Moderate-Length Barrel Evangelist
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Posted: 9/30/2025 9:29:27 PM EDT
[Last Edit: 1168RGR][Edited]
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Hi, y’all, Looking for thoughts and opinions on diversification. I’m like 99% in equities, mostly ones that correlate strongly with SPY. Leverage around 1.5x, total, generally on the lower end. I hold a tiny amount of bond ETFs and an even tinier amount of preferred ETFs. Early middle-aged, have a gov’t retirement when the time comes, working in the meantime. Everytime I look at bonds (ETFs) lately, they’re just not very attractive, either barely beating inflation (or not), or have equity-like returns, but too short a history to judge. No in-between, that I’m seeing. Additionally, bonds sometimes correlate with equities when you least want them to. Tax treatment is lame, too. Managed futures come up a lot online, but I’m lacking knowledge, and they also appear to mostly kinda suck. I’ve noticed that a lot of these appear to be suspiciously new, also. Gold and derivatives? The miners have been killing it for me, but more GDX is not quite what I’m after. Quite a few products, and types of products, in this space, though. *to equities, specifically to common indices |
Moderate-Length Barrel Evangelist
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Originally Posted By hammer1995: BND is a great bond ETF. It seems like you are very comfortable with risk but it wouldn’t hurt to begin adding some stability to your portfolio. Thanks, that’s actually one of the bond ETFs that I hold a placeholder amount of. What made you choose that one over other bond funds, like SGOV? |
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Originally Posted By Morgan321: Risk parity is the phrase you are looking for. There’s a lot of takes on it, if you pursue it make sure you go with an approach that involves math to determine your investments. Most approaches are made-up junk. Thanks; reading about that was beneficial. |
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Originally Posted By 1168RGR: Thanks; reading about that was beneficial. If you take those four “quadrants” as possible situations the question becomes how much weight do you assign to each quadrant. Ie. What fraction of time do you think will be spent in each one? That’s the big unknown if you want the set it and forget style of investing. If you follow the pure math of it and equally weight each combination you will find that backtesting shows that this will consistently provide lower volatility returns. Ie you give up some return for more certainty. Put another way, you narrow the range of your possible outcomes. The logic is that, if you need 6% returns to meet your goal you should find 6% at the lowest possible volatility(ie risk). Why take 10% if there is a chance you might get 4% and not meet your goal? It really does work, but for timelines greater than 5-10 years you come out ahead being 100% stocks until you’re middle aged older.  |
Moderate-Length Barrel Evangelist
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Moderate-Length Barrel Evangelist
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Any further input on bond funds that a middle-aged dude should be reading about? Currently have placeholders of GOVT, BND, BLV, VTEB, VTIP, SGOV, HYG, SCYB, but not sure I fully know the benefits and drawbacks, other than comparing retrospective annualized returns. I do think I’ll stay heavily in equities for a few more years, and I have a .mil retirement that I could fall back on (as well as another couple decades of working, perhaps). But I think it’s time to work on a plan for a time when I can’t just throw paychecks at dips or use leverage. I think I’ll also keep occasionally reading about managed futures out of curiosity, but might not ever buy any. |
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Originally Posted By grendelbane: Have you considered looking at long duration Treasury bond funds like TLT or my personal favorite ZROZ? Doesn’t take much, so opportunity cost is not too bad. Not as popular as they used to be, which makes them more appealing. I have looked at those; they come up often in discussions of LETFs. Looking at them again, I’ve noticed something I didn’t see before. I’ll report back later on that. |
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Ok, so the thing I noticed: Bond funds that “suck”, by losing money over a 10yr period have more inverse correlation to SPY. Super obvious, now that I saw it. Probably useful for strategies that pair a bond ETF with leveraged equity ETFs and rebalance on technicals or news. Perhaps. There are bond funds that have positive returns of the same period that have mildly inverse correlation, or just slightly more than none. Might be useful as a store of dry powder. And some of the ones that have the best positive returns have moderate correlation, so they’d be at their weakest when you need them most. Maybe retired folk like them for stability and income since they’re not as concerned about building wealth. Dunno; not there yet. No surprise, corporate bond ETFs seem more likely to correlate with SPY than Govt bond ETFs. I’m going to do some more comparison later and make a spreadsheet (on paper) to judge them on degree of correlation, depth of drawdown, ER, and risk-adjusted returns. |
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Originally Posted By hammer1995: BND is a great bond ETF. It seems like you are very comfortable with risk but it wouldn’t hurt to begin adding some stability to your portfolio. I might be missing something here, but it doesn't look like it's paying any better than most of the brokerage money market funds you hold strike money in. Show me where I'm wrong. I'm open minded about it. I have a small position in it, but I just don't see it as being an advantage. |
Those who ignore history are doomed to repeat it..
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Originally Posted By Waldo: I might be missing something here, but it doesn't look like it's paying any better than most of the brokerage money market funds you hold strike money in. Show me where I'm wrong. I'm open minded about it. I have a small position in it, but I just don't see it as being an advantage. Ie. The 20 year rate is about the same as the very short term rates, that’s why bond funds are yielding the same as a money market fund. That’s not normal though, the yield curve will return to normal and the longer term bonds will again yield higher than the short term bonds. Bond funds are simply a way to expose yourself to the (normally higher) long term rates without having to buy 10-20-30 year bonds yourself. |
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I made that spreadsheet. It looked at correlation, max drawdown, whether the max drawdown coincided with a big drawdown of SPY, E/R, risk-adjusted returns of the past year, and annualized returns over the past 10 years, if available, and also over max years the product has existed. I included 10 bond funds, including the ones mentioned here, gold, 2x gold futures ETF, gold miners ETF, 3 preferred stock ETFs, 8 managed futures ETFs, 2 cryptos. All had fairly low correlation, *MOST* of the time, with the preferred stock and corporate bond ETFs having the most correlation. I looked back 10 years when possible, max when not. My key takeaway is that almost all of them had drawdowns that coincided with SPY’s big drawdowns. Usually the inverted peak was timed exactly with SPY’s inverted peak. Sometimes they didn’t. But usually. So they might have low correlation on most days by simply not growing much, but when you actually need them, they correlate on the drawdown. To make it worse, on all but the shortest timescales, most didn’t even intersect SPY at it’s deepest dips (I’ll attach pics after I re-up my membership here), indicating that in the time looked at, a person would be better off just going all-in on diverse equities, and ignoring the charts, without planning to rebalance into drawdowns. Some did better than others. And this makes sense. These drawdowns in the market end when the mean order flows reverse again, and that appears to have people selling their bonds, gold, and bitcoin to get back in. Or even selling their bonds for income, maybe. The 2 exceptions: SGOV. It never does anything at all, except slightly beat inflation, in a nearly straight line. It’s only been around for 5 years or so, so maybe it’s just not popular enough for the selloffs to happen? I dunno. I’m kinda baffled as to why it doesn’t move at all like the other bond ETFs. Managed futures. They’ve also got a short track record. But, what’s really interesting is they appear to be shifted slightly to the right in drawdowns. It looks like maybe they have selloffs during the recovery phase of SPY’s drawdowns, which would make sense, too. Or more likely, I just don’t understand managed futures. It seems like if you wanted to set up a portfolio that uses safe haven assets in part of it, and high-risk/high-reward assets in the rest, and periodically rebalance to lock in gains or buy drawdowns, you really would want to have all of the ones in Morgan’s chart above. Even then, it might not work. They might be a false sense of security as they drag on your portfolio. |
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Originally Posted By 1168RGR: I looked back 10 years when possible, max when not. To make it worse, on all but the shortest timescales, most didn’t even intersect SPY at its deepest dips ….. ……you really would want to have all of the ones in Morgan’s chart above. Even then, it might not work. They might be a false sense of security as they drag on your portfolio. Pick the timeframe for a bad outcome though - say you retired in 2007 and were 100% stocks. The spy would drop vastly more in that 2008-09 timeframe than your risk parity portfolio. It’s a tool that reduces risk (at the expense of lower returns) and enables more precise planning (by reducing the range of your investment outcomes). If you need either/both of those two things it’s great, if not then it’s not great for you. ETA: on the sgov, its performance tracks the short term treasuries. If you look in 2021 it yielded under 1% because that was the fed rate. It spiked up to around 5% when the fed rate skyrocketed and is down to around 4% now that rates have come down a couple times. |
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Originally Posted By Morgan321: as I’ve said before, on a long enough time frame when you don’t need to withdraw your money (ie. You’re not retired or within 5-10 years of retiring) then I don’t think it’s a good idea because, as you discovered, the broader stock market has always been profitable over a long enough timeframe. Pick the timeframe for a bad outcome though - say you retired in 2007 and were 100% stocks. The spy would drop vastly more in that 2008-09 timeframe than your risk parity portfolio. It’s a tool that reduces risk (at the expense of lower returns) and enables more precise planning (by reducing the range of your investment outcomes). If you need either/both of those two things it’s great, if not then it’s not great for you. ETA: on the sgov, its performance tracks the short term treasuries. If you look in 2021 it yielded under 1% because that was the fed rate. It spiked up to around 5% when the fed rate skyrocketed and is down to around 4% now that rates have come down a couple times. Yep. Every few years I rediscover this, but I’m a little smarter each time. I’ll keep learning, and may set up a risk parity portfolio in my smaller Roth, but I’ll be staying in mostly equities until I’m like 50-60 years old. On SGOV, I think I understand that it tracks very short term treasuries, the confusing part is that it looks impervious to outside influences. Other than the monthly sawtooth, it just steadily tracks a rate, driven by the fed rate. Any other bond fund’s chart looks more like a (lame) stock when I zoom out. ULST PULS or GSY, for example. |
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Lets be real. The Bond market sucks and won't beat inflation. Unless you retired and no longer investing and 'need' to have peak stability. Its wasted opportunity. Its really hard to beat investing in etfs that follow an index. I'd say DCA into Bitcoin is also a solid strategy. The billionaires and big hedge funds are all buying it now. |
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Originally Posted By ICEAGE: Lets be real. The Bond market sucks and won't beat inflation. Unless you retired and no longer investing and 'need' to have peak stability. Its wasted opportunity. Its really hard to beat investing in etfs that follow an index. I'd say DCA into Bitcoin is also a solid strategy. The billionaires and big hedge funds are all buying it now. I was listening to a lecture on risk management, and the dude mentioned that in a crisis almost everything becomes correlated. Classic cars, artworks, almost everything that would normally be expected to hold value or appreciate. The relative strength of buyers vs sellers is just skewed when times are bad. Makes sense. |