Logical and Personal Quandary

[pb4uski]

Quote:

Originally Posted by pb4uski From Portfolio Visualizer... Sept 2007 to June 2021

Quote:

Originally Posted by mrfeh Good results does not imply a sound strategy. I could go to a Vegas roulette wheel and put half my portfolio on 00. If I won, would that have made it a good choice?

How in the world could you infer that I was in any way shape or form implying that it was a sound strategy? I was simply providing information. If you go back to post #9, you'll see that I was suggesting caution. Wake up man.

Quote:

Originally Posted by pb4uski I would be hesitant as your plan has a high risk of financial ruin. While PSLDX has a great track record, it is only 14 years old. If you are reliant on PSLDX, all it takes is one significant misjudgement by the fund manager to ruin you. For example, say that the current PSLDX manager retires or moves on to their own fund and the new PIMCO manager has a particular investment hypothesis and goes with it in an effort to prove themselves and then it goes horribly wrong. ...

[mrfeh]

Quote:

Originally Posted by pb4uski How in the world could you infer that I was in any way shape or form implying that it was a sound strategy? I was simply providing information. If you go back to post #9, you'll see that I was suggesting caution. Wake up man.

I inferred no such thing. I was just pointing out to anybody reading this thread that looking at results from the last 14 years does not indicate a sound strategy.

[OldShooter]

Professional fiduciaries and trust officers' portfolios are regularly reviewed by their organization's management. Any holding beyond 10-15% of the total is considered to be "an imprudent concentration of assets."

It is a fine thing to be conscious of the risk you are taking, but it is a far better thing to minimize it. Betting the farm on a crazy long/short fund with high expenses and high turnover does not minimize risk. The fact that the manager has recently been lucky, is irrelevant. Mountains for research have shown that (gasp!) past results do not predict future performance.

[TheWizard]

Quote:

Originally Posted by OldShooter Professional fiduciaries and trust officers' portfolios are regularly reviewed by their organization's management. Any holding beyond 10-15% of the total is considered to be "an imprudent concentration of assets." It is a fine thing to be conscious of the risk you are taking, but it is a far better thing to minimize it. Betting the farm on a crazy long/short fund with high expenses and high turnover does not minimize risk. The fact that the manager has recently been lucky, is irrelevant. Mountains for research have shown that (gasp!) past results do not predict future performance.

I must be missing something.
More than 15% of financial assets in an S&P 500 or total market index fund is imprudent?
Shirley you must be joshing...

[OldShooter]

Quote:

Originally Posted by TheWizard I must be missing something. More than 15% of financial assets in an S&P 500 or total market index fund is imprudent? Shirley you must be joshing...

Sorry, it was me who missed something -- a more complete explanation. A truly diversified stock fund, like a total market fund, is not considered to be a single investment. Typically these concentration criteria are used to look at holdings of individual stocks, but in the OP's case PSLDX can't IMO be considered to be a diversified holding. It is a very strange beast, as @SecondCor521 points out in Post #5. Personally I wouldn't touch it, but the OP says he is in love so I'm suggesting that he at least limits the love a bit. Sorry for any confusion.

[NW-Bound]

Quote:

Originally Posted by Life_by_Fire So if in your mid 30s with 2 kids, would you consider leaving the workforce if you had dividend income of $150k + and reinvesting some of it?

Many couples with kids do not make $150K/year, and they do fine.

The question is then, how reliable that $150K income is.

I neglected to do what p4uski did, which was to look at the total return of PSLDX. And it shows a very respectable return since its inception in 2007, with nice Sharpe ratio.

It beat the market for the past 3/5/10 years. Recent performance is not as good; it trails the market YTD, and is about even with the market in the past year.

Looking further into the fund holdings, I saw things that I did not understand at all. This fund is heavily invested in derivatives which may not be available to individual investors. Here's an excerpt of the fund description:

Quote:

A traditional index fund typically invests in all, or a representative sample, of the stocks in an index in an effort to replicate the return of the index. PIMCO StocksPLUS Long Duration Fund seeks to outperform the index by employing a unique, bond-centric strategy. It does this by purchasing low-cost S&P 500 derivatives and backing this exposure with an actively managed portfolio of diversified long-duration bonds.

[Chuckanut]

I'm going to look at this from another angle. Some may disagree with me, or maybe not.

Your time horizon concerns me. Also your age. You have matured in a world where the stock market has for the most part gone up, Up and UP!! We have not seen a real BEAR market that lasts and lasts and lasts. I mean a Bear market that takes a big chunk out of you, takes another, goes way for a while, comes back and takes another.

I matured in the market starting in 1974.
That was a Bear market. It took well over a decade to return to break even in real terms. Double digit inflation rates in 74, 79, 80 and 81 did not help. That kind of a Bear can't be outrun, and can't be out fought. It is merciless. And relentless.

I have no idea if such a powerful Bear will return within your life. I hope not. But it has happened to people on this site within our life times. If you choose to retire, keep your skill set up to date.

[Out-to-Lunch]

A wise person once said not to invest in that which you do not understand. I wonder if you can understand this (sorry for the poor formatting):

https://www.schwab.com/research/mutu...ortfolio/psldx

%Long	%Short	%Net
•
Domestic Stock
100.04	0.00	100.04
•
Foreign Stock
0.24	0.00	0.24
•
U.S. Bonds
142.58	11.07	131.51
•
Non-U.S. Bonds
44.18	19.78	24.40
•
Convertible
4.38	0.00	4.38
•
Cash
8.56	169.13	-160.57

Personally, I cannot quite imagine how to generate a position that is 160% shorting cash. (Edit: NW-Bound nicely explains below that "shorting cash" == "borrowing" )

I cannot help but feel that the fund has been aided by the decrease in interest rates over its tenure.

[NW-Bound]

Quote:

Originally Posted by Out-to-Lunch Personally, I cannot quite imagine how to generate a position that is 160% shorting cash. (Edit: NW-Bound nicely explains below that "shorting cash" == "borrowing" )

Sorry that I deleted my post, because I thought of something else.

Maybe the "short of cash" does not mean borrowing, but to reflect the fact that the fund buys call options, and does not really own the underlying stock.

Here's an example. Suppose you buy stock ABC at $100. It now goes up to $101. Your net value is really $101 (if you sell). Your book simply shows that you own 1 share of ABC, and it is currently worth $101.

But what if you only buy an option to buy the stock at $100, and the option costs you $0.25, and that's all the money you have.

If the stock stays at $100 at expiry, the option is worthless, and your net value is now $0. You have lost your original $0.25.

But if the stock moves up to $101 at expiry, the intrinsic value of the option is now $1. You can now exercise the option or sell it at a small discount to someone else to exercise it. In either event, you now increase the value of your investment from $0.25 to $1.

And so until you exercise the option, how do you record your investment in your book? Is it reasonable to record that you own $101 worth of stock, but also -$100 of cash, the cash you will need in order to exercise the option? The net value is $1, which is truly what you have.

[Life_by_Fire]

Lots of great insights here. I understand this fund isn't as popular because of the use of leverage. There are great points being made about reliance on a particular fund manager and the what ifs that creates.

If this helps, each year I am converting the RMDs to VTSAX and VTIAX (PSLDX is held in a pre- secure act Inherited IRA). So over time I am reducing my exposure to PSLDX.

I also don't plan to "retire" right now. The original goal is 2030. Really this was a thought experiment as to if I could maybe pull the plug sooner, say 2025, should we choose to do so.

It sounds like the general consensus is reduce exposure to PSLDX and continue to plug away at w*rk until we have a more secure foundation in more traditional holdings......or win the lottery

[SecondCor521]

If the PSLDX is in an inherited IRA, you realize that you could sell all or some of it and buy something else today with no tax consequences, right? Just make the transaction inside the IRA.

I'm not sure if you don't realize that, or are trying to rationalize holding on to more of the fund for a while (either in the face of criticism of the fund here, or in your own head before you started this thread), or something else.

If I were in your shoes, I'd decide on my asset allocation, including my preferred allocation to PSLDX, and make it so today. It doesn't make sense to me to transition slowly when there's an option for getting there now.

I wonder what I'm missing.

[Life_by_Fire]

I am aware of those things. We are at our current desired AA. I don't wish to get rid of PSLDX but I won't hold it in a taxable account. So as we take RMDs, those PSLDX shares will be converted to VTSAX and VTIAX in a taxable account. This is in line with our planned glide path AA as we get closer to retirement.

I understand the risks of this fund but for now am willing to accept them. As we near and enter retirement, we will be less inclined to take on those risks. So the transition is a glide path. Does that make sense now?

[NW-Bound]

Quote:

Originally Posted by Life_by_Fire ... I understand this fund isn't as popular because of the use of leverage...

If I understand the fund's modus operandi correctly, its use of leverage is not really bad as people would automatically assume.

I think the fund buys long bonds, then uses the interest payout from the bonds to buy stock options. If stocks go up a lot, you participate in the bull market via the options. If the market goes down, the options become worthless. You only lose the interest from your bond, and do no worse than someone who is sitting in cash and having no bond nor stock.

When I first dabbled in options way back around 2000 or so, I independently thought of this idea, but never carried it out. If a novice like me stumbled upon this idea, then millions must have had the same. And indeed, here in this forum many posters brought this idea up. I don't know if any has tried it out.

Just as with anything else, a lot depends on the execution, and chance too. What I am really curious about is how the fund did so well early, but not lately. Understanding how different tactics work in different environments does not help you predict the future, but teaches you something that can turn useful.

[pb4uski]

Quote:

Originally Posted by NW-Bound Sorry that I deleted my post, because I thought of something else. Maybe the "short of cash" does not mean borrowing, but to reflect the fact that the fund buys call options, and does not really own the underlying stock. Here's an example. Suppose you buy stock ABC at $100. It now goes up to $101. Your net value is really $101 (if you sell). Your book simply shows that you own 1 share of ABC, and it is currently worth $101. But what if you only buy an option to buy the stock at $100, and the option costs you $0.25, and that's all the money you have. If the stock stays at $100 at expiry, the option is worthless, and your net value is now $0. You have lost your original $0.25. But if the stock moves up to $101 at expiry, the intrinsic value of the option is now $1. You can now exercise the option or sell it at a small discount to someone else to exercise it. In either event, you now increase the value of your investment from $0.25 to $1. And so until you exercise the option, how do you record your investment in your book? Is it reasonable to record that you own $101 worth of stock, but also -$100 of cash, the cash you will need in order to exercise the option? The net value is $1, which is truly what you have.

I'm currently doing something similar to this for my stock allocation that I explained in the options thread... I buy very long LEAPS as a stock substitute.

And I'm in a dilemma as to how to count it towards my AA... using your example whether to use the notional amount (100 in your example) which is the amount of the investment that I will get appreciation from based on market performance... ot the 25c that I paid for the option (in reality it is more like $9 rather than 25c for a long term option).

SWAN uses a similar strategy... 90% of the fund is in ~10 year UST and 10% of the fund is invested in SPY 12 mo call options... at 6 month intervals so they have half 6 month call options and half 12 month call options.

[Koolau]

Quote:

Originally Posted by NW-Bound If I understand the fund's modus operandi correctly, its use of leverage is not really bad as people would automatically assume. I think the fund buys long bonds, then uses the interest payout from the bonds to buy stock options. If stocks go up a lot, you participate in the bull market via the options. If the market goes down, the options become worthless. You only lose the interest from your bond, and do no worse than someone who is sitting in cash and having no bond nor stock. When I first dabbled in options way back around 2000 or so, I independently thought of this idea, but never carried it out. If a novice like me stumbled upon this idea, then millions must have had the same. And indeed, here in this forum many posters brought this idea up. I don't know if any has tried it out. Just as with anything else, a lot depends on the execution, and chance too. What I am really curious about is how the fund did so well early, but not lately. Understanding how different tactics work in different environments does not help you predict the future, but teaches you something that can turn useful.

DW owned a mutual fund that actually worked this way. Can't recall the name and I never would have bought it. Her "FA" was an old school chum who encouraged DW to have her "own" money and funds, etc. DW made such a piddly amount after all the fees that she eventually decided to psssst. Wellesley (with a bit of coaching from me - and unclemick.)

[NW-Bound]

Quote:

Originally Posted by pb4uski And I'm in a dilemma as to how to count it towards my AA... using your example whether to use the notional amount (100 in your example) which is the amount of the investment that I will get appreciation from based on market performance... ot the 25c that I paid for the option (in reality it is more like $9 rather than 25c for a long term option)...

Out of curiosity, I searched the Web to see what FASB says about how funds like PSLDX should do their accounting, but have not found anything.

I wonder if you could use the option Delta for this purpose. It also reflects the Beta of your portfolio, which is desirable to know.

[pb4uski]

On the first part, I'm pretty sure that they would carry the option at fair value in the fund's accounting and probably disclose notional and other info. SWAN is very transparent in that it is in their portfolio details. https://amplifyetfs.com/swan-holdings.html

[OldShooter]

Quote:

Originally Posted by Life_by_Fire ... I understand this fund isn't as popular because of the use of leverage. ...

I don't think the use of leverage is the main criticism. Certainly not the only one.

Speaking for myself only but from almost 50 years of investing experience, impending fund disasters and near-certain underperformance can be predicted when (a) fees are high (b) turnover is high (= further increased costs), and (c) "innovative" techniques are employed. This fund's techniques included leverage, short sales, and options trading. As far as I can figure from the summary data, there may also be self-dealing with other PIMCO entities. This is a witches brew designed to attract assets; it is not a recipe for long term investment success.

I will shut up now and leave you with two quotations from William Bernstein:

(on investing for retirement) “Make no mistake about it: The object of this particular game is not to get rich – It’s to not get poor.”

(on concentrations) “Do you think that by choosing a portfolio of only a few stocks that you hope will score big, you are maximizing your chances of becoming wealthy? Indeed you are, but you are also maximizing the chances of a retirement of cat food cuisine”

Good luck to you. I hope your love of PSLDX doesn't end up hurting you or your family too badly.

[ERD50]

Quote:

Originally Posted by NW-Bound If I understand the fund's modus operandi correctly, its use of leverage is not really bad as people would automatically assume. I think the fund buys long bonds, then uses the interest payout from the bonds to buy stock options. If stocks go up a lot, you participate in the bull market via the options. If the market goes down, the options become worthless. You only lose the interest from your bond, and do no worse than someone who is sitting in cash and having no bond nor stock. ...

Yes, but losing the bond income is a big deal. You are also losing the stock dividends.

Break it down into the components. If the total return on buying stock options on average was very close to owning the stocks, why wouldn't everyone do it? Far less of your money at risk, with similar returns - sounds great!

But of course, the option sellers want to make a profit, as they are the ones that have their money tied up holding the stock and are exposed 100% to any downside. If you want (most of) the gains, and reduced downside risk, you have to pay the piper. There is no free lunch.

So I fail to see how this strategy can work over the long run. Like most, it works until it doesn't.

-ERD50

[ERD50]

Quote:

Originally Posted by Life_by_Fire I am aware of those things. We are at our current desired AA. I don't wish to get rid of PSLDX but I won't hold it in a taxable account. So as we take RMDs, those PSLDX shares will be converted to VTSAX and VTIAX in a taxable account. This is in line with our planned glide path AA as we get closer to retirement. I understand the risks of this fund but for now am willing to accept them. As we near and enter retirement, we will be less inclined to take on those risks. So the transition is a glide path. Does that make sense now?

I don't see the significance of tying getting out of PSLDX and your RMDs.

Yes, I understand you use the RMD to purchase diversified funds in your taxable account, but that seems like a false construct (money is fungible, are you spending "other" money, and using the RMD to buy funds, or are you spending the RMD and using "other" money to buy funds?) and a meaningless limitation to me. You can diversify out of PSLDX in the IRA with no taxable impact, so why the dabble out of it?

You either believe that PSLDX will outperform in the future, or you don't. So either dump it or hold it, don't dabble. If for some reason you think it should remain as some smaller % of portfolio (5%, 10%?), then get there today - why wait years?

-ERD50