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Questions on Bonds

Posted: Fri May 03, 2013 11:58 am
by FrankR66
Hi, newbie here. I am doing my research before transferring over my traditional and roth IRAs over to Vanguard.

A few questions came up when reading up on bonds. I am 48 and am looking at the Vanguard Target Retirement 2035 Fund (VTTHX). It has only 14.5% in bonds.

Question #1: If Bogle recommends "roughly your age in bonds" that would be roughly 48%. Why such a large difference in strategies?

Question #2: What risk are bonds reducing? If I look at the performance before and after the crash of 2008 I see that all the Target funds did worse than the S&P 500 or the Dow Jones US Total Stock Market Index.

BTW: I am okay with having less exposure to bonds. In fact, I am currently not seeing the value in them.

Please explain, what am I missing? Was the crash of 2008 just an anomoly that affected everything and the usual rules just did not apply?

Re: Questions on Bonds

Posted: Fri May 03, 2013 2:42 pm
by ofcmetz
FrankR66 wrote:Hi, newbie here. I am doing my research before transferring over my traditional and roth IRAs over to Vanguard.

A few questions came up when reading up on bonds. I am 48 and am looking at the Vanguard Target Retirement 2035 Fund (VTTHX). It has only 14.5% in bonds.

Question #1: If Bogle recommends "roughly your age in bonds" that would be roughly 48%. Why such a large difference in strategies?

Question #2: What risk are bonds reducing? If I look at the performance before and after the crash of 2008 I see that all the Target funds did worse than the S&P 500 or the Dow Jones US Total Stock Market Index.

BTW: I am okay with having less exposure to bonds. In fact, I am currently not seeing the value in them.

Please explain, what am I missing? Was the crash of 2008 just an anomoly that affected everything and the usual rules just did not apply?
Bogle's recommendation is a great starting point and you could do a lot worse than age in bonds. Owning bonds for their investment returns is only a small part of the reason I use them in my portfolio. I see bonds as serving a few purposes. One of them is they give you something to sell during a market crash in order to rebalance into equities. Another is that they moderate your losses during a market crash, which makes it easier for one to not panic and sell at the worst time possible. A third reason which is related to the second is that they help one sleep better by ensuring that your possible portfolio losses are moderated.

With a 50% market crash you lose 50% with an all equity portfolio while having nothing left to buy more stocks with. With a 50/50 stock bond portfolio you only lose 25% of your value and can easily rebalance by selling some bonds to buy more stocks. Somewhere between these two ranges is a good place to be at your age. Its better to error on the side of being a little more conservative than being a little more aggressive in my opinion. If you weathered the 08 through 09 crash with a decent sized portfolio and did not sell out then that would tell you that you have a decent amount of risk tolerance. I caution people that its one thing to talk about how it feels hold a high equity portfolio through a crash and a total other thing to actually feel it happen.

If you are certain that you could hold onto to the Target Retirement Fund while continuing to invest through the thick and thin, then you will be fine. They are great, buy, hold, and forget funds.

Best of luck in your decisions.

Re: Questions on Bonds

Posted: Fri May 03, 2013 3:36 pm
by dbr
FrankR66 wrote:Hi, newbie here. I am doing my research before transferring over my traditional and roth IRAs over to Vanguard.

A few questions came up when reading up on bonds. I am 48 and am looking at the Vanguard Target Retirement 2035 Fund (VTTHX). It has only 14.5% in bonds.

Question #1: If Bogle recommends "roughly your age in bonds" that would be roughly 48%. Why such a large difference in strategies?

Apparently Vanguard does not agree with Mr. Bogle's advice. It should be kept in mind that the dates on TR funds are somewhat misleading marketing labels that should not be interpreted as Vanguard offering investment advice although the investor is likely to take it as exactly that. A bettere approach is to choose the fund with the desired asset allocation and ignore the dates.

Question #2: What risk are bonds reducing? If I look at the performance before and after the crash of 2008 I see that all the Target funds did worse than the S&P 500 or the Dow Jones US Total Stock Market Index.

Bonds do dilute the volatility but only in proportion to their presence. 14% bonds is hardly enough to have much of an effect. Note that TR funds also invest in international stocks so US stock market is not an exact benchmark for the fund.

BTW: I am okay with having less exposure to bonds. In fact, I am currently not seeing the value in them.

If for your objectives there is no benefit in reducing volatility with a reduction in expected return, then there would not be value in bonds for you. At age 48 there are not many investors who would want the volatility of 100% stocks, however.

Please explain, what am I missing? Was the crash of 2008 just an anomoly that affected everything and the usual rules just did not apply?

I doubt 2008 would be viewed as an anomaly except perhaps that the recovery was very rapid.


Re: Questions on Bonds

Posted: Fri May 03, 2013 3:41 pm
by FrankR66
ofcmetz wrote: With a 50% market crash you lose 50% with an all equity portfolio while having nothing left to buy more stocks with. With a 50/50 stock bond portfolio you only lose 25% of your value and can easily rebalance by selling some bonds to buy more stocks. Somewhere between these two ranges is a good place to be at your age. Its better to error on the side of being a little more conservative than being a little more aggressive in my opinion. .
But I am not seeing this reflected in the performance charts. It seems like the funds underperform the S&P 500 in a down market. Shouldn't this be somehow mitigated by the bond portion of the fund? Or am i misundersanding how the bonds affect the mix?

Re: Questions on Bonds

Posted: Fri May 03, 2013 3:48 pm
by FrankR66
dbr wrote:[Question #2: What risk are bonds reducing? If I look at the performance before and after the crash of 2008 I see that all the Target funds did worse than the S&P 500 or the Dow Jones US Total Stock Market Index.

Bonds do dilute the volatility but only in proportion to their presence. 14% bonds is hardly enough to have much of an effect. Note that TR funds also invest in international stocks so US stock market is not an exact benchmark for the fund.
The Vanguard Target Retirement 2020 Fund has 37% in bonds yet it took a dive like the rest. What gives?

Re: Questions on Bonds

Posted: Fri May 03, 2013 3:53 pm
by gerrym51
if you buy a bond and hold it to maturity it's value(to you does not go down)..

an example - you buy a 1000 bond at 5 percent 10 years. if you hold it to maturity you get the 1000 dollars back plus the 5 percent interest you got over the 10 year period.

say 5 years into the period 1000 dollar bonds start giving 6 percent. now your bond is worth less on the secondary market. obviously if somebody was going to buy a 1000 bond then they would buy the one that gives 6 percent.

however if you hold your bond to maturity it is still worth 1000 dollars to you


the 2008 crash was mostly caused by derivatives tied to failed mortgages.

Re: Questions on Bonds

Posted: Fri May 03, 2013 3:56 pm
by Twins Fan
Can you give us an example of what you mean? What target date fund, and from what to what timeline are you using.

Also, remember that the S&P 500 does not directly line up with any target date fund. The target date funds have total stock, total international, and total bond. So, that's not a real good comparison to make.

How do/did you have your Roth and traditional IRAs invested/set up before?

Re: Questions on Bonds

Posted: Fri May 03, 2013 4:04 pm
by MindBogler
FrankR66 wrote:
dbr wrote:[Question #2: What risk are bonds reducing? If I look at the performance before and after the crash of 2008 I see that all the Target funds did worse than the S&P 500 or the Dow Jones US Total Stock Market Index.

Bonds do dilute the volatility but only in proportion to their presence. 14% bonds is hardly enough to have much of an effect. Note that TR funds also invest in international stocks so US stock market is not an exact benchmark for the fund.
The Vanguard Target Retirement 2020 Fund has 37% in bonds yet it took a dive like the rest. What gives?
If I look at Vanguard Target Retirement 2020 vs S&P 500 over a 10 year period on Morningstar, it lost much less during the crash and now they're basically equal. What charts are you looking at? :P

Re: Questions on Bonds

Posted: Fri May 03, 2013 4:08 pm
by gerrym51
my 2020 target fund troweprice took a beating 2008-2009-it is now worth more. it was in 2008 close to 70 percent stocks. of course target funds took hits

Re: Questions on Bonds

Posted: Fri May 03, 2013 4:13 pm
by FrankR66
Twins Fan wrote:Can you give us an example of what you mean? What target date fund, and from what to what timeline are you using.

Also, remember that the S&P 500 does not directly line up with any target date fund. The target date funds have total stock, total international, and total bond. So, that's not a real good comparison to make.
Vanguard Target Retirement 2035 Fund https://personal.vanguard.com/us/funds/ ... =INT#tab=1
Vanguard Target Retirement 2020 Fund https://personal.vanguard.com/us/funds/ ... =INT#tab=1

I am sure that I am not reading them correctly; that is why I am asking. In a down market, wouldn't the S&P 500 dip below these funds?

The 2020 fund is probably not a good example because it looks like it was started in 2006.
Twins Fan wrote: Hos do/did you have your Roth and traditional IRAs invested/set up before?
I will be addressing this in a later post. I had this long post with a few questions written out, but I have been finding answers as I do more reading.

Re: Questions on Bonds

Posted: Fri May 03, 2013 4:33 pm
by dbr
FrankR66 wrote:
The Vanguard Target Retirement 2020 Fund has 37% in bonds yet it took a dive like the rest. What gives?
It looks like a fall of about 25% vs. 40% for S&P 500. So 63% of 40% is about 25%, which is exactly the dilution one would expect.

If you really want stock volatility as in 2008 to disappear completely, you can't be in stocks at all.

Re: Questions on Bonds

Posted: Fri May 03, 2013 5:11 pm
by roymeo
FrankR66 wrote: Vanguard Target Retirement 2035 Fund https://personal.vanguard.com/us/funds/ ... =INT#tab=1
Vanguard Target Retirement 2020 Fund https://personal.vanguard.com/us/funds/ ... =INT#tab=1

I am sure that I am not reading them correctly; that is why I am asking. In a down market, wouldn't the S&P 500 dip below these funds?

The 2020 fund is probably not a good example because it looks like it was started in 2006.
Yeah, if you're looking at the 10-year span with the 2020 fund and you roll your mouse over the beginning of the blue line, you'll see you're comparing the performance of $10,000 in the TR2020 vs. $14646.82 in the S&P500. Try the 5 year so they both start at the same point.

Same deal with the 2035: $10,000 vs $10943.26. The 5 year shows that they don't really stray that much.

Re: Questions on Bonds

Posted: Fri May 03, 2013 5:20 pm
by Default User BR
FrankR66 wrote:But I am not seeing this reflected in the performance charts. It seems like the funds underperform the S&P 500 in a down market. Shouldn't this be somehow mitigated by the bond portion of the fund? Or am i misundersanding how the bonds affect the mix?
You're either looking at the wrong charts or not interpreting them correctly.

Here is a 10-year total-return plot for TR 2020, 2035, and the S&P 500.

It shows about what I would expect.


Brian

Re: Questions on Bonds

Posted: Fri May 03, 2013 7:52 pm
by abuss368
Default User BR wrote:
FrankR66 wrote:But I am not seeing this reflected in the performance charts. It seems like the funds underperform the S&P 500 in a down market. Shouldn't this be somehow mitigated by the bond portion of the fund? Or am i misundersanding how the bonds affect the mix?
You're either looking at the wrong charts or not interpreting them correctly.

Here is a 10-year total-return plot for TR 2020, 2035, and the S&P 500.

It shows about what I would expect.


Brian
Past performance is no guarantee of future returns.

Re: Questions on Bonds

Posted: Fri May 03, 2013 10:47 pm
by roymeo
abuss368 wrote:
Past performance is no guarantee of future returns.
Obtuse. Not helpful.

No attempt to project future returns was really in play here, this was a simple attempt to understand how why bad reading of a particular chart made it look as if an all equity index was less affected than a blend fund during an equity downturn.

Re: Questions on Bonds

Posted: Sat May 04, 2013 8:16 am
by FrankR66
MindBogler wrote: If I look at Vanguard Target Retirement 2020 vs S&P 500 over a 10 year period on Morningstar, it lost much less during the crash and now they're basically equal. What charts are you looking at? :P
Vanguard Target Retirement 2020 Fund https://personal.vanguard.com/us/funds/ ... =INT#tab=1

I checked out the same fund on Morningstar and it looked more like I was expecting. I think the Vanguard chart is misleading because of the chart date.

Are the charts on Vanguard reliable?

Re: Questions on Bonds

Posted: Sat May 04, 2013 8:18 am
by FrankR66
roymeo wrote:
FrankR66 wrote: The 5 year shows that they don't really stray that much.

Yes, this is what I was expecting to see; it makes more sense now.

Re: Questions on Bonds

Posted: Sat May 04, 2013 8:22 am
by FrankR66
Default User BR wrote: You're either looking at the wrong charts or not interpreting them correctly.
I figured this is the problem, that is why I am asking. I am glad it is only an interpretation problem and not a performance problem.
Default User BR wrote: Here is a 10-year total-return plot for TR 2020, 2035, and the S&P 500.

It shows about what I would expect.


Brian

Now we are talking! This is the clearest example yet, and answers my questions.

I am wondering why the Vanguard charts aren't as clear.

Re: Questions on Bonds

Posted: Sat May 04, 2013 11:53 am
by Default User BR
FrankR66 wrote:
Default User BR wrote: Here is a 10-year total-return plot for TR 2020, 2035, and the S&P 500.

It shows about what I would expect.
Now we are talking! This is the clearest example yet, and answers my questions.
The nice thing about the using the Morningstar "share a chart" instead of an image is that you can play with what I presented. You can add other funds for comparison. Try VGSIX (VG REIT) and really see some action in 2009.


Brian