I’m undertaking a 1000-day reinvention project, blogging here daily to track my progress. In Monday Money, I write about money management.
I’m in the process of developing and implementing a new allocation model for my traditional IRA, whose management I’m taking over from an asset manager. I wrote a bit about it yesterday in my Sunday Planning post:
I’m adapting Meb Faber’s tactical asset allocation approach which uses simple timing rules to enter and exit a set of asset sleeves. I’ve defined a portfolio of 16 ETFs that cover a variety of strategies and factors (e.g., large cap U.S. momentum, 10-year U.S. treasuries, international real estate). And then I’m going to rebalance weekly in 25% tranches, as per this update to Faber’s model.
Based on my reflections about stocks and flows, I’m calling this Flow Allocation because money flows in and out of investments based on the simple timing rule of whether that asset is above or below its 200-day simple moving average (200 DMA). The model makes no predictions about what’s going to happen.
I’m building an application to calculate signals and help me move to my target allocation. It calculates that I should sell all my bond positions, as all my bond funds are below their 200 DMA. They have been below that signal line since March, so had I already been running flow allocation, I’d be out already.
Why are bonds doing so poorly lately? Bond prices move inversely to yields, and yields have been rising. Many people will tell you its because of expected inflation, which is high because of the ongoing war in the Middle East, the current administration’s tariff policy, and also the ever-growing U.S. debt.
Mohamed El-Erian identifies two additional factors in his New York Times opinion piece America Is About to Get More Expensive, increased corporate borrowing competing for demand for debt and decreased foreign buying, leading to decreased demand:
The most notable is a staggering surge in actual and prospective borrowing by technology companies pursuing the transformative promise of artificial intelligence. Simply put, a rising number of tech companies want to borrow huge amounts of money to deliver breathtaking innovations that can benefit billions. They’ve already sold almost $500 billion in bonds this year and will probably borrow a minimum of another $300 billion by year’s end….
While this corporate appetite is growing, traditional foreign buyers of American Treasuries have retreated. This is not merely a consequence of China’s geopolitical hesitancy or the need for Persian Gulf states to redirect some of their wealth toward domestic economic diversification and repair damage from the Iran conflict. It also involves steadfast buyers who could become sellers because of their own domestic exigencies. Japan, for one, faces mounting pressure to liquidate foreign assets, including U.S. government and corporate bonds, to defend its battered yen — something that the U.S. has already supported in a rare joint intervention.
So you’ve got more supply of debt, less demand, and an increasing inflation premium.
My advisor kept asking me if I wanted to add back more bonds, especially $TLT, the 30-year U.S. treasury ETF. I kept saying no, but I didn’t have a rules-based justification for it. Now my flow allocation model tells me: don’t be in bonds. And it will tell me when to get back in.
I’m looking forward to basing my investment decisions not on gut instinct but on rules and standard practices.