MickeyBoy wrote:As it happens, Larry Swedroe has a new column today in the CBS MoneyWatch entitled, 'Why ginnie maes may not be right for your portfolio." In it he recommends avoiding bonds with 'optionality,' i.e., of uncertain maturity. In his book he stated that if you insist on having MBS in your portfolio, you should consider ginnie maes only. In today's column he cites evidence that ginnie maes don't earn higher returns, despite their higher yields.
At the risk of hijacking this thread, I would like to ask your opinion of the idea of creating a diversified bond portfolio by means of separate funds or ETFs. E.g. one could combine VBISX, VBIIX, and other funds, perhaps along with an international bond fund. Such a group of funds would be just as diversified as Total Bond, but shorn of questionable bond types such as MBS.
Let me add that I have been searching the literature for good articles on diversifying one's bond holdings, but to no avail. Larry's book has some good information. Do you know of other sources?
Note that while Jack Bogle likes VBMFX he also had this to say about it:
"The Total Bond Market Index Fund is fine, but I vaguely wonder about a bond fund that has 35% of its portfolio in non-bonds (i.e., GNMA securities, with their risk of being prepaid early, when interest rates tumble).
That said, TBMF happens to have a maturity profile that is intermediate-term on balance, and so differs from IT largely in its holdings of GMNAs and Treasurys. Their ten-year records are similar, based on the tabulation I’m sending separately (IT 6.49%, TBM 5.96%, which included a single year–2002–in which we sort of forgot to stick to index principles, costing 2.00%, or about 0.20% per year. I’m assured by management that such an aberration will not recur.)"
Larry is an excellent source of information on any investing topic, especially fixed income. The best diversifier for your purposes might be TIPS, and Larry certainly has a lot to say about those and CCFs as diversifiers, (CCFs enabling one to go longer in bond maturity). Some dislike TIPS and others dislike CCFs. There are lots of relevant discussions here in past threads.