Long Term Bond ETF (BLV) or I-Bonds

[aua868s]

Hi all
I am an index funds investor. I have a combo of the following
Total US stock market fund (VTI) 40%
Total International Stock Market fund (VXUS) 40%
Long Term Bond Market fund (BLV) 20%

I also invest in I-Bonds. My question is, from Bond part of my portfolio is it worthwhile to invest in Long Term Bond Market fund or just hold the equivalent percentage in I-Bonds (and invest only in VTI & VXUS)?

I am not sure if this question was asked before and was answered. If so, please point me to the appropriate post. I could not find it in my search.

Thanks in advance!

[hollowcave2]

There's a big difference in the experience you'll have holding a long term bond ETF and I-bonds.

While you may get more return from a LT bond ETF, the price you'll pay is volatility. The ETF price will fluctuate, and a LT fund will have much more fluctuation than a ST bond index, but also more income. I see that you already have 20% of your allocation in LT bonds, and I think that's enough for today's environment.

So given the choice, I would invest in I-bonds. The benefit is a stable price with a guarantee of keeping up with inflation. The disadvantage is no current income, limited amount you can buy in any given year, and somewhat less liquid (cannot redeem in less than a year and penalty for redeeming in less than 5 yrs). But I cannot advocate adding to a LT bond position if you already have 20% of your AA in it.

Other alternatives could include adding bonds, but instead of LT bonds, consider ST bonds, for example.

[livesoft]

There are many other options in bonds than the choices you gave us. One of those options is to hold both BLV and I-bonds. Are you interested in other options?

[aua868s]

There are many other options in bonds than the choices you gave us. One of those options is to hold both BLV and I-bonds. Are you interested in other options?

Sure, I would be interested to know other Bond options as well. Thanks.

[aua868s]

But I cannot advocate adding to a LT bond position if you already have 20% of your AA in it.

At this moment, I am using the I-Bonds as a secondary Emergency fund.
My question was more in the line of for my future investments in the Bond part of my AA (20%), should I be investing solely in Bond Funds or should I split between Bond Funds and I-Bonds.

[camaro327]

You can only do 10K in i-bonds per year, so it would depend on your total amount that you intend to invest in bonds. If you have more than 10K to invest, I would split between the I-bonds and an intermediate term bond fund. The LT bond just has too much interest rate risk for my taste.

[livesoft]

There are many other options in bonds than the choices you gave us. One of those options is to hold both BLV and I-bonds. Are you interested in other options?

Sure, I would be interested to know other Bond options as well. Thanks.

Larry Swedroe had an outstanding interview about this that was recently linked on the forum. Here's the link: http://seekingalpha.com/article/1081411 ... -for-yield
What did you learn from reading that?

[grabiner]

Hi all
I am an index funds investor. I have a combo of the following
Total US stock market fund (VTI) 40%
Total International Stock Market fund (VXUS) 40%
Long Term Bond Market fund (BLV) 20%

Is this a taxable account or an IRA? BLV is not good for a taxable investment because it generates a lot of dividends (3.51% currently, and this may go up), taxed at your full tax rate. I-Bonds are good for a taxable account because they are tax-deferred and exempt from state tax, but if you need to hold more bonds than the I-bond limit, you'll probably want a municipal-bond fund (Vanguard has them, although not as ETFs) rather than a long-term taxable bond fund.

[letsgobobby]

re: livesoft's link, note that Larry and others have consistently advised staying away from long term bonds.

long term bonds and I-bonds are so different from each other, I wouldn't think to ever replace one for the other.

[aua868s]

Is this a taxable account or an IRA? BLV is not good for a taxable investment because it generates a lot of dividends (3.51% currently, and this may go up), taxed at your full tax rate.

That is a great point. This is a Taxable Account. I did not think about it. Thank You!

[Hector]

Is this a taxable account or an IRA? BLV is not good for a taxable investment because it generates a lot of dividends (3.51% currently, and this may go up), taxed at your full tax rate.

That is a great point. This is a Taxable Account. I did not think about it. Thank You!

Depending on your tax bracket, even after paying taxes, 3.51% is higher than I-Bonds' interest rate if you are looking only at current yield

[grabiner]

Is this a taxable account or an IRA? BLV is not good for a taxable investment because it generates a lot of dividends (3.51% currently, and this may go up), taxed at your full tax rate.

That is a great point. This is a Taxable Account. I did not think about it. Thank You!

Depending on your tax bracket, even after paying taxes, 3.51% is higher than I-Bonds' interest rate if you are looking only at current yield

But that is a big "if". The reason long-term bonds yield 3.51% is that they have a lot of interest-rate risk; BLV could easily lose 10% of its value if interest rates rise. If you want to hold long-term bonds in a taxable account and take that risk, long-term munis make more sense.

[bdpb]

If you want to hold long-term bonds in a taxable account and take that risk, long-term munis make more sense.

It's very risky for me not to agree with grabiner 100%, but munis may not be better than long term bonds. In isolation, the return of munis may be better, but from a whole portfolio perspective, it might be better to hold long term bonds with this high equity allocation.

[grabiner]

If you want to hold long-term bonds in a taxable account and take that risk, long-term munis make more sense.

It's very risky for me not to agree with grabiner 100%, but munis may not be better than long term bonds. In isolation, the return of munis may be better, but from a whole portfolio perspective, it might be better to hold long term bonds with this high equity allocation.

Given the tax cost, if you want to hold long-term bonds, it's usually best to hold them in an IRA and hold stock index funds in your taxable account, rather than to hold long-term munis in your taxable account and stocks in your IRA, and I believe this is your point.

But once you have decided that you will be holding bonds in your taxable account (possibly because your 401(k) doesn't have a good bond option and you need more bonds than you can fit in your IRA), munis and corporate bonds have essentially the same risks. Therefore, if you are in a high tax bracket, you should usually prefer munis for a higher after-tax return at a given risk level.