• 406 days Will The ECB Continue To Hike Rates?
  • 406 days Forbes: Aramco Remains Largest Company In The Middle East
  • 408 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 808 days Could Crypto Overtake Traditional Investment?
  • 813 days Americans Still Quitting Jobs At Record Pace
  • 815 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 818 days Is The Dollar Too Strong?
  • 818 days Big Tech Disappoints Investors on Earnings Calls
  • 819 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 821 days China Is Quietly Trying To Distance Itself From Russia
  • 821 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 825 days Crypto Investors Won Big In 2021
  • 825 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 826 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 828 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 829 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 832 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 833 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 833 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 835 days Are NFTs About To Take Over Gaming?
How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

  1. Home
  2. Markets
  3. Other

Asset Allocation Strategy: Buy and Hold Bonds

This is the second installment of our series on asset allocation. The first article was on buy and hold SP500, where we learned that risks were relatively high (2 drawdowns > 45%) over the past 20 years to earn a compound annual growth rate of 6.46%. In this article, I will look at buy and hold of the Dow Jones Composite Bond Index. Bonds are our great diversifier, and when incorporated into an equity portfolio, it is our intention to reduce risk without sacrificing gains. In essence, the sum of the parts (stocks plus bonds) is better than either entity alone, but that will be the next article in this series. But first we must understand the limitations to a passive (i.e., buy and hold) strategy if we want to construct portfolios that are strategic, balanced and targeted.

From November, 1991 to March, 2011, buy and hold (passive) of the DJ Composite Bond Index had a compound annual growth rate of 5.35%. $100,000 becomes $275,434. Figure 1 shows the equity curve for buy and hold of the DJ Composite Bond Index. (Of note, I have chosen this particular starting date as my models start in this time frame; future articles in this series will be making this "apples to apples" comparison.)

Figure 1. Equity Curve/ buy and hold DJ Composite Bond Index
Equity Curve/ buy and hold DJ Composite Bond Index

Drawdown is the peak-to-trough decline (in percentage terms) of an investment, and it is measured from the time a retrenchment begins to when a new high is reached. Drawdown is a measure of risk. The maximum draw down for buy and hold DJ Composite Bond Index is 14.72%. As of March, 2011, the longest draw down period was 216 weeks. The draw down curve is shown in figure 2.

Figure 2. Draw down/ buy and hold DJ Composite Bond Index
Draw down/ buy and hold DJ Composite Bond Index

Buy and hold DJ Composite Bond Index earned a return slightly less than buy and hold SP500 (5.35% v. 6.46%). However, the risk of loss was considerably less with buy and hold DJ Composite Bond Index. The reward to risk ratio (or CAGR to drawdown ratio) was 0.36, which is 3x better than buy and hold SP500.

In the next installment of this series, we will combine buy and hold SP500 with buy and hold DJ Composite Bond Index into a single portfolio and review the reward to risk profile.

 

Back to homepage

Leave a comment

Leave a comment