The Permanent Portfolio, Investing, Finance and Random Thoughts.
Posts tagged bonds
My Easiest Money Is From Market Timers
0Anyone reading this blog knows I don’t market time because I just don’t think it works. That’s for any asset class. Yet I sometimes see advice from those that would say that stock market timing doesn’t work, but will tell people about bond market timing strategies that supposedly do work. You can’t have it both ways!
Here’s the truth: Bond timing doesn’t work either. If anything, the bond market is likely more efficient than the stock market. Trying to predict future interest rate directions is impossible. Trying to predict future market crises that will make people buy bonds en masse is even more impossible.
Let’s look at two examples. First are Treasury Long Term bonds and Treasury Inflation Protected Securities (TIPS) in 2011. Who predicted these movements?
(Charts courtesy of www.stockcharts.com and include interest and dividends in total returns)
Treasury Long Term Bonds in 2011:
2011 Long Term Treasury ETF Performance
Vanguard Treasury Inflation Protected Bonds in 2011:
Maybe a market timer using moving averages could claim they would have been out of these the first part of the year and only got in towards the mid/end of Q3 before the spike. But the entire time they were out, guys like me were pulling down interest payments! So they still lost in terms of total year’s returns. Easy money!
But hey, someone else may say that moving averages don’t work for bonds. That’s obvious! However shifting around TIPS maturities to time the market does work based on some backtesting.
Well, I don’t own TIPS and don’t recommend them. But many people do like them. Yet this kind of timing is likely a bad idea there, too.
This is a chart comparing the Vanguard TIPS fund vs. the Vanguard Intermediate Treasury Fund from 2000-2012 (Longest it goes back for this charting site and includes all interest and dividends. Both have similar durations.). The person that just bought the intermediate term Treasury fund and did nothing pummeled the TIPS fund alone. However that’s not the real point. The real point is that anyone going in and out of TIPS shifting around maturities likely did worse. They probably missed out on the total gains of the simpler TIPS fund over the entire time. This doesn’t even include possible tax consequences of selling in and out of assets and paying any potential gains.
Market timing doesn’t work. I’ve said it many times. But market timers are my best friends. They are handing me their money going in and out of assets while I sit back and do nothing. It’s the easiest money I make.
A Reminder: Keep up to date on the upcoming Permanent Portfolio book by signing up for the announcement list!
Tutorial on Buying Bonds from Fidelity
3 months ago
Forum member Gumby has put up a great tutorial on how to buy bonds directly if you are with Fidelity:
Buying bonds directly for the Permanent Portfolio is always the best way to own them. You eliminate fund risk and save on management fees as well. Most brokerages have similar interfaces to allow this (or you can call up the bond desk and ask for help). Fidelity’s interface should be a model for others to follow.
Thanks again to Gumby for the tutorial.
iShares ETFs – Synthetic or Direct Holdings?
Relating to this post about funds holding things they otherwise shouldn’t:
Vanguard Treasury Bond Funds Filled with Mortgage Garbage
A reader wrote to iShares to ask about their ETFs and find out which had direct holdings and which were synthetically run with derivatives. The directly held funds have less moving parts involved around counter-party risk and are theoretically safer than synthetic versions. Here was iShare’s response which I was given permission to repost (H/T to R):
Thank you for your interest in iShares.
Further to your email, we have stipulated which of the funds you are holding are physical/synthetic below:
TLT – Physical
ACWI – Physical
IWRD – Physical
EEM – Physical
IDVY – Physical
IUKD – Physical
JSC – Non iShares ETF – Statestreet -
EWJ – Physical
XMWO – Non iShares ETF – DBX Trackers – Synthetic ETF
SHY – Physical
SHV – Physical
As of 19th September 2011, iShares managed 113 ETFs domiciled in Ireland of which only two were synthetic. Please note some of the products listed above are not Irish domiciled iShares ETFs. Should you require any further assistance please do not hesitate to contact us.
Best regards,
iShares Feedback
Looking at the above, the Treasury Long Term (TLT), and Short Term Treasury Funds (SHY and SHV) are directly held by the bond funds. I still recommend you hold bonds directly if you are able. However, if you are not able, the iShares funds still appear to be one of the better choices out on the market especially compared to Vanguard’s Treasury bond funds.
Vanguard “Treasury” Bond Funds Filled with Mortgage Garbage
4 months ago
EyeDee over at the Bogleheads forum posts the following:
Those who own Vanguard Treasury funds to avoid mortgage-backed securities should probably be aware that as of 08/31/2011, Government Mortgage-Backed securities in Vanguard’s Treasury funds are up to:
17.7% in Short-Term Treasury Fund
17.4% in Intermediate-Term Treasury Fund
16.9% in Long-Term Treasury Fund
These links go over the current composition of these funds:
https://personal.vanguard.com/us/funds/snapshot?FundId=0032&FundIntExt=INT#hist=tab%3A2
https://personal.vanguard.com/us/funds/snapshot?FundId=0035&FundIntExt=INT#hist=tab%3A2
https://personal.vanguard.com/us/funds/snapshot?FundId=0083&FundIntExt=INT#hist=tab%3A2
I went over why I don’t like Vanguard’s Treasury Bond Funds in a previous post on holding cash. Sometimes you just can’t help but use them depending on your situation, but given the choice I recommend avoiding Vanguard’s Treasury Funds.
Now, allow me to vent for a bit.
Vanguard bond managers are adding absolutely no benefit to investors by shifting around 20% of the assets in these funds to what they think adds more value. And if you look at the Total Bond Fund fiasco in 2002, even Vanguard managers can and do make mistakes. They are chasing yield, and chasing yield can cause problems.
I had posted before that running a Treasury bond fund should be the simplest job in the world for Vanguard and they are trying to make it difficult. If I ran the fund I would require a computer and a PlayStation 3.
The computer is to balance the deposits and redemptions each morning and close of business with buys/sells of Treasury bonds.
The PS3 is for the other seven hours a day where I would have absolutely nothing to do.
I don’t understand why they feel like they need to run their Treasury funds with a speculative bent. I recommend you just buy bonds directly and sit them in your brokerage account or at Treasury Direct. This costs you nothing each year in management fees and they just sit there quietly and pay you interest twice a year.
If you can’t do the above, then use the iShares products (Tickers: TLT, SHY, SHV) that are essentially 100% Treasuries and have a prospectus that limits better what they can do behind the scenes.
Vanguard putting mortgage bonds in a Treasury bond fund is completely inappropriate. Mortgages behave much differently than nominal bonds in changing interest rate environments. Why? Well, people refinance mortgages when interest rates are falling for instance but tend to hold onto low interest loans when rates rise. So it’s heads they win tails you lose. Mortgages have no business being in a Treasury bond fund and I recommend avoiding Vanguard Treasury Bond funds if you are able.
Long Term Bonds Continue to Confound the Gurus
4 months ago
Well I don’t normally comment on current market news, but it looks like the Fed may keep up the pressure on long term bond rates. This, despite the predictions of many gurus that long term bonds have nowhere to go but up and should be avoided.
Well rates continue to fall. As of right now they are yielding about 3.0% for the 30 year bond! The iShares Treasury Long Term Bond ETF [NYSE:TLT] (Which I use a benchmark tracker for the Permanent Portfolio) is up over 25% this year according to Morningstar.
Once again I say that I have made far more money in my life ignoring market gurus than I ever have by listening to them.
We must hold all the assets in the Permanent Portfolio all the time no matter what we think will happen! The future is not predictable.
Hope you are weathering the market volatility well. Rebalance your portfolio if it needs it!
