The Great Bond Bubble?

Discussion of the Bond portion of the Permanent Portfolio

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buddtholomew
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Re: The Great Bond Bubble?

Post by buddtholomew » Wed Mar 07, 2018 7:55 am

sophie wrote:Yes, that's true: you can substitute a 50% allocation of intermediate bonds for the 25% cash and 25% LTT barbell and get about the same result on backtesting.
This is an accurate statement as I update my results daily and compare the LTT/Cash allocation (5.6 years) to the BND ETF with the same duration.
Psychologically it is more challenging to hold the LTT/Cash position (volatility in LTT's), but in aggregate the two positions perform within 5-15 basis points of each other on a daily basis.
On occasion I have witnessed some divergence, but the gap narrows in a few days with the laggard outperforming to catch-up.
The two approaches are closer than they are different.
Kevin K.
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Re: The Great Bond Bubble?

Post by Kevin K. » Wed Mar 07, 2018 8:33 am

sophie wrote:Yes, that's true: you can substitute a 50% allocation of intermediate bonds for the 25% cash and 25% LTT barbell and get about the same result on backtesting. Two caveats:

1. The barbell lets you use the PP as a cash management system as well as a long-term portfolio. That's one of the PP's best features IMHO. Think twice before giving this up.

2. Backtesting only tells you how the portfolio performs in the specific market environments that prevailed during the backtest. If you backtest during a period dominated by prosperity, your conclusion might not be worth much if you're about to enter a period of extended inflation or deflation.

I'd like to see a simulated backtest for the four major financial conditions described by Harry Browne. It would use actual data drawn from the appropriate market periods, but strung together differently so you could explore different scenarios, individually or in sequence.
To your first point not only is the 25% cash convenient it (and not gold) is what provides a large part of the PP's inflation protection, as Tyler shows pretty convincingly in this excellent post on his site:

https://portfoliocharts.com/2017/05/12/ ... -investor/

Regarding backtesting and how the 4 assets work during various market conditions, that's pretty much the entire subject of William Bernstein's little book "Deep Risk," which originated in conversations he and our esteemed mentor Craig Rowland had. One of Bernstein's key take-aways is that (a) gold is really more SHTF insurance than anything else and (most important) that the four economic conditions the PP is constructed in light of are nowhere near equally likely to occur or equally important to protect against, meaning that 4 x 25% is overly simplistic. The Golden Butterfly with its slight tilt towards prosperity and slight diversification of equities beyond TSM is one of many intriguing PP iterations that arise when considering Bernstein's points.
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