International Bond Allocation?
- Petrocelli
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International Bond Allocation?
I just added the International Bond Index Fund to my company's 401(k).
I am going to allocation my bonds like this: 60% Total Bond, 20% International Bond, and 20% TIPS.
Does that sound about right?
Thanks in advance.
I am going to allocation my bonds like this: 60% Total Bond, 20% International Bond, and 20% TIPS.
Does that sound about right?
Thanks in advance.
Petrocelli (not the real Rico, but just a fan)
Re: International Bond Allocation?
Why do you think adding international bonds is beneficial?
Last edited by John3754 on Sat Mar 29, 2014 10:18 am, edited 1 time in total.
- Petrocelli
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Re: International Bond Allocation?
I think it would provide a smidgen of diversification.
Petrocelli (not the real Rico, but just a fan)
Re: International Bond Allocation?
The Barclay Gov/Credit Bond Index fund that I use in my 401k has about 15% international.
"..the cavalry ain't comin' kid, you're on your own..."
Re: International Bond Allocation?
20% sounds reasonable, but there's really no correct answer to this question.Petrocelli wrote:I think it would provide a smidgen of diversification.
- abuss368
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Re: International Bond Allocation?
A good question.
I have started a few bond threads over the last few months as I have been trying to think more critically about bonds in general. In turn, I have learned a lot about bonds which at first I did not realize are a challenging asset class to understand.
We invest in Total Bond Index in our tax advantage accounts and Intermediate Term Tax Exempt in our taxable account.
The only additional bond funds I have been reading up on is the Intermediate Term TIPS funds and the new Total International Bond Index fund. I have no interest in High Yield or any other bond funds as we are more of a total market investor.
I am not going to be surprised if over the next few years more and more investors invest in international bonds. With Vanguard in the picture now, this asset class is going to become more mainstream. Dodge & Cox, who only offers a few funds, filed a registration to offer international bonds as well. As a result, Dodge & Cox will offer the same four asset classes that are included in Vanguard's Target and Life Strategy funds. That is, US equities, International equities, US bonds, and International bonds. Interesting.
The flip side is David Swensen's book "Unconventional Success" where he provides a very convincing argument to avoid international bonds. Granted, the book was published in 2005 which was well before this asset class became mainstream with low cost offerings available to the average investor. The duration is higher than Total Bond at 6.5+- compared to 5.5+- with a lower yield. Still the fund provides monthly income, possibly additional diversification, but also additional risks as well.
Then there is the TIPS fund which can be frustrating. Almost zero cash flow from dividends including the recent distributions. That is tough for a retiree who needs cash flow. The fund has a higher duration than the international bond fund at 8.5+- compared to 6.5 +-. This fund also dropped 9% last year which is tough considering this is the safe part of a portfolio.
I have never understood the need for more than one or two bond funds. Three would be the absolute max. Bonds are for safety and income. They provide stability so we can take our risks with equities.
I guess I will continue to learn about this asset class much like all of us.
I have started a few bond threads over the last few months as I have been trying to think more critically about bonds in general. In turn, I have learned a lot about bonds which at first I did not realize are a challenging asset class to understand.
We invest in Total Bond Index in our tax advantage accounts and Intermediate Term Tax Exempt in our taxable account.
The only additional bond funds I have been reading up on is the Intermediate Term TIPS funds and the new Total International Bond Index fund. I have no interest in High Yield or any other bond funds as we are more of a total market investor.
I am not going to be surprised if over the next few years more and more investors invest in international bonds. With Vanguard in the picture now, this asset class is going to become more mainstream. Dodge & Cox, who only offers a few funds, filed a registration to offer international bonds as well. As a result, Dodge & Cox will offer the same four asset classes that are included in Vanguard's Target and Life Strategy funds. That is, US equities, International equities, US bonds, and International bonds. Interesting.
The flip side is David Swensen's book "Unconventional Success" where he provides a very convincing argument to avoid international bonds. Granted, the book was published in 2005 which was well before this asset class became mainstream with low cost offerings available to the average investor. The duration is higher than Total Bond at 6.5+- compared to 5.5+- with a lower yield. Still the fund provides monthly income, possibly additional diversification, but also additional risks as well.
Then there is the TIPS fund which can be frustrating. Almost zero cash flow from dividends including the recent distributions. That is tough for a retiree who needs cash flow. The fund has a higher duration than the international bond fund at 8.5+- compared to 6.5 +-. This fund also dropped 9% last year which is tough considering this is the safe part of a portfolio.
I have never understood the need for more than one or two bond funds. Three would be the absolute max. Bonds are for safety and income. They provide stability so we can take our risks with equities.
I guess I will continue to learn about this asset class much like all of us.
Last edited by abuss368 on Sun May 25, 2014 9:39 pm, edited 2 times in total.
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Re: International Bond Allocation?
There's nothing wrong with that allocation. The Intl Bond fund hedges currency, so its volatility should be similar to the US Treasury Bond fund. I don't know what VG's portfolio modelling has suggested but my guess is that something like 50% TBM, 25% Intl, 25% TIPS gives you max diversification (that's a guess). But that is to split hairs.Petrocelli wrote:I just added the International Bond Index Fund to my company's 401(k).
I am going to allocation my bonds like this: 60% Total Bond, 20% International Bond, and 20% TIPS.
Does that sound about right?
Thanks in advance.
Re: International Bond Allocation?
Makes sense to me. I suppose one day Rick Ferri may even be advocating an adaptation of his current bond split recommendation to include International bonds. (I realize he's not in favor of it at this time.) I imagine it would look like this: 40% Total Bond, 20% Total International Bond, 20% High Yield and 20% TIPS. Of course, then you start wondering about too many splits, too much complexity, etc., etc. Perhaps Vanguard will one day offer a bond fund-of-funds that does something like it?Petrocelli wrote:I am going to allocation my bonds like this: 60% Total Bond, 20% International Bond, and 20% TIPS.
Good point. I seem to recall that there was a time when International equities were considered imprudent on the basis of costs. Perhaps we're seen seeing a turning point for International bonds as well.abuss368 wrote:The flip side is David Swensen's book "Unconventional Success" where he provides a very convincing argument to avoid international bonds. Granted, the book was published in 2005 which was well before this asset class became mainstream with low cost offerings available to the average investor.
Last edited by pingo on Sat Mar 29, 2014 10:53 pm, edited 1 time in total.
- abuss368
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Re: International Bond Allocation?
Good post. Your right about bonds. Four bond funds is a lot to manage. I typically believe that when it comes to bonds, whether we have one bond fund or five bond funds, we probably end up in the same place.pingo wrote:Makes sense to me. I suppose one day Rick Ferri may even be advocating an adaptation of his current bond split recommendation to include International bonds. (I realize he's not in favor of it at this time.) I imagine it would look like this: 40% Total Bond, 20% Total International Bond, 20% High Yield and 20% TIPS. Of course, then you start wondering about too many splits, too much complexity, etc., etc. Perhaps Vanguard will one day offer a bond fund-of-funds that does something like it?Petrocelli wrote:I am going to allocation my bonds like this: 60% Total Bond, 20% International Bond, and 20% TIPS.
Good point. I seem to recall that there was a time when International equities were considered imprudent on the basis of costs. Perhaps we've seen a turning point for International bonds as well.abuss368 wrote:The flip side is David Swensen's book "Unconventional Success" where he provides a very convincing argument to avoid international bonds. Granted, the book was published in 2005 which was well before this asset class became mainstream with low cost offerings available to the average investor.
John C. Bogle: “Simplicity is the master key to financial success."
Re: International Bond Allocation?
Petrocelli, your bond allocation sounds reasonable to me. Unfortunately, there is no right answer to the correct asset allocation for a portfolio. It is a matter of investment philosophy and taste. At least I haven't found the answer key to the investment test.
For my own portfolio, I have investment grade intermediate term bond funds, TIPS, and International Bonds. I do own Vanguard Total Bond Market and the Vanguard TIPS funds at my workplace savings plan. So what you are doing is along the lines of my own thinking.
For my own portfolio, I have investment grade intermediate term bond funds, TIPS, and International Bonds. I do own Vanguard Total Bond Market and the Vanguard TIPS funds at my workplace savings plan. So what you are doing is along the lines of my own thinking.
A fool and his money are good for business.
Re: International Bond Allocation?
Petrocelli,
The international bond allocation seems OK. If there is anything off on the bond allocation, it would be not enough TIPS for inflation protection.
Lar
The international bond allocation seems OK. If there is anything off on the bond allocation, it would be not enough TIPS for inflation protection.
Lar
Re: International Bond Allocation?
It's funny that you should say that. We actually have 6 different bond funds in hopes that that we end up in the same place!abuss368 wrote:I typically believe that when it comes to bonds, whether we have one bond fund or five bond funds, we probably end up in the same place.
BTW based on your earlier post here, it sounds like you've being deeply considering an expansion of your bond pallet. I might have to change what I said about you near the end of my post in a different thread.
Last edited by pingo on Sun May 25, 2014 2:39 am, edited 1 time in total.
- House Blend
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Re: International Bond Allocation?
Define what you mean by "right".Petrocelli wrote:Does that sound about right?
Once you've controlled for costs (ER), average duration, and credit quality, I don't think it matters what you do for fixed income.
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Re: International Bond Allocation?
You could buy a new watch with the dividends form these bond funds!
John C. Bogle: “Simplicity is the master key to financial success."
- Petrocelli
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Re: International Bond Allocation?
I could buy more than one, but I choose not to do so.abuss368 wrote:You could buy a new watch with the dividends form these bond funds!
Petrocelli (not the real Rico, but just a fan)
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Re: International Bond Allocation?
"Right" means "reasonable".House Blend wrote:Define what you mean by "right".Petrocelli wrote:Does that sound about right?
Once you've controlled for costs (ER), average duration, and credit quality, I don't think it matters what you do for fixed income.
Petrocelli (not the real Rico, but just a fan)
Re: International Bond Allocation?
Slightly off-topic, is Vanguard's International Bond Index fund considered a corporate bond fund, foreign government, or a mix? I could not find identifying data.
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Re: International Bond Allocation?
I looked at this on Vanguard's website a while ago. It appears that the fund is mostly government bonds with some corporation bonds. Perhaps this is why the yield is a little lower (i.e. government bonds).Munir wrote:Slightly off-topic, is Vanguard's International Bond Index fund considered a corporate bond fund, foreign government, or a mix? I could not find identifying data.
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Re: International Bond Allocation?
Petrocelli, Vanguard has "answered" this question themselves:
https://personal.vanguard.com/us/insigh ... ion-052013
https://personal.vanguard.com/us/insigh ... ion-052013
Christopher Philips wrote:What's the right allocation to international bonds?
...There is no right or wrong allocation to foreign bonds.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: International Bond Allocation?
0% is a good starting point for international bonds.
I get the feeling that Vanguard does not have a strong feel for what an appropriate amount of international bonds is at this point, but at the same time, they want to push their new international bond fund/ETF offerings; therefore, they recommend 20%.
I get the feeling that Vanguard does not have a strong feel for what an appropriate amount of international bonds is at this point, but at the same time, they want to push their new international bond fund/ETF offerings; therefore, they recommend 20%.
Re: International Bond Allocation?
Vanguard also doesn't have a strong indication of what an appropriate amount of TIPS is for a portfolio, either. A study of the matter showed that having such bonds made a positive difference without any clear sweet spots. They decided that 20% of bonds was reasonable enough to make a difference for diversification purposes, but they have indicated that it is a reasonable guess.
I think putting the International Bond fund in the Target/LifeStrategy funds does help build a good asset-base to keep costs reasonable, and to justify offering Admiral shares, and to ensure that the ETF is efficient and effective. I believe they are net positives and I do not criticize Vanguard for making that choice. I think that all of those things work together to ensure reasonable costs for non-Target/LifeStrategy investors who are interested in obtaining exposure to international bonds.
I also really think that Vanguard is concerned about the need for diversification beyond U.S. borders as the U.S. is maneuvering through fairly unprecedented territory. I do not believe it is a question of prediction or speculation but of prudence and preparation.
I think putting the International Bond fund in the Target/LifeStrategy funds does help build a good asset-base to keep costs reasonable, and to justify offering Admiral shares, and to ensure that the ETF is efficient and effective. I believe they are net positives and I do not criticize Vanguard for making that choice. I think that all of those things work together to ensure reasonable costs for non-Target/LifeStrategy investors who are interested in obtaining exposure to international bonds.
I also really think that Vanguard is concerned about the need for diversification beyond U.S. borders as the U.S. is maneuvering through fairly unprecedented territory. I do not believe it is a question of prediction or speculation but of prudence and preparation.
Last edited by pingo on Tue May 13, 2014 12:33 am, edited 2 times in total.
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Re: International Bond Allocation?
Thoughtful post.pingo wrote:Vanguard also doesn't have a strong indication of what an appropriate amount of TIPS is for a portfolio. A study of the matter showed that having such bonds made a positive difference without any clear sweet spots. They decided that 20% of bonds was reasonable enough to make a difference for diversification purposes, but they have indicated that it is a reasonable guess.
I think putting the International Bond fund in the Target/LifeStrategy funds does help build a good asset-based to keep costs reasonable, and to justify offering Admiral shares, and to ensure that the ETF is efficient and effective. I believe they are net positives and I do not criticize Vanguard for making that choice. I think that all of those things work together to ensure reasonable costs for those interested in obtaining exposure to international bonds.
I also really think that Vanguard is concerned about the need for diversification beyond U.S. borders as the U.S. is maneuvering through fairly unprecedented territory. I do not believe it is as a question of prediction or speculation but of prudence and preparation.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: International Bond Allocation?
That is an interesting post. Thank you.pingo wrote:Vanguard also doesn't have a strong indication of what an appropriate amount of TIPS is for a portfolio. A study of the matter showed that having such bonds made a positive difference without any clear sweet spots. They decided that 20% of bonds was reasonable enough to make a difference for diversification purposes, but they have indicated that it is a reasonable guess.
I think putting the International Bond fund in the Target/LifeStrategy funds does help build a good asset-based to keep costs reasonable, and to justify offering Admiral shares, and to ensure that the ETF is efficient and effective. I believe they are net positives and I do not criticize Vanguard for making that choice. I think that all of those things work together to ensure reasonable costs for those interested in obtaining exposure to international bonds.
I also really think that Vanguard is concerned about the need for diversification beyond U.S. borders as the U.S. is maneuvering through fairly unprecedented territory. I do not believe it is as a question of prediction or speculation but of prudence and preparation.
John C. Bogle: “Simplicity is the master key to financial success."
Re: International Bond Allocation?
I was curious.......
As of 02/28/2014
Vanguard Total Bond Index Fund VBMFX 6.6% in Foreign Bonds
Vanguard Balanced Index Fund VBINX 5.6% in Foreign Bonds
As of 02/28/2014
Vanguard Total Bond Index Fund VBMFX 6.6% in Foreign Bonds
Vanguard Balanced Index Fund VBINX 5.6% in Foreign Bonds
"..the cavalry ain't comin' kid, you're on your own..."
Re: International Bond Allocation?
I see bond funds, once you have balanced costs and duration, and the credit quality you want to hold, as making and seasoning a stew to taste. Take a core of .. for the sake of this post and in an IRA, investment grade IT corporates. Stir in some ST IG and HY in %'s you are comfortable with. Let's remember, TBM holds long, short and IT government and corporates as well as MBS. What's really so different except you deleted the long, the government bonds and the MBS while adding a touch of HY for seasoning.
Seem to recall reading Jack holds ST and IT Muni's in his taxable in a 1:2 ratio, or thereabouts. I do the same with LT and IT Muni's in taxable... it's just making the stew in the %'s you like and sleep well with.
Spreadsheets track it all and their $ and % relationship to each other from a download from M* to update which takes less than 2 minutes including booting up the computer. Since these holdings are not very volatile the relationships change slowly and may require rebalancing once every few years. No big bother and once I hit RMD it will be a matter of which ones to sell and in what amount for this year.
To answer the OP, yes, it is an OK mix as long as YOU are comfortable with it.
Seem to recall reading Jack holds ST and IT Muni's in his taxable in a 1:2 ratio, or thereabouts. I do the same with LT and IT Muni's in taxable... it's just making the stew in the %'s you like and sleep well with.
Spreadsheets track it all and their $ and % relationship to each other from a download from M* to update which takes less than 2 minutes including booting up the computer. Since these holdings are not very volatile the relationships change slowly and may require rebalancing once every few years. No big bother and once I hit RMD it will be a matter of which ones to sell and in what amount for this year.
To answer the OP, yes, it is an OK mix as long as YOU are comfortable with it.