Author Topic: Long Term Treasuries In High Equity Portfolios  (Read 1736 times)

heybro

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Long Term Treasuries In High Equity Portfolios
« on: September 23, 2018, 03:56:14 AM »
I'd like to pair about 10% of US Treasuries in with my 90% Total Stock Market Index Fund.

I've been trying to decide between Short Term Treasuries, Intermediate Term Treasuries, and Long Term Treasuries.

I am young and in the accumulation stage.  I just want to add some Treasuries so I have some bonds in there.

I get a lot of conflicting information.


Short Term Treasuries:
--These are best now because interest rates will rise!
--These are best to own with high equity portfolios because they tend to move opposite of equities during a recession!
--These are a bad idea because you won't get any return!
--Don't try to time the market!  So no opinion!

Intermediate Term Treasuries:
--These match the term of the Total Bond Market Index Fund!
--These have interest rate risk!

Long Term Treasuries:
--These go best with high equity portfolios because they tend to move opposite of equities in deflation times!
--These are so bad to own because interest rates will rise!
--Don't try to time the market!  So no opinion!

Which makes sense to hold long-term --set and forget-- with a high equity portfolio and would also be something that one could own more of as they grow older in life?

And....if I do buy the Long Term Treasury Index Fund and it says it has a bond length of 20 years, does that mean, that every year, I'm buying a new 20 year bond?  So, basically, in 2018 the fund with buy a 20 year bond, then in 2019 the fund will buy another 20 year bond, etc, etc.
??

FLBX says the bond duration in the fund are 94% 10 plus years and the maturity of the bonds in the fund are 88% 20 plus years.

What I'm asking is if I buy the fund today and don't buy the fund again for a long time, does the fund purchase new bonds every year?  So that even though today may be a bad time to buy a long term bond, next year may be a GREAT time to buy one.  Am I buying one next year simply by owning the fund or would I need to buy more of the fund next year to get exposure to new 20 yr bonds.  Stupid question I know.  Bonds confuse me for some reason.  With stocks, you'd have to purchase more of that stock at the new price in order to gain exposure to that price.  But with bond funds, they seem to 'cycle' through on their own?

Thank you.

Indexer

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Re: Long Term Treasuries In High Equity Portfolios
« Reply #1 on: September 23, 2018, 07:46:27 AM »
A long term bond index is trying to replicate it's index. It won't necessarily buy a new 20 year bond every year. It will buy the same types of bonds that are in it's index, which will include some new 20 year bonds, and some 25 year bonds, and some 19 year... you get the idea. It will buy new bonds as new money comes in, and it will probably sell bonds after they fall into the 'intermediate' term category.

Here is one concern I have. Long term treasuries + equities has been a good combination the past 30 years. The past 30 years interest rates have been falling. To be more specific, every time there was a recession the Fed lowered rates. During a recession your stocks are likely doing poorly, and since long term bonds are highly sensitive to interest rates they did well every time rates fell. This made for a great inverse relationship between equities and long term treasuries.

That was the past 30 years. My concern now is that interest rates are very low and could increase over time, or at least they don't have as much room to go down in future recessions.

I'm not saying ditch bonds. I'm saying you shouldn't expect long term bonds to perform and hedge as well over the next 30 years the same way they did the past 30 years.


As for what you should invest in, why don't you just have some short term, some intermediate term, and a little in long term? This is easy, just buy a Total bond index fund. It's very heavy in government bonds, but has some investment grade corporates as well. In 2008 Vanguard's total bond was up about 5%.

Adam Zapple

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Re: Long Term Treasuries In High Equity Portfolios
« Reply #2 on: September 23, 2018, 04:48:17 PM »
I hope this thread gains some traction.  I've just started researching this myself after learning about Ray Dalio's "all weather portfolio.". He recommends only intermediate and long term government treasuries if memory serves me correctly.

maizefolk

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Re: Long Term Treasuries In High Equity Portfolios
« Reply #3 on: September 23, 2018, 05:27:47 PM »
What I'm asking is if I buy the fund today and don't buy the fund again for a long time, does the fund purchase new bonds every year?  So that even though today may be a bad time to buy a long term bond, next year may be a GREAT time to buy one.  Am I buying one next year simply by owning the fund or would I need to buy more of the fund next year to get exposure to new 20 yr bonds.  Stupid question I know.  Bonds confuse me for some reason.  With stocks, you'd have to purchase more of that stock at the new price in order to gain exposure to that price.  But with bond funds, they seem to 'cycle' through on their own?

The fund does buy new bonds each year, but they pay for this by selling older bonds which now have shorter maturities. So if this year is a terrible year to own bonds, the value of the bonds they are selling is lower, and the number of new bonds that the fund can afford to buy next year is lower.

So to get the equivalent of dollar cost averaging into a new stock or stock index you would indeed need to buy new shares of the bond fund over time.

heybro

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Re: Long Term Treasuries In High Equity Portfolios
« Reply #4 on: September 25, 2018, 03:44:42 PM »
I found an interesting fund that holds short, intermediate, and long term treasuries!

GOVT iShares U.S. Treasury Bond ETF

Grande

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Re: Long Term Treasuries In High Equity Portfolios
« Reply #5 on: September 25, 2018, 06:42:07 PM »
I think you have answered your question.

You do not want to be in long term bonds in an environment of rising rates. That's now or very soon. I would stick with short term or money market. I get the idea of 'don't time the market'. But rates are likely going no where but up. You can get a respectable 2.1% in a Vanguard money market fund.
 

One

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Re: Long Term Treasuries In High Equity Portfolios
« Reply #6 on: September 28, 2018, 10:52:09 AM »
You can buy individual bonds at auction through vanguard with no fee. We are in a raising rates environment. You could buy 1 to 2 year treasuries and let them mature so you get the guaranteed interest, similar to how a cd works but better. If the rates get up to 5% you could buy the longer bonds 5 to 10 years. If you let a bond fully mature you get the quoted interest of the bond and the price you paid back when it matures. If the rates rise and you sell the bond early you will lose some of your principle money, if the rates lower and you sell early you will gain some of your principle money. I don't think now is a good time to buy longer bonds because there's a high risk of the rising rates. When or if the bonds get to 5 percent there's less risk of them going higher and a guaranteed 5% is probably a good investment even if they do go higher. Also keep in mind there's no state tax on us treasuries. You could also buy the funds, but for now I'd recommend the short term individual bonds.

Rates
https://personal.vanguard.com/us/FixedIncomeHome

How auction works
https://www.youtube.com/watch?v=Wgcv_wJOLcA

mintleaf

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Re: Long Term Treasuries In High Equity Portfolios
« Reply #7 on: September 28, 2018, 11:12:25 AM »
Remember that different parts of your portfolio serve different purposes. Bonds aren't likely to shine during good times and rising interest rates; that's what your stocks are for. You hold bonds to hedge against specific scenarios: Short bonds for crashes/recessions, and long bonds for deflation. Which of those is more likely? Despite what others like to say, we have no idea what's around the corner. So why not hold a little of both?

One

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Re: Long Term Treasuries In High Equity Portfolios
« Reply #8 on: September 28, 2018, 11:20:58 AM »
Remember that different parts of your portfolio serve different purposes. Bonds aren't likely to shine during good times and rising interest rates; that's what your stocks are for. You hold bonds to hedge against specific scenarios: Short bonds for crashes/recessions, and long bonds for deflation. Which of those is more likely? Despite what others like to say, we have no idea what's around the corner. So why not hold a little of both?

The reason I wouldn't hold both is because the longer bond funds have been buying bonds at very low rates for the past 10 years. if you buy a fund full of long term bonds paying low rates there's a good chance you will lose some money if you have to sell the fund going forward.

Rubic

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Re: Long Term Treasuries In High Equity Portfolios
« Reply #9 on: September 28, 2018, 02:44:24 PM »
I'll have a similar allocation of equities to treasury notes in retirement,
but can't envision a scenario that it would make sense (for me) to purchase
notes beyond 1-2 years.

Especially at today's rates (3.06%), even if the short-term rates "permanently"
drop 100-200 basis points in the near future (unlikely), I don't see how holding
the long-term notes substantially enhances your portfolio -- given that it's still
only 10% of your portfolio allocation.  I think the downside risk is asymmetrical
with respect to the potential upside benefit to your net worth.




Adam Zapple

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Re: Long Term Treasuries In High Equity Portfolios
« Reply #10 on: September 28, 2018, 03:30:46 PM »
Remember that different parts of your portfolio serve different purposes. Bonds aren't likely to shine during good times and rising interest rates; that's what your stocks are for. You hold bonds to hedge against specific scenarios: Short bonds for crashes/recessions, and long bonds for deflation. Which of those is more likely? Despite what others like to say, we have no idea what's around the corner. So why not hold a little of both?

This is great advice.  History is littered with surprises.  Nobody knows what will happen to interest rates in the future.  We can only assume they will rise.  If you listen to or read the advice of the great investors of the last several decades you will see a recurring theme...asset allocation is the most important part of being a good investor.

chasesfish

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Re: Long Term Treasuries In High Equity Portfolios
« Reply #11 on: September 28, 2018, 05:37:41 PM »
I'm in short-term, but I have an option inside my 401k that's an FDIC insured deposit paying 1yr Treasury + 0.50%.  Its running around 3% risk free.

a 10 year treasury is also around 3%, but it has more risk of loosing value

 

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