Earlier this month, I wrote about my
silly investment strategy for my Roth IRA. I switched to this strategy mostly from the frustration of managing an integrated portfolio. I missed a lot of rebalancing opportunities due to the hassle of updating a daunting spreadsheet to calculate which accounts to buy/sell investments and which accounts needed changes in automatic contribution amounts. To solve for this problem, I am moving my tax-free/tax-deferred accounts to simple percentage holdings that can be easily rebalanced after a big market swing. (2 Vanguard fund accounts left to do -- just waiting for better market conditions.) For my taxable accounts, I will continue to update that complex spreadsheet once a year to determine contribution amounts for the year.
In my Roth IRA, I chose to rebalance commodities against long-term treasuries. I did not look at any data before picking this strategy as I was influenced by the core idea of
Harry Browne's Permanent Portfolio to understand how/when/why asset classes move during different economic conditions versus looking at price data. Long-term treasuries do well in 2 different scenarios: deflation and flight to safety. Commodities do well in unexpected inflation and hot economic growth that increases demand for commodities. So we have 2 asset classes that have some overlap -- economic growth during times of decreasing interest rates -- but mostly protects against different conditions.
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But now that I have been using this strategy for 2 years, I guess I could drum up some past performance numbers. Using Yahoo's historic prices, I was able to get daily dividend-adjusted prices since inception (12/8/2002) for PCRIX (Pimco Commodity Return) and use the same beginning date for VUSTX (Vanguard Long-Term Treasuries). The following graph shows what daily rebalancing looks like compared to buying 50:50 and forgetting about it.
Commodities (PCRIX)Annualized Return: 11.66%
Daily Volatility (Standard Deviation): 1.34%
Biggest 1-day Loss: -9.04%
Long-Term Treasuries (VUSTX)
Annualized Return: 10.88%
Daily Volatility (Standard Deviation): 0.71%
Biggest 1-day Loss: -3.95%
50:50 Set & Forget
Annualized Return: 11.27%
Daily Volatility (Standard Deviation): 0.82%
Biggest 1-day Loss: -5.11%
50:50 Daily Rebalancing
Annualized Return: 12.41%
Daily Volatility (Standard Deviation): 0.77%
Biggest 1-day Loss: -4.83%
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Obviously, daily rebalancing is beyond the ability for small investors. The tax drag and brokerage costs would be too great. How do the numbers look for annual rebalancing? For this scenario, I grabbed the performance numbers from
Simba's backtest spreadsheet and set the return scale to logarithmic.
Commodities (PCRIX)
Annualized Return: 10.58%
Annual Volatility (Standard Deviation): 20.44%
Biggest 1-year Loss: -43.33%
Long-Term Treasuries (VUSTX)
Annualized Return: 8.24%
Annual Volatility (Standard Deviation): 11.35%
Biggest 1-year Loss: -12.05%
50:50 Set & Forget
Annualized Return: 9.65%
Annual Volatility (Standard Deviation): 12.97%
Biggest 1-year Loss: -26.92%
50:50 Yearly Rebalancing
Annualized Return: 10.19%
Annual Volatility (Standard Deviation): 10.37%
Biggest 1-year Loss: -10.44%
Holding 100% would have produced the highest returns but what a ride it was. The largest commodity futures loss was -43.33% in 2008 -- yikes! Starting out with 50% Treasuries helps but by 2007 comes around, Commodities grows to 75% of the total balance which meant you still saw a -26.92% loss in 2008. The smoothest strategy would definitely have been annual 50:50 rebalancing producing lower volatility and smaller losses than holding 100% Treasuries.
(Filed in investing)
Rebalancing Commodities & Treasuries
Posted by Mossy
September 17, 2011 9:33 AM
In my Roth IRA, I chose to rebalance commodities against long-term treasuries. I did not look at any data before picking this strategy as I was influenced by the core idea of Harry Browne's Permanent Portfolio to understand how/when/why asset classes move during different economic conditions versus looking at price data. Long-term treasuries do well in 2 different scenarios: deflation and flight to safety. Commodities do well in unexpected inflation and hot economic growth that increases demand for commodities. So we have 2 asset classes that have some overlap -- economic growth during times of decreasing interest rates -- but mostly protects against different conditions.
---
But now that I have been using this strategy for 2 years, I guess I could drum up some past performance numbers. Using Yahoo's historic prices, I was able to get daily dividend-adjusted prices since inception (12/8/2002) for PCRIX (Pimco Commodity Return) and use the same beginning date for VUSTX (Vanguard Long-Term Treasuries). The following graph shows what daily rebalancing looks like compared to buying 50:50 and forgetting about it.
Commodities (PCRIX)
Annualized Return: 11.66%
Daily Volatility (Standard Deviation): 1.34%
Biggest 1-day Loss: -9.04%
Long-Term Treasuries (VUSTX)
Annualized Return: 10.88%
Daily Volatility (Standard Deviation): 0.71%
Biggest 1-day Loss: -3.95%
50:50 Set & Forget
Annualized Return: 11.27%
Daily Volatility (Standard Deviation): 0.82%
Biggest 1-day Loss: -5.11%
50:50 Daily Rebalancing
Annualized Return: 12.41%
Daily Volatility (Standard Deviation): 0.77%
Biggest 1-day Loss: -4.83%
---
Obviously, daily rebalancing is beyond the ability for small investors. The tax drag and brokerage costs would be too great. How do the numbers look for annual rebalancing? For this scenario, I grabbed the performance numbers from Simba's backtest spreadsheet and set the return scale to logarithmic.
Commodities (PCRIX)
Annualized Return: 10.58%
Annual Volatility (Standard Deviation): 20.44%
Biggest 1-year Loss: -43.33%
Long-Term Treasuries (VUSTX)
Annualized Return: 8.24%
Annual Volatility (Standard Deviation): 11.35%
Biggest 1-year Loss: -12.05%
50:50 Set & Forget
Annualized Return: 9.65%
Annual Volatility (Standard Deviation): 12.97%
Biggest 1-year Loss: -26.92%
50:50 Yearly Rebalancing
Annualized Return: 10.19%
Annual Volatility (Standard Deviation): 10.37%
Biggest 1-year Loss: -10.44%
Holding 100% would have produced the highest returns but what a ride it was. The largest commodity futures loss was -43.33% in 2008 -- yikes! Starting out with 50% Treasuries helps but by 2007 comes around, Commodities grows to 75% of the total balance which meant you still saw a -26.92% loss in 2008. The smoothest strategy would definitely have been annual 50:50 rebalancing producing lower volatility and smaller losses than holding 100% Treasuries.
(Filed in investing)
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