Bonds for young(er) people

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gravity
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Bonds for young(er) people

Post by gravity » Sun Aug 31, 2014 10:26 pm

Hi all,

I am 32 and currently hold some Wellington fund as my bonds portion of my AA. From reading more and more, I am switching my thinking to being more of a purist and buying a bond fund directly (balanced with some TSM) instead of a balanced fund.

My question is what bond fund!? I am reading a lot, but can't seem to figure out what exactly I should be leaning towards. There are SO many!

Here are the funds I'm deciding from:

Inflation-Protected Securities (VAIPX)
Intermediate-Term Bond Index (VBILX)
Total Bond Market Index (VBTLX)

I know each one boils down to more risk versus more reward, but is there a general rule of thumb for young investors just needing a bit of bonds to round out their AA? I don't want to speculate on interest rates and all that, but I'm also willing to take a bit more risk to make sure I get more return than say a Short-Term Bond Index, because I don't need income. Any help is appreciated!

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The529guy
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Re: Bonds for young(er) people

Post by The529guy » Sun Aug 31, 2014 10:59 pm

Welcome to the forum!

I think either IT Bond Index or TBM would be fine. I don't think many folks here would advise dedicating your whole bond allocation to TIPS, though one of the Three Fund Lazy Portfolios does.

I use some TBM and a Stable Value Fund. You can get a sense of the variety of fixed income people are using in the epic Bonds - Throw it all on the table!!! thread from earlier this year.

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tyler_cracker
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Re: Bonds for young(er) people

Post by tyler_cracker » Sun Aug 31, 2014 11:39 pm

hi gravity,

i'm 35 and faced the same decision a couple years ago. some observations:

- i concluded that total bond market is Good Enough. it's Mario and Luigi -- it has some strengths and some weaknesses but it's basically "average". if i could only own one bond fund, i'd own TBM.

- i bonds are a pretty good deal for smaller portfolios / bond allocations (i.e. if $10k/yr is enough to make a difference).

- fwiw i'm at 33% bonds with about 2/3s in TBM and 1/3 in i bonds.

- remember that the people posting here are huge investing nerds[1] who love to debate minutiae, particularly when the topic is as complex and varied as bonds and bond funds. don't get lost in the trees; Keep It Simple.

gl!


[1] i use this term affectionately, of course

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haban01
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Re: Bonds for young(er) people

Post by haban01 » Sun Aug 31, 2014 11:47 pm

Good Evening, As being a similar age to you, I would like you to focus on the "bit" of bonds as an Asset Allocation question rather than what your breakdown is between say the TIPs, Int BND or TBM. May we ask what your AA is?

If you have say an 70% Stock and 30% Bond Allocation and your bond allocation is large enough you could split it between two or three funds. If however you could qualify for lower cost admirable shares with larger balances that would be even better :). I like the idea of holding two funds for example and re-balancing equally between them as the markets run them off course. TIPS (VIPSX) has a lot of volatility it terms of share price fluctuation but will protect more if inflation does take off.

Best of Luck!!
Eric Haban | | "Stay the Course" | "Press on Regardless" | | Wisconsin Bogleheads Chapter Coordinator

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ogd
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Re: Bonds for young(er) people

Post by ogd » Mon Sep 01, 2014 1:52 am

VBTLX (which we usually call TBM) and VBILX are very similar; the decision between them essentially doesn't matter. I am about to use the word "slightly" a lot.

VBILX is slightly riskier, slightly longer so it will generally make slightly more in good times (as if you held slightly more stocks). TBM is safer, MUCH bigger (and slightly cheaper as a result) and less or more diversified, depending on who you ask, but this matters little in the world of bonds. Some don't like its large and shifting position in US government, whereas VBILX pins it at 50%.

Because TBM is large, safe, very liquid and very available, it's the default recommendation around here. It makes for a better companion for high equity allocations because of the safety. So I would say go with that. But I'd lie if I said it matters much.

VAIPX is a very different beast. Its value fluctuates with, essentially, inflation predictions integrated over the next eight years, which turns out to be surprisingly high volatility, more correlated with stocks than a good bond fund should be. The upside is that it protects you from unexpected inflation; the inflation that the market predicts is already included in the price. It's not generally recommended for younger people with relatively small income portfolios and lots of time ahead for nominal bonds to adjust to inflation, which they do in a few years.

As I often say on bond threads, don't overthink this and resist the temptation to collect a few funds to "diversify". The only other candidates for THE bond recommendation are the tax-exempt fund for taxable accounts and high tax brackets, and bank CDs which are right now very attractive if you can deal with some hassle.
Last edited by ogd on Wed Sep 03, 2014 1:14 am, edited 2 times in total.

gravity
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Re: Bonds for young(er) people

Post by gravity » Mon Sep 01, 2014 8:08 am

haban01 wrote:Good Evening, As being a similar age to you, I would like you to focus on the "bit" of bonds as an Asset Allocation question rather than what your breakdown is between say the TIPs, Int BND or TBM. May we ask what your AA is?


I am targeting about 10-20% bonds at the moment. I definitely don't want to do 30% as I am pretty aggressive and have awhile to go, but I wonder if 10% is enough. Either way, I would quality for Admirable shares though.

gravity
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Re: Bonds for young(er) people

Post by gravity » Mon Sep 01, 2014 9:00 am

ogd wrote:VBTLX (which we usually call TBM) and VBILX are very similar; the decision between them essentially doesn't matter. I am about the use the word "slightly" a lot.

VBILX is slightly riskier, slightly longer so it will generally make slightly more in good times (as if you held slightly more stocks). TBM is safer, MUCH bigger (and slightly cheaper as a result) and less or more diversified, depending on who you ask, but this matters little in the world of bonds. Some don't like its large and shifting position in US government, whereas VBILX pins it at 50%.

Because TBM is large, safe, very liquid and very available, it's the default recommendation around here. It makes for a better companion for high equity allocations because. So I would say go with that. But I'd lie if I said it matters much.

VAIPX is a very different beast. Its value fluctuates with, essentially, inflation predictions integrated over the next eight years, which turns out to be surprisingly high volatility, more correlated with stocks than a good bond fund should be. The upside is that it protects you from unexpected inflation; the inflation that the market predicts is already included in the price. It's not generally recommended for younger people with relatively small income portfolios and lots of time ahead for nominal bonds to adjust to inflation, which they do in a few years.

As I often say on bond threads, don't overthink this and resist the temptation to collect a few funds to "diversify". The only other candidates for THE bond recommendation are the tax-exempt fund for taxable accounts and high tax brackets, and bank CDs which are right now very attractive if you can deal with some hassle.


Wow, thanks for all the info, this is exactly what I wanted!

Johm221122
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Re: Bonds for young(er) people

Post by Johm221122 » Mon Sep 01, 2014 9:08 am

Are all these choices in your 401? Do you have a 401?

John

gravity
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Re: Bonds for young(er) people

Post by gravity » Mon Sep 01, 2014 9:24 am

Johm221122 wrote:Are all these choices in your 401? Do you have a 401?

John


I have TBM available in my 401k, but currently I am doing 100% Target Age Fund in my 401k. Then in my Roth(s) and Taxable I am doing TSM and another bond (hence this thread). Since I am already getting some TBM in my Target Fund, maybe I'll go with the Intermediate-Term Index to hit my AA. I would be better off doing this in my Roth, and not in the Taxable account, correct?

Johm221122
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Re: Bonds for young(er) people

Post by Johm221122 » Mon Sep 01, 2014 9:49 am

gravity wrote:
Johm221122 wrote:Are all these choices in your 401? Do you have a 401?

John


I have TBM available in my 401k, but currently I am doing 100% Target Age Fund in my 401k. Then in my Roth(s) and Taxable I am doing TSM and another bond (hence this thread). Since I am already getting some TBM in my Target Fund, maybe I'll go with the Intermediate-Term Index to hit my AA. I would be better off doing this in my Roth, and not in the Taxable account, correct?

My advice is
Pick best choice(s) in your 401
Pick tax efficient funds in taxable
Put the rest in ira
Asking portfolio question

viewtopic.php?t=6212

John

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House Blend
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Re: Bonds for young(er) people

Post by House Blend » Mon Sep 01, 2014 10:15 am

ogd wrote:As I often say on bond threads, don't overthink this and resist the temptation to collect a few funds to "diversify". The only other candidates for THE bond recommendation are the tax-exempt fund for taxable accounts and high tax brackets, and bank CDs which are right now very attractive if you can deal with some hassle.

I would add stable value funds to the short list of alternatives or supplements to TBM.

Of course, not everyone has access to a SVF in their 401K.

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