rethinking bond allocation

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thinkingmama
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rethinking bond allocation

Post by thinkingmama » Fri Oct 05, 2012 10:59 am

I've been reading Annette Tau and now I'm thinking I may want to reconsider the bond portion of our portfolio.

I'm in my late 30's, spouse is in early 50's. We share all assets.

33% tax bracket, portfolio in high six figures.

30% is devoted to bond portion of portfolio, as follows:
50% TIPS fund at Vanguard IRA
50% long term US treasury index at Fidelity, spouse's 401K

This is based on Swensen's argument that TIPS protect against inflation while long term treasuries protect against deflation.

Thau is making me reconsider this due to the fact that a long term treasury bond funds can be more volatile than novice investors realize (true of me).

Am wondering if the volatility of the long term bond fund is too great, especially given that at some point in the next 10 years, interest rates are bound to go up, meaning that principal in the long term bond fund will go down when the NAV decreases in response.

Would we be better served moving from long term fund to total bond fund, or to intermediate bond fund?

Thoughts most welcome, and thank you in advance.

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CyberBob
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Re: rethinking bond allocation

Post by CyberBob » Fri Oct 05, 2012 11:08 am

Swensen doesn't recommend long-term treasuries. This seems to be an issue with articles about his allocations. Some state that he recommends long-term, others state that he recommends short-term. His books aren't terribly specific, but the last time he was asked about it via email from a Boglehead he recommended a 'total treasury' allocation that simply matched the overall treasury market, which, at the time, had a duration of about 5 years (much more intermediate-term).

For comparison, Vanguard's long-term treasury fund has a duration of 15.6 years and the intermediate-term treasury fund has a duration of 5.2 years.

Bob

Call_Me_Op
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Re: rethinking bond allocation

Post by Call_Me_Op » Fri Oct 05, 2012 11:43 am

thinkingmama wrote:I've been reading Annette Tau...


Annette Thau has a pretty good bond book too. :wink:
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

thinkingmama
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Re: rethinking bond allocation

Post by thinkingmama » Fri Oct 05, 2012 12:28 pm

Call_Me_Op wrote:
thinkingmama wrote:I've been reading Annette Tau...


Annette Thau has a pretty good bond book too. :wink:



That's what I've been reading... it's making my reconsider.

ResNullius
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Re: rethinking bond allocation

Post by ResNullius » Fri Oct 05, 2012 12:29 pm

I certainly would not be long, regardless of age.

thinkingmama
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Re: rethinking bond allocation

Post by thinkingmama » Fri Oct 05, 2012 12:31 pm

CyberBob wrote:Swensen doesn't recommend long-term treasuries. This seems to be an issue with articles about his allocations. Some state that he recommends long-term, others state that he recommends short-term. His books aren't terribly specific, but the last time he was asked about it via email from a Boglehead he recommended a 'total treasury' allocation that simply matched the overall treasury market, which, at the time, had a duration of about 5 years (much more intermediate-term).

For comparison, Vanguard's long-term treasury fund has a duration of 15.6 years and the intermediate-term treasury fund has a duration of 5.2 years.

Bob



You're right! I just checked p. 84 of Unconventional Success and what he recommends in his "Well-Diversified, Equity-Oriented Portfolio" is 15% in US Treasury Bonds. So there it is. Change to total bond index seems merited.

Placenshow
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Re: rethinking bond allocation

Post by Placenshow » Fri Oct 05, 2012 12:51 pm

Based on your analysis above, does FBIDX (Spartan US Bond Index) warrant consideration?

thinkingmama
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Re: rethinking bond allocation

Post by thinkingmama » Fri Oct 05, 2012 12:59 pm

Placenshow wrote:Based on your analysis above, does FBIDX (Spartan US Bond Index) warrant consideration?

I think that is an excellent idea. Thank you.

thinkingmama
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Re: rethinking bond allocation

Post by thinkingmama » Fri Oct 05, 2012 2:19 pm

Here is where I got the mistaken impression that Swesen recommends long term bond index:

http://www.marketwatch.com/lazyportfoli ... -portfolio

Now I know better. Thank you, all.

thinkingmama
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Re: rethinking bond allocation

Post by thinkingmama » Fri Oct 05, 2012 2:38 pm

thinkingmama wrote:
Call_Me_Op wrote:
thinkingmama wrote:I've been reading Annette Tau...


Annette Thau has a pretty good bond book too. :wink:



That's what I've been reading... it's making my reconsider.



Just caught me own typo... apologies!

thinkingmama
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Re: rethinking bond allocation

Post by thinkingmama » Fri Oct 05, 2012 3:22 pm

thinkingmama wrote:
CyberBob wrote:Swensen doesn't recommend long-term treasuries. This seems to be an issue with articles about his allocations. Some state that he recommends long-term, others state that he recommends short-term. His books aren't terribly specific, but the last time he was asked about it via email from a Boglehead he recommended a 'total treasury' allocation that simply matched the overall treasury market, which, at the time, had a duration of about 5 years (much more intermediate-term).

For comparison, Vanguard's long-term treasury fund has a duration of 15.6 years and the intermediate-term treasury fund has a duration of 5.2 years.

Bob



You're right! I just checked p. 84 of Unconventional Success and what he recommends in his "Well-Diversified, Equity-Oriented Portfolio" is 15% in US Treasury Bonds. So there it is. Change to total bond index seems merited.


How can I find out what the average overall treasury market duration is in 2012?

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JupiterJones
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Re: rethinking bond allocation

Post by JupiterJones » Fri Oct 05, 2012 4:34 pm

thinkingmama wrote:
Placenshow wrote:Based on your analysis above, does FBIDX (Spartan US Bond Index) warrant consideration?

I think that is an excellent idea. Thank you.


For what it's worth, that's the very fund I'm using for my bond allocation.

JJ
Stay on target...

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CyberBob
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Re: rethinking bond allocation

Post by CyberBob » Fri Oct 05, 2012 5:21 pm

thinkingmama wrote:Change to total bond index seems merited.

Definitely not the Total Bond Index Fund VBMFX/VBTLX/BND as it includes corporates and mortgage-backed. For a Swensen portfolio the one best treasury only fund at Vanguard would have to be Vanguard Intermediate-Term Treasury Fund VFITX/VFIUX.

Bob

thinkingmama
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Re: rethinking bond allocation

Post by thinkingmama » Fri Oct 05, 2012 5:29 pm

Thanks, Bob. I think that's a good point, and am now leaning strongly toward the intermediate term treasury index at Fidelity.

Do you know how to find out the average bond maturity in the US treasury market?

scone
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Re: rethinking bond allocation

Post by scone » Fri Oct 05, 2012 5:31 pm

I own FIBAX, which gives me .10% ER. It has taken a bit of a hit recently, but has a good record, FWIW. Total Bond is much more diversified. So I guess it's whether you want the "flight to quality" insurance of an all-Treasury fund, versus the huge range of Total Bond. I have both, at the moment.
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore

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