Bogle: Yield Seekers Shouldn't Go Out on a Limb

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Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby abuss368 » Wed Jun 26, 2013 10:58 pm

Great interview with our mentor Jack Bogle from Morningstar a little over a week ago:

http://www.morningstar.com/cover/videoC ... &SR=EVZ128

Jack discusses yield, global bonds, emerging market bonds, junk bonds, and REITs. He notes that REITs are "One of the bigger places for looking for yield, as you know, is REITs, real estate investment trusts, including our Real Estate Investment Trust Index fund, and it's probably an intelligent way to do it."

"So, can you go over and instead of buying a portfolio of equities, the market, at a 2% yield, I see very little harm to be done by going and taking part of that, again not all, but maybe a third of it, and putting it into higher-yielding mutual funds."

"Reaching for more yield is like going further out the limb, and no one knows where the breaking point is, but at some point that limb will snap, and you'll be out there, and you'll be devastated in your losses."

"When you get into global bonds, emerging-market bonds, bond futures, junk bonds…Yes, I'd say, look out.
Now we talk a little bit, I do certainly, in extremes. I would not say you shouldn't own any of the above. But I would say absolutely you should not own all of the above. To get out of that very safe bond index fund and into a global bond fund would be just unacceptable to me, getting into a whole new area of unknown risk, and you have to worry a lot about that. So if you know what you are doing, maybe flavoring a combined … Treasury-corporate position with a seasoning of higher-yielding bonds and emerging-market bonds and global bonds, but that seasoning [should be no more than] 10% of the bond portfolio, 15%, I would say no more than 20%, and of course when you do that math, when you've got higher yields on no more than 20%, it doesn't change your yield; it doesn't improve a lot."

Wow!

Thank you Mr. Bogle!
Last edited by abuss368 on Thu Jun 27, 2013 8:38 pm, edited 1 time in total.
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby louis c » Wed Jun 26, 2013 11:17 pm

Great interview - thanks for posting.

Some comments that struck me (and I paraphrase):

Don't reach for yield.
Accept the market yield.
TBM is over weighted in treasuries and so you need more corporates to balance things out.
Retirees who need yield should consider more exposure to dividend paying stocks.
Stock valuations are not cheap but they are not extremely overvalued either.
..and my personal favorite..."There is no such thing as a free lunch...except reducing costs...just had to get that in there!"
There is no free lunch.
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby abuss368 » Wed Jun 26, 2013 11:45 pm

I thought it was a great interview. I am partial to REITs in a portfolio. I have an interview Jack did a couple of years ago where notes that he could see a 10% of a portfolio allocated to REITs. Now in this recent interview, he notes a third of the equity portfolio to a higher yielding equity fund while touching on REITs specifically.

Thank you Mr. Bogle!
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby IlliniDave » Thu Jun 27, 2013 9:14 am

To me the most profound thing, and the thing I have the most difficulty accepting gracefully is the idea of accepting what the markets give/don't reach too far for yield. Spread your risk prudently (allocation), do so efficiently (low cost), and take what you get. I was a self-taught results-chaser for most of my investing "career" and I guess that's left a strong imprint on how signals run around in my brain. I need to inject some Zen in my investing, I suppose.

I'm still a long way from full retirement but I enjoy hearing his remarks regarding income streams from investments. Having been a simple fund-the-401(k) investor up until just recently I'd always just paid attention to long-term total return in tax-deferred space. It sounds like there's a palette of approaches to consider for distribution strategies--a new bone to chew on for the next 20 years. :D
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby Dandy » Thu Jun 27, 2013 11:38 am

Once again Bogle doesn't seem to say "stay the course" in the sense that if you choose Total Bond fund you must stay the course with that fund. He is much more flexible than some of his followers who seem to be very rigid about what the "stay the course" means. He talks about changes when there are extremes and he cautions about not moving all - but maybe 1/3 to a different fund. He seems to be able to make moderate changes to the "course" without losing his Boglehead credentials.

It is a tricky approach, fraught with dangers of recency bias, subtile risk increases etc. It may not make a material difference in the long run, and it might not be wise for most investors, but it isn't heresy or market timing if done in a measured fashion especially in times of extremes. So can't we agree the stay the course is a very good guideline that should be followed in most circmstances and changes should be infrequent, measured and triggered mostly by very extreme conditions?
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby dbc47 » Thu Jun 27, 2013 11:51 am

louis c wrote:Great interview - thanks for posting.

Some comments that struck me (and I paraphrase):

Don't reach for yield.
Accept the market yield.
TBM is over weighted in treasuries and so you need more corporates to balance things out.
Retirees who need yield should consider more exposure to dividend paying stocks.
Stock valuations are not cheap but they are not extremely overvalued either.
..and my personal favorite..."There is no such thing as a free lunch...except reducing costs...just had to get that in there!"


Man! I thought that was a big fat no no! Maybe I'm not so dumb after all for buying some dividend paying stocks. :sharebeer
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby G-Money » Thu Jun 27, 2013 12:26 pm

abuss368 wrote:"One of the bigger places for looking for yield, as you know, is REITs, real estate investment trusts, including our Real Estate Investment Trust Index fund, and it's probably an intelligent way to do it. So, can you go over and instead of buying a portfolio of equities, the market, at a 2% yield, I see very little harm to be done by going and taking part of that, again not all, but maybe a third of it, and putting it into higher-yielding mutual funds."

Careful with this quote.

It looks like you took quotes from two different parts of the interview, changed their sequence, and then combined them. The effect is they appear as a single, continuous quote, which is not the case. Your quote makes it appear that Bogle is recommending up to 1/3 of equities going into REITs, when he never actually makes that recommendation.

From the transcript (portions quoted by you above are in bold and underlined):
We know, and I think not nearly enough people are aware of this, but today's yield basically is a superb predictor of your return for the next year. And today's yield and possible earnings growth is a very good, if not excellent, predictor over the next 10 years, if you take out that speculative element. In other words, if you look at what we'll call investment return, dividend yields plus earnings growth; the one you know at the outset, the other you can, I think, reasonably assume will continue at past rates of growth of our nation, maybe a little bit slower. Maybe there will be a new normal, and I would suspect there would be a percentage point less of growth.

So, can you go over and instead of buying a portfolio of equities, the market, at a 2% yield, I see very little harm to be done by going and taking part of that, again not all, but maybe a third of it, and putting it into higher-yielding mutual funds.

Then, later, he says the following about REITs:
… Look at your income stream, particularly for the retired person. And if you look at the dividend stream of American business, even the total, it's a line that looks just like this--almost a straight line going upward with two great big exceptions going back to 1925. One is the Depression, and that cumulative dividend line goes like this, and then comes back up, continues to grow. And the only other time there was a significant decline in corporate dividends was 2008, and that was a very specific problem where bank stocks, financial stocks generally, cut their dividends, and in some cases, most cases, eliminated the dividends. But think about this--dividends were already higher in 2012 than they were in 2007. So you took that bump, and you are still going up again.

So pay attention to the dividends. Don't reach for outrageous--if you find a stock yielding 6% out there, that probably means everybody knows the dividend is going to be cut.

One of the bigger places for looking for yield, as you know, is REITs, real estate investment trusts, including our Real Estate Investment Trust Index fund, and it's probably an intelligent way to do it. And if you look there, so much of that is a return of capital. We don't know how much, but it's not as if they are yielding a certain amount; they're giving you a capital return of a certain amount. So I'd say, know your accounting, which very few people do, or have an advisor who knows the accounting. And just be careful when there seems like a free lunch, because as someone observed a long time ago, there is no such thing as a free lunch. Except for low costs, there isn't. I couldn't resist that.

Bogle says you can put up to 1/3 of equities in higher-yielding stocks, and he talks about REITs, but combining the quotes inside a single set of quotation marks conveys a different message than I think Bogle intended to convey.
Last edited by G-Money on Thu Jun 27, 2013 1:47 pm, edited 1 time in total.
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby G-Money » Thu Jun 27, 2013 12:31 pm

I still don't understand the fascination with yield and dividend strategies. Money is fungible. Your portfolio doesn't care whether you spend the income and keep the principal, or whether you spend some principal and keep the income.
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby IlliniDave » Thu Jun 27, 2013 1:32 pm

Dandy wrote:Once again Bogle doesn't seem to say "stay the course" in the sense that if you choose Total Bond fund you must stay the course with that fund. He is much more flexible than some of his followers who seem to be very rigid about what the "stay the course" means. He talks about changes when there are extremes and he cautions about not moving all - but maybe 1/3 to a different fund. He seems to be able to make moderate changes to the "course" without losing his Boglehead credentials.

It is a tricky approach, fraught with dangers of recency bias, subtile risk increases etc. It may not make a material difference in the long run, and it might not be wise for most investors, but it isn't heresy or market timing if done in a measured fashion especially in times of extremes. So can't we agree the stay the course is a very good guideline that should be followed in most circmstances and changes should be infrequent, measured and triggered mostly by very extreme conditions?


In his writing he clarifies that jumping wholesale in and out of markets or from one hot investment to the next is the activity his "stay the course" recommendation is intended to warn against. He has no trouble with what he calls "tactical asset allocation" small moves/tilts based on reasonable assessment of the current environment suggesting it might be beneficial. The tilting away from treasury bonds is one he's talked about a lot recently. He says it's something the "bold and confident" investor might consider at times, and duly warns it entails additional risk. You are correct, I think. There is no black-and-white set of instructions for those sorts of things.
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby abuss368 » Thu Jun 27, 2013 1:35 pm

I need to separate the quotes better. I was unsure how to post them (first time last night).

Let me try to edit.

Thanks.
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby IlliniDave » Thu Jun 27, 2013 1:55 pm

G-Money wrote:I still don't understand the fascination with yield and dividend strategies. Money is fungible. Your portfolio doesn't care whether you spend the income and keep the principal, or whether you spend some principal and keep the income.


I am neutral on the topic for now, but am perfectly willing to consider it in my planning. Worst case I learn some things and decide it doesn't matter.

In his book Battle for the Soul of Capitalism Bogle wrote this (I'm going from memory, so consider it a paraphrase): "Cash is real; earnings are conjecture." "Cash" in context refers to dividends. He's generally not a fan of the recent emphasis on capital appreciation bolstered through (sometimes dubious) ongoing quarterly earnings reports. He touches on that briefly in the subject interview. He seems to believe it places too much emphasis on short term speculation (good for management paid in options) in contrast to the relatively steady flow of dividends which he views as straightforward return on the investor's capital. It very well may be a hopelessly old-fashioned and outmoded approach, but investing for income has a long history. It's hard for me to dismiss what he says out-of-hand.

"Fascination" is too strong a term for my case, but certainly in my view worthy of thinking about.
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby Scooter57 » Thu Jun 27, 2013 2:02 pm

G-Money,

Maybe you don't understand dividend investing strategies, but I'd be willing to bet John Bogle does.

in several recent interviews he's made it clear that he, along with Charles Ellis and Malkiel, recommends them as a solution for older people who need an income stream in retirement.

Swedroe doesn't like them, and is very vocal about that on this board, where he has an inordinant amount of influence and enthusiastic followers who shout down anyone who disagrees with him. But his arguments don't convince me, and Bogle made very clear arguments for dividend-growth oriented investing that were much easier to understand than Swedroe's rebuttals which tend to be laced with technical language he doesn't bother to explain in simpler language.
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby G-Money » Thu Jun 27, 2013 2:19 pm

Scooter57 wrote:G-Money,

Maybe you don't understand dividend investing strategies, but I'd be willing to bet John Bogle does.

I understand the strategies just fine. I just think they aren't optimal. You don't need to let the dividends of your investments dictate your income stream. You just need to determine your income needs, and sell whatever portion of your portfolio is needed to get there. If you need 4% of your portfolio per year, but your investments are only yielding 2%, then you need to sell 2% of principal. It's not complicated, IMO.

I guess you can put me in the Larry Swedroe camp on this one.
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby Investing is boring » Thu Jun 27, 2013 2:20 pm

Scooter57 wrote:G-Money,

Maybe you don't understand dividend investing strategies, but I'd be willing to bet John Bogle does.

in several recent interviews he's made it clear that he, along with Charles Ellis and Malkiel, recommends them as a solution for older people who need an income stream in retirement.

Swedroe doesn't like them, and is very vocal about that on this board, where he has an inordinant amount of influence and enthusiastic followers who shout down anyone who disagrees with him. But his arguments don't convince me, and Bogle made very clear arguments for dividend-growth oriented investing that were much easier to understand than Swedroe's rebuttals which tend to be laced with technical language he doesn't bother to explain in simpler language.


Just because you do not understand what Larry is saying, and are assuming what Bogle means, does not make you right. Larry considers Dividend Strategies to be a poor mans value strategy, and he has enough evidence to convince any with the intellectual aptitude that he is right. What Bogle COULD be suggesting is simplicity. Rather then a total return approach al la Larry, Jack could be simply saying "live off of the dividend stream and dont bother with selling anything." From a simplicity point of view, this is valid. From a total return point of view, the evidence suggest that there are better value strategies available.
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby dbr » Thu Jun 27, 2013 3:51 pm

G-Money wrote:
Scooter57 wrote:G-Money,

Maybe you don't understand dividend investing strategies, but I'd be willing to bet John Bogle does.

I understand the strategies just fine. I just think they aren't optimal. You don't need to let the dividends of your investments dictate your income stream. You just need to determine your income needs, and sell whatever portion of your portfolio is needed to get there. If you need 4% of your portfolio per year, but your investments are only yielding 2%, then you need to sell 2% of principal. It's not complicated, IMO.

I guess you can put me in the Larry Swedroe camp on this one.


Indeed, I also am quite sure Mr. Bogle understands dividend investing, and I think I do to, with or without Mr. Swedroe, but I confess most of what Mr. Bogle has been purported to say about investing in the various sound bytes on this forum in the last couple of years just simply baffles me at the simplest level. Now, what G-Money says above, I do understand, and it really is that simple. Why on earth people would not at least start with the simplest arithmetic that a withdrawal is a withdrawal is a withdrawal really, really does baffle me.
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby SVariance1 » Thu Jun 27, 2013 4:55 pm

Scooter57 wrote:G-Money,

Maybe you don't understand dividend investing strategies, but I'd be willing to bet John Bogle does.

in several recent interviews he's made it clear that he, along with Charles Ellis and Malkiel, recommends them as a solution for older people who need an income stream in retirement.

Swedroe doesn't like them, and is very vocal about that on this board, where he has an inordinant amount of influence and enthusiastic followers who shout down anyone who disagrees with him. But his arguments don't convince me, and Bogle made very clear arguments for dividend-growth oriented investing that were much easier to understand than Swedroe's rebuttals which tend to be laced with technical language he doesn't bother to explain in simpler language.


Unless you can afford to lose a substantial amount of money in retirement, one should not invest substantially in dividend paying equities. They are still equities with equity risk.
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby staythecourse » Thu Jun 27, 2013 10:55 pm

SVariance1 wrote:
Scooter57 wrote:G-Money,

Maybe you don't understand dividend investing strategies, but I'd be willing to bet John Bogle does.

in several recent interviews he's made it clear that he, along with Charles Ellis and Malkiel, recommends them as a solution for older people who need an income stream in retirement.

Swedroe doesn't like them, and is very vocal about that on this board, where he has an inordinant amount of influence and enthusiastic followers who shout down anyone who disagrees with him. But his arguments don't convince me, and Bogle made very clear arguments for dividend-growth oriented investing that were much easier to understand than Swedroe's rebuttals which tend to be laced with technical language he doesn't bother to explain in simpler language.


Unless you can afford to lose a substantial amount of money in retirement, one should not invest substantially in dividend paying equities. They are still equities with equity risk.


Wow that is too much common sense for some folks to get. We spend SO MUCH time talking about asset allocation that folks forget the whole point is controlling risk as much as you can. So for ANYONE, including Mr. Bogle, to suggest this for a retiree WITHOUT that accompanying warning label as you mention is just irresponsible.

Good luck.
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby nedsaid » Thu Jun 27, 2013 11:04 pm

I am glad to see that Mr. Bogle is flexible in his thinking and that he makes adjustments in his investing. He also seems to like dividends and keeps an eye on valuations. I am not too far off the Boglehead reservation.
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby IlliniDave » Fri Jun 28, 2013 12:09 am

staythecourse wrote:
SVariance1 wrote:
Scooter57 wrote:G-Money,

Maybe you don't understand dividend investing strategies, but I'd be willing to bet John Bogle does.

in several recent interviews he's made it clear that he, along with Charles Ellis and Malkiel, recommends them as a solution for older people who need an income stream in retirement.

Swedroe doesn't like them, and is very vocal about that on this board, where he has an inordinant amount of influence and enthusiastic followers who shout down anyone who disagrees with him. But his arguments don't convince me, and Bogle made very clear arguments for dividend-growth oriented investing that were much easier to understand than Swedroe's rebuttals which tend to be laced with technical language he doesn't bother to explain in simpler language.


Unless you can afford to lose a substantial amount of money in retirement, one should not invest substantially in dividend paying equities. They are still equities with equity risk.


Wow that is too much common sense for some folks to get. We spend SO MUCH time talking about asset allocation that folks forget the whole point is controlling risk as much as you can. So for ANYONE, including Mr. Bogle, to suggest this for a retiree WITHOUT that accompanying warning label as you mention is just irresponsible.

Good luck.


Did you watch the linked interview with Bogle? What he said is a person investing for income might consider taking 1/3 of their existing equity holding and putting it in dividend paying stocks (no recommendation to increase equity holdings in order to do this, so no change to the investor's risk), and at the same time cautioning the same investors not to reach for yield in the "safe" part of their portfolio by loading up on high risk bonds.

If you did listen to the interview, perhaps you should do so again before you accuse JB of being irresponsible.
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby louis c » Fri Jun 28, 2013 10:20 am

Investing is boring wrote:Just because you do not understand what Larry is saying, and are assuming what Bogle means, does not make you right. Larry considers Dividend Strategies to be a poor mans value strategy, and he has enough evidence to convince any with the intellectual aptitude that he is right. What Bogle COULD be suggesting is simplicity. Rather then a total return approach al la Larry, Jack could be simply saying "live off of the dividend stream and dont bother with selling anything." From a simplicity point of view, this is valid. From a total return point of view, the evidence suggest that there are better value strategies available.


:thumbsup

Well put. I think the more controversial part of the interview is the comments on high yield bonds. At least the way I heard it, he did not rule them out as a part of a portfolio. To be fair, the subject of the interview was income-producing securities.

JB: “You may reach out (for yield) a little bit” then mentions corporate bonds as a way to do so.

Regarding global bonds, emerging market bonds, bond futures and junk bonds...JB: “I’d say look out.” “We talk a lot..I certainly do..in extremes..I would not say you should not own any of the above, but I absolutely would say you should certainly not own all of the above.”

While he may mean do not own junk but own a little on global or high grade corporates, he was not clear, and specifically pointed out his tendency to talk in extremes. I took that to mean "just don't over-do" higher yielding vehicles, and of course focus on costs.
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby abuss368 » Fri Jun 28, 2013 10:44 pm

Hopefully Taylor and Rick Ferri will watch Jack Bogle's latest interview and offer their perspective.
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Real time interviews.

Postby Taylor Larimore » Sat Jun 29, 2013 8:04 am

abuss368 wrote:Hopefully Taylor and Rick Ferri will watch Jack Bogle's latest interview and offer their perspective.

Abuss:

I watched. It is what it is.

Until you have done it, you learn that it is impossible to give instant, thoughtful and best answers to complex questions.

Best wishes.
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Re: Real time interviews.

Postby abuss368 » Sat Jun 29, 2013 8:17 am

Taylor Larimore wrote:
abuss368 wrote:Hopefully Taylor and Rick Ferri will watch Jack Bogle's latest interview and offer their perspective.

Abuss:

I watched. It is what it is.

Until you have done it, you learn that it is impossible to give instant, thoughtful and best answers to complex questions.

Best wishes.
Taylor


Hi Taylor,

That is very true. When you are constantly asked questions, it must be difficult.

Thanks.
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Re: Real time interviews.

Postby Investing is boring » Sat Jun 29, 2013 8:39 am

Taylor Larimore wrote:
abuss368 wrote:Hopefully Taylor and Rick Ferri will watch Jack Bogle's latest interview and offer their perspective.

Abuss:

I watched. It is what it is.

Until you have done it, you learn that it is impossible to give instant, thoughtful and best answers to complex questions.

Best wishes.
Taylor


Add to that the fact that interviewers are constantly looking to create a headline quote, and craft language that is intended to elicit "news worthy" responses.
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby optimpessim » Sat Jun 29, 2013 10:41 am

I need a little help in understanding the following quote from the interview:

I think a reasonable thing to do, for example, on the fixed-income side would be to have a corporate bond index fund in your portfolio, as well as a total bond market index fund in your portfolio. The total bond market index fund is 70% government guaranteed, U.S. Treasury, etc. And that's just too high, in my opinion, with those yields where they are now, which are not an awful lot above 1.25%. The corporate yield is probably 2.7%-2.8%. So there ought to be, for people that need the yield--and just about everybody that's in those funds does, that's why they invest in them--they ought to be able to go out there and … bring their yield up on that.


Who is it that needs the yield and who does not? It is those who need the income who need current yield, right? But if you have no need or intent to get income from the bond part of your portfolio then can it be said that you do not need yield? In that case if you have the Vanguard Intermediate Term Bond Index Fund is there any good reason to switch to the Investment Grade fund?

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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby dbr » Sat Jun 29, 2013 11:15 am

optimpessim wrote:I need a little help in understanding the following quote from the interview:

I think a reasonable thing to do, for example, on the fixed-income side would be to have a corporate bond index fund in your portfolio, as well as a total bond market index fund in your portfolio. The total bond market index fund is 70% government guaranteed, U.S. Treasury, etc. And that's just too high, in my opinion, with those yields where they are now, which are not an awful lot above 1.25%. The corporate yield is probably 2.7%-2.8%. So there ought to be, for people that need the yield--and just about everybody that's in those funds does, that's why they invest in them--they ought to be able to go out there and … bring their yield up on that.


Who is it that needs the yield and who does not? It is those who need the income who need current yield, right? But if you have no need or intent to get income from the bond part of your portfolio then can it be said that you do not need yield? In that case if you have the Vanguard Intermediate Term Bond Index Fund is there any good reason to switch to the Investment Grade fund?

Sally


It is way worse than that. If a person needs income, then they need return, and the return comes from the entirety of the portfolio and not just from deciding between one bond fund and another. There is a risk analysis that has to be done and it is not the one of return vs volatility (Begin ad nauseum useless discussion of what is risk.) The exception would be an investor who is entirely invested in one bond fund and nothing else who needs to decide what fund to invest in to obtain income from the return of that fund (having first somehow grasped that yield and return are two different things and that there is risk the different forms of which need to be understood). If such a person is pushing the income generating capability of a portfolio then either they are opting for a very low rate of expenditure or they are in very dangerous territory. That would be almost no one, and practically the only case that one might think of is one of those people who have such high independent income and are so wealthy relative to their needs that they just have everything in tax exempt munis and move on.
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby nedsaid » Sat Jun 29, 2013 11:39 am

It is interesting that the market punishes folks who reach too far to get extra returns beyond the market.

Mr. Bogle's advice is to stretch a bit but don't go too far. His suggestions are sensible and his comments show flexibility in his thinking.
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby optimpessim » Sat Jun 29, 2013 1:53 pm

dbr wrote:
optimpessim wrote:I need a little help in understanding the following quote from the interview:

I think a reasonable thing to do, for example, on the fixed-income side would be to have a corporate bond index fund in your portfolio, as well as a total bond market index fund in your portfolio. The total bond market index fund is 70% government guaranteed, U.S. Treasury, etc. And that's just too high, in my opinion, with those yields where they are now, which are not an awful lot above 1.25%. The corporate yield is probably 2.7%-2.8%. So there ought to be, for people that need the yield--and just about everybody that's in those funds does, that's why they invest in them--they ought to be able to go out there and … bring their yield up on that.


Who is it that needs the yield and who does not? It is those who need the income who need current yield, right? But if you have no need or intent to get income from the bond part of your portfolio then can it be said that you do not need yield? In that case if you have the Vanguard Intermediate Term Bond Index Fund is there any good reason to switch to the Investment Grade fund?

Sally


It is way worse than that. If a person needs income, then they need return, and the return comes from the entirety of the portfolio and not just from deciding between one bond fund and another. There is a risk analysis that has to be done and it is not the one of return vs volatility (Begin ad nauseum useless discussion of what is risk.) The exception would be an investor who is entirely invested in one bond fund and nothing else who needs to decide what fund to invest in to obtain income from the return of that fund (having first somehow grasped that yield and return are two different things and that there is risk the different forms of which need to be understood). If such a person is pushing the income generating capability of a portfolio then either they are opting for a very low rate of expenditure or they are in very dangerous territory. That would be almost no one, and practically the only case that one might think of is one of those people who have such high independent income and are so wealthy relative to their needs that they just have everything in tax exempt munis and move on.


I guess I did not make clear what I was asking. Let me try again. I consider the purpose of the bonds in my stock/bond portfolio to be to control risk and not to provide income. I understand that they are in no way risk free but I do expect them to be less volatile in difficult economic times. Mr. Bogle's statement above leads me to think that since I have a low rate of expenditure perhaps the index fund, with a high proportion of treasuries and without corporate bonds may be O.K. even though the "yield" would be somewhat lower. Could it be that the Index Fund without Corporates would carry somewhat less risk?

I don't pretend to be very knowledgable but I am struggling to understand.
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby dbr » Sun Jun 30, 2013 10:25 am

optimpessim wrote:I guess I did not make clear what I was asking. Let me try again. I consider the purpose of the bonds in my stock/bond portfolio to be to control risk and not to provide income. I understand that they are in no way risk free but I do expect them to be less volatile in difficult economic times. Mr. Bogle's statement above leads me to think that since I have a low rate of expenditure perhaps the index fund, with a high proportion of treasuries and without corporate bonds may be O.K. even though the "yield" would be somewhat lower. Could it be that the Index Fund without Corporates would carry somewhat less risk?

I don't pretend to be very knowledgable but I am struggling to understand.


You are exactly correct about risk. If you have a diversified portfolio of stocks and bonds and expect your bonds to control risk, which is what the use of bonds in a rational total portfolio investing plan is, then a philosophy of taking risk in stocks and owning low risk bonds makes all kinds of sense. There would be no reason whatsoever to "reach" for yield in bonds. If you want more expected return, the most rational way to do that is to allocate more to stocks or allocate to more risky stocks (small cap value tilt), knowing that by any strategy risk will have to be taken to get more return.

Where I think you are mistaken, and my problem with Mr. Bogle, is that this has nothing to do with "low rate of expenditure" because it is misguided mental accounting to equate the dividends and interest paid by a portfolio with the withdrawals that can be taken from a portfolio for income. A person is free to take whatever withdrawals they want and the issue is what will happen to the portfolio as a consequence. Study after study has shown that the two factors that dominate the fate of mixed portfolios of stocks and bonds are first of all what period in history the withdrawals are taken over and secondly the size of the withdrawals. The effect of stock/bond asset allocation is very small except when stock allocation is too little. I doubt anyone could find an effect where selecting between a treasury dominated index fund and a corporate bond fund would have a meaningful effect on the long term fate of a diversified stock/bond portfolio under a reasonable rate of withdrawal.

I think of the two factors, withdrawal and history, the effect of withdrawal is pretty well understood. It is less clear whether or not one can predict whether or not one has retired at a bad time as by history one means the course of returns and inflation of an entire future period, and I don't know how you predict that although some models exist.

Also, if a person is in a marginal situation of wealth relative to needed income, it probably makes more sense to insure against longevity risk by making sure enough of the income stream is annuitized to get by. This requires comparing income needs to existing pension, Social Security, and annuity income streams, fixed vs. COLA'd taken into account and going from there. Since inflation is the joker in the works for retirees, if there is a bond position that should be taken it is in TIPS rather than shifting nominals to corporates. The fact that real yields for TIPS have been negative recently has caused much fluster and consternation that has distracted from the fundamentals of long term investing.
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby optimpessim » Tue Jul 02, 2013 11:09 am

dbr wrote: The effect of stock/bond asset allocation is very small except when stock allocation is too little. I doubt anyone could find an effect where selecting between a treasury dominated index fund and a corporate bond fund would have a meaningful effect on the long term fate of a diversified stock/bond portfolio under a reasonable rate of withdrawal.


dbr: I appreciate your thoughts. They make good sense to me. I especially like the above quote. However a problem for me when I read Boglehead threads is that I am aware that I am looking for confirmation of thoughts I have and when I find it I am suspicious since I don't trust my own thinking! If I endorse the above quote, and I do, I don't have to do anything and that is appealing!

Thank you, dbr.

Bottom line: With our allocation we are not "out on a limb".
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Re: Bogle: Yield Seekers Shouldn't Go Out on a Limb

Postby abuss368 » Thu Nov 28, 2013 2:04 am

I went back and watched this interview tonight. I found the last paragraph the most interesting where Jack notes:

Benz: So, your overall comment for people attempting to navigate the current environment for income producers is, don't get too fancy with the bond piece. Do own dividend payers, perhaps in lieu of a small part of your bond stake, and keep the costs overall really quite low.

Bogle: And let me make a distinction with those two. You have it exactly right. But I'd say, all these years of experience, six decades of experience, tells me reaching for yield on the safe side of your portfolio is simply not a good idea. It's going too far out the limb.

On the equity side, I don't have that same reservation, and I wouldn't necessarily recommend this strategy, but I would not be troubled by it: If you mixed a total bond market index fund with 30% or 40% or even 50% in high-yielding or a dividend growth kind of a mutual fund or even an ETF if we're going to hold it and not trade it, that's not a ridiculous thing to do. Because it's going to have a high correlation with the market as a whole, probably 90%-94% correlation--very high. So it's not as if you're moving away from X and into Y. You're modifying X into X3 or something like that.
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