Search found 173 matches

by Rooster
14 Mar 2013 16:02
Forum: Financial Planning and Building Portfolios
Topic: Bonds versus bond funds
Replies: 45
Views: 1654

Re: Bonds versus bond funds

Thanks for that IdOp.

Is it not then simply betting that rates won't rise more than the spread?
by Rooster
13 Mar 2013 16:00
Forum: Financial Planning and Building Portfolios
Topic: Bonds versus bond funds
Replies: 45
Views: 1654

Re: Bonds versus bond funds

adrian2 wrote:
Rooster wrote:Basically, longer bonds, greater duration, greater expected yield. No free lunch.
Previous thread wrote:- 1 year bonds yield 1%
- 2 year bonds yield 2%
- your investment policy is to hold 2 year bonds
- interest rates are not expected to change
The default expected return is 3%?
I call it a free lunch; you can choose to say it's been paid for.

I think we've beaten this to death and I'll bow out (at least for today).
Certainly. I enjoyed the exchange. Furthers/tests my understanding. Thanks for indulging.

Cheers Adrian.

:thumbsup:
by Rooster
13 Mar 2013 15:47
Forum: Financial Planning and Building Portfolios
Topic: Bonds versus bond funds
Replies: 45
Views: 1654

Re: Bonds versus bond funds

adrian2 wrote:
Rooster wrote:I think this is skewed because in the examples we are assuming that after one year rates did not increase by more than the spread.
Here is your problem. The shape of the yield curve is not a prediction of what rates will be a year later, just as future forex rates are not a prediction of what exchange rates will be in the future (even if this last sentence sounds counter-intuitive).
Ah, maybe. What then are yield curves set on?

I would think that if the market is efficient, they would reflect the then market consensus of the risk of the underlying security.
by Rooster
13 Mar 2013 15:45
Forum: Financial Planning and Building Portfolios
Topic: Bonds versus bond funds
Replies: 45
Views: 1654

Re: Bonds versus bond funds

It's not irrational, it's the textbook definition of the yield curve. Generally, longer bonds yield more than shorter ones -- it is not an irrational spread (the precise numbers were chosen to make the example easier to follow rather than dealing with xx bps). I'm simply stating that it would be irrational if not a function of interest rate risk. Therefore the higher yield (which is what the technique seeks to exploit) is linked to interest rate risk. The exact spread will be the market consensus of what that risk is. The technique makes money if the spread is bigger than actual realized interest rate risk and loses money if the risk (interest hikes) turns out to be greater than the spread. Basically, longer bonds, greater duration, greate...
by Rooster
13 Mar 2013 15:09
Forum: Financial Planning and Building Portfolios
Topic: Bonds versus bond funds
Replies: 45
Views: 1654

Re: Bonds versus bond funds

adrian2 wrote:
Previous thread wrote:- 1 year bonds yield 1%
- 2 year bonds yield 2%
- your investment policy is to hold 2 year bonds
- interest rates are not expected to change
The default expected return is 3%?
In this specific case, if "interest rates are not expectd to change" (and diff in credit risk is neglieable between the two), why is your 2 year bond yielding 2% and one year 1%.

That would be irrational. If that does exist (and is not a function of interest risk), then by all means it should be arbitraged. One should look for these irrational spreads and exploit them.
by Rooster
13 Mar 2013 15:03
Forum: Financial Planning and Building Portfolios
Topic: Bonds versus bond funds
Replies: 45
Views: 1654

Re: Bonds versus bond funds

If we were simply talking about maintaining a ladder for a target duration, then I'm sorry. However, if we are simply talking about the latter, i fail to see where there is any higher expected return that is not a function of the higher duration and therefore completely miss why finiki talks about this potentially offsetting mers. Xbb has a higher expected return than xsb, it's a function of the longer duration (and hence interest risk carried). It doesn't offset xbb's mer nor is it a free lunch. I this as the same (except with much closer durations, obviously). So you don't find it remarkable that in an environment where - 1 year bonds yield 1% - 2 year bonds yield 2% - your investment policy is to hold 2 year bonds - interest rates are n...
by Rooster
13 Mar 2013 14:31
Forum: Financial Planning and Building Portfolios
Topic: Bonds versus bond funds
Replies: 45
Views: 1654

Re: Bonds versus bond funds

The efts will ladder their portfolio, inter alia, so as to reach their target duration. That's fine and not what i understand we are talking about. We are talking about a practice that is extending target duration for reasons other than maintaining target duration (otherwise, we are just talking about a normal ladder). No, we are not talking about such a practice. At least I'm talking about a practice of maintaining the target duration . If you keep bringing out other motives, I'll bow out of the discussion. I thought, as per the finiki that i originally quoted, that we are talking about a fund practice of selling bonds as they reach 1 year to term and replacing with longer term bonds and the fact that this practice may yield a higher retu...
by Rooster
13 Mar 2013 14:16
Forum: Financial Planning and Building Portfolios
Topic: Bonds versus bond funds
Replies: 45
Views: 1654

Re: Bonds versus bond funds

newguy wrote:Rooster, I don't know if you've seen this
http://newguys.freeoda.com/rollcalc.html

You can click (or finger tap on a mobile) and drag the B,S,C and curve to see answers. I see a 5 bps gain from 2y to 1y as of last august.

newguy
Which i would think quite normal if rate increased less than spread at purchase. I don't know if that's the case.
by Rooster
13 Mar 2013 14:12
Forum: Financial Planning and Building Portfolios
Topic: Bonds versus bond funds
Replies: 45
Views: 1654

Re: Bonds versus bond funds

Take your example: 2 year bond: 2% 1 year: 1% The market is pricing in a one percent increase in one year rate. If that fails to materialise (say one year later one year rate is at 1.5%) [...] You can win (you beat market set spreads) or lose (market set spreads beat you). I don't see where there is a free lunch unless somebody tells me that yield curves do not adequately price interest risk (in which case, by all means arbitrage away inneficiencies in the spreads). It's been said that the best prediction of future rates is today's rates (i.e. no change ). This is the default position, and not a bet . What the market is "pricing in" is not for the constant maturity investment policy, which BTW is in the prospectus of most bond ET...
by Rooster
13 Mar 2013 13:04
Forum: Financial Planning and Building Portfolios
Topic: Bonds versus bond funds
Replies: 45
Views: 1654

Re: Bonds versus bond funds

That thread assumes rates stay the same. By constantly selling your 1 years and purchasing 2 years, you increase your duration and hence sensitivity to higher rates. The cap gain in your example, as i see it, is a reflection of you winning your bet (took a two year term and a year later one year rates did not increase). It's not a bet . It's sticking to the investment policy set at the beginning. The duration is kept constant across time passing by. There is no extra risk in year two compared to the first year. Exactly the same with a bond ETF, where the strategy is more applicable (because of institutional commissions) and actually forced upon by the prospectus. Sorry, but I don't quite see it that way. If your investment policy is to &qu...
by Rooster
13 Mar 2013 12:30
Forum: Financial Planning and Building Portfolios
Topic: Bonds versus bond funds
Replies: 45
Views: 1654

Re: Bonds versus bond funds

Please read my original thread , and then we can carry on the conversation. Thanks had not seen that thread. My comment is similar to shakespeare's in that thread. That thread assumes rates stay the same. By constantly selling your 1 years and purchasing 2 years, you increase your duration and hence sensitivity to higher rates. The cap gain in your example, as i see it, is a reflection of you winning your bet (took a two year term and a year later one year rates did not increase). If the 1 year rate increases by more than your spread, you lose. Therefore, i see it as either you are compensated for your added risk (took longer term and won as rates did not increase more than what was priced in for that risk) or exploiting a market inneficie...
by Rooster
13 Mar 2013 12:09
Forum: Financial Planning and Building Portfolios
Topic: Bonds versus bond funds
Replies: 45
Views: 1654

Re: Bonds versus bond funds

Shakespeare wrote:[to Rooster]I don't see your point.
Edited to reflect intervening post.
My understanding is you are buying longer bonds, with higher duration and higher reinvestment risk in the hope that rates rise less than that already provided in the yield curve and therefore profit.

Basically, more interest risk (longer bonds) for more return (higher yield on longer bonds).

In my comment above, I was trying to figure out where a "free lunch" may be. Could only see it if the fund disclosed duration that was higher to take into account the strategy but did not reflect this in ytm (which would be odd). Otherwise, i fail to see why this is anything other than longer term for higher yield.
by Rooster
13 Mar 2013 12:04
Forum: Financial Planning and Building Portfolios
Topic: Bonds versus bond funds
Replies: 45
Views: 1654

Re: Bonds versus bond funds

My understanding is that this is a trading strategy that aims to profit from particularly steep portions of the yield curve. It assumes rates will not increase by more than that estimated by the curve. Should rates increase by less than the curve, you will profit from your gamble. However, your "trade up" in the curve (for which you have taken on added reinvestment risk by increasing your duration) would turn out to your disfavour if rates rise more than the curve provided for. You're basically looking for sweet spots in the yield curve where you think you have sufficient cushion that trading up will yield more than rate increase. In current environment and funds selling at 1 year to maturity to buy higher in the curve, assumes th...
by Rooster
13 Mar 2013 11:16
Forum: Financial Planning and Building Portfolios
Topic: Bonds versus bond funds
Replies: 45
Views: 1654

Re: Bonds versus bond funds

Shakespeare wrote:
Quick question, does this technique not increase duration, therefore the higher yield is not a "free feature" but rather a corollary of the higher duration?
That is correct.
Thanks. Then, why does it matter (off the top of my head, would think it matters if the posted duration takes the technique into account but not the posted ytm)?
by Rooster
13 Mar 2013 10:48
Forum: Financial Planning and Building Portfolios
Topic: Bonds versus bond funds
Replies: 45
Views: 1654

Re: Bonds versus bond funds

Fixed income ladder (in finiki) Great entry. Did not know about impact of "rolling down the yield curve" prior to seeing this and the related thread. Quick question, does this technique not increase duration, therefore the higher yield is not a "free feature" but rather a corollary of the higher duration? One small point on the finiki, in paragraph 2 of "effects of interest rates" the duration used to estimate the price decline accompanying a 1% rise in rates appears to be the Macaulay duration disclosed by the fund and not the modified duration I believe needs to be used to estimate effect on price. Please see "Duration dynamics" in the linked article (third paragraph of that section staring with &q...
by Rooster
12 Mar 2013 22:03
Forum: Financial Planning and Building Portfolios
Topic: Lump sum - buy in period
Replies: 5
Views: 455

Re: Lump sum - buy in period

The loss is irreplaceable because you can not add money to the LIRA. You can not dollar average into it or rebalance internally. OTOH, a fixed allocation not only mitigates loss within the account but allows rebalancing which may, if done infrequently, enhance returns. But the main reason is loss mitigation. I understand, but I tend to view "retirement savings" globally, irrespective of account type (DB, rrsp, lira and shortly to spill over to tfsa -now holding hisa- and taxable accounts). Basically, a loss is a loss and a loss in lira is relevant, in my understanding, in as much as it takes away tax shelterred space (ie. I can rebalance with other parts of portfolio -likely new savings in other accounts). I understand that tax s...
by Rooster
12 Mar 2013 21:46
Forum: Financial Planning and Building Portfolios
Topic: Lump sum - buy in period
Replies: 5
Views: 455

Re: Lump sum - buy in period

I have a LIRA. Losses are irreplaceable. I would not do 100% equities in it. (Currently 32% but in withdrawal LRIF phase; was about 45% in non-LIRA accumulation.) Thanks. My situation is that I have roughly a 20 year horizon til retirement and a DB that accrues roughly at the same rate as my savings. That's basically why I feel comfortable with having all equities outside of DB (keeps an overall allocation to DB/bonds that I feel is safe). Where what asset is then becomes a question of tax planning. Do you mean keep the LIRA space for fixed income as it's best to keep FI in sheltered space? (Otherwise a loss is "irreplaceable" anywhere). I wasn't planning on keeping much or any more FI in my long term savings once the value of my...
by Rooster
12 Mar 2013 21:22
Forum: Financial Planning and Building Portfolios
Topic: Lump sum - buy in period
Replies: 5
Views: 455

Lump sum - buy in period

I've pretty much decided to take the commuted value of previous employers DB in a LIRA (low discount rates of 1.8% first 10 years / 2.5% thereafter -which I feel confident in chances of beating- and I don't hate the idea of having greater control over withdrawls). The amount is roughly $80k. I currently have about $105k in rrsps. New employer also has DB (PA of roughly $22k/year, present value should be higher -they were asking for $53k/year purchased if I transferred old plan's cummuted value to new). I mention this because I consider my DB as bond like and hence have almost all rrsp in equities. Goal at term is to also have LIRA at 100% equities, but want to do so gradually as only have 6 months accumulated under new DB plan (hence low bo...
by Rooster
12 Mar 2013 21:07
Forum: Financial Planning and Building Portfolios
Topic: Re: My Portfolio Seeking advice, please help 2013-14
Replies: 165
Views: 7656

Re: My Portfolio Seeking advice, please help 2013

I think it's important to note that gics don't carry any less interest risk than any other bond of same term/rate simply because they don't show up in your account as marked to market. If rates rise and you could sell your non redeemable gic prior to term, you very much would have to sell at a lower principle amount than face value.

Basically, when rates rise prices of bonds/gics should lower by an amount that compensates for the lower rate til term. If you keep your bond/gics til term, in either case, your return will be rate at time of purchase. Your "capital loss" if you sell a bond prior to maturity is the reflection of the opportunity to reinvest that amount at higher rate for the remainded of your original term.
by Rooster
09 Mar 2013 23:29
Forum: Financial Planning and Building Portfolios
Topic: Risk over time - contradictory opinions
Replies: 49
Views: 3784

Re: Risk over time - contradictory opinions

I also don't like just using last years p/e (which i believe would require about a 15% drop to revert to means). Any thoughts on p/e3 or 5 (or other valuation method which is deemed more reliable for evaluating whole indices)? Well, you should really be using the next ten years' earnings, but that's kind of difficult. :wink: By all means look at the PE10 and the PE5 and the PE3. But don't stop there. Look at why they are where they are. In the example above, if you are looking at the PE10 or PE5, remember that they include 2008 and 2009. Then ask yourself how likely it is that we will have two more years like 2008 and 2009 in the next five or ten years. Maybe you conclude that the risk of another reecession is significant. Then invest acco...
by Rooster
09 Mar 2013 22:49
Forum: Financial Planning and Building Portfolios
Topic: Risk over time - contradictory opinions
Replies: 49
Views: 3784

Re: Risk over time - contradictory opinions

Mean: 16.47 Median: 15.88 Peak: 44.20 (Dec 1999) Current: 23.38 To revert to the mean, P has to drop about 42% (23.38 / 16.47). Another option is for E to increase dramatically. This seems less likely, given that corporate profits are at an all time high. That's the Shiller PE10, i.e. the earnings are the average of the last ten years. We can discuss whether that's a good measure or not. But remember that, currently, the 10 year E includes earnings during the Great Recession. We might have a similar recession again some time soon. But we might not. If we don't, then the E in PE10 should grow appreciably as we drop a few unfortunate years, and PE10 could decline dramatically. George I also don't like just using last years p/e (which i belie...
by Rooster
09 Mar 2013 22:38
Forum: Financial Planning and Building Portfolios
Topic: Risk over time - contradictory opinions
Replies: 49
Views: 3784

Re: Risk over time - contradictory opinions

This brings me to another question that's been bugging me. How the heck is every asset class seemingly so expensive? My amateur, unscientific theory: stocks are expensive due to irrational exuberance of the late 1990s. Two market crashes in the early and late 2000s were not sufficient to bring valuations back to earth. We need another big crash to revert to the mean. Shiller PE of the S&P500: Mean: 16.47 Median: 15.88 Peak: 44.20 (Dec 1999) Current: 23.38 To revert to the mean, P has to drop about 42% (23.38 / 16.47). Another option is for E to increase dramatically. This seems less likely, given that corporate profits are at an all time high. Thanks. Isn't that a 30% drop though? 23.38*0.7=16.4. I had in mind that stock where "ov...
by Rooster
09 Mar 2013 20:38
Forum: Financial Planning and Building Portfolios
Topic: Risk over time - contradictory opinions
Replies: 49
Views: 3784

Re: Risk over time - contradictory opinions

Which would suggest a go-forward expected real return from earnings and dividends (for the S&P) of ~ 1.74% + 2.04% = 3.78%. In which case, a significant change in P/Div over a 20- or 30-year period can have an outsize impact on realized real return. I.e. if the P/Div changed from 50x to 25x or 100x (yield goes from 2% to 4% or 1%), that could nearly wipe out your entire cumulative return or nearly double it over 20 years. Even at 30 years, it could add or subtract about 2.3% to your 3.78%... I agree with roughly 3% expeçted real returns on stock at current prices and that a steep drop in price could push that down to roughly 1-2% over about a 20 year period, but the higher yield on lower price should push returns back towards 3% real (...
by Rooster
09 Mar 2013 12:06
Forum: Financial Planning and Building Portfolios
Topic: Risk over time - contradictory opinions
Replies: 49
Views: 3784

Re: Risk over time - contradictory opinions

No idea what you guys are on about (;) ) but i think the curves become more normalised when using larger time frames because with longer peiods you are not so much measuring random returns but earnings. I think there is danger in simply using yearly/monthly/dayly returns and projecting these into the future as fluctuations in those time frames will almost exclusively measure p/e fluctuations and speculation, whereas with a longer timeframe returns will be roughly earnings. Basically, we are not buying randomly fluctuating numbers when we buy stock. We are buying companies. While the current trade price fluctuates much with speculation/investor sentiment, what an investor gets long term is earnings of that company (the price fluctuations bec...
by Rooster
06 Mar 2013 23:48
Forum: Financial Planning and Building Portfolios
Topic: Risk over time - contradictory opinions
Replies: 49
Views: 3784

Re: Risk over time - contradictory opinions

I could well be out to lunch, but also feel that these types of analysis fail to take into account fundamentals of what stock returns will be constituted of. Basically, earnings (current + growth) adjusted for changes in pricing levels (+/- p/e changes), with earnings eclipsing changes in p/e over the long term (20-30 years). Considering that even a catastrophic permanent drop of 50% in p/e (and ignoring shorter duration that would bring to a constant investor in the accumulation phase) would result in roughly 2% or less lower annual return (roughly neutralising current yield) in a 20+ year period, leaving yield growth as the return. As I stated in another thread, I fail to see how global business average earnings growth (assuming a globall...