Re: Maximum Bond Upside
Posted: Sun Dec 11, 2016 9:47 am
I'm at 9% BF after the holidays
Permanent Portfolio Forum
https://gyroscopicinvesting.com/forum/
Thanks for the insights.tarentola wrote:I did a backtest comparison of the PP, comparing it to a portfolio where ITTs replace LTTs. Results from Portfolio Visualizer...
This indicates to me that the dominant factor in the alleged superiority of LTTs over ITTs in the PP is not volatility, but the direction of interest rates. The dictum that LTTs are a bet on falling interest rates seems to hold, even within a PP.
Interest rates are probably going to rise soon, or at least stop falling. Like Budd, I am still holding my LTTs, but I think any future bond purchases will be ITTs. Given that the PP is intended as an all-weather portfolio, I see no evidence that LTTs are the better choice.
How long have we been hearing that? It sounds like your crystal ball is a lot clearer than mine. Could you please give us a date fixed?tarentola wrote: Interest rates are probably going to rise soon, or at least stop falling.
Ha! Thanks DS.dualstow wrote:I like the new Budd!
Stuperstuper1 wrote:How long have we been hearing that? It sounds like your crystal ball is a lot clearer than mine. Could you please give us a date fixed?tarentola wrote: Interest rates are probably going to rise soon, or at least stop falling.
Have you seen where long-bond yields are at in other countries? Is there some reason that US yields couldn't go that low?
I'm confused about your answers. You give a date when interest rates are going to stop falling, and then you say that there is no reason that they can't go lower. So, which is it?tarentola wrote:Stuperstuper1 wrote:How long have we been hearing that? It sounds like your crystal ball is a lot clearer than mine. Could you please give us a date fixed?tarentola wrote: Interest rates are probably going to rise soon, or at least stop falling.
Have you seen where long-bond yields are at in other countries? Is there some reason that US yields couldn't go that low?
I could be branded a heretic for questioning the value of long-term bonds in a PP, but I don't want to be a market- or interest-rate timing heretic.
To answer your questions: 1. Years. 2. 14 December 2016 ie tomorrow at the Fed meeting (probably - we will soon find out). 3. Yes, I live in one of them. 4. No.
I have never done this, but for LTTs Harry Browne suggested buying 30-year bonds and selling them when they had 25 years left to maturity. I suppose you could do something similar with shorter bonds.grapesofwrath wrote:Dumb question : how do you get an ITT performance with discrete treasury bonds and not a treasury fund ? i.e. Do you buy 10, 7 or 5 year treasuries and hold them to they mature or sell them earlier at a defined time ? Thanks.
You could mimic say ishares treasury funds. Buy at 7 sell at 3, 10/7, 20/10 or make up your own 15/10, 10/5 etc.tarentola wrote:I have never done this, but for LTTs Harry Browne suggested buying 30-year bonds and selling them when they had 25 years left to maturity. I suppose you could do something similar with shorter bonds.grapesofwrath wrote:Dumb question : how do you get an ITT performance with discrete treasury bonds and not a treasury fund ? i.e. Do you buy 10, 7 or 5 year treasuries and hold them to they mature or sell them earlier at a defined time ? Thanks.
I ShruggedI Shrugged wrote:tarentola,
You asked for opinions, here are mine. I've been in my PP since 2009. I have not rebalanced because of the taxable gains I have, and I am still within 15-35 percent bands.
1. I am glad you realized you are not good at speculating. I realized the same thing probably about 10 years ago.
2. I like your current allocation. I personally would not change it.
3. I think as long as you are within your bands, there is nothing wrong with going with a hunch as to whether it is a good time to buy or sell.
4. I believe there is less value in backtesting than people want to believe. It can be addicting. Anything that can be addicting needs to be handled with a lot of self control and self awareness.
Know it all too well! I am what is called a "hard gainer". Thin arms (which, I guess, are on thin bones?) which makes it difficult to put on muscle anywhere? I plateau out fairly quickly on free weight barbells. Today was a major victory in that I added 5 lbs to two of the three major exercises I did this morning. Adding 5 lbs is something I might not do over a whole year. Therefore, week after week, month after month, year after year, I am just maintaining. That is good in itself for an aging body It seems it is difficult for many reasons (age, body type) to get beyond those plateaus.
tarentola wrote: ↑Mon Dec 12, 2016 12:38 pm I did a backtest comparison of the PP, comparing it to a portfolio where ITTs replace LTTs. Results from Portfolio Visualizer.
In a backtest period 1981-2016, a (standard) PP with 25% long-term treasuries beats a PP with 25% intermediate-term treasuries. CAGRs:
with 25% LTTs: 7.41%
with 25% ITTs: 6.88%
with 25% STTs: 6.49%
The difference between CAGRs is only about half a percent. Using 25% short-term treasuries loses another half a percent. MaxDDs varied little between bond durations. I conclude that in the last 35 years, bonds of almost any duration would have given the PP a respectable CAGR. 1981-2016 is a 35-year period of falling interest rates.
The period 1972-1980 is the only multi-year period in PV's available data (1972-present) when interest rates rose, from 5% in November 1971 to 20% in December 1980. For the bond durations, the order of success is reversed. ITTs beat LTTs. (Data for STTs were not available as early as 1972.) CAGRs:
with 25% LTTs: 13.17%
with 25% ITTs: 14.50%
Using 25% ITTs beats 25% LTTs by 1.33%. Conclusion: the PP with shorter-duration bonds did better when interest rates are rising, and worse when interest rates were falling. I also compared the two in portfoliocharts.com, and the ITT version beat the LTT PP in 8 out of 9 years in the 1970s. (I can't work out how to post the image.)
The argument for longer-term treasuries in the PP is that their higher volatility compensates for the volatility in stocks or gold. So let's have a look at volatilities. Here are CAGR, MaxDD and Sharpe ratio for LTTs and STTs (alone, not in a PP) 1972-1980:
100% ITTs : 4.87%, -10.70%, -0.26
100% LTTs : -0.55%, -21.77%, -0.89
LTTs are more volatile than ITTs, no surprise there. And LTTs suffered more than ITTs as rates rose, no surprise either. But within the PP, the higher volatility of the LTTs did not compensate for their lower CAGR in 1972-80, when interest rates were rising.
This indicates to me that the dominant factor in the alleged superiority of LTTs over ITTs in the PP is not volatility, but the direction of interest rates. The dictum that LTTs are a bet on falling interest rates seems to hold, even within a PP.
Interest rates are probably going to rise soon, or at least stop falling. Like Budd, I am still holding my LTTs, but I think any future bond purchases will be ITTs. Given that the PP is intended as an all-weather portfolio, I see no evidence that LTTs are the better choice.
tarentola wrote: ↑Tue Dec 13, 2016 3:11 amStuperstuper1 wrote:How long have we been hearing that? It sounds like your crystal ball is a lot clearer than mine. Could you please give us a date fixed?tarentola wrote: Interest rates are probably going to rise soon, or at least stop falling.
Have you seen where long-bond yields are at in other countries? Is there some reason that US yields couldn't go that low?
I could be branded a heretic for questioning the value of long-term bonds in a PP, but I don't want to be a market- or interest-rate timing heretic.
To answer your questions: 1. Years. 2. 14 December 2016 ie tomorrow at the Fed meeting (probably - we will soon find out). 3. Yes, I live in one of them. 4. No.
But my answers don't matter. Anything is possible. My conclusion was that any outperformance of LTTs over ITTs in the PP is attributable to bond interest rates falling, not to LTT volatility. Personally I am not willing to chase that slight outperformance by assuming that for the life of my PP, interest rates will continue to fall.
For fun I did a backtest comparison 1981-2016 of a standard 4x25% PP with a portfolio of 100% ITTs and one of 100% LTTs. CAGR, MaxDD, Sharpe Ratio
PP 4x25% : 7.41%, -13.40%, 0.48
100% ITTs : 7.93%, -6.47%, 0.65
100% LTTs : 9.89%, -16.68%, 0.54
Believe it or not, the clear risk-adjusted winner is 100% ITTs. Or the winner is LTTs if you don't mind the DD. For thirty-five years. What?, I hear you cry. Why are we bothering with the PP and with this forum, when we could just invest in ITTs?
You know the answer - 1981-2016 was a period of falling interest rates. Could be called cherry-picking, although 35 years is a big cherry - an investment lifetime for many. To avoid more heresy charges, let's pick the other cherry, 1972-1980.
PP 4x25% : 13.17%, -11.49%, 0.62
100% ITTs : 4.87%, -10.70%, -0.26
100% LTTs : -0.55%, -21.77%, -0.89
And the PP wins. ITTs were positive, but would not have beaten inflation which was well above 5% for most of the seventies. This is why we are bothering with the PP. It works whether interest rates are rising or falling.
And so, one could argue, do ITTs. For more fun, 1972-2016 figures are
PP 4x25% : 8.55%, -13.40%, 0.51
100% ITTs : 7.31%, -10.70%, 0.43
100% LTTs : 7.71%, -23.12%, 0.31
Looking at the whole backtestable period, including the inflationary seventies, 100% ITTs provided a decent return and low MaxDD over the last 45 years. But that's enough heresy for one day.
I don't believe we've got back to 4% in the last three years? If so, have you held to only buying EE bonds?whatchamacallit wrote: ↑Tue Dec 13, 2016 7:03 pm Thank you for analysis tarentola
While I still have some LTTs , I am a heretic by only buying EE bonds in their place until we get back to 4%.
For my PP, I ended up in a compromise, buying some medium and some long.A full three years later, after both this and your prior analysis, what have you been deciding to do during these past three years?
I realise that I am challenging a central tenet of the PP (which I take no pleasure in doing), but i don't remember anyone seriously refuting it.... the dominant factor in the alleged superiority of LTTs over ITTs in the PP is not volatility, but the direction of interest rates. The dictum that LTTs are a bet on falling interest rates seems to hold, even within a PP.
The central tenet of the PP that I am challenging is that LTTs are the best bonds to use, due to their volatility. The backtesting I did indicates that LTTs are the best PP bonds only when interest rates are falling. When interest rates are rising, ITTs seem to be a better choice for the bond compartment of the PP.
We do now have fairly recent evidence from Craig that he did drop this 1% threshold down to 0%!craigr wrote: ↑Mon Feb 08, 2016 2:17 pmClearly at some point investors should just not be buying bonds.Lang wrote: Switzerland's 50 year bond (to be precise, it's actually 48 years, due 2064) yield today fell to an all time low of 0.32%.
Yes, if you want to lend Switzerland money for the next 50 years, you're only going to get 0.32% interest per year.
In the case of the Permanent Portfolio, you'd have a hard time getting me to buy long term bonds under 1%. I say this knowing that it breaks the model. But I'd also say that 30 year bonds paying under 1% the risk is just far too high. 50 year bonds under 1% is an absurdly bad deal as well. Investors would be better in cash.
craigr wrote: ↑Tue Feb 09, 2016 6:31 pm Well yes I suppose there is a number for everyone. The bond number for me is 1% for sure. At that point I don't want them anymore. Under 2% I'm probably not buying them as a new investor, but if I already have them I'm not selling until 1% or so.
This is all highly subjective. But with bonds you kind of know what you're getting in terms of valuation. Stock P/E can change rapidly for a variety of reasons, but a long bond paying 0.50% is pretty much a known bad deal by most any measure I can come up with.
In terms of the Permanent Portfolio I know this would break the model, but sometimes dogma needs to step aside for reality. That reality for me is risk vs. reward for the bonds and the fact that at 1% it's just too rich for my blood and I'll go very short on the yield curve until they recover. But this of course puts investors in the unfortunate situation of asking: "When do I get back in?" And that I don't have an answer for yet. I'll cross that bridge if I'm forced to part ways with my bonds.