TBM for life?

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Taggerung
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TBM for life?

Post by Taggerung »

I'm 40 and the first to admit that bonds confuse me. Am I irresposible for wanting to keep 100% of my fixed income allocation in TBM forever and always? Diversifying fixed income gets so complicated so quickly. Maybe just add short-term TIPS at retirement? Is following the Vanguard Target Date Funds fixed income allocation a better strategy?
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Re: TBM for life?

Post by Johm221122 »

Seems like good strategy unless you have some good fixed income in retirement accounts not available to general public
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Re: TBM for life?

Post by DSInvestor »

I think Total Bond Market is a great choice for all of your fixed income allocation. I see from your other threads that you're investing 403(b) and Roth IRA. TBM would fit very well in that mix. I see from another thread that the 403b is with Fidelity. The Fidelity Spartan US Bond Index fund would be equivalent to Vanguard's Total Bond Market Index fund.

If you start to invest outside of tax advantaged accounts and wish to hold fixed income in taxable accounts, a tax exempt bond fund may make sense if you're in a high tax bracket. Consider Vanguard Intermediate Term Tax Exempt VWITX or VWIUX admiral to complete your bond allocation in taxable accounts in this situation.
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Re: TBM for life?

Post by nisiprius »

Taggerung wrote:...I'm 40 and the first to admit that bonds confuse me. Am I irresposible for wanting to keep 100% of my fixed income allocation in TBM forever and always? ...
No.
Diversifying fixed income gets so complicated so quickly.
Well, the whole point of TBM is that it is already diversified. Sane people could disagree about the exact mix, and the composition of the Lehman Brothers (now Barclay's) Aggregate Index seems sort of arbitrary and has some elements of accidents of history, but it is still an awful lot of different bonds, and an awful lot of different kinds of bond.

But the second point is that as long there is any significant stock allocation at all, the fluctuations in your stock portfolio will be so huge that any additional fluctuations from the bond portfolio will be completely drowned out. This point can be argued endlessly of course--to the purists everything matters. But to me it does not make any sense to pay as much attention to the bonds as to the stocks. It is an amusement park; buying a stock fund is a decision to ride a rollercoaster. Choosing the stock portfolio is deciding whether to ride the Wildcat or the Zoomerang; choosing the bond fund is like deciding whether you will get a better ride in the front car or the back.

Now, I feel a little hypocritical saying that as I am not 100% TBM myself. My personal preference is that having lived through 10% inflation around 1980 I prefer to have a lot of my stuff indexed to inflation, so I'm about half in TIPS and mostly individual TIPS rather than a fund--that's more like a bad habit than a considered judgement. But I still stand by my statement that it doesn't matter much.

Look at 2008-2009, at four bond funds and one stock fund.

Image

If you want to play oneupmanship or hindsight games about bond choices, you could point out that $10,000 in Total Bond at the start of 2008 was at least a little more than $10,000 at the worst of the crash. You could point out that Treasuries (green) which for some reason it seems to be popular to diss now, did the best of the four bond funds, and were practically the only thing with a small upward bulge to take some of the edge off stock losses. You could point out that an investment in my beloved TIPS (orange) were down 4%. And that despite all the gushing now over corporates, the corporate-heavy Intermediate Term Investment Grade, was down 7% (red). How do you like losses in what's supposed to be the safe part of the portfolio, blah blah blah. Which is better, which is worst, what about GNMAs blah blah.

But I say it just isn't important. What was important in 2008-2009 was the stock/bond allocation, all the bond funds in that chart represented a relatively safe anchor, and the differences between them are negligible compared to the 50% loss in stocks (yellow). Seriously, who cares whether their bonds are down 4% or 7% when stocks are down 50%?
Last edited by nisiprius on Thu Feb 27, 2014 9:26 am, edited 2 times in total.
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Taylor Larimore
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Re: TBM for life?

Post by Taylor Larimore »

Taggerung:
...I'm 40 and the first to admit that bonds confuse me. Am I irresponsible for wanting to keep 100% of my fixed income allocation in TBM forever and always? ...
Taggerung:

I agree with Nisiprius and his chart. The bond diversification within Total Bond Market is what sets it apart from other bond funds. In addition to its simplicity, you enjoy the reassurance that your bonds will never be all in an under-performing category.

Best wishes.
Taylor
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Re: TBM for life?

Post by G-Money »

Perfectly sensible plan. And I wouldn't feel compelled to add short-term TIPS in or near retirement, unless you felt you were particularly sensitive to inflation.
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Re: TBM for life?

Post by tadamsmar »

Taggerung wrote:I'm 40 and the first to admit that bonds confuse me. Am I irresposible for wanting to keep 100% of my fixed income allocation in TBM forever and always? Diversifying fixed income gets so complicated so quickly. Maybe just add short-term TIPS at retirement? Is following the Vanguard Target Date Funds fixed income allocation a better strategy?
I think using TBM is a good strategy, the Vanguard LifeStrategy funds use that approach. Using Vanguard Target Retirement funds as a guide would be another good strategy.
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Re: TBM for life?

Post by House Blend »

^Actually, none of the LifeStrategy and none of the TR funds use a TBM-only allocation now. International Bonds are in the mix too. (But I agree with the general sentiment of this thread that TBM-only is fine.)
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Re: TBM for life?

Post by G-Money »

House Blend wrote:^Actually, none of the LifeStrategy and none of the TR funds use a TBM-only allocation now. International Bonds are in the mix too. (But I agree with the general sentiment of this thread that TBM-only is fine.)
Yes, and I think it's a shame. The costs of hedging seem to cut significantly into TIBM's yield, to the point where it has greater term risk and default risk than TBM, but has a materially lower yield than TBM.

Of course, at 20% of fixed income (which is the amount LS and TR funds devote to TIBM), I'm not sure it's enough to really move the needle one way or the other. So, IMO, it's a disappointing but mostly harmless addition.
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Re: TBM for life?

Post by deikel »

Most bonds these days suck big time, they give you about inflation rate and thats it. If you want to become sohpisticated with bonds you can tweak the bond allocation to corporate and increase yield (and increase risk) or add inflation protected government ...but at this point in time they behave pretty much like cash/savings account/CD - give or take 1%

Since the OP mentioned he does not understand bonds all that much (and who does exactly these days ?) - staying in the TBM - or his FIdelity brother seems totally reasonable, no reason to waste time and effort to squeeze out another 0.5 % when the market just jumped 35 % last year in your stock allocation.

ANd since you are just 40, you hopefully had a good allocation tilt towards stock.

" keep it simple stupid" always rules.
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Re: TBM for life?

Post by tadamsmar »

House Blend wrote:^Actually, none of the LifeStrategy and none of the TR funds use a TBM-only allocation now. International Bonds are in the mix too. (But I agree with the general sentiment of this thread that TBM-only is fine.)
Opps! You are right.

So the LifeStrategy approach to bonds would be a 3rd good approach.
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Re: TBM for life?

Post by LH »

Taggerung wrote:I'm 40 and the first to admit that bonds confuse me. Am I irresposible for wanting to keep 100% of my fixed income allocation in TBM forever and always? Diversifying fixed income gets so complicated so quickly. Maybe just add short-term TIPS at retirement? Is following the Vanguard Target Date Funds fixed income allocation a better strategy?
Bonds are for safety.

Now consider a high inflation environment like the 70s.

TBM is not safe in high inflation. Inflation can devastate a bond holding in TBM. Especially if it happens in retirement stage.

I would recommend TIPS + TBM.

That way, if 70s like inflation comes again, the TIPS -=hopefully=- will keep up with inflation.
Last edited by LH on Thu Feb 27, 2014 3:50 pm, edited 1 time in total.
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Re: TBM for life?

Post by G-Money »

LH wrote:Bonds are for safety.

Now consider a high inflation environment like the 70s.

TBM is not safe in high inflation. Inflation can devast a bond holding in TBM. Especially if it happens in retirement stage.

I would recommend TIPS + TBM.

That way, if 70s like inflation comes again, the TIPS -=hopefully=- will keep up with inflation.
My understanding was that TBM would not be "safe" in high inflation only if the high inflation was unexpected. If the market expects high inflation, the nominal bonds in TBM would reflect that expectation.
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ogd
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Re: TBM for life?

Post by ogd »

I think 100% of fixed income in TBM is fine, since it's so diversified, with two gotchas.

One is that if part of your allocation is in taxable and you're in a high tax bracket (above 25% or so), you should be at least part in municipal bonds to save on taxes. Going further, if most of the allocation is there you can add some Treasuries or CDs into the mix to balance out the credit risk (reproducing TBM but with munis instead of corporates).

The second is that when you're older and your stock allocation no longer provides enough of the inflation heavy-lifting, perhaps it's worth adding some TIPS into your now larger fixed income allocation. I wouldn't do it above 50% stocks, but that's just me.
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Re: TBM for life?

Post by abuss368 »

Total Bond Market Index was created by Jack Bogle and it is his largest bond holding based on his interviews. He has recommended it extensively in his many excellent books. As a side note, he is also pressing for an update to the index that the fund tracks to include a little more corporate bonds and a little less Treasuries. Besides the point.

Bond returns are a function of credit and term. The role of bonds in an investment portfolio are for safety and income. During the financial crisis the "dry powder" of bonds allowed rebalancing back into equities with additional contributions.

There was an advisor who used to post on this website. He had an excellent saying regarding bonds and that was "anyone who spends two minutes a year thinking about bonds, has spent 90 seconds too many". Your right in terms bonds can feel more complicated.

We have always stayed away from investing complexity. No individual bonds either. Our strategy has always been a simple and low cost, diversified, bond fund. Total Bond Market Index is in our tax advantaged accounts and Intermediate Term Tax Exempt in the taxable account. This has worked well and we are going to stay the course.

I honestly believe an investor can chose to own one or more bonds funds and it will probably not make any difference return wise. We will probably all end up in the same place as we are all at the mercy of interest rates. So it depends on investor preference and what allows one to sleep at night as Warren Buffett so often notes. The additional funds, re-balancing, etc. will lead to more complexity.

I believe there are so many inflation hawks, advisors, and watchers that I can not see an unexpected surprise in inflation. Your wages adjust for inflation, social security adjusts, etc. Who needs the complexity of TIPS? Investors who believe they have protection from "unexpected inflation" with a 30% or 40% bonds allocation overall and then a sub-allocation of 20% or 30% or so to TIPS really do not have a material amount. Probably will not move the needle in any direction.

I also prefer cash flow from an investment. The Total Bond Market Index does exactly this each and every month. The goal is this will help fund retirement. TIPS provide next to nothing in cash flow in terms of the Intermediate TIPS fund. The Short Term TIPS fund? That fund pays nothing!

I think you have made an excellent choice. Now stay the course.
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Phineas J. Whoopee
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Re: TBM for life?

Post by Phineas J. Whoopee »

abuss368 wrote:...
I also prefer cash flow from an investment. The Total Bond Market Index does exactly this each and every month. The goal is this will help fund retirement. TIPS provide next to nothing in cash flow in terms of the Intermediate TIPS fund. The Short Term TIPS fund? That fund pays nothing!
...
TIPS mutual funds, unlike other bond funds, include accumulated interest in their net asset values. Dividends are not any more significant than they are in total stock. On the ex-dividend date the NAV falls just enough to match the payout; added to the day's market move, if any.

That isn't to say TIPS, in funds or otherwise, are for everybody. They certainly aren't.

PJW
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Taylor Larimore
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Re: TBM for life?

Post by Taylor Larimore »

Bogleheads:

Listed below are the historical U.S. inflation rates (CPI-U) and total returns for the Aggregate Bond Index since its inception:

YEAR--INFLATION--BOND INDEX
1976-------4.9%--------15.6%
1977-------6.7-----------3.0
1978-------9.0-----------1.4
1979------13.3-----------1.9
1980------12.5-----------2.7
1980------12.5-----------2.7
1981-------8.9-----------6.3
1982-------3.8----------32.6
1983-------3.8-----------8.4
1984-------3.9----------15.2
1985-------3.8----------22.1
1986-------1.1----------15.2
1987-------4.4-----------2.8
1988-------4.4-----------7.9
1989-------4.6----------14.5
1990-------6.1-----------8.9
1991-------3.1----------16.0
1992-------2.9-----------7.4
1993-------2.7-----------9.7
1994-------2.7---------(-2.9)
1995-------2.5----------18.5
1996-------3.3-----------3.6
1997-------1.7-----------9.7
1998-------1.6-----------8.7
1999-------2.7---------(-0.8)
2000-------3.4----------11.6
2001-------1.6-----------8.4
2002-------2.4----------10.3
2003-------1.9-----------4.1
2004-------3.3-----------4.3
2005-------3.4-----------2.4
2006-------2.5-----------4.3
2007-------4.1-----------7.0
2008-------0.1-----------5.2
2009-------2.7-----------5.9
2010-------1.5-----------6.5
2011-------3.0-----------7.8
2012-------1.7-----------4.2
2013-------1.5---------(-2.2)
Source: U.S. Department of Labor and Barclays

Observations:
* Inflation increased from 4.9% in 1976 to 13.3% in 1979; nevertheless the Index had positive returns during that period of rising inflation.

* The Index had only three negative years (all small) reflecting very low risk.

* Total Bond Market currently has the best year-to-date performance of the three funds in The Three Fund Portfolio

Past performance does not guarantee future performance.

Best wishes.
Taylor
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LH
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Re: TBM for life?

Post by LH »

G-Money wrote:
LH wrote:Bonds are for safety.

Now consider a high inflation environment like the 70s.

TBM is not safe in high inflation. Inflation can devast a bond holding in TBM. Especially if it happens in retirement stage.

I would recommend TIPS + TBM.

That way, if 70s like inflation comes again, the TIPS -=hopefully=- will keep up with inflation.
My understanding was that TBM would not be "safe" in high inflation only if the high inflation was unexpected. If the market expects high inflation, the nominal bonds in TBM would reflect that expectation.
sure, but in the 70s, the inflation was not baked in, bonds were called

"certificates of confiscation"

What you say its true, but one could say the same thing about stock price, the market prices in what it expects, sure. did stock market expect the 2007 2008 drop, no. did bonds price in 70s inflation, no.

Look at long bonds now, they are projecting inflation of what over next tens of years? So if high inflation happens, its not priced in.

Bonds have done great over past 30 years, at one point, beating stock returns. But TBM can lose a lot of money in the right conditions.

To see the effect, one would have to take Taylors data, and start in 1960, and compound the effect most likely. But there is a slice in there, where bonds lose a ton.

This graph below does not show it, but I have always thought it pretty neat just by itself:

http://www.zerohedge.com/sites/default/ ... _bonds.jpg

http://www.bogleheads.org/forum/viewtopic.php?t=35932
by SmallHi » Thu Apr 09, 2009 11:26 am
Short term high quality worked fine. 66-82 saw ST bonds exceed inflation by about +1.2% per year*. Over this same period, LT bonds underperformed inflation by over 4.5% per year, and the S&P 500 had 0 real return, while Large Value stocks outpaced CPI by almost 4.5% per year, and Small Value stocks exceeded CPI by over 9% per year.
I cannot find it on a quick google about bonds in 1970s, but I did get smallhi saying "LT bonds underperformed inflation by over 4.5% per year" its not exactly specified, but one assumes he meant over the 10 year period of the 70s. which is in line with my gestalt of what happened to nominal bonds then. (.955)^10 = .63 so not very fun. 37 percent loss. 50/50 TIPS/AGG would mitigate that expectantly.
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Re: TBM for life?

Post by abuss368 »

Phineas J. Whoopee wrote:
abuss368 wrote:...
I also prefer cash flow from an investment. The Total Bond Market Index does exactly this each and every month. The goal is this will help fund retirement. TIPS provide next to nothing in cash flow in terms of the Intermediate TIPS fund. The Short Term TIPS fund? That fund pays nothing!
...
TIPS mutual funds, unlike other bond funds, include accumulated interest in their net asset values. Dividends are not any more significant than they are in total stock. On the ex-dividend date the NAV falls just enough to match the payout; added to the day's market move, if any.

That isn't to say TIPS, in funds or otherwise, are for everybody. They certainly aren't.

PJW
Thank you for that explanation.

Best.
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Five-year Treasury bonds in the 60s

Post by Taylor Larimore »

To see the effect, one would have to take Taylors data, and start in 1960, and compound the effect most likely. But there is a slice in there, where bonds lose a ton.
These are returns for 5-year Treasuries in the 60s and 1970:

1960 =11.8%
1961 = 1.9%
1962 = 5.6%
1963 = 1.6%
1964 = 4.0%
1965 = 1.0%
1966 = 4.7%
1967 = 1.0%
1968 = 4.5%
1969 = (0.7%)
1970 = 16.9%

Source: Gummy-Stuff returns data.

Past performance does not guarantee future performance.

Best wishes.
Taylor
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Taggerung
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Re: TBM for life?

Post by Taggerung »

Wow, great info as always (that's why we love this forum, right?)!

I'm glad to hear so many people chime in that TBM for life is a reasonable, responsible, rational strategy. I read so many threads on here where folks are debating between I-bonds vs. TIPS, various bond ladder strategies, whether or not TBM really IS the bond market, etc. I think it may have been Mr. Swedroe who once recommended (apologies if I'm wrong) a combination of TBM, TIPS, and HY in order to accurately replicate the bond market. Since I do slice and dice on the equities side I just felt as though I was being lazy (bad lazy, not good lazy) by not understanding bonds better and having a better, stronger, or more complete "fixed income strategy."

I should have known from the the start, if TBM is good enough for Taylor, it's good enough for me! :sharebeer

Thanks Again

edit: I should add that we do have enough room between our IRA's and 403(b)'s for our fixed income allocation without having to worry about bonds in taxable accounts.
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Re: TBM for life?

Post by Munir »

May I register a dissenting opinion about the Total Bond Fund?

- It's portfolio is 70% US government instruments because of the index it follows.

- Jack Bogle has expressed his dissatisfaction in the last two years with this index because of the high % of govenrment instruments. He is recommending adding more corporate bonds to the index and to one's bond holdings.

- You may want to compare its performance record to other Vanguard intermediate bond funds before committing to it, while acknowledging that past performance is not necessarily an accurate indicator of the future.

- Swedroe does not like this fund because of its holdings of mortgage-backed securities. Others feel that it does not include segments of the bond market such as anti- inflation instruments and high yield bonds to be truly representative of the total bond market world.

- Some want a shorter duration bond fund to complement this fund because interest rates are currently vey low and are likely to rise. This is a very controversial and complicated area where feelings run very strong- as they actually do about this fund in general. It has a core following who will defend it vociferously and feel that this fund is appropriate for every investor in every situation.

Conclusion: does this mean this is a "bad" fund or not appropriate for you? Not necessarily. I am merely pointing out that some Bogleheads, including Saint Jack himself, have some rerservations about it that should be included in discussions about this fund.
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Re: TBM for life?

Post by abuss368 »

Munir wrote:May I register a dissenting opinion about the Total Bond Fund?

- It's portfolio is 70% US government instruments because of the index it follows.

- Jack Bogle has expressed his dissatisfaction in the last two years with this index because of the high % of govenrment instruments. He is recommending adding more corporate bonds to the index and to one's bond holdings.

- You may want to compare its performance record to other Vanguard intermediate bond funds before committing to it, while acknowledging that past performance is not necessarily an accurate indicator of the future.

- Swedroe does not like this fund because of its holdings of mortgage-backed securities. Others feel that it does not include segments of the bond market such as anti- inflation instruments and high yield bonds to be truly representative of the total bond market world.

- Some want a shorter duration bond fund to complement this fund because interest rates are currently vey low and are likely to rise. This is a very controversial and complicated area where feelings run very strong- as they actually do about this fund in general. It has a core following who will defend it vociferously and feel that this fund is appropriate for every investor in every situation.

Conclusion: does this mean this is a "bad" fund or not appropriate for you? Not necessarily. I am merely pointing out that some Bogleheads, including Saint Jack himself, have some rerservations about it that should be included in discussions about this fund.
My understanding from watching many of Mr. Bogle's interviews and reading his articles is that he would like to update the index that the fund tracks to include more corporate bonds.

However, I have never watched or read anything from Mr. Bogle where he recommends not to invest in the Total Bond Market Index fund.
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Re: TBM for life?

Post by abuss368 »

Munir wrote: - Swedroe does not like this fund because of its holdings of mortgage-backed securities. Others feel that it does not include segments of the bond market such as anti- inflation instruments and high yield bonds to be truly representative of the total bond market world.
Rick Ferri has recommended this bond portfolio - 60% Total Bond, 20% Intermediate TIPS, and 20% High Yield.
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Re: TBM for life?

Post by abuss368 »

Taggerung wrote: I think it may have been Mr. Swedroe who once recommended (apologies if I'm wrong) a combination of TBM, TIPS, and HY in order to accurately replicate the bond market.
Rick Ferri has recommended this bond portfolio - 60% Total Bond, 20% Intermediate TIPS, and 20% High Yield.

I am not sure what Larry Swedroe recommends in terms of bonds.
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Taggerung
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Re: TBM for life?

Post by Taggerung »

abuss368 wrote:
Taggerung wrote: I think it may have been Mr. Swedroe who once recommended (apologies if I'm wrong) a combination of TBM, TIPS, and HY in order to accurately replicate the bond market.
Rick Ferri has recommended this bond portfolio - 60% Total Bond, 20% Intermediate TIPS, and 20% High Yield.

I am not sure what Larry Swedroe recommends in terms of bonds.
See, I knew I would get that wrong. I knew it was either of them and I had a 50\50 chance. But yes, thank you for the correction, that is indeed the recommendation I was referencing. I hope that anyone following the thread this far can understand why one, meaning me, might feel like some sort of fixed income philistine for wanting to stick with TBM for life. Plus, no one has even mentioned ladders or auctions yet.
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Re: TBM for life?

Post by 500Kaiser »

Mr. Swedroe posted this column in October 2010. I think it raises a couple of interesting points regarding TBM. Fortunately, or unfortunately, it leads one down the path of spending more than 90 seconds thinking about bonds. http://www.cbsnews.com/news/vanguard-bo ... ted-equal/
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