Thanks for an instructive article! But may I offer the somewhat petty advice that your writing in this field would be greatly enhanced if you did not write "principle" for "principal"?
Building a Treasury Bond Ladder
81–90 of 109 posts
Re: Building a Treasury Bond Ladder
#82Earlier quoted context omitted.
Although you'll have to interact with TreasuryDirect, one of the worst, 90's era security decision websites. Their idea of secure password entry is (mandatory) clicking buttons on an on-screen keyboard.
This Bookmarklet makes the field editable: javascript:$(":password").removeAttr("readonly") I agree TreasuryDirect is not the best website. No trading on the secondary market either. But it has some nice benefits. It has zero fees lower minimums than other institutions. You can also purchase savings bonds and transfer in existing paper bonds. Savings bonds are just as secure as US treasury bonds. It's not popular to…
Yeah, I'm familiar with I bonds and EE bonds — that's why I'm familiar with the TreasuryDirect website.
Re: Building a Treasury Bond Ladder
#83Earlier quoted context omitted.
VFITX is down ~2% since January. If I had bought shares of it in January, I would have less money than I started with. If I had bought individual treasury bonds in January, I would have more money than I started with. That seems like a significant difference between bonds and bond funds.
I looked up VFITX. It looks like they pay distributions (i.e. dividends) that are roughly proportional to the expectation of the interest rate over the average maturity of their holdings, so you need to take this into account when considering "what-if". They have paid approximately 1.4% in dividends during 2018. That makes their total losses around 0.6%. This doesn't fully explain the underperformance of VFITX compar…
According to the VFITX portfolio page (https://investor.vanguard.com/mutual-funds/profile/portfolio...), the average maturity of its holdings in 6 years, which probably explains why its performance is different than that of a 3 year treasury bond.
Re: Building a Treasury Bond Ladder
#84Earlier quoted context omitted.
So buy TIPS? But the elephant in the room is that inflation isn't the same for everyone. It's calculated based on a basic basket of goods, but if you're high income, it may not replicate your spending habits. Private school isn't factored into the CPI.
Over a long timeframe, the investment with the lowest risk of underperforming against inflation is broad-market equity index funds. Bear markets and corrections happen, sure, but the nigh-inevitable performance during bull markets more than covers for that. Over something like 30 years, the only question is whether your investment will outperform inflation or massively outperform it. Like, the 5th percentile worst re…
You're talking strictly US index funds. Have you taken a look at Japan? What if the characteristics of the US markets turn into something more like Japan? Your entire thesis would be wrong, and you could lose a lot of money.
Re: Building a Treasury Bond Ladder
#85Responding in general to the meme of "but what is your time worth?" people often underestimate their ability to change their own utility functions. If you're watching 4 hours of TV every night (or reading or w/e other "mental recharge" activity) simply change your utility function to let financial planning "recharge you." The ultimate arb is changing your own utility function. Obviously this may be harder or easier f…
>simply change your utility function
... how?
Re: Building a Treasury Bond Ladder
#86Earlier quoted context omitted.
Tell that to the people that invested in the Nikkei in 1989.
Global market-cap weighted equity investment has done fine since 1989. And anyhow, Japan's lost decade is more of a central bank policy failure than anything else, and one that is unlikely to be repeated. The pre-Soviet Russian stock market is probably a better example.
How did the Russian stock market do? I'm curious and haven't heard this discussed before.
Re: Building a Treasury Bond Ladder
#87Earlier quoted context omitted.
If things are bad enough that the 30-year treasury outperforms global stocks at maturity, then the correct hedge is canned food, guns, and ammunition. The most pessimistic long-term outlooks cannot be mitigated by any sort of market mechanism because that level of pessimism implies a breakdown of the market itself.
But what you're talking about isn't guaranteed. There's a lot of room between "stocks rip higher forever" and "societal collapse". I'm not saying the right call is 100% t-bonds, but when you say things like "Over something like 30 years, the only question is whether your investment will outperform inflation or massively outperform it", you're making guarantees based on data from a narrow slice of history that is also…
There's no world in which economic growth is low enough that 30 year bonds win out over equities, yet high enough that the US can afford to pay their debts in full without inflating them away. Economic growth isn't a given, sure, but there basically isn't a plan that works for that pessimistic of market conditions. If there isn't enough economic activity to support retiring a large majority of your generational cohort, then unless you save extraordinarily large amounts of money you simply don't get to retire.
Re: Building a Treasury Bond Ladder
#88This under-represents the risks of bond investment. While it's true that the credit risk of treasuries is incredibly low, interest rate and inflation risk needs to be addressed more seriously than it is in this post. In today's market, it's easy to think of holding a bond until maturity under adverse interest rate movements as "not losing money". This is a false model. For example, a ten year treasury purchased at is…
Thanks for the comment. I was trying to make clear this is a short-term strategy in a rising rate environment where you eventually want the principal back and don't want to take much risk. In accounts with longer term goals like retirement accounts you'd probably mix equities and more diversified bond funds. Is there a way you think the strategy and when it's appropriate could be made more clear?
> Is there a way you think the strategy and when it's appropriate could be made more clear?
I think it's a useful strategy as part of a diversivied portfolio. As the GP mentioned:
> Prudent portfolios include equities as well as debt.
Your guide to building a treasury ladder would be useful to someone implementing Harry Browne's Permanent Portfolio concept, which holds 50% of its assets in US Treasuries. However, building a diversified portfolio is likely outside the scope of your guide.
Re: Building a Treasury Bond Ladder
#89Earlier quoted context omitted.
Over a long timeframe, the investment with the lowest risk of underperforming against inflation is broad-market equity index funds. Bear markets and corrections happen, sure, but the nigh-inevitable performance during bull markets more than covers for that. Over something like 30 years, the only question is whether your investment will outperform inflation or massively outperform it. Like, the 5th percentile worst re…
You're talking strictly US index funds. Have you taken a look at Japan? What if the characteristics of the US markets turn into something more like Japan? Your entire thesis would be wrong, and you could lose a lot of money.
You're right about that, but Thrustvectoring is right too. The lowest risk investment that will make you the most over the long term, at least historically, has been index funds. Of course, environments change, and past performance is not a guarantee of future results. As you correctly imply.
I think most responsible advisors would not say, "Put everything here!" Or, "Put everything there!"
You need to diversify a bit, and that diversification should be informed by your own personal appetite for risk. If you have a low appetite for risk, TIPS are the way to go. Maybe some small percentage of your assets diversified across other asset classes.
Conversely, if you have a high appetite for risk, I believe a responsible advisor would still recommend some smaller percentage in TIPS, and then maybe the majority of your holdings diversified across other asset classes.
Re: Building a Treasury Bond Ladder
#90Earlier quoted context omitted.
Global market-cap weighted equity investment has done fine since 1989. And anyhow, Japan's lost decade is more of a central bank policy failure than anything else, and one that is unlikely to be repeated. The pre-Soviet Russian stock market is probably a better example.
How did the Russian stock market do? I'm curious and haven't heard this discussed before.
It did about what you'd expect out of a national stock market - that is, until the Soviets seized the means of production, at which point you had literally nothing.