/safe inflation protection. Basically my 5yr bond ladder is a holding pattern....

Rebalancing:
Coupons from the notes in my TD account just accumulate in 30 day bills or its 0% cash account (proper cash) and dividends from stock just go into (Vanguard) money market account. After while I will push accumulated cash to either equity and/or new bond rungs for rebalancing.
I'm not overly worried about "emergency cash" : I (currently) have an OK job, no mortgage/debt, decent insurance.
My coupon payments/dividends over a few months are OK. Anyway, whats the worst that would happen ? - I pull out a few rungs, better than having that pure cash sitting there indefinitely at half the interest waiting for disaster.
If you're willing to give up LTT's why hold the PP at all?
Or maybe, you no longer wish to hold the PP.
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Re: 5 year ladder vs Cash and 30 year barbell

Post by grapesofwrath » Sat Aug 12, 2017 12:29 pm

buddtholomew wrote:If you're willing to give up LTT's why hold the PP at all?
Or maybe, you no longer wish to hold the PP.
I'm not a strict adherent to the PP - never was, never will be. I hold the same three components : stocks, treasuries and gold, but not in the proportions advocated by PP. I like the fact that the PP has these three basic uncorrelated components for simple robust portfolio. I don't feel cash+long bonds give any real benefit over intermediate bonds. (Yes, bullet, barbell blah blah but not even the Fed knows which way rates will go or can't even influence them at the high end). As for gold I believe it can provide a useful diversifier as an uncorellated asset but am more comfortable with it at ~10%. I feel its PP weight at 25% is too heavily influenced by transition from time when gold was money to a decoupled fiat currency. Beyond not being uncorrellated I get some comfort gold could provide "insurance" of last resort (albeit unlikely) but am troubled that its "value" is not "tied" to a yield. (also the fact that it attracts so many weirdos doesn't help me ). I would be more aligned with what you call a "Desert Portfolio". That is where I am comfortable.
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Re: 5 year ladder vs Cash and 30 year barbell

Post by buddtholomew » Sat Aug 12, 2017 12:37 pm

I can't fault you for feeling more comfortable with a conventional allocation. I hold both a BH and HB portfolio that blended together produces a 50/40/10 allocation.

It's interesting to watch how both portfolios perform daily and either the bullet or barbell approach are more similar than they are different.

Good luck.
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Re: 5 year ladder vs Cash and 30 year barbell

Post by sophie » Sat Aug 12, 2017 5:13 pm

I think Jack Bogle and Harry browne would have gotten along. I wonder if they ever met?

In regards to the proportion of gold in the PP...it's not arbitrary, it was based on a set of simulations run by Harry Browne. He doesn't report the results as far as I know, but describes the outcome in one of his books. Also, Tyler's portfolio charts supports at least a 20% gold allocation. Look at what happens in the 1970s - 10% or even 15% gold wasn't enough to sustain a portfolio through that time period. I know everyone wants to discount the 1970s, as if it couldn't happen again. Hopefully afros, disco, shag carpeting, and 1970s architecture won't ever come back, but I'm not as confident about the financial conditions.

10% is better than nothing and easier for most people to stomach, which I guess is the idea of the Desert Portfolio. Sustainable trumps optimal after all!
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Re: 5 year ladder vs Cash and 30 year barbell

Post by vnatale » Tue Jan 14, 2020 9:26 pm

MangoMan wrote:
Sat Aug 12, 2017 12:49 pm
buddtholomew wrote:BH and HB portfolio
Wow, I never noticed that this is kinda palindromic. I wonder if that is significant? :o
A GEM worthy of being resurrected!

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