I am a lazy, sloppy, "satisficing" investor. I have fairly little interest in the nuances of allocation within bonds, for these reasons:
- Even with only about 1/3 stocks, the volatility of stocks is so much higher than bonds that what you do within the bond allocation just seems unimportant. Who cares whether ones' bonds sailed straight through 2008-2009 (Total Bond) or dropped 10% (Intermediate-Term Investment Grade) when stocks dropped 50%? You can argue until the cows come home about how the 10% drop impaired your rebalancing bonus or whatever, but still.
- The bond market--for investment-grade bonds, and assuming not too many weird things like callability--has got to be pretty efficient, because there just aren't as many variables to look at. If two highly-rated bonds have the same rating, maturity, and coupon, anyone can do the bond math and get the same answer. You don't need to know boo about the business their in, and the ratings agency did the job of looking at the balance sheet. There just can't be a lot of difference in price, and the chances that I'd be able to identify mispricing are slim. You can surf the waves of the yield curve, but everyone else knows what the yield curve is, too. It has to be awfully close to "you get what you pay for."
- Nobody can predict interest rates, and we're not talking about small errors; see the chart below.
This chart is from a Vanguard paper. The thin lines are the market's interest rate predictions--not one guru's vision, the wisdom-of-the-crowds prediction. The thick lines are what actually happened. Notice the utter failure to be even approximately right even as little as one year ahead.
People have trouble understanding this chart, and I think the reason is that they can't actually believe what they're seeing. Thin little hairs? Prediction. Thick line? Fact. Any place it looks bushy, the predictions were badly wrong. It looks bushy everywhere.
I aspire to be a lazy investor, too - but thanks for providing some good reasons for being so. Don't worry, I'm not trying to predict interest rates, I think my real question is whether these lower rates fundamentally change the risk
of bonds, which might suggest changing an overall asset allocation or the types of bonds held. Another argument for being lazy is that if I were to make some decision about how to allocate within bonds based on low rates now, I'd have to make a decision about undoing this at some later point. Which not only starts to sound more like market timing, but as a new Boglehead would undermine the effort to create investment discipline.
One of the things I've found out recently is that one of my retirement plans has access to the signal shares version of Vanguard's Total Bond Market Index (VBTSX), and I'm thinking that maybe the low 0.10% expense ratio might make more difference than any scheme to reduce bond risk.
DaveS wrote:My reaction to the historically low rate environment we are in is to gradually reduce my average duration. In part this is easy because I have some of my bond money in a ladder. So I can just reduce the duration of the replacement bonds when one pays off. I still think bonds have an important role in a portfolio in the form of stability when other things crash. As a result I have not changed my stock/bond allocation. In other posts I have been telling people to try for a average duration of around 4. That can be done by adding a short term bond fund to the usual mix of total bond and TIPS.
This idea makes good sense, but I'm not sure how I would implement it, or if I could given the limitations of my retirement plans. Are there any mutual funds out there to build a ladder from, and might they be part of the Fidelity No Transaction Fee Network?
YDNAL wrote: If you invest for the next day or next month or even next year.... one thing.
If you invest for 30, 40 years.... completely different thing.
Please tell us about yourself.
Well if it were 30 years I wouldn't worry at all. My investments are all tax-advantaged, and one of the things that prompts this is that I'm turning 50 this year so I'm looking at a 15 year time horizon - but only have 25% bonds right now. No course to stay yet, but I'm trying to come up with a plan to reduce risk over the next few years.