Basic bond question ...

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briang_g
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Joined: Thu Jan 31, 2013 1:30 am

Basic bond question ...

Postby briang_g » Sat Feb 09, 2013 12:35 am

All,

I am a little confused about bonds.

The 3 fund index portfolio wiki suggests a single bond (Vanguard Total Bond Market Fund).

The Bogleheads investment philosophy wiki suggest two bond funds, one is the Total Bond market fund, and the other is a TIPS fund.

Assumming I have both funds, what factors determine how I should choose the ratio should of the Total Bond market fund to the TIPS fund ?

Thanks,

Brian

Day9
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Re: Basic bond question ...

Postby Day9 » Sat Feb 09, 2013 12:46 am

Both are quite low risk, low reward in the world of investing. But the TIPS is even lower risk, and lower reward. This isn't exactly true and another Boglehead will hopefully give you the nitty gritty details.

vtanzi
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Re: Basic bond question ...

Postby vtanzi » Sat Feb 09, 2013 4:01 am

Day9 wrote:Both are quite low risk, low reward in the world of investing. But the TIPS is even lower risk, and lower reward. This isn't exactly true and another Boglehead will hopefully give you the nitty gritty details.


I would be more cautious calling bonds low risk---bonds have undergone 3 decades of growth and Interest Rates are very low--once interest rates start to go up--and it is only a matter of time--bonds will go down in value--so I would characterize Bonds as more risky at the moment

jdilla1107
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Re: Basic bond question ...

Postby jdilla1107 » Sat Feb 09, 2013 8:20 am

vtanzi wrote:
Day9 wrote:Both are quite low risk, low reward in the world of investing. But the TIPS is even lower risk, and lower reward. This isn't exactly true and another Boglehead will hopefully give you the nitty gritty details.


I would be more cautious calling bonds low risk---bonds have undergone 3 decades of growth and Interest Rates are very low--once interest rates start to go up--and it is only a matter of time--bonds will go down in value--so I would characterize Bonds as more risky at the moment


Ugh. There sure are a lot of interest rate timers on this forum.

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House Blend
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Re: Basic bond question ...

Postby House Blend » Sat Feb 09, 2013 8:54 am

briang_g wrote:Assumming I have both funds, what factors determine how I should choose the ratio should of the Total Bond market fund to the TIPS fund ?


There's no right answer. Having your fixed income holdings be anywhere from 0% to 50% TIPS would put you in the Boglehead mainstream.

The Vanguard Target Retirement funds have no TIPS at all until you get to around 5-10(?) years from the target date. Presumably the reasoning is that young accumulators' income and savings will keep pace with or beat inflation (and that heavy stock allocations will on average beat inflation), so have less need for TIPS.

Old folks with "enough" need to preserve the buying power of what they've got. So more TIPS for them.

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telemark
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Re: Basic bond question ...

Postby telemark » Sat Feb 09, 2013 1:51 pm

There are no TIPS in the Total Bond Market fund, so adding them gives you some additional diversification. TIPS are a relatively new asset class and there's much debate on how much to hold or whether you should hold them at all. Personally, I like a ratio of 3/4 TBM to 1/4 TIPS, enough to give some diversification benefit without betting the farm on TIPS, but I'm not prepared to defend that rigorously.

grok87
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Re: Basic bond question ...

Postby grok87 » Sat Feb 09, 2013 2:42 pm

well the market cap of the aggregate bond fund is 16.8 trillion vs. 0.7 trillion for tips.
so market weighting would say like 95/5. But i follow swensen and bodie and think much higher allocations to tips are warranted, probably 50% or more...
grok, CFA | Danon delenda est

JimInIllinois
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Re: Basic bond question ...

Postby JimInIllinois » Sat Feb 09, 2013 4:39 pm

jdilla1107 wrote:Ugh. There sure are a lot of interest rate timers on this forum.

It would be timing if bonds were yielding 5% and you were sure rates were heading up to 7% so you bought a CD yielding 4%. Nobody is doing that.

For stocks, future value is harder to predict the further out you go. It's basically a random walk. For bonds, future value is easier to predict since, barring default, we know the dates and amounts of all future payouts. Why would I buy a 5-year bond when I can buy a 5-year CD that yields more?

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Bustoff
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Re: Basic bond question ...

Postby Bustoff » Sun Feb 10, 2013 6:38 am

briang_g wrote:All,
I am a little confused about bonds.
The 3 fund index portfolio wiki suggests a single bond (Vanguard Total Bond Market Fund).
The Bogleheads investment philosophy wiki suggest two bond funds, one is the Total Bond market fund, and the other is a TIPS fund.
Assumming I have both funds, what factors determine how I should choose the ratio should of the Total Bond market fund to the TIPS fund ?
Thanks,
Brian


See this for Vanguards answer to your question. They don't include TIPS in Target funds until 2015 or you're around 60 yoa.
https://institutional.vanguard.com/VGApp/iip/site/institutional/investments/portfoliodetails?fundId=0308#GlidePath

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dbr
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Re: Basic bond question ...

Postby dbr » Sun Feb 10, 2013 11:31 am

briang_g wrote:All,

I am a little confused about bonds.

The 3 fund index portfolio wiki suggests a single bond (Vanguard Total Bond Market Fund).

The Bogleheads investment philosophy wiki suggest two bond funds, one is the Total Bond market fund, and the other is a TIPS fund.

Assumming I have both funds, what factors determine how I should choose the ratio should of the Total Bond market fund to the TIPS fund ?

Thanks,

Brian


It is simply a preference regarding the degree to which you want some of your assets to be insensitive to direct effects of inflation. That makes some sense for people who are otherwise at risk to inflation. That would mean specifically those who are retired, especially those who might otherwise have an income stream that is sensitive to inflation, such as a fixed pension.

As far as portfolio examples go, those things are not recommendations that people should do this or should do that. Those portfolios are examples of how a person might intelligently select their investments. Most of the various alternatives are not much different in end result. Within the examples the factors that do matter are things like stock/bond ratio, which is a property of any portfolio.

If the Wiki is causing people to think there are some kind of contradictory recommendations given here, then there is a major misunderstanding of what is intended by listing these various examples. This is a little like a person finding an excellent recipe for fish thinking that the book is telling them they should never eat pasta.

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Taylor Larimore
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Total Bond and TIPS ratio ?

Postby Taylor Larimore » Sun Feb 10, 2013 11:56 am

briang_g wrote:All,

I am a little confused about bonds.

The 3 fund index portfolio wiki suggests a single bond (Vanguard Total Bond Market Fund).

The Bogleheads investment philosophy wiki suggest two bond funds, one is the Total Bond market fund, and the other is a TIPS fund.

Assumming I have both funds, what factors determine how I should choose the ratio should of the Total Bond market fund to the TIPS fund ?

Brian:
In my opinion, any "split" between 25% TIPS to 50% TIPS is reasonable. At Mel's suggestion, we have used a 50% TBM/50% TIPS allocation (for maximum non-correlation) since Vanguard's Inflation-Protected Securities Fund's 2000 inception. This is the result:

YEAR..INFLATION..TBM ....TIPS
2001......2.8%.......8.4%.....7.7%
2002......1.6%.......8.3%....16.6%
2003......2.3%.......4.0%.....8.0%
2004......2.7%.......4.2%.....8.3%
2005......3.4%.......2.4%.....2.6%
2006......3.2%.......4.3%.....4.3%
2007... ..2.8%.......5.9%....11.6%
2008......0.1%.......5.1%....-2.8%
2009......2.7%.......5.9%....10.8%
2010......1.5%.......6.5%.....6.2%
2011......3.0% ......7.6%....13.2%
2012......1.7%.......4.1%.....6.8%

Past performance does not guarantee future performance.

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle


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