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Old 01-10-2016, 07:04 PM   #41
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Great question! I am not confident I can answer that, but let me share what I have. First, I am indebted to big-papa for directing me to Simba's spreadsheet (updated) from Bogleheads. The spreadsheet must have been an enormous amount of work by Simba, updated by several others. A thousand thanks to all!

https://drive.google.com/file/d/0B6r...bWc/view?pli=1

The first image is from FRED (thank you for the reference!) showing long-term (>20 years?) since 1954. Note the gap when LTB were not issued. Interest rates peaked in 1982.

The second image is from Simba's spreadsheet for 100% LTB from 1972 to 2014. I believe this would be for a LTB fund, but I cannot confirm that. I believe this is for no withdrawals, just compounding. The blue dots are for the Coffeehouse Portfolio, for reference. (LTB<<CHP.)

The third image is also from Simba's spreadsheet showing 100% SCV. Again, the blue dots are for the Coffeehouse Portfolio. (SCV>>CHP.)

The fourth image is for a 50/50 SCV/LTB (fund?) portfolio vs CHP. The red dots are for the portfolio rebalanced; the yellow ones are for not-rebalanced (why would that be interesting? Dunno. Can't shut it off, though.) Note that the rebalanced 50/50 SCV/LTB outperforms the CHP and takes a shallower dip in 2008.

Finally, the fifth image shows 50/50 (P1, navy-blue diamond), 100% LTB (P2, purple square) and 100% SCV (P3, yellow triangle) returns vs risk, measured as annual standard deviation. (Ignore the light blue diamond and the grey circle.)

Over the 43 year period,
50/50 had a 12%+ annualized total return with 11.8% SD and outperformed the CHP,
100% LTB had a 8.9%+ annualized total return with 12.1% SD and did NOT outperform the CHP (no surprise),
and 100% SCV had a 15.3% annualized total return with 20.4% SD and outperformed the CHP.

Back to your question, it looks like the equivalent of a LTB fund weathered 1972-1984 just fine. (Not sure how they got this performance as there does not seem to have been a LTB fund that goes that far back, although I checked performance against one fund as far back as I could and they match. I have not seen any comparable data from 1954-1972.)

What are your thoughts? Anyone? Someone please poke holes in this study. It looks too good to be true: only two funds, rebalanced, outperform the CHP with less volatility.
The Simba spreadsheet has a tab that shows the source of the returns it uses. It actually has two tabs for two different timeframes. It uses Vanguard funds when they existed, before then they are derived from indices or research.

OK, I once went this same route for a while (SCV + LTB) for exactly the same reason you did. You have two asset classes with large returns. And everybody knows that stocks/bonds are a good mix.

However, over the entire timeframe of stocks and bonds, you'll see that both Intermediate govt bonds and Long Term government bonds are actually uncorrelated to stocks, not anti-correlated. The simba spreadsheet also has a nice correlation table for 1972-2014 by the way. If you go back to 1926 you'll see that the uncorrelated nature of stocks to govt bonds (both long term and intermediate) still holds over that timeframe (that data is available in Ibbotson's annual yearbook available at most university libraries) Now that doesn't mean that there won't be periods of time within the 1926-2014 timeframe where they're correlated or anti-correlated. You'll notice that LTBs did phenomenally well in 2008 against stocks. In the 2000-2002 bear market they did well for 2 of those 3 years but not for all 3 years. But if you go back to the bear market of the early 1970's you'll see they didn't do as well as the more recent bear markets. Why is that? Was it inflation? Was it where the interest rates were back then vs more recently? I'm not sure and that's something on my to-do list to look at.

But make a note that the bigger anti-correlation during big downturns (and the subsequent big recovery year) is a more recent phenomenon - not guaranteed to always be the case.

Big-Papa
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Old 01-10-2016, 07:26 PM   #42
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Bonds and stocks go down simultaneously when the Fed is bumping up the interest rates to fight inflation. If a different cause is driving stocks down, like Lehman Brothers going bankrupt, then stocks and long term treasuries are anticorrelated. In a steep downturn, bond quality is paramount. Only the highest quality bonds have this anticorrelation characteristic. Lower quality bonds will go down along with stocks.

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Old 01-10-2016, 07:34 PM   #43
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Bonds and stocks go down simultaneously when the Fed is bumping up the interest rates to fight inflation. If a different cause is driving stocks down, like Lehman Brothers going bankrupt, then stocks and long term treasuries are anticorrelated. In a steep downturn, bond quality is paramount. Only the highest quality bonds have this anticorrelation characteristic. Lower quality bonds will go down along with stocks.

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That is what makes this interest rate increase "cycle" so unique and hard to handicap. They are fighting "anticipated" but not yet occurring inflation. And no rate tightening has ever started this late in a "recovery cycle". But in the early going it is mimicking your last two sentences for sure.


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Old 01-10-2016, 08:03 PM   #44
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Agreed. In fact, the thought has occurred to me that I might replace BLV in the portfolio with half really long term treasuries (like long term on steroids) and the other half shorter term corporate bonds. I think the long term corporate bonds part of BLV may hurt it's performance a bit during those downturns.

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Old 01-10-2016, 08:13 PM   #45
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Agreed. In fact, the thought has occurred to me that I might replace BLV in the portfolio with half really long term treasuries (like long term on steroids) and the other half shorter term corporate bonds. I think the long term corporate bonds part of BLV may hurt it's performance a bit during those downturns.

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I have even went longer. I have most of my money in perpetual "yield trapped" preferred stocks, that in essence mirror the bond market. Most were issued when 10 year treasury was between 4-5%. Being now 400 plus basis points above treasury as opposed to historical 200 basis points should provide a ballast that long and liquid bonds will not. They are "trapped" at a higher rate because issue price cant rise to lower the yield to true market price because fear of possible par call. Nobody in their sane mind would risk paying $3-$4 over par for a past call issue so the price stays low and yield return high.



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Old 01-10-2016, 08:40 PM   #46
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Sorry, what are "yield trapped" preferred stocks? Actually, never mind the yield trapped part, what are preferred stocks?

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Why I have a portion of long term bonds
Old 01-10-2016, 08:52 PM   #47
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Why I have a portion of long term bonds

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Sorry, what are "yield trapped" preferred stocks? Actually, never mind the yield trapped part, what are preferred stocks?

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Orcas in this Stock Picking and Market strategy section there is a continuous thread titled "Preferred Stocks, the Good, the Bad....". It is a continuous thread explaining them. In very short loose summary, they are stocks that trade like high yielding bonds that get rated by bond agencies like a bond because they trade like a bond...I generally stay in investment grade perpetual issues (meaning company can "call" or never "call" the issue. I tend to stick with electrical utility ones that yield around 6-6.5% but I do buy higher yielding ones from other safe companies also.


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Old 01-10-2016, 10:23 PM   #48
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However, over the entire timeframe of stocks and bonds, you'll see that both Intermediate govt bonds and Long Term government bonds are actually uncorrelated to stocks, not anti-correlated.
That is not bad. There is no point in having two correlated assets. Anti-correlated is best; uncorrelated is OK.
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Old 01-10-2016, 10:43 PM   #49
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That is not bad. There is no point in having two correlated assets. Anti-correlated is best; uncorrelated is OK.
Why not just focus on total return? The addition of an asset should increase total return, no? Or at least lower standard deviation without decreasing return much.
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Old 01-11-2016, 06:31 AM   #50
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Why not just focus on total return? The addition of an asset should increase total return, no? Or at least lower standard deviation without decreasing return much.
Anti-correlated being best really depends on how much anti-correlation - obviously no sense in having two completely anticorrelated items in your portfolio, unless you want growth to come to a grinding halt. As for me, I prefer uncorrelated assets, though as everybody who experienced 2008 knows, sometimes seemingly uncorrelated assets can become correlated for brief enough periods to do some damage.

On the total return question, I think that's exactly what he's trying to do - he's using SCV for the stock portion and trying to push down the overall volitility using long term bonds.

As for me, as I mentioned in an earlier response, I started off with SIMBA's spreadsheet and headed down this path as well. But somewhere along the way, I realized that the long bond returns in that spreadsheet came about as a result of high interest rates of the late 70's/early 80's and the slow-but-steady long term drop in interest rates since then, culminating in the near zero rates that happened after 2008. Ultimately, I steered to the middle, moving more towards mid-cap value and to intermediate govt bonds. In Simba's spreadsheet, you can only backtest this combination in the 1985-2014 tabs.
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Old 01-11-2016, 06:43 AM   #51
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That is not bad. There is no point in having two correlated assets. Anti-correlated is best; uncorrelated is OK.
Actually lots of people use correlated assets. A typical stock portion of a portfolio that many people use is an SP500 index fund and "tilt" it with SCV to improve returns while maintaining the same long-term volatility. And the SP500 and SCV are positively correlated (the correlation just isn't 1.0). Same with bonds of different duration.
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Old 01-11-2016, 10:41 AM   #52
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...
However, over the entire timeframe of stocks and bonds, you'll see that both Intermediate govt bonds and Long Term government bonds are actually uncorrelated to stocks, not anti-correlated. The simba spreadsheet also has a nice correlation table for 1972-2014 by the way. If you go back to 1926 you'll see that the uncorrelated nature of stocks to govt bonds (both long term and intermediate) still holds over that timeframe (that data is available in Ibbotson's annual yearbook available at most university libraries) Now that doesn't mean that there won't be periods of time within the 1926-2014 timeframe where they're correlated or anti-correlated. You'll notice that LTBs did phenomenally well in 2008 against stocks. In the 2000-2002 bear market they did well for 2 of those 3 years but not for all 3 years. But if you go back to the bear market of the early 1970's you'll see they didn't do as well as the more recent bear markets. Why is that? Was it inflation? Was it where the interest rates were back then vs more recently? I'm not sure and that's something on my to-do list to look at.
...

Big-Papa
I've looked back to the 1954 period using Fed data. The 5yr Treasury took a hit then as rates moved up. For about 5 years the rates rose pretty fast and one would have gotten low real returns. Those rates in 1954 were only slightly higher then today's rates. I have not done the same analysis for LTB as I've never considered them for my portfolio. A guess would be that they would perform pretty poorly for the first part of that rate rise starting in 1954.

Mid cap value seems to be a sweet spot from my data for MSCI indexes and VG funds since about 1992. One reason might be MV retains the value premium but does not have the negative small cap premium of large value. That would be a factor analysis person's explanation.
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Old 01-13-2016, 01:56 PM   #53
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Unfortunately, what we have been seeing since the 4th of January is starting to look like a textbook example of anticorrelation of long term bonds against stocks. S&P has gone from 2043 to 1888 or about 7.6% down for the year. BLV has gone from 86.81 up to 88.90 or an increase of 2.4%. See below for the trend continuing.

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BLV back in the green for us
Old 03-19-2016, 05:14 PM   #54
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BLV back in the green for us

BLV was the ETF that I have been using for long term bonds. I pointed out earlier that I kind of believe that due to the malaise in our economy, I expect interest rates to not really change significantly going forward. Well, this investment that my family has made in this particular ETF of about $270k is in the positive by about $7K overall, not including dividends. Plus it has been earning about 4.1% the whole time. It is about 40% of our bonds.

The combined interest rate for our family's bonds is 40%*4.1+60%*2.3 or about 3% overall. This was our goal, not to get too greedy, but to have "enough" to get the job done as Bogle would say it.

Overall, including stocks, 6% is the expected return. 10% stocks + 3% bonds.

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Old 03-20-2016, 01:19 PM   #55
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Why not just focus on total return? The addition of an asset should increase total return, no? Or at least lower standard deviation without decreasing return much.
I believe the graphs in my post #39 do reflect total return and it is superior to that of Wellesley (my current standard for total return and volatility) with less volatility (see 5th graph). If I am wrong, please advise.

I should point out that both assets show good total returns over time. I do not consider assets that do not grow well over time even if they are uncorrelated. Cash is uncorrelated with everything but I use it only to park my money, not as part of an AA program.
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Old 03-20-2016, 01:24 PM   #56
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The Simba spreadsheet has a tab that shows the source of the returns it uses. It actually has two tabs for two different timeframes. It uses Vanguard funds when they existed, before then they are derived from indices or research.

OK, I once went this same route for a while (SCV + LTB) for exactly the same reason you did. You have two asset classes with large returns. And everybody knows that stocks/bonds are a good mix.

However, over the entire timeframe of stocks and bonds, you'll see that both Intermediate govt bonds and Long Term government bonds are actually uncorrelated to stocks, not anti-correlated. The simba spreadsheet also has a nice correlation table for 1972-2014 by the way. If you go back to 1926 you'll see that the uncorrelated nature of stocks to govt bonds (both long term and intermediate) still holds over that timeframe (that data is available in Ibbotson's annual yearbook available at most university libraries) Now that doesn't mean that there won't be periods of time within the 1926-2014 timeframe where they're correlated or anti-correlated. You'll notice that LTBs did phenomenally well in 2008 against stocks. In the 2000-2002 bear market they did well for 2 of those 3 years but not for all 3 years. But if you go back to the bear market of the early 1970's you'll see they didn't do as well as the more recent bear markets. Why is that? Was it inflation? Was it where the interest rates were back then vs more recently? I'm not sure and that's something on my to-do list to look at.

But make a note that the bigger anti-correlation during big downturns (and the subsequent big recovery year) is a more recent phenomenon - not guaranteed to always be the case.

Big-Papa
thanks, Big-Papa. I will look into this. You directed me to Simba's spreadsheet which took me in this direction.
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Old 03-20-2016, 01:30 PM   #57
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Bonds are a subtle investment. Everyone seems to be aware of the rough estimate of how much long term bonds can go up or down. You simply multiply the change in interest rate times the duration and the result is the amount of gain or loss. BLV has a 15 year duration, so if it's interest rate changes by 1% it can change value by 15%, a seemingly scary figure. The subtle part is that it already is somewhat closer to historical rates and so I think will see somewhat smaller interest rate changes. Plus it earns 4.1% instead of 2.3% BND return, a 5 year duration bond. Both are solid bonds with high % treasuries and no junk. I use about a third long term and two thirds medium term bonds. I'll let you all know in a few years if this was a good move or a bad move.
FYI, TLT has more bounce (volatility) to it than BLV:PerfCharts - StockCharts.com - Free Charts
right-click on the '200 days' bar and set it to 'ALL' and see the available histories of both together (total return).

I have not committed to my proposed plan yet,but if and when, I too will let y'all know if it was a good move or a bad one.
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Old 03-20-2016, 01:39 PM   #58
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Actually lots of people use correlated assets. A typical stock portion of a portfolio that many people use is an SP500 index fund and "tilt" it with SCV to improve returns while maintaining the same long-term volatility. And the SP500 and SCV are positively correlated (the correlation just isn't 1.0). Same with bonds of different duration.
All true. Still, over time, there is a relative premium to SCV vs. large cap (S&P500). Here is Wellesley vs VFINX vs SCV:
PerfCharts - StockCharts.com - Free Charts
Why choose S&P500 (VFINX) when you can get better long-term performance and less volatility with Wellesley? And if a combo of LTB and SCV outperforms Wellesley with less volatility than Wellesley over long periods of time, why not go 50/50 SCV/LTB instead?

As we are in IMHO uncharted territory, I have not committed to this path yet but it remains compelling. As always, comments welcome.
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Old 03-20-2016, 05:20 PM   #59
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One of my goals for long term bonds was to use UNcorrelated assets in mixing it up with stocks. This lowers volatility

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Old 06-04-2016, 04:38 PM   #60
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When I started this thread several months ago, I had no idea that interest rates would decline and that this asset, BLV, would grow from $87.55 to $95.00 a share plus be paying dividends at a rate of about 4%. But that was the whole point, wasn't it?... To have a portion of one's investments in a truly diversifying asset of reasonable risk.

That was an increase of over 8% + the 4% dividends.

I would not recommend buying BLV today because it has become over valued now, but I have no plans to sell it either.


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