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NTSX suitable for mitigating SORR?


darthdiablo
Posts: 3
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(@darthdiablo)
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Joined: 2 months ago

Thanks for your fabulous ERN series on SWR! 

I've read thru most of the ERN series on SWR. Part 19 is of particular interest here. 

Tell me if I'm incorrect, but the premise is that if we glidepath from 60/40 to 100/0 at onset of retirement, we would mitigate SORR very well. 

The article also mentions that 60/40 comes with its own risk, obviously that we could miss out on gains if the first years of retirement happen to see very good market. That's just one con of doing glidepath, but to mitigate away SORR, it's a worthy risk to take. 

I've searched various forums.. Bogleheads, ERN, etc. I don't think I've seen any mention/discussion of using something like NTSX for SORR mitigation. NTSX basically gives me exposure to 90% equities, 60% bonds (average duration is intermediate-term). Paradoxically, through leverage obtained from treasury futures, NTSX makes things "lesser volatile" than 100% VTI. And given enough time with corrections and crashes, NTSX would put us ahead of those who are 100% VTI as well. 

So does it seem like a viable strategy to have most of my net worth in NTSX, when starting out my retirement? I have the upside potential (90% of it), but also protected from downside through 60% bonds exposure, which I think would be enough mitigate away most of the SORR?

Thoughts?

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earlyretirementnow.com
Posts: 273
(@earlyretirementnowcom)
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Joined: 6 years ago

Interesting idea. In the historical simulations, it would not have worked universally.

Start with the baseline 75% stocks and 25% bonds.

Now replace the 75% stocks with 75% NTSX, so 67.5% Stocks, 45% Bonds -37.5% Cash. Add the 25% bonds and you get the allocation 67.5% Stocks, 70% bonds, -37.5% cash.

Would have improved the failsafe in 1929. But would have made the 1960/70 worse. There's no free lunch!

But if you are absolutely sure we will not have another inflationary shock where both stocks and bonds lose, then NTSX is certainly a nice improvement. 

 

See also my old classic post from 2016: https://earlyretirementnow.com/2016/07/20/lower-risk-through-leverage/

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darthdiablo
(@darthdiablo)
Joined: 2 months ago

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Posts: 3

@earlyretirementnowcom Thanks for responding!

What tool were you using? The ERN SWR Toolkit 2.0? If that was the one, I have that but did not realize I can test leveraged positions there. Let me know if that was the one.

It's a shame it did not improve the SORR mitigation except for the 1929 scenario. Well, that's good to know now! 

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earlyretirementnow.com
(@earlyretirementnowcom)
Joined: 6 years ago

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Posts: 273

@darthdiablo "The ERN SWR Toolkit 2.0?"

Yes. Leverage simply means you set your risky weights to more than 100%, but then you need to set the Cash (i.e., short-term instruments) to a negative number to make sure the weights sum up to 1.00=100%.

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nobatmanjokes
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(@nobatmanjokes)
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Joined: 1 year ago

During accumulation I like the DIY approach to NTSX: a 90/60 portfolio that starts with leveraged bond ETFs and transitions to treasury futures over time. I don’t want to lock myself into unrealized cap gains in a fund from which I couldn’t wind down leverage as I approach retirement.

For me the 1.5x leverage in retirement is too much so the biggest advantage of the DIY approach is that I can scale down the leverage as I approach retirement and settle towards an 80/20 portfolio. The DIY approach also allows me to build a small allocation of inflation protected bonds (TIPS, I-bonds) if the risk premium is low compared to nominal bonds at that time. However, I could certainly be wrong no matter what I choose and would no longer have income, so I don’t want to keep the leverage in retirement.

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earlyretirementnow.com
(@earlyretirementnowcom)
Joined: 6 years ago

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Posts: 273

@nobatmanjokes Yeah, good point. Once you factor in the tax inefficiencies and inflexibility of some of the packaged products it's best to DIY!

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