Bernstein: Don’t Bother With International Bonds

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dharrythomas
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Re: Bernstein: Don’t Bother With International Bonds

Post by dharrythomas »

It doesn't bother me that we own some in LifeStrategy and Target Retirement, but I don't think the potential benefit is worth the cost and effort to do it on my own.
pop77
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Re: Bernstein: Don’t Bother With International Bonds

Post by pop77 »

I own Templeton Global Bond Closed End Fund (GIM) and Fidelity Emerging Market Bond Fund (FNMIX). They have performed much better than VBTIX but with more risk over time. The question is whether I should redistribute the assets in these funds into EAFE index fund (FSIIX) and Emerging Market Index Fund (EEM).

If I compare M* growth charts GIM has performed much better than FSIIX and FNMIX is pretty close to EEM. FNMIX and GIM also pay monthly dividends that might be useful as regular income. GIM and FNMIX also have lower volatility than FSIIX and EEM.

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

FSIIX 10 year Sharpe Ratio 0.38 Vs GIM's 0.99
EEM 10 year sharpe ratio 0.5 Vs FNMIX's 0.86

To me it looks like owning GIM and FNMIX provides better risk adjusted return than owning FSIIX and EEM. Thoughts?
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Ketawa
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Re: Bernstein: Don’t Bother With International Bonds

Post by Ketawa »

pop77 wrote:I own Templeton Global Bond Closed End Fund (GIM) and Fidelity Emerging Market Bond Fund (FNMIX). They have performed much better than VBTIX but with more risk over time. The question is whether I should redistribute the assets in these funds into EAFE index fund (FSIIX) and Emerging Market Index Fund (EEM).

If I compare M* growth charts GIM has performed much better than FSIIX and FNMIX is pretty close to EEM. FNMIX and GIM also pay monthly dividends that might be useful as regular income. GIM and FNMIX also have lower volatility than FSIIX and EEM.

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

FSIIX 10 year Sharpe Ratio 0.38 Vs GIM's 0.99
EEM 10 year sharpe ratio 0.5 Vs FNMIX's 0.86

To me it looks like owning GIM and FNMIX provides better risk adjusted return than owning FSIIX and EEM. Thoughts?
My thoughts are that you are asking the wrong questions. Your current holdings are two international bond funds. Does your IPS call for international bonds? If yes, are these the best choices? Past performance is no predictor of future results, so I would switch to something low cost from Vanguard. If no, why are you holding them?

Your proposed replacements are a MSCI EAFE fund and a MSCI Emerging Markets fund. Why did you pick those? EEM is a particularly bad option with a 0.69% ER. If you really need separate developed and emerging markets funds, IEFA and IEMG also follow MSCI indexes, include small caps, and have lower expenses. Or, why hold separate developed and emerging funds when you could just use VXUS?
bpp
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Re: Bernstein: Don’t Bother With Intnational Bonds

Post by bpp »

bpp wrote:
magellan wrote:
abuss368 wrote:And the unhedged currency exposure with unhedged international bonds is very risky. All you have to do is look to what happened to the euro and the yen in the last crisis—they cratered. That’s a risk you simply don’t want to take.
I have enormous respect for Dr. Bernstein, but IMO this is way overstated.
More than overstated, it is wrong. If by "the last crisis" is meant the Lehman Shock of 2008-2009, it was the dollar and the euro that cratered, not the yen. The yen actually strengthened relative to those two currencies in that period.

I likewise have great respect for Dr. Bernstein, and his writings were a big influence on me when I started out investing, but he got the facts wrong in this particular case.
To follow up, the obvious question that could be asked in retort is: for a Japanese investor then, would holding foreign bonds in the last crisis have been a disastrous thing to do?

The green and yellow lines show the difference between taking the bond portion of 60/40 stock/bond portfolio as either all 1-year Japanese bonds, or 50/50 Japanese/foreign bonds, where the foreign bonds are represented by 1-year US treasuries, unhedged. (The stock portion for those two lines is 50/50 Japan/non-Japan.) Inflation-adjusted yen base:
Image

Yes, there is some small difference between the two lines, especially around and in the lead-up to 2008... But overall, I don't see that currency fluctuations alone give a compelling argument to omit unhedged foreign bonds.

It is a matter of personal taste. Include them or not because you feel one way or the other about their ability to provide diversification. Don't try to argue for or against them based on the numbers, because the numbers don't support a strong argument either way. (The Vanguard paper also does not present compelling data either way, despite its being widely quoted as supporting only hedged foreign bond positions.)
grok87
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the data

Post by grok87 »

Here is the data on the (backtested) performance of the international bond index tracked by the vanguard fund compared with the total (us) bond index. I've also shown a 80/20 domestic/intl mix which is what vanguard uses in the target date funds etc.

ANNUAL RETURN IN %

YEAR..... TOT US BND INDEX..... INTL BND INDEX..... 80/20
2003.................4.10....................... 20.47.............7.37
2004.................4.34.........................13.23.............6.12
2005 ................2.43................ .........-8.32.............0.28
2006.................4.33...........................8.70............ 5.20
2007.................6.97..........................11.14............7.80
2008.................5.24...........................2.93............4.78
2009.................5.93...........................8.80............6.50
2010..................6.58..........................3.87............6.04
2011..................7.92..........................3.63............7.06
2012..................4.32..........................6.46............4.75
2013.................-1.97.........................-1.36...........-1.85

Arith MEAN..........4.56...........................6.32............4.91
ST DEV...............2.67...........................7.62...........3.03

CORRELATION 35.2%

So historically the performance has been quite different. The 80/20 mix that vanguard uses in say the target date funds has historically had higher risk (at least measured by std. dev.) but with also higher return.

The thing is, going forward, it looks like that the higher return will probably NOT be there- the yield for the international bond index is just 1.5% vs. 2.1% for the total us bond index. BUT the higher risk part is likely to prove true as the duration for the international index is like 6.5 vs. say 5.5 for the us index.

Lower returns for higher risk does not seem like a good deal to me.

cheers,
RIP Mr. Bogle.
dl7848
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Re: Differences of Opinion.

Post by dl7848 »

Taylor Larimore wrote:
I'm talking about market timing, which as I've mentioned appears to be allowed.
dl7848:

Bogleheads welcome differences of opinion. It is how we learn.

This is an important part of our Forum Policy:
This is a moderated forum. We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones. Respect your debating opponents. Debates are about issues, not people. If you disagree with an idea, go ahead and marshal all your forces against it. But do not confuse ideas with the person posting them; at all times we must conduct ourselves in a respectful manner to other posters.
The Boglehead Philosophy:

1 Develop a workable plan
2 Invest early and often
3 Never bear too much or too little risk
4 Diversify
5 Never try to time the market
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8 Minimize taxes
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Best wishes.
Taylor
Taylor,

I was half joking but half serious.

Most of the threads on bonds -- both domestic and international -- have a market timing aspect to it. The big complaint is that interest rates are so very low, that now is a bad time to buy. So I was making a factual statement that market timing appears to be allowed when it comes to fixed income. I should have figured that out before now, but it just hit me, :oops: so I was laughing at myself about it. :D
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BackInTheBlack
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Re: Bernstein: Don’t Bother With International Bonds

Post by BackInTheBlack »

Based on my limited research in this area, I'd be inclined to agree with Dr Bernstein in regards to developed world foreign debt. And, as has been pointed out frequently before, this is a particularly unattractive risk profile at the present moment, compared to US treasuries that is. Where I begin to diverge in my thinking is with emerging market debt - both corporate and sovereign. Credit ratings look to improve with time in general, while compensation for the added risk would appear to be adequate IMO, at least until the market gets flooded with foreign investment. I liken emerging market debt to domestic junk bonds, in the sense that both are obviously high yielding, equity-like in behavior, and less sensitive to interest rate fluctuations due to those characteristics. Personally, I think that adds a layer of diversification that can be very beneficial to the overall makeup and implied volatility of my portfolio.
"Do not put your faith in what statistics say until you have carefully considered what they do not say." | | -William W. Watt
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HardKnocker
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Re: Bernstein: Don’t Bother With International Bonds

Post by HardKnocker »

Bernstein opinion makes total sense to me.
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Rodc
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Re: Bernstein: Don’t Bother With International Bonds

Post by Rodc »

pop77 wrote:I own Templeton Global Bond Closed End Fund (GIM) and Fidelity Emerging Market Bond Fund (FNMIX). They have performed much better than VBTIX but with more risk over time. The question is whether I should redistribute the assets in these funds into EAFE index fund (FSIIX) and Emerging Market Index Fund (EEM).

If I compare M* growth charts GIM has performed much better than FSIIX and FNMIX is pretty close to EEM. FNMIX and GIM also pay monthly dividends that might be useful as regular income. GIM and FNMIX also have lower volatility than FSIIX and EEM.

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

FSIIX 10 year Sharpe Ratio 0.38 Vs GIM's 0.99
EEM 10 year sharpe ratio 0.5 Vs FNMIX's 0.86

To me it looks like owning GIM and FNMIX provides better risk adjusted return than owning FSIIX and EEM. Thoughts?
I think this is similar to a question with stocks. If you on the stock side you only own an S&P 500 fund which adds more diversification (a) adding a developed international large cap fund or (b) an emerging market fund? In general the answer is (b). Now of course one might argue for both, but if the question were to add just one more stock holding the answer is (b).

Similarly, it is likely that adding a little emerging bonds is going to add more diversification than adding developed markets bonds.

Whether the cost and risk makes it a good idea is a harder answer. I have held a modest slice of FNMIX for many years dating back to when I did not have easy exposure to emerging stocks. I'm not sure I would add it today as it probably makes more sense to just add the risk on the stock side, but I see no reason to change what I am doing, and in the spirit discipline I only make changes based on a clear benefit to doing so. It has served me well. The future benefit is of course unknown.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Beliavsky
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Re: Bernstein: Don’t Bother With International Bonds

Post by Beliavsky »

abuss368 wrote:Bernstein: Well, first, there is absolutely no way any rational investor would want an unhedged international bond fund in their portfolio for a very simple reason: Your bonds are your “safe” assets.
Bernstein is pretty self-confident -- people who disagree with him are not "rational". Owning unhedged bonds of other countries could be viewed as an inflation hedge. A "carry" strategy of buying short-term bonds in currencies with yields higher than in the domestic bond market has been profitable over long periods, although subject to drawdowns -- just like stocks. I don't know what the optimal allocation to foreign bonds is, but I find Bernstein's logic very unconvincing, and I am a CFA.
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magellan
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Re: Bernstein: Don’t Bother With International Bonds

Post by magellan »

Beliavsky wrote:I don't know what the optimal allocation to foreign bonds is, but I find Bernstein's logic very unconvincing...
I'm in about the same place myself. I'm also troubled by Dr. Bernstein's use of the often repeated slogan to 'take your risk on the equity side.' Many experts say this, but despite trying, I haven't yet found any academic research that supports it.

IMO, stocks and bonds are both potentially risky assets that blend well in a portfolio because their risks have historically combined well. It's important to get the overall risk level of the portfolio right, but that doesn't mean that the only "good" risk is equity risk.

A lot of folks mistakenly equate equity risk and credit risk, but again, academic research points toward them not being the same. Sure, as we learned in the financial crisis, all risky assets move together in a panic, regardless of the sources and nature of their risks. The fact that risky bonds move in sync with risky stocks in a crisis doesn't mean that the underlying risks are the same or that their long term movement will be in sync. In fact, history tells us that the opposite is true.

I do agree with Dr. Bernstein that a well built portfolio must provide adequate liquidity for both planned spending and rebalancing. But those needs don't justify a conclusion that one should only hold 'safe' bonds.

So IMO, bonds ARE risk assets and that's an essential part of why they belong in a well constructed portfolio. Stay diversified and take your risk on both sides!

Jim
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Re: Bernstein: Don’t Bother With International Bonds

Post by Longtimelurker »

Beliavsky wrote:
abuss368 wrote:Bernstein: Well, first, there is absolutely no way any rational investor would want an unhedged international bond fund in their portfolio for a very simple reason: Your bonds are your “safe” assets.
Bernstein is pretty self-confident -- people who disagree with him are not "rational". Owning unhedged bonds of other countries could be viewed as an inflation hedge. A "carry" strategy of buying short-term bonds in currencies with yields higher than in the domestic bond market has been profitable over long periods, although subject to drawdowns -- just like stocks. I don't know what the optimal allocation to foreign bonds is, but I find Bernstein's logic very unconvincing, and I am a CFA.
You have to understand the context of his statement. Bill believes, and I agree, that bonds are for safety. This by definition excludes things like "carry trade" or high-yield, or extended duration, as each is subject to large losses over short periods. In the context of the portfolio Bill would be viewing this from, only high quality bonds of intermediate or short duration qualify.

In other context's, where bonds are not "for safety" but seek highest return, I think all would agree that alternative strategies with currencies could provide a benefit and could be considered rational.
Stay the course. If you can't resist greed, and fear is proven to be 2x as strong, you are doomed as an investor.
freddie
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Re: Bernstein: Don’t Bother With International Bonds

Post by freddie »

Unfortunately past performance doesn't help predict future returns. Those EM bonds you bought 10 years ago had a much higher spread and as that was reduced those old bonds shot up in value. It is going to be hard for that to happen again. Personally I think of them a lot like high yield bonds. Some people love the higher yields. Other people hate the risk.

pop77 wrote:I own Templeton Global Bond Closed End Fund (GIM) and Fidelity Emerging Market Bond Fund (FNMIX). They have performed much better than VBTIX but with more risk over time. The question is whether I should redistribute the assets in these funds into EAFE index fund (FSIIX) and Emerging Market Index Fund (EEM).

If I compare M* growth charts GIM has performed much better than FSIIX and FNMIX is pretty close to EEM. FNMIX and GIM also pay monthly dividends that might be useful as regular income. GIM and FNMIX also have lower volatility than FSIIX and EEM.

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

FSIIX 10 year Sharpe Ratio 0.38 Vs GIM's 0.99
EEM 10 year sharpe ratio 0.5 Vs FNMIX's 0.86

To me it looks like owning GIM and FNMIX provides better risk adjusted return than owning FSIIX and EEM. Thoughts?
dl7848
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Re: Bernstein: Don’t Bother With International Bonds

Post by dl7848 »

magellan wrote:
I'm in about the same place myself. I'm also troubled by Dr. Bernstein's use of the often repeated slogan to 'take your risk on the equity side.' Many experts say this, but despite trying, I haven't yet found any academic research that supports it.

IMO, stocks and bonds are both potentially risky assets that blend well in a portfolio because their risks have historically combined well. It's important to get the overall risk level of the portfolio right, but that doesn't mean that the only "good" risk is equity risk.

A lot of folks mistakenly equate equity risk and credit risk, but again, academic research points toward them not being the same. Sure, as we learned in the financial crisis, all risky assets move together in a panic, regardless of the sources and nature of their risks. The fact that risky bonds move in sync with risky stocks in a crisis doesn't mean that the underlying risks are the same or that their long term movement will be in sync. In fact, history tells us that the opposite is true.

I do agree with Dr. Bernstein that a well built portfolio must provide adequate liquidity for both planned spending and rebalancing. But those needs don't justify a conclusion that one should only hold 'safe' bonds.

So IMO, bonds ARE risk assets and that's an essential part of why they belong in a well constructed portfolio. Stay diversified and take your risk on both sides!

Jim
Excellent! Completely agree.

I think the lack of knowledge on non-equity risk assets has to do with the lack of long-term data. Whether from price charts or Ibbotson data*, it's hard to find information on other risk assets anytime before the 1990s. But since past performance doesn't guarantee future returns anyway, we should analyze the data that is available and try to understand it.

I've never looked at Ibbotson, but my impression is that it only/mainly covers equities and "safe" bonds.
pop77
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Re: Bernstein: Don’t Bother With International Bonds

Post by pop77 »

The point I was trying to make with my GIM and FNMIX example is that if we consider foreign bonds as part of your equity portfolio, looks like they provide better risk adjusted returns. For example instead have a 12% allocation to emerging market stocks can one have 9% in emerging market stocks and 3% in emerging market bonds? Similarly instead of having a 15% allocation to international developed stocks can one have 12% in international dev stocks and 3% in international developed bonds?

The simplest portfolio would be just two securities, total world stock +Total US Bond. If we want to slice it better then you would split them further and further. My question is not of simplicity but of incremental returns or reduced risk.
freddie
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Re: Bernstein: Don’t Bother With International Bonds

Post by freddie »

By the same logic US bonds also provide better risk adjusted returns than US stocks. Look at 2000-2013:
TSM CAGR 4.22 STD 20.44 worst year -37%
TBM CAGR 5.43 STD 5.42 worst year -2.26%

We don't look at it that way since we have 100 years of history to look at where we can see various market cycles. With EM bond funds we can see the current cycle as rates dropped from 15% to 5% but I for one have never seen EM bond performance from lets say 1970-1990.
pop77 wrote:The point I was trying to make with my GIM and FNMIX example is that if we consider foreign bonds as part of your equity portfolio, looks like they provide better risk adjusted returns. For example instead have a 12% allocation to emerging market stocks can one have 9% in emerging market stocks and 3% in emerging market bonds? Similarly instead of having a 15% allocation to international developed stocks can one have 12% in international dev stocks and 3% in international developed bonds?

The simplest portfolio would be just two securities, total world stock +Total US Bond. If we want to slice it better then you would split them further and further. My question is not of simplicity but of incremental returns or reduced risk.
grok87
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Re: Bernstein: Don’t Bother With International Bonds

Post by grok87 »

freddie wrote:By the same logic US bonds also provide better risk adjusted returns than US stocks. Look at 2000-2013:
TSM CAGR 4.22 STD 20.44 worst year -37%
TBM CAGR 5.43 STD 5.42 worst year -2.26%

We don't look at it that way since we have 100 years of history to look at where we can see various market cycles. With EM bond funds we can see the current cycle as rates dropped from 15% to 5% but I for one have never seen EM bond performance from lets say 1970-1990.
pop77 wrote:The point I was trying to make with my GIM and FNMIX example is that if we consider foreign bonds as part of your equity portfolio, looks like they provide better risk adjusted returns. For example instead have a 12% allocation to emerging market stocks can one have 9% in emerging market stocks and 3% in emerging market bonds? Similarly instead of having a 15% allocation to international developed stocks can one have 12% in international dev stocks and 3% in international developed bonds?

The simplest portfolio would be just two securities, total world stock +Total US Bond. If we want to slice it better then you would split them further and further. My question is not of simplicity but of incremental returns or reduced risk.
agree. in the table i posted above, the backtested performance of the vanguard intl bond index for the past 10 years was 6.4%. looking forward the yield is 1.5%. I'm pretty sure the performance for the next 7 years or so will be a lot closer to 1.5% than 6.4%.
RIP Mr. Bogle.
dl7848
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Re: Bernstein: Don’t Bother With International Bonds

Post by dl7848 »

grok87 wrote:
freddie wrote:By the same logic US bonds also provide better risk adjusted returns than US stocks. Look at 2000-2013:
TSM CAGR 4.22 STD 20.44 worst year -37%
TBM CAGR 5.43 STD 5.42 worst year -2.26%

We don't look at it that way since we have 100 years of history to look at where we can see various market cycles. With EM bond funds we can see the current cycle as rates dropped from 15% to 5% but I for one have never seen EM bond performance from lets say 1970-1990.
pop77 wrote:The point I was trying to make with my GIM and FNMIX example is that if we consider foreign bonds as part of your equity portfolio, looks like they provide better risk adjusted returns. For example instead have a 12% allocation to emerging market stocks can one have 9% in emerging market stocks and 3% in emerging market bonds? Similarly instead of having a 15% allocation to international developed stocks can one have 12% in international dev stocks and 3% in international developed bonds?

The simplest portfolio would be just two securities, total world stock +Total US Bond. If we want to slice it better then you would split them further and further. My question is not of simplicity but of incremental returns or reduced risk.
agree. in the table i posted above, the backtested performance of the vanguard intl bond index for the past 10 years was 6.4%. looking forward the yield is 1.5%. I'm pretty sure the performance for the next 7 years or so will be a lot closer to 1.5% than 6.4%.
I think when you get into the area of foreign bonds, active management can be a plus. The guy who runs GIM has been able to take advantage of 9%-yielding Ukrainian bonds. That's something an international bond index fund can't do.
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Re: Bernstein: Don’t Bother With International Bonds

Post by steve_14 »

magellan wrote:
Beliavsky wrote:I don't know what the optimal allocation to foreign bonds is, but I find Bernstein's logic very unconvincing...
I'm in about the same place myself. I'm also troubled by Dr. Bernstein's use of the often repeated slogan to 'take your risk on the equity side.' Many experts say this, but despite trying, I haven't yet found any academic research that supports it.
I'd say this is more of a preference with a self evident aim (you have a floor of wealth that will always be there), so I wouldn't think "research", which I guess means looking at historical data, would be of much use.
magellan wrote:A lot of folks mistakenly equate equity risk and credit risk, but again, academic research points toward them not being the same.


I'm not sure what you mean - exactly the same risks that cause the equity value of a company to drop make its bonds drop as well.
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Re: Bernstein: Don’t Bother With International Bonds

Post by freddie »

How is he taking advantage of them in a way an index fund does? And how does it differ from an active manager buying some apple stock because he thinks the market has undervalued it.

dl7848 wrote:
I think when you get into the area of foreign bonds, active management can be a plus. The guy who runs GIM has been able to take advantage of 9%-yielding Ukrainian bonds. That's something an international bond index fund can't do.
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Re: Bernstein: Don’t Bother With International Bonds

Post by MnD »

I think I'm turning into something of a Bernstein contrarian. :mrgreen:

I'm in the process of building what will be a very substantial position in Dodge and Cox Global Bond paired with the TSP G fund.
I don't think "buy the biggest debtors debt" is a good way to invest in bonds, but that's what the market cap index funds are forced to do both for US and International bond funds. A lot of the poor yield stats on International bond indices are due to Japan - massive amounts of sovereign debt so a high % in the index coupled with ultra-low yields.

And as for US bond index funds, US government and govt agency backed debt results in ~70% of your investment being in that sector. Many entities are buying US government debt not because it's a good value or yield but because there is simply no other liquid fixed-income option to soak up the amount of cash being invested. i don't have trillions to invest so i don't have to compete with them in that market. I also look at the huge US tilt for all my capital. Both our jobs are dependent on US economic health, likewise our home value, our claims on Social security and my pension. 50% of fixed income in a global bond fund is only ~25% of fixed income in international. I'm not going to lose any sleep with the some unhedged currency diversity in fixed income and a global market cap approach to equity weighting. That diversity can cut both ways as opposed to the quote by Berstein which only looks at one negative example of international fixed income.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
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Re: Bernstein: Don’t Bother With International Bonds

Post by mptfan »

magellan wrote:I'm also troubled by Dr. Bernstein's use of the often repeated slogan to 'take your risk on the equity side.' Many experts say this, but despite trying, I haven't yet found any academic research that supports it.

IMO, stocks and bonds are both potentially risky assets that blend well in a portfolio because their risks have historically combined well. It's important to get the overall risk level of the portfolio right, but that doesn't mean that the only "good" risk is equity risk.

A lot of folks mistakenly equate equity risk and credit risk, but again, academic research points toward them not being the same. Sure, as we learned in the financial crisis, all risky assets move together in a panic, regardless of the sources and nature of their risks. The fact that risky bonds move in sync with risky stocks in a crisis doesn't mean that the underlying risks are the same or that their long term movement will be in sync. In fact, history tells us that the opposite is true.

I do agree with Dr. Bernstein that a well built portfolio must provide adequate liquidity for both planned spending and rebalancing. But those needs don't justify a conclusion that one should only hold 'safe' bonds.

So IMO, bonds ARE risk assets and that's an essential part of why they belong in a well constructed portfolio. Stay diversified and take your risk on both sides!

Jim
:thumbsup I couldn't have said it better myself!
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Taylor Larimore
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Re: Bernstein: Take risks in stocks, not bonds.

Post by Taylor Larimore »

This 2011 interview with Bill Bernstein is insightful:

Bernstein: Take Risks in Stocks, Not Bonds

Stocks help us eat well. Bonds help us sleep well.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
dl7848
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Re: Bernstein: Don’t Bother With International Bonds

Post by dl7848 »

freddie wrote:How is he taking advantage of them in a way an index fund does?
The GIM manager is taking advantage of Ukrainian bond yields -- something an index fund with a fixed set of countries cannot do. (Ukraine isn't in any bond index that I'm aware of.) An active manager has the flexibility to take advantage of such ad hoc opportunities as they appear. This is particularly valuable in a world where, as mentioned before, many central banks are causing bond yields to plummet, meaning one has to look harder to get good yields. Active managers with a flexible mandate can uncover these unique opportunities.
dl7848
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Re: Bernstein: Don’t Bother With International Bonds

Post by dl7848 »

MnD wrote:

And as for US bond index funds, US government and govt agency backed debt results in ~70% of your investment being in that sector. Many entities are buying US government debt not because it's a good value or yield but because there is simply no other liquid fixed-income option to soak up the amount of cash being invested.
While I like diversity in bonds, and the inclusion of risky bonds (as a partial replacement for equities), I do like having Treasuries and other US Government bonds for safety. So the heavy weighting in Vanguard's total bond market fund doesn't bother me. It's an easy way to get Treasuries. Otherwise, however, I do have doubts like you, about the value of cap-weighting bonds.
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Re: Bernstein: Don’t Bother With International Bonds

Post by freddie »

Vanguard Emerging Markets Government Bond Index Fund Admiral Shares has 1.7% in Ukraine bonds to go along with 11% in russian bonds and bunch of other stuff with 9%+ coupons. The question though is that 9% bond a good deal or not? I sure don't know enough about the risks to say either way. If your a fan of holding junk emerging bonds, there are funds for that:) I have heard the spiel about the advantages of active management using a flexible mandates to seek out unique opportunities before. I am sure the skilled managers beat the indexes just like in the stock market. The hard part is figuring out if your manager is skilled or just lucky....

dl7848 wrote:
freddie wrote:How is he taking advantage of them in a way an index fund does?
The GIM manager is taking advantage of Ukrainian bond yields -- something an index fund with a fixed set of countries cannot do. (Ukraine isn't in any bond index that I'm aware of.) An active manager has the flexibility to take advantage of such ad hoc opportunities as they appear. This is particularly valuable in a world where, as mentioned before, many central banks are causing bond yields to plummet, meaning one has to look harder to get good yields. Active managers with a flexible mandate can uncover these unique opportunities.
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Re: Bernstein: Don’t Bother With International Bonds

Post by dl7848 »

freddie wrote:Vanguard Emerging Markets Government Bond Index Fund Admiral Shares has 1.7% in Ukraine bonds to go along with 11% in russian bonds and bunch of other stuff with 9%+ coupons.
Okay, so Ukraine is represented, but not in a way that would benefit from the current situation.
I am sure the skilled managers beat the indexes just like in the stock market. The hard part is figuring out if your manager is skilled or just lucky....
The GIM manager is very experienced.. He's managed a lot of funds, and his track record is out there for all to see. From his commentaries and thru analyzing his holdings and performance, you can see his thought process. The one criticism some people have is that some of his funds seem more like currency funds than bond funds, but overall, he does a good job. If he thinks Ukraine is a good bet, chances are it is.
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Re: Bernstein: Don’t Bother With International Bonds

Post by freddie »

I don't want to beat this too much since it is off topic, but that is the exact same logic people use for active management of stock funds. If you look at the returns of the em bond index funds (unfortunately the ones I am aware of only have 5 year data), they cluster in the same place stock index funds do. Maybe you picked the winning mutual fund.

Again I think EM bonds are in a whole different category than international bonds. Developed market bonds are giving you diversification. EM bonds are giving you more return at higher risk. Long term the numbers I have seen suggest that EM stocks outperform EM stocks by a couple of percentage points but the numbers are very time sensative. There are some huge EM drops when those every decade crisis hit.

dl7848 wrote:
freddie wrote:Vanguard Emerging Markets Government Bond Index Fund Admiral Shares has 1.7% in Ukraine bonds to go along with 11% in russian bonds and bunch of other stuff with 9%+ coupons.
Okay, so Ukraine is represented, but not in a way that would benefit from the current situation.
I am sure the skilled managers beat the indexes just like in the stock market. The hard part is figuring out if your manager is skilled or just lucky....
The GIM manager is very experienced.. He's managed a lot of funds, and his track record is out there for all to see. From his commentaries and thru analyzing his holdings and performance, you can see his thought process. The one criticism some people have is that some of his funds seem more like currency funds than bond funds, but overall, he does a good job. If he thinks Ukraine is a good bet, chances are it is.
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Re: Bernstein: Don’t Bother With International Bonds

Post by cowboysFan »

magellan wrote: So IMO, bonds ARE risk assets and that's an essential part of why they belong in a well constructed portfolio. Stay diversified and take your risk on both sides!

Jim
I think you need to differentiate between sovereign and corporate bonds. Governments lend each other trillions of dollars for reasons that have nothing to do with getting the best Sharpe ratio and everything to do with international relations and geopolitics. I'm not sure what the net effect of that is, but it surely has to distort the market for sovereign bonds.
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Re: Bernstein: Don’t Bother With International Bonds

Post by dl7848 »

freddie wrote:I don't want to beat this too much since it is off topic, but that is the exact same logic people use for active management of stock funds. If you look at the returns of the em bond index funds (unfortunately the ones I am aware of only have 5 year data), they cluster in the same place stock index funds do. Maybe you picked the winning mutual fund.
Investors who are serious about active investing do a lot of research into funds and portfolio managers. Studies that compare active vs passive management seem to assume that investors pick the average or mediocre funds. My thinking is that for all the intellectual energy spent on a board like this in analyzing indices, the same intellectual capital could be spent researching funds and managers. I think the difference is just a difference in ability and interest. Successful active investors enjoy learning about the market and doing research on funds/managers. Successful passive investors enjoy doing statistical analyses to determine what works best "on average".

Also, although I don't view debt the same way as equity and so don't buy the passive arguments 100%, I think the arguments for bonds being an inefficient market are getting stronger. Regulations such as the banning of proprietary trading have resulted in liquidity issues in the bond market. As have the increased bank capital requirements. Also, European banks are in an early stage in the deleveraging of their balance sheets which means the forced selling of assets at inefficient prices. Plus, the Fed's bond buying, which has taken a huge chunk of Treasuries out of the market, has resulted in a lack of quality collateral which has caused illiquidity in lending markets. So, a portfolio manager who can navigate all these obstacles and take advange of the price inefficiencies can add value.
Again I think EM bonds are in a whole different category than international bonds. Developed market bonds are giving you diversification. EM bonds are giving you more return at higher risk.
That's why emerging market bonds are often looked at as a substitute for equity. On average, they tend to have similar returns with less volatiliy that stocks, and of course, you can get good income along the way. I'd really like to see more studies done on EM debt, but as mentioned upthread, it's hard to get information before the 1990s. So if one is inclined to invest in EM debt, one has to analyze it based on the last few decades. I personally prefer to get my EM debt mixed in with other bond types in multisector bond funds. Let the managers worry about, I say!
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Re: Bernstein: Don’t Bother With International Bonds

Post by Beliavsky »

cowboysFan wrote:I think you need to differentiate between sovereign and corporate bonds. Governments lend each other trillions of dollars for reasons that have nothing to do with getting the best Sharpe ratio and everything to do with international relations and geopolitics. I'm not sure what the net effect of that is, but it surely has to distort the market for sovereign bonds.
Corporate bonds are typically priced using a yield spread to government bonds reflecting credit risk, so if the market for sovereign bonds is distorted, the market for corporate bonds probably is too.
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Re: Bernstein: Don’t Bother With International Bonds

Post by AlohaJoe »

abuss368 wrote:And the unhedged currency exposure with unhedged international bonds is very risky. All you have to do is look to what happened to the euro and the yen in the last crisis—they cratered. That’s a risk you simply don’t want to take.
Didn't people living in the Eurozone or Japan suffer through that? Does that mean they should have bothered with international bonds?

Does his advice only apply to people who live in America?
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Re: Bernstein: Don’t Bother With International Bonds

Post by steve_14 »

dl7848 wrote:Investors who are serious about active investing do a lot of research into funds and portfolio managers. Studies that compare active vs passive management seem to assume that investors pick the average or mediocre funds. My thinking is that for all the intellectual energy spent on a board like this in analyzing indices, the same intellectual capital could be spent researching funds and managers.
I'm not buying this, since as we've seen in many, many cases, a hot fund can turn cold in an instant. Looking for hot active managers is a wild goose chase.
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Re: Bernstein: Don’t Bother With International Bonds

Post by pop77 »

steve_14 wrote:
dl7848 wrote:Investors who are serious about active investing do a lot of research into funds and portfolio managers. Studies that compare active vs passive management seem to assume that investors pick the average or mediocre funds. My thinking is that for all the intellectual energy spent on a board like this in analyzing indices, the same intellectual capital could be spent researching funds and managers.
I'm not buying this, since as we've seen in many, many cases, a hot fund can turn cold in an instant. Looking for hot active managers is a wild goose chase.
Just look at the growth chart of VBTIX Vs GIM for the past 10 years, forget VBTIX compare it with FSIIX (Dev Market Equity Index)! The trick is to stick with GIM when the manager makes bold bets (often early) like the one he made with Ukraine. He is often early in his calls so the bonds fall first further before turning around. I think this lesson is applicable to other good managers as well the trick is to stick with them even for years of underperformance against index or even be bold to add positions during these down turns.
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Re: Bernstein: Don’t Bother With International Bonds

Post by dl7848 »

steve_14 wrote:
dl7848 wrote:Investors who are serious about active investing do a lot of research into funds and portfolio managers. Studies that compare active vs passive management seem to assume that investors pick the average or mediocre funds. My thinking is that for all the intellectual energy spent on a board like this in analyzing indices, the same intellectual capital could be spent researching funds and managers.
I'm not buying this, since as we've seen in many, many cases, a hot fund can turn cold in an instant. Looking for hot active managers is a wild goose chase.
Did I say looking for "hot" active managers?

You seem to be assuming, just like all those studies that conclude that passive is superior assume, that active investors are stupid, pick poor funds and have bad investing habits like chasing "hot funds" or chasing performance. That completely ignores the investors who don't fit that mold.

The only generalizations that can be made about active investors is that they don't settle for "average", which is what passive investors do. Some active investors don't make the cut, and they may eventually settle for average and become passive investors. Those that do make the cut stay with acive investing but don't make stupid mistakes like chasing performance.

We're getting pretty off topic here. Let's just say that there are bright folks on either side -- passive and active. That was my original point. You can spend your intellectual capital conducting studies that show that passive investing is better "on average", or you can spend your intellectual capital doing research to become a "successful" active investor and do better than average. The choice is your's (I'm using the rhetorical "your's). It's a matter of ability and interest.
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"Average investors don't settle for average?"

Post by Taylor Larimore »

The only generalizations that can be made about active investors is that they don't settle for "average", which is what passive investors do.
Not really. Passive investors know that "average" investors usually outperform "active" investors. The arithmetic is irrefutable.

The arithmetic of active management

Best wishes.
Taylor
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Re: Bernstein: Don’t Bother With International Bonds

Post by rustymutt »

Academics don't lie. If Bernstein believes this, I do to. USA Bonds only. Support your government and buy bonds.
Hi Taylor!
Even educators need education. And some can be hard headed to the point of needing time out.
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Re: "Average investors don't settle for average?"

Post by dl7848 »

Taylor Larimore wrote:
The only generalizations that can be made about active investors is that they don't settle for "average", which is what passive investors do.
Not really. Passive investors know that "average" investors usually outperform "active" investors. The arithmetic is irrefutable.

Best wishes.
Taylor
The operative word is "usuallly". :D

Taylor, you're basically agreeing with me. Passive investors get the market average. That means they get "average" returns. Active investors don't settle for market averages, and so they alone have the opportunity to best the market averages. It doesn't matter that many or most may fail. What matters is that individuals with the ability and interrest can best the market averages. The fact that many or most do fail is why passive investing is a good option for many people. But that doesn't take away from the fact that those who have the time, the ability and the interest to research active investments can and do outperform the market averages.

I think passive investing is a good solution for many people. But let's be clear that getting the market averages isn't always a great thing. It's been wonderful since March 2009, but it wasn't exactly great the decade before.

With regards to "average", I read this the other day:

Famous last words of drowning man: "but you said the average depth of the river is just three feet!"

:D
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Individual vs. Professional investors.

Post by Taylor Larimore »

But that doesn't take away from the fact that those who have the time, the ability and the interest to research active investments can and do outperform the market averages.
di7848:

Why does the average mutual fund manager who has the "time, ability, and the interest to research active investments" NOT outperform the market average?

Thank you and best wishes.
Taylor
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Re: "Average investors don't settle for average?"

Post by pop77 »

Taylor Larimore wrote:
The only generalizations that can be made about active investors is that they don't settle for "average", which is what passive investors do.
Not really. Passive investors know that "average" investors usually outperform "active" investors. The arithmetic is irrefutable.

The arithmetic of active management

Best wishes.
Taylor
This might be (or is) true when you have indexes constructed properly. Regarding bond indexes they are indexed based on how indebted a country is. This is not the proper way to construct a bond index.

One of the main reason why active managers under perform indexes is due to mass psychology. When Bill Miller or Bill Gross outperforms for a couple of years investors pour money into their funds resulting in either the manager relaxing their criteria to pick stocks/bonds or parking the money in cash resulting in under performance. Similarly after a brief period of under performance, investors pull money out en mass forcing the manager to sell securities that they would normally would not sell resulting in under performance.

We are off topic here but my original point was that while I agree that International bonds do not belong in the 'bond portion' of your portfolio, they have a place in the 'equity portion' of the portfolio.
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Re: Bernstein: Don’t Bother With International Bonds

Post by abuss368 »

This thread has further convinced me to stay with the US for the bond portion and listen to David Swensen, Jack Bogle, Rick Ferri, and Dr. Bernstein.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: "Average investors don't settle for average?"

Post by dl7848 »

pop77 wrote:

One of the main reason why active managers under perform indexes is due to mass psychology. When Bill Miller or Bill Gross outperforms for a couple of years investors pour money into their funds resulting in either the manager relaxing their criteria to pick stocks/bonds or parking the money in cash resulting in under performance. Similarly after a brief period of under performance, investors pull money out en mass forcing the manager to sell securities that they would normally would not sell resulting in under performance.
Agreed. That's one of the reasons I like CEFs. The porfolio manager can keep his/her investments intact. No need to liquidate for redemptions.
We are off topic here but my original point was that while I agree that International bonds do not belong in the 'bond portion' of your portfolio, they have a place in the 'equity portion' of the portfolio.
Agreed with most of that as well. Once we get outside of domestic bonds, categorizing bonds gets harder. There's a continuum, with developed-world bonds closer to the bond side and EM debt closer to the equity side.
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Re: Bernstein: Don’t Bother With International Bonds

Post by Sunny Sarkar »

wbern wrote:Maybe you get a tiny bit of extra diversification, but it’s a trivial amount—plus you’re paying higher expenses and higher transactional costs to deal with foreign bonds.
Same applies for international stocks. (Now I'll run and duck)
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Re: Individual vs. Professional investors.

Post by dl7848 »

Taylor Larimore wrote:
But that doesn't take away from the fact that those who have the time, the ability and the interest to research active investments can and do outperform the market averages.
di7848:

Why does the average mutual fund manager who has the "time, ability, and the interest to research active investments" NOT outperform the market average?
Taylor, I'm not sure I get the big emphasis on "average". Above-average investors can scout out the above-average managers. These are not "hot" managers, but rather capable managers that have shown their ability to navigate a number of difficult market environments. They may be the minority of managers out there, but there are enough around to fill the needs of smart, active investors. If their abilities ever come into question, an investor has the choice to leave. But that's not the same as chasing "hot" managers or, conversely, picking one of the mediocre managers that are out there.

I also think one of the confusions here is just what type of managers are we talking about? Are we talking about equity-only? Bonds? Or are we talking about allocation managers that can move around among asset types? I can say with great confidence that if I wanted pure equity exposure, I would go with an index fund. [Did I just hear thousands of heads explode here? :D] I just don't think active managers have that much of an edge in the all-equity area (with some exceptions...primarily foreign equity funds that have an on-the-ground presence]. But if I want a fixed income fund or an allocation fund, I would go with a manager. The value added there can be huge.
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Re: "Average investors don't settle for average?"

Post by Sunny Sarkar »

Taylor Larimore wrote:
The only generalizations that can be made about active investors is that they don't settle for "average", which is what passive investors do.
Not really. Passive investors know that "average" investors usually outperform "active" investors. The arithmetic is irrefutable.

The arithmetic of active management

Best wishes.
Taylor
"Average" can be either mean or median. By staying close to the mean, passive investors "settle" way above the median.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
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Re: Individual vs. Professional investors.

Post by Beliavsky »

dl7848 wrote:
Taylor Larimore wrote:
But that doesn't take away from the fact that those who have the time, the ability and the interest to research active investments can and do outperform the market averages.
di7848:

Why does the average mutual fund manager who has the "time, ability, and the interest to research active investments" NOT outperform the market average?
Taylor, I'm not sure I get the big emphasis on "average". Above-average investors can scout out the above-average managers. These are not "hot" managers, but rather capable managers that have shown their ability to navigate a number of difficult market environments.
Morningstar gives star ratings to mutual funds and also has analyst picks of their favorite funds. How has a portfolio based on stars or picks in each asset class done compared to an index portfolio? If Morningstar's professionals cannot pick good funds, there is little reason to believe many individuals can.
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Re: Individual vs. Professional investors.

Post by dl7848 »

Beliavsky wrote:
Morningstar gives star ratings to mutual funds and also has analyst picks of their favorite funds. How has a portfolio based on stars or picks in each asset class done compared to an index portfolio? If Morningstar's professionals cannot pick good funds, there is little reason to believe many individuals can.
Belovsky, the standard wisdom is that when M* assigns a good rating to a fund, that is the kiss of death. What typically happens is M* assigns a gold star to a fund, investors flood in, AUM gets bloated and the manager doesn't know what to do with the money and makes subpar investments. Then, when performance slows, investors flood out of the fund, the manager is forced to liquidate holdings, causing the fund to decline even more.

Morals of the story?

1. Don't use M* fund ratings.
2. Watch a fund's AUM. If it gets too bloated, sell.
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Re: Bernstein: Don’t Bother With International Bonds

Post by LadyGeek »

Please stay on-topic, which is (not) owning international bonds.
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Re: "Average investors don't settle for average?"

Post by freddie »

Maybe start a new thread on Emerging Bonds versus Emerging Stocks. Past 15 years have been a big win for the bonds but you could say the same thing about US bonds versus US stocks. My market timing sense is that EM bonds are going to struggle to come close to the last 15 years performance but EM stocks might suffer the same fate.
pop77 wrote: We are off topic here but my original point was that while I agree that International bonds do not belong in the 'bond portion' of your portfolio, they have a place in the 'equity portion' of the portfolio.
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Adding Total International Bond Index Fund ?

Post by Taylor Larimore »

I considered adding Vanguard's International Bond Fund to The Three Fund Portfolio when Vanguard introduce its new international bond fund on May 31, 2013. It is always tempting to add additional funds to the Three Fund Portfolio and overlook their additional costs and complexity. International bonds represent a large asset class which Vanguard added to their Target and Life-Strategy funds so their new Total International Bond Fund deserves a look.

It is notable that Vanguard added only a small amount of the new bond fund to their Target and Life Strategy funds. Total International Bond fund represents only 2% of the 2060 Target Fund and only 4% of the Life Strategy Growth Fund. It's largest allocation is 14% in the Target Retirement Income fund. These allocations are nearly meaningless.

Adding another fund inside a single Target or Life-Strategy fund adds no complexity to the investor. However, I doubt if it is worth complicating The Three Fund Portfolio with another small fund containing several disadvantages: More political risk; higher expense ratios (.23% and .20% Adm.); longer duration (6.8 years) and relatively week credit quality compared with Total Bond Market which is already in the Three Fund Portfolio to provide safety and income. Not to be overlooked is the fact that Total Bond Market already includes about 7% foreign bonds. Mr. Bogle said this in a recent Morningstar interview:
The other thing that's typical of an industry that's going kind of marketing-wild is think about [how much] are people saying you should put in these exotic, if you will, (international) bond funds. And they say, well, maybe 5% of your bond position or 10% of your bond position. Well, that's not going to change your returns. They're expensive. They have hedging costs--I guess about half are hedged and half are not. I don't even an opinion about which is which because I wouldn't buy either.
Best wishes.
Taylor
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