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An alternative for part of a bond portfolio
Old 08-03-2020, 11:54 AM   #1
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An alternative for part of a bond portfolio

Bonds are at incredibly low yields. I think that a simple moving average (SMA) equity timing method will be a good way to reduce my bond exposure. This is used NOT to beat a buy-hold equity strategy. Rather this would just be to reduce the bond exposure and get decent returns. Usually people talk about such a timing method to replace a buy-hold equity portfolio but I think it is a better argument to use it as a way to beat bonds.

For my 60/40 portfolio I will take about 15% of the bond portion and move it to this SMA approach. So the 60/40 would move to a 60/25/15.

The timing method I am referring to is a simple moving average approach. You get out of equities and into Treasuries (or a money market account) when the SP500 index drops below its 12 month moving average and buy back when it rises above the moving average. This is nothing new and is pretty robust in that using an 8 or 10 or 12 month average will give better results then an intermediate Treasury bond return.

For one 12 month SMA method I’ve got backtested results for 70 years. This trades at the last day of any month. There were 32 trades in 70 years with 11 good trades and 21 whipsaws. The worst whipsaw was -12%. Here is a table showing the SMA return difference versus the Treasury. The numbers are compound annual average return (CAGR) differences.



I am posting this as a way to have a respectful dialog about this sort of thing. I recognize that some people hate market timing in any form but this part of the forum should be tolerant of such an idea.

In a response I will post a few relevant charts.
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Old 08-03-2020, 11:56 AM   #2
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Here is a 70 year chart showing rolling compound annual returns.


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Old 08-03-2020, 01:46 PM   #3
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When yields get so low, if you have a low risk way to pick up some return then I say go for it. You'll never know unless you try, and with the way the markets are today, along with interest rates, you have very little to lose.
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Old 08-03-2020, 02:06 PM   #4
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I am using dividend paying stocks in lieu of bonds or CDs. Pick carefully for a strong balance sheet. I am looking to pick up Digital Realty Trust, JnJ, and more Kimberly-Clark.

Dividends for these firms are low by historic standards but there is also the opportunity for capital appreciation.
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Old 08-03-2020, 02:51 PM   #5
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I have some money in SWAN as an alternative. The underlying investments are ~90% 10-year treasuries, ~5% 6-month ITM SPY calls and ~5% 12-month ITM SPY calls.
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Old 08-03-2020, 04:24 PM   #6
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I'm using dividend stocks to replace some of my bond allocation. It's a mix of individual stocks along with SCHD to keep it simple. I'm ok with the extra volatility.
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Old 08-03-2020, 05:58 PM   #7
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I took a brief look at high dividend yield funds and they seem to have fallen about as much as the sp500 in declines like 2008-2009 and in this year's decline.

What I want to eliminate is the deep dive characteristics of stocks that can take years to work out. I'm not saying I can get the volatility down to bond volatility though. Also I might not be able to eliminate the possibility of an October 1987 surprise -20% decline.
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Old 08-03-2020, 07:10 PM   #8
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I use MERFX and to a lesser extent ARBFX as stand in for part of the bond portfolio. These are merger arbitrage funds that typically seek to earn 200 to 400BP over LIBOR after expenses with low volatility. In capital markets crashes they will slide a bit but generally recover quickly.
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Old 08-03-2020, 10:12 PM   #9
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Quote:
Originally Posted by brewer12345 View Post
I use MERFX and to a lesser extent ARBFX as stand in for part of the bond portfolio. These are merger arbitrage funds that typically seek to earn 200 to 400BP over LIBOR after expenses with low volatility. In capital markets crashes they will slide a bit but generally recover quickly.
I have looked at MERFX a few times but it sure did fall a lot in the selloff.

Trouble with pretty much any equity, really, and all but highest quality bonds.
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Old 08-03-2020, 10:13 PM   #10
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Originally Posted by Lsbcal View Post
Here is a 70 year chart showing rolling compound annual returns.


Seems like an interesting idea.
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Old 08-04-2020, 01:42 PM   #11
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Here is a 70 year plot of one particular SMA method versus Treasuries and buy-hold equities. The red "SMA trade" signal has one trade out of the SP500 when it is low. The blue triangles "final trade outcome" show how that trade did when the SMA trade signal goes high. The blue triangles use the right most Y-axis.

There were 6 trades since 2009 with 5 whipsaws. The worst of those whipsaws was a 7.8% loss to buy-hold. But again, I am comparing this method to bonds represented here by intermediate Treasuries.


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Old 08-04-2020, 07:28 PM   #12
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I like covered call ETFs/CEFs for replacing bond income.

ETFs = QYLD, HSPX

CEFs = QQQX, SPXX, STK

If I was braver I'd also use options for replacing the counterbalancing aspects of bonds vs equities as well. You should be able to use options to zig when equities zag. No need to use bonds for that.
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