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Summary

  • Buying Treasuries is like buying insurance, if everything goes well you'll be sorry you bought them.
  • But when things go wrong you'll be sorry you didn't.
  • The threat of rising interest rates makes it a difficult time to feel comfortable investing in treasuries.
  • Here's how I am dealing with this dilemma.

I am semi-retired. As I get closer to withdrawing from my portfolio, the safety of my principal is becoming more important. Treasuries are one of the few investments that almost always has a negative correlation with equities during a market correction. This negative correlation can provide downside protection to my portfolio. The chart below compares iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT) and the S&P 500 does a nice job of showing how having long-term Treasuries in your portfolio can provide protection during a market downturn.

(click to enlarge)

Source: Google

Shorter-term Treasuries also provide some protection but not as much, as the comparison of Schwab Intermediate-Term U.S. Treasury ETF (NYSEARCA:SCHR) to the S&P shows.

(click to enlarge)

Source: Google

On the other hand Treasuries rates are at the lowest they have been since the early 1950s and the Fed is scaling back its purchases of treasuries. Many pundits believe rates have nowhere to go but up.

(click to enlarge)

Source: www.multpl.com/

However, pundits have been predicting the rise in rates since the Fed began talking about unwinding the stimulus in May of 2013. Eventually, they will probably be right, but how much and how quickly will rates rise? When do you know they have stopped rising? If I wait to invest in treasuries only when I can predict the future of interest rates - I will never invest in treasuries.

How do I resolve my desire to buy treasuries with my concern about buying treasuries while rates are low? The solution I have come up with is to dollar cost average. My plan is simple; buy a set amount of treasuries each quarter until I have the desired amount in my portfolio. I would like to have at least 20% of my portfolio in treasuries. I plan on spreading my treasury purchases over at least 12 quarters with interest re-invested.

There are three investments I will use to create the treasury part of my portfolio long-term treasury funds like (TLT) and Vanguard Long-Term Treasury Fund (VUSTX), intermediate term treasury funds like (SCHR) and Vanguard Intermediate-Term Treasury Fund (VFITX) and 5 to 10 year CDs. (I understand CDs are not Treasuries but they provide the same benefits to my portfolio.) The idea is not to try and anticipate where interest rates will go. The idea is to dollar cost average by investing the same amount every quarter into treasuries and CDS. I will allow myself some flexibility to adjust the duration I invest in every quarter but none of the money allocated to this portion of my portfolio will be invested in funds or CDS that have durations less then 5 years.

Conclusion

  1. I want to add treasuries because they provide downside protection.
  2. Interest rates are low but predicting when and by how much they will rise is something I don't believe I can do.
  3. To fulfill my goal of adding treasuries without taking on too much interest rate risk, I plan to dollar cost average by investing a set sum of money in treasuries every quarter.

I'm in the process of simplifying my portfolio and changing my asset allocation to do a better job of protecting my principal. Buying Treasuries over time is part of the plan. Managing my portfolio is an evolving process and changes in personal circumstances or market conditions may cause me to change the plan.

I encourage all investors do their own due diligence and please share your findings. I strongly feel the best thing about Seeking Alpha is the sharing of ideas. Please comment, I value your input. Divergent opinions are welcome.

Disclosure: The author is long TLT, SCHR. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Why I Am Adding Treasuries To My Retirement Portfolio