Shouldn't you put -34% BIL if you're levering? Then the result becomes nothing to write home about:
-21% drawdown
recovery 10 years
SWR30 5.1%
Portfolio Charts doesn't use the daily carry rate and BIL is the best we can use. So I agree with including the -34% BIL. The other issue with portfolio charts is there is no provision for TIPs. Remember the 34.6% LT Treasury portion of the portfolio is actually 11% LT TIPs and 23.6% LT Treasuries. The coupon portion of a 30 year TIP is closer to the 10-yr rate. So the TIP price is going to respond more like an IT bond to changes in interest rate, but bond will math the inflation rate similar to BIL.
How do you model that? 1:1 BIL : IT bond?
That gives you a SWR of 5.6% but the 10 yr drawdown still stands. 7.5% vs 6.8% on the pinwheel portfolio.
@index - The length of retirement matters, but you haven't mentioned it.
I think you're also ignoring the bond environment. Long-term bonds look good because for decades they've had falling yields, which gives bonds a capital gain. So if you back test using data from even the past 30-40 years, you will only see an environment in which bond yields have been falling.
But right now 30-year treasury bonds yield 1.2% - there isn't room to fall further. To get the past 30-40 years of bond performance, you'd need to see treasury yields go negative, and continue dropping. I could be wrong, but that strikes me as very unlikely. So anyone relying on the past 30-40 years of historical bond performance is very likely to be wrong about future bond performance.
And most of your portfolio is bonds, so that may be a significant risk to your retirement.
So I agree with you to a certain extent except for the early 70's when bond yields were increasing which is when the portfolio had the worst returns. The portfolio is attempting to follow a risk parity chart similar to the pinwheel and golden butterfly portfolio:
No one really knows what bond return is going to look like in the future. Germany has negative rates. The portfolio is seeking to weight the bonds heavier because they are not sensitive enough to produce adequate diversification. If rates increase, it will probably be to control inflation. The EM, Ex-US, Gold, TIPs, and Commodities should balance that risk while the LT bonds are getting killed.
I'm not going to give much attention to any portfolio with a leveraged position. Historically the best performing portfolio is a 300% leveraged stock-only portfolio.. even if you blow up once or twice, eventually you'll get lucky and do great. Except nobody does that with good reason.
That said, I have been wondering if anyone has ever done a regression fit comparing Sharpe Ratio vs SWR. Or even better, two separate regressions, one comparing Sharpe Ratio vs SWR and another comparing CAGR vs SWR. We know that growth and volatility are both important factors in supporting higher SWRs, so this sort of analysis is really useful in my mind to see exactly how much each factor matters.
The leverage is coming from treasury futures which is the tamest form that can be used. The leverage is used to increase your exposure to the "safe" treasuries without killing your returns by over allocating to them. Read up on rolling treasury futures. It is pretty standard in the financial industry and nothing like the 2x and 3x ETFs on daily index futures you are referencing. The two ETFs I highlighted do this for you and at pretty low ERs - 0.36 combined which is a bp over a robo advisor charges for standard ETF rebalancing.
@index - The length of retirement matters, but you haven't mentioned it.
I think you're also ignoring the bond environment. Long-term bonds look good because for decades they've had falling yields, which gives bonds a capital gain. So if you back test using data from even the past 30-40 years, you will only see an environment in which bond yields have been falling.
But right now 30-year treasury bonds yield 1.2% - there isn't room to fall further. To get the past 30-40 years of bond performance, you'd need to see treasury yields go negative, and continue dropping. I could be wrong, but that strikes me as very unlikely. So anyone relying on the past 30-40 years of historical bond performance is very likely to be wrong about future bond performance.
And most of your portfolio is bonds, so that may be a significant risk to your retirement.
Very true and very good points with respect to the bond allocation.
Over the last 30 to 40 years bonds have been in bull market. With 30 yrs US treasuries at 1.2%, there is huge downside for bonds in a portfolio.
Cash relative to bonds look a better asset class in this environment, although "cash is trash over the medium and long term" :) For a retiree, cash is a better option to cover living expenses for 2-4 years depending on risk tolerance and also to reduce SWR.
Personally, I have reduced bonds allocation to a minimum, actually divested all my long term bonds few months ago.
I agree with you that bonds don't look attractive right now, but this is essentially market timing. I mean the market sitting at an all time high when we have record unemployment and negative GDP doesn't look very attractive either... As we learned from Europe, there are no rules against negative yields.
Edited image size!