Talk Me Off The Edge

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BetaTracker
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Talk Me Off The Edge

Post by BetaTracker »

Right now, our entire bond portfolio is invested in the Total Bond fund. With interest rates still near historical lows, would it be worthwhile to consider shifting our allocation to the Short-Term Bond Index fund? We have more than 10 years to work, and we're only looking at this portfolio to support our retirement. (At this point, we're following a variation of Taylor's simple three fund portfolio, and to keep things simple, we only want one bond fund.) In the past, we've tried the Vanguard Intermediate-Term Bond Index fund, drawn to its lack of mortgage securities. In the end, we decided that the fund's longer duration was just a little too volatile for our tastes. We've been happy with Total Bond, but now wondering if it might be better to sit out any prolonged rise in rates to more normal levels in the Short-Term Bond Index fund? Our goal is to focus on total returns for our entire portfolio, not income.
I'd rather be content than happy -- Lao Tzu.
livesoft
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Re: Talk Me Off The Edge

Post by livesoft »

This is a decision one has to make for oneself. Furthermore, one does not need to make a complete shift from Total Bond to Short-term.

I shifted some to short-term in March 2013: http://www.bogleheads.org/forum/viewtop ... 2#p1638192

This thread started by Rick Ferri also has some comments for and against short-term bonds: http://www.bogleheads.org/forum/viewtop ... 0&t=142228

Be sure you are not suffering from loss aversion. Here is a chart showing that interest rates have gone up in September, so bond funds dropped in value:
Image


I have to say that I am considering shifting some short-term bond fund to total bond fund after this week's FOMC meeting minutes are published.
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mhc
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Re: Talk Me Off The Edge

Post by mhc »

Betatracker,

people have been talking about shifting to shorter term bonds for a couple of years because interest rates are about to go up. I don't know when rates will go up, but so far I have been better off staying in TBM. I'm don't know how to time the market, so I will stay the course with TBM. The volatility of TBM vs Short Term Bonds is nothing compared to Equities.
52% TSM, 23% TISM, 24.5% TBM, 0.5% cash
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HardKnocker
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Re: Talk Me Off The Edge

Post by HardKnocker »

"C'mon on inside Mr. Betatracker. You have a lot to live for. Just come back inside off that ledge. Think of your family, Mr. Betatracker."

:wink:

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Regal 56
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Re: Talk Me Off The Edge

Post by Regal 56 »

Bear in mind that the purpose of bonds in your portfolio isn’t high returns. (Long term, stocks do much better than bonds.) Rather, you hold bonds to cushion your portfolio against a stock market crash. Currently, stocks have had a good long run. Almost everyone is wondering when the next big crash is due. When it comes—as surely it will—you’ll be glad you’ve got bonds to soften the blow.

It’s ironic that you’re considering moving away from total bond index. I’m currently at 90% equities, and that’s getting a bit rich for my blood. So as soon as 2015 rolls around, all my new contributions are going into a bond index fund. I went through the crash of 2008 at 80% stocks. I’d like to go through the next crash at something lower.

It also doesn’t hurt to compare the historical returns of the two funds you’re looking at:

Vanguard Short-Term Bond Index (VBISX)
3 year return: 1.00%
5 year return: 2.06%
10 year return: 3.19%
15 year return: 4.08%

Vanguard Total Bond Index (VBMFX)
3 year return: 2.27%
5 year return: 4.02%
10 year return: 4.49%
15 year return: 5.34%
Dandy
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Re: Talk Me Off The Edge

Post by Dandy »

It depends on why you want to keep it simple. There seems to be a bias toward simplicity especially on the fixed income side. On the equity side The Total Stock and Int'l Stock funds go a great job. Total Bond is very good but there are a number of fixed income products that it doesn't cover. So it is simple and has reasonable diversity but there is opportunity for additional diversity if you are not hung up on simplicity.

If the purpose of your fixed income is for stability so you can take most of your risk on the equity side you can achieve that with a more diverse fixed income allocation. Each fixed income product has pros and cons understand them so you can make good choices. Short term bonds/funds may hold their value better when interest rates rise, CDs/CD ladder may offer some stability with a government guarantee. (also with an early redemption penalty or with brokerage CDs market risk), muni funds offer tax advantages, Ibonds an TIPs offer inflation protection, Stable Value funds offer stability, Corporate bonds/funds offer higher yields but a bit more risk, GNMAs offer higher yields but with unusual risks/features.

My only caution is not to select fixed income choices like longer duration bonds/funds, high yield junk bonds/funds etc. e.g. choices that are much riskier than Total bond fund.

I own Total Bond, TIPs fund, Corporate bond fund, Short term bond funds, brokerage CD ladder, Muni bond fund. That may be too much for a person who values simplicity but you don't have to confine yourself to just the Total bond fund. But if you do no need to jump off the ledge.
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dratkinson
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Re: Talk Me Off The Edge

Post by dratkinson »

BetaTracker wrote:... We've been happy with Total Bond, ... Our goal is to focus on total returns for our entire portfolio, not income.
Stick with TBM if you have no better reason to change than your worry about interest rate risk. Yes, TBM will drop when interest rates rise, but it will recover as old bond issues are replaced by newer bond issues. Then you will have a new problem, what to do with the increased yield.

TBM has higher yield now than short term bond index, and will have a higher yield after interest rates rise, so this is not a problem. And if you are NOT planning to liquidate your bonds, then you don't care about their price fluctuations, so that too is not a problem.

Idea. When interest rates rise/TBM price drops, buy more before the price recovers. More cheap shares producing higher yields is a good thing.
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linenfort
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Re: Talk Me Off The Edge

Post by linenfort »

Moving to short-term bonds would be market timing. People who did this last year missed out! Wasn't there a Rick Ferri article posted about this fairly recently?
HardKnocker wrote:"C'mon on inside Mr. Betatracker. You have a lot to live for. Just come back inside off that ledge. Think of your family, Mr. Betatracker."
:wink:
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BetaTracker
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Re: Talk Me Off The Edge

Post by BetaTracker »

Thanks, everyone! Very thoughtful comments. We've decided to adopt dratkinson's suggestion and stay with TBM, using price dips to buy additional shares. Our bond allocation is already quite low for our ages, and we've been in no hurry to raise it given the present environment. This is looking more like an opportunity, not a problem.
I'd rather be content than happy -- Lao Tzu.
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