Gyroscopic Investing

I recall reading in another bond thread in this forum, that MediumTex mentioned

1 EDV has about approx 1.5X volatility as TLT; as well as approx 1.5X volatility of other asset classes - stock/VTI or gold/SGOL

2 theoretically one could manage a PP by holding 100% of of their LT bond assets as EDV, but in a lower amount?

The reason I bring this up, is the case of a accumulator/age 30s working person, whose nonwork IRA acct(s) are small (analogy: the Earth), compared to their work retirement 401k/457 accounts with no brokerage window & no options to buy LT bond or gold assets (the Jupiter).

Questions

1 Would would be the ratio of EDV to hold in relation to the VTI, SGOL, SHY?  Is 2/3X the appropriate ratio, given the 1.5X relative volatility of EDV?

Specifically, if standard HBPP has 25% in each asset class, rebalancing when 1 asset class' percentage of the portfolio increases or decreases 40% from this target, eg the 15%-35% band,

then, in EDV-PP, wouldn't
EDV have a target allocation 2/11 ~18.1%,
& the VTI/SGOL/SHY have a target allocation of 3/11 ~27.3%?

2 Would the rebalancing bands for EDV & the other assets still be based off of 40% from the target allocation?
EDV band from 10.9% to 25.3%
VTI/SGOL/SHY band 16.4% to 38.2%

3 In another post a reader who similarly had no LT bond or gold options in their 401k/457, & had a much larger 401k/457 account(s) than nonwork IRA account(s), noted MediumTex advised him that for the LT bond portion, 50% EDV + 50% US bond index would be acceptable.  Presumably, is this bond index "Barclays Capital U.S. Aggregate Float Adjusted Index" - BND at Vanguard?  The benefit of this approach is that the BND could be held in the 401k/457 fund if it's part of the fund list, thus allowing "more space" in the limited "bottleneck" nonwork IRA.

4 Wouldn't this EDV-PP approach be "less bad" than the 50% EDV / 50% BND approach, since at least EDV's borrowers are 100% US Treasury, whereas given BND has at most 43% US Treasuries (note https://personal.vanguard.com/us/funds/ ... st=tab%3A2 , as of 2010-Dec-31, 43% of BND holdings are Treasury/Agency), this approach has at most ~71.5% of its borrowers being US Treasury (50% EDV * 100% US Treasury) + (50% BND * at most 43% US Treasury). 

In other words aren't the problems Harry Browne noted (per yet another post here) about Zero Cupon Bonds "less bad" than the problems with having 28.5% of your supposed LT bonds holding having other issues, such as borrowers that could default in a crisis such as Lehman Brothers, bonds in BND that may have call risk, etc?

Thanks in advance.  This forum is excellent!

I am very curious to hear what people think about this.  I know HB toyed with the idea of using zeros, but decided against it. 

He did mention that, when push comes to shove, they may be okay. 

I have to think that you're better off in a 50/50 split of BND and EDV than you are paying taxes on 30 year bonds, although that's just my gut instinct.

Adam

let me get specific about my suggested plan/advice for the friend I'm advising.

I'd love to get your feedback from MediumTex, craigr, clive, or other such veteran PP gurus.  Forgive me if I'm too verbose in explaining this; this is the first time I'm describing such a scenario.

I'm advising a friend, early 30s & working, "accumulator", who wants to implement the PP across his
- $20K with planned $1K annual new total contribution by Dec 31 (his own + employer match) in work 457, ING is the custodian with no brokerage window choice, a craptastic fund list with limited bad high expense ratio fund choices for stock & cash, & no LT bond or gold fund choices.  The annual new total contribution is the minimum amount that the employer will completely match.

- $5K Roth IRA with maximum $5K annual limit new contribution by Dec 31 but as early as possible/affordable (in each of 2011, 2012, etc) at custodian VBS (Vanguard Brokerage Services).

Friend has no interest in Variable Portfolio/speculation. 

Altho an intelligent individual, shows little intellectual curiosity for retirement investing.  I guess you could say a typical USian on this issue, that will do solid due dilligence on buying a house or a household item like a furnace, but not on retirement investing.  Given this, I suggest a "Keep It Simple" approach.  I suggest contributing the incremental $5K to the Roth IRA once a year, purchasing EDV, SGOL (and perhaps VTI or SHY if relevant 2013 or later) in a manner that will rebalance the overall portfolio.

Suggest to have the 457 account, 50% stock index fund, 50% cash fund intially. In the future, this will change as rebalancing dictates.  Suggest new incremental contributions from paycheck/employer match to be 50% stock, 50% cash.

Based off this plan, & my assumptions on the rebalancing bands in my prior post, the intial (eg Feb 2011) portfolio would "need rebalancing", but rebalancing would not yet be possible due to the VBS account being too small.

Feb 2011 (amounts in $1000 USD)
10.0 40% stock in 457
10.0 40% cash in 457
2.0 8% lt bond (EDV) in VBS
3.0 12% gold (SGOL) in VBS


at the time he makes his $5K 2011 VBS contribution (Dec 31 but sooner if possible), the amounts will be within the rebalancing bands I assumed above, 10.9% to 25.3% for EDV, 16.4% to 38.2% for other asset classes.  I'm assuming 0% in appreciation/loss for each asset class; obviously this will be different in reality.

Dec 2011
10.5 33.9% stock in 457
10.5 33.9% cash in 457
4 12.9% lt bond (EDV) in VBS
6 19.4% gold (SGOL) in VBS

Similarly by Dec 2012
11 29.7% stock in 457
11 29.7% cash in 457
6 16.2% lt bond (EDV) in VBS
9 24.3% gold (SGOL) in VBS

By Dec 2013 the amounts are near the target allocation of 18.1% EDV, 27.3% other assets
11.5 26.7% stock in 457
11.5 26.7% cash in 457
8 18.6% lt bond (EDV) in VBS
12 27.9% gold (SGOL) in VBS

Any rebalancing between stock & cash will be done in 457

Any rebalancing between lt bond & gold will be done in VBS

Any rebalancing required bt lt bond & stock, or lt bond & cash, or gold & stock, or gold & cash, needs to be done in VBS.  In practice, this will mean that until approximately Dec 2013 (could be sooner or later depending on the appreciation of each asset class), there will be times where there is insufficient LT bond, insufficient gold, excessive stock, or excessive cash.  In such cases, he will "temporarily tolerate this situation" until the next yearly $5K VBS contribution, which will likely serve to rebalance the portfolio.  This possibility gives extra motivation to contribute the $5K as soon as possible each year.  Eg, for 2011, contribute in Mar 2011 or Jun 2011 instead of Dec 2011 or filing taxes at the deadline & contributing in Apr 2012.

In the future if he is able to contribute more annually to the 457, he should do so, even if it puts his stock & cash portion above the 38.2% band.  He plans to switch employers for career reasons sometime between now & 2015.  My guesstimate is that the downside of exceeding the 38.2% band is less than the downside of giving up the annual "use it or lose it" 457 space.  Especially given that once he changes employers, he'll roll the 457 into a VBS Traditional IRA, & from that time forward will be able to manage the portfolio more effectively, as from that time forward his VBS accounts (Traditional IRA + Roth IRA) will be the "Jupiter" that dwarfs his new job's 457 "Earth".

What do you gurus think of this plan?

Adam1226 wrote: I have to think that you're better off in a 50/50 split of BND and EDV than you are paying taxes on 30 year bonds, although that's just my gut instinct.

Adam

In this scenario, the guy is fully in nontaxable retirement accounts, between the work ING 457, & the nonwork VBS Roth IRA.  So there are no special tax issues for holding EDV, as far as I can tell

cabronjames

i have very similar interest to your 1st two statements:

    "1 EDV has about approx 1.5X volatility as TLT; as well as approx 1.5X volatility of other asset classes - stock/VTI or gold/SGOL

      2 theoretically one could manage a PP by holding 100% of of their LT bond assets as EDV, but in a lower amount? "

(see the thread topic "EDV")

regards statement 1, after comparing EDV vs TLT over both the past 12 months & past 24 months, i'm not sure the relationship is linear. (btw, how can a do comparison taking into account the dividends?) if so, i think that would undermine statement 2.

however, i am very interested to learn educated opinions on what a suitable allocation might be (in lieu of the full LT bond or TLT allocation)

fundamentally, i don't have a clear understanding of how/why EDV responds the way it does.




ps...just came across this link  http://www.gyroscopicinvesting.com/foru ... opic=123.0

wish i could see this article: "Why Zero Coupon Bonds Aren't What They Seem"