Charlie and anyone else who wishes to chime in,I usually don't work this way and occasionally everyone must, I need to sort some ideas out that are not crystal enough to put my finger on. Time and time again the two of us preach and attempt to practice cover one's backside/downside prior to seeking profit/upside. We are pretty sure that current market conditions are not value orientated investor friendly. (possibly they are growth orientated friendly) We are also pretty sure that these conditions cannot continue for an extended period. Our problem is "extended period" is undefined and probably undefinable. How do we best manage our downside exposure given most of the above is true? When is minimizing real(experienced) losses better than exposing our capital to chasing yield or even buying at premium (which is accepting a controlled capital loss). I would also extend the idea of paying a premium down the credit quality scale, paying 75-80 for credit quality that is more properly priced 65-80 is paying a premium. Spreading one's risk across many positions defends against individual positions moving harshly against us. It does a poor job of defending against more macro moves against us. Charlie states So it wasn’t as if I couldn’t afford a predictable loss of –3% on 1% of them for the years 2011 through 2021 compared with a possible loss that would be multiples of that if I “chased yield” at current prices and the position blew up. Assumes the other 99% maintains above average gains or at least above personally experienced real losses. We know the 25% gains experienced this year will be mitigated over time. A bond is worth 100 at maturity and no more. It may have been bought and 60 and repriced to 80 within 12 - 18 mo which are tasty gains if and only if we capture them. In the end, at maturity, the bond is worth 100. We also anticipate that some market correction could occur taking our bought at 60 bond and now at 80 back down to 65 or 70 - still in the black but not nearly as impressive. Buying 100 cents for less is always a good idea. Buying a slightly riskier 80 cents for 60 cents is often a good idea. Those options are not easily available for new money, within the bond market. (the low hanging fruit has been picked) I'm not smart enough or wired right to buy 100 cents for 110 so I can sell it for 130. Be it bonds or bond funds many of us are have bought at various points, 80, 90, 100, 110 and are now looking at the port valuing it, because of macro market conditions at 120 - 130. Bond math tells us 120 - 130 is not sustainable. Under current conditions how do we manage our downside exposure? LTBH suggests we ride it out. The market will either correct to 100 = 100 or it may temporarily over correct and then come back to 100=100. The LTBH rides it out. It will look like a portfolio loss, retraction of 20% - 30% loss event though the real nominal gains are the compiled YTM of the port and not ultimately negative. The knock on LTBH is the losses it sustains by failing to capture profits it has made. The reinvestment conundrum; is it better to hold back down to 100=100 or capture gains and redeploy? Or put specific to current conditions, can one go to cash or cash equivalents and ride out minor real experienced losses long enough to come back into the market at better/safer/more profitable positions? Is it smarter to cash out at 120 - 130 and endure X number of years at -1%, then it is to ride the port down to 100?I know I'm rambling more that just a little bit. The prune the port and go to cash argument is easier to make on the equity side because there is far less certainty in a stocks price returning to predicted valuation and, usually, far greater price volatility. In 2006 - 2007 I started arguing on the stock methods/clubs boards for an pre-thought out cash management strategy. How do we do the same for a bond heavy port? Or should we bother?jack
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