It's been several years since I've been able to make a Roth IRA contribution and the back door conversion is too painful to consider since I have a hefty balance in a traditional IRA. As a practical matter, not being able to add more money has made integration with my overall portfolio a tougher challenge, especially with auto-rebalancing enabled for my 401K.
After a few years of treating my Roth IRA as part of my overall portfolio, I decided it was not working very well. The amounts in my other accounts were growing too fast and I was losing rebalancing opportunities by having just 1 holding in my Roth IRA. I puzzled over various strategies but the relatively low balance limited the options I could effectively pursue. I came up with the either brilliant or stupid idea of having 2 volatile but counterbalancing asset classes I would continually rebalance against each other. The 2 classes:
- Commodities to capitalize on unexpected price inflation and soaring costs of commodities due to economic growth, especially in emerging market countries. My choice in this category is/was DBC PowerShares Commodity Index.
- Long Term Treasuries to capitalize on deflation and flights to safety during big market drops. My preferred choice in this category always was EDV Vanguard Extended Duration Treasuries (30 yr) as the longest duration is the most volatile holding. However, trading volumes were not high enough in 2009 so I started with TLT iShares 20+ Year Treasuries. By the end of 2010, EDV trading volumes were high enough for me to comfortably use market orders. (I also waited until EDV's gain over TLT since my strategy start point had disappeared.)
Performance for this strategy for the past 2 years:
Commodities:
Long Term Treasuries
Overall Strategy
So during this period, this rebalancing strategy has produced returns as high as holding either asset class in isolation but with a much smoother growth line. Looking at the graph, I missed out on a few rebalancing opportunities (01/10, 02/10, 07/10, 08/10) due work/travel/whatever that would have boosted my return over 20%. Otherwise, the 15 rebalancing transactions (purple dots) turned 2 volatile classes into a much straighter line. The green dot is a pending transaction for Tuesday after Friday's dismal job reports sent EDV up 6.25%.
While past performance -- especially just 2 years -- is no guarantee of the future, I am relatively confident in this strategy since it depends on market volatility and it is easy to implement in an "isolated" account. I don't have to calculate out 100% in Roth IRA = 3.46% and then propagate that number out against the rest of my portfolio. I don't have to worry about "interest rates are too low, don't buy bonds" or "market PE is too high, don't buy stocks" or "gold/oil/commodities are in a bubble". I just periodically monitor my balances and if it's not 50:50, I sell one and buy the other.
(Filed in investing)
Stupid Roth IRA tricks
Posted by Mossy
September 4, 2011 10:16 AM
After a few years of treating my Roth IRA as part of my overall portfolio, I decided it was not working very well. The amounts in my other accounts were growing too fast and I was losing rebalancing opportunities by having just 1 holding in my Roth IRA. I puzzled over various strategies but the relatively low balance limited the options I could effectively pursue. I came up with the either brilliant or stupid idea of having 2 volatile but counterbalancing asset classes I would continually rebalance against each other. The 2 classes:
- Commodities to capitalize on unexpected price inflation and soaring costs of commodities due to economic growth, especially in emerging market countries. My choice in this category is/was DBC PowerShares Commodity Index.
- Long Term Treasuries to capitalize on deflation and flights to safety during big market drops. My preferred choice in this category always was EDV Vanguard Extended Duration Treasuries (30 yr) as the longest duration is the most volatile holding. However, trading volumes were not high enough in 2009 so I started with TLT iShares 20+ Year Treasuries. By the end of 2010, EDV trading volumes were high enough for me to comfortably use market orders. (I also waited until EDV's gain over TLT since my strategy start point had disappeared.)
Performance for this strategy for the past 2 years:Commodities:
- 17.32% annualized return
Long Term Treasuries- 19.80% annualized return
Overall StrategySo during this period, this rebalancing strategy has produced returns as high as holding either asset class in isolation but with a much smoother growth line. Looking at the graph, I missed out on a few rebalancing opportunities (01/10, 02/10, 07/10, 08/10) due work/travel/whatever that would have boosted my return over 20%. Otherwise, the 15 rebalancing transactions (purple dots) turned 2 volatile classes into a much straighter line. The green dot is a pending transaction for Tuesday after Friday's dismal job reports sent EDV up 6.25%.
While past performance -- especially just 2 years -- is no guarantee of the future, I am relatively confident in this strategy since it depends on market volatility and it is easy to implement in an "isolated" account. I don't have to calculate out 100% in Roth IRA = 3.46% and then propagate that number out against the rest of my portfolio. I don't have to worry about "interest rates are too low, don't buy bonds" or "market PE is too high, don't buy stocks" or "gold/oil/commodities are in a bubble". I just periodically monitor my balances and if it's not 50:50, I sell one and buy the other.
(Filed in investing)
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