TBM too much treasury?

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Mikle
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TBM too much treasury?

Post by Mikle » Thu Oct 16, 2014 9:41 am

I've come across a few articles ( one quoting Jack Bogle ) suggesting that the Total Bond Index Fund is too heavy in government bonds and investors should consider adding Intermediate corporate bonds to achieve a better diversification .
Any opinions on this?

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Re: TBM too much treasury?

Post by Gill » Thu Oct 16, 2014 9:55 am

I agree. I've avoided the fund for this reason.
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Re: TBM too much treasury?

Post by Call_Me_Op » Thu Oct 16, 2014 9:58 am

Mikle wrote:I've come across a few articles ( one quoting Jack Bogle ) suggesting that the Total Bond Index Fund is too heavy in government bonds and investors should consider adding Intermediate corporate bonds to achieve a better diversification .
Any opinions on this?
Too heavy compared to what? It holds treasuries in proportion to their value in the market. What is being suggested (deviating from capitalization weighting) is exactly what Jack tells us NOT to do everywhere else. Why is he condoning speculation in one asset class but not in others?
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Re: TBM too much treasury?

Post by Tom_T » Thu Oct 16, 2014 10:00 am

There have been countless discussions here on that very topic! Plenty of opinions. Lots of old threads to look over. Here is one from last year that is still worth a look.

http://www.bogleheads.org/forum/viewtop ... 1&t=119783

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Re: TBM too much treasury?

Post by ruralavalon » Thu Oct 16, 2014 11:00 am

Lots of other discussions over the last few years, and several comments by Mr. Bogle reported in the media. You might want to try the search box for more on this.

"TBM too much treasury?"

"Compared to what" is a fair question. TBM does mimic a large part of the bond market (excludes TIPS and munis). But it's also fair to say that the bond market has been deliberately distorted, to produce artificially low interest rates.

I am one of those who endorse the idea of adding more corporates to the bond mix, we are currently about 40% Treasury STRIPS and 60% Vanguard Intermediate-Term Investment Grade Admiral VFIDX.
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Re: TBM too much treasury?

Post by ogd » Thu Oct 16, 2014 11:27 am

This forum is bipolar when it comes to TBM.

On one hand, you have those who claim it doesn't have enough corporates because of various problems, real or perceived, with the size of the Treasury market.

On the other, you have those who say you're better off with a large amount of Treasuries, perhaps even only Treasuries, alongside a normal-to-large equity allocation, because corporate credit risk isn't doing anything for you anyway.

As a rule, when this forum is bipolar about something, chances are high it doesn't matter. As always if you're not a credit analyst, you should consider both Treasuries and corporates as fairly priced in the market. Total Bond Market is safe, liquid, cheap and perhaps most importantly, widely available in 401k's if you also count its siblings from other families following the same index. It will do the job.

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Re: TBM too much treasury?

Post by nisiprius » Thu Oct 16, 2014 11:48 am

The funny thing is that the same sources of media noise that have been knocking Treasuries since 2011 or so have also been wringing their hands over issues with liquidity issues in the bond market and how "liquidity problems with bonds" could affect "bond mutual funds" and create losses in value as managers sell off to meet redemptions as investors run for the exits, blah blah...

For example... and I'm putting the quotes around the word "bonds" myself... "Bond" trading is about to get a whole lot harder.

--> On close inspection, all the warnings about liquidity in "bonds" are talking about low-credit-quality "junk" bonds. None of which are in Total Bond. Or municipals. None of which are in Total Bond. Or emerging markets bonds. None of which are in Total Bond.

Meanwhile, those boring Treasuries and other government bonds are among the most liquid of bonds and thus least likely to run into these problems. In fact, part of the knock on them is that their return is too low... because they are supposedly overvalued... in part because investors seem to be willing to pay "too high" a price for liquidity.

As far as I know, the issue with Total Bond having "too much" in Treasuries, and the only issue, is that as a result of that fact, it has lower return than you might get if you were willing to be a sport and take a chance.

I admit that until fairly recently I was pretty blasé about bond liquidity issues--I'm a mutual fund investor, the fund is required to redeem at the NAV, my fund is liquid, I figured that whether the assets in it are liquid was the fund manager's problem, not mine. I'm not quite as sure about that any more, so I'm glad that my core bond holdings have a lot of Treasuries.
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Re: TBM too much treasury?

Post by mptfan » Thu Oct 16, 2014 11:51 am

Call_Me_Op wrote:Too heavy compared to what? It holds treasuries in proportion to their value in the market. What is being suggested (deviating from capitalization weighting) is exactly what Jack tells us NOT to do everywhere else. Why is he condoning speculation in one asset class but not in others?
The "total bond market fund" does not hold any high yield bonds, despite the fact that there is a significant amount of value allocated to high yield bonds in the bond market. Would you be in favor of adding high yield bonds to the total bond market fund to reflect their value in the market?

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Re: TBM too much treasury?

Post by Call_Me_Op » Thu Oct 16, 2014 11:53 am

mptfan wrote:
Call_Me_Op wrote:
Mikle wrote:I've come across a few articles ( one quoting Jack Bogle ) suggesting that the Total Bond Index Fund is too heavy in government bonds and investors should consider adding Intermediate corporate bonds to achieve a better diversification .
Any opinions on this?
Too heavy compared to what? It holds treasuries in proportion to their value in the market. What is being suggested (deviating from capitalization weighting) is exactly what Jack tells us NOT to do everywhere else. Why is he condoning speculation in one asset class but not in others?
The "total bond market fund" does not hold any high yield bonds, despite the fact that there is a significant amount of value allocated to high yield bonds in the bond market. Would you be in favor of adding high yield bonds to the total bond market fund to reflect their value in the market?
Yes, I would. Why not? There's additional risk but it is compensated.

If I want to limit my risk to duration risk, I'll stick with treasuries.
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Re: TBM too much treasury?

Post by mptfan » Thu Oct 16, 2014 11:54 am

Call_Me_Op wrote:Yes, I would. Why not? There's additional risk but it is compensated.
Why not indeed. You are being consistent in your view, and I agree.

What bothers me is when some people preach the gospel of "investing in the market according to market allocations" when it comes to equities, but when it comes to bonds, all of a sudden they have some justification for why they ignore the bond market weightings and selectively pick and choose which bond market allocations should be included, and they ignore the bond market allocations to a significant amount of high yield bonds.

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Re: TBM too much treasury?

Post by ogd » Thu Oct 16, 2014 12:03 pm

mptfan wrote:
Call_Me_Op wrote:Yes, I would. Why not? There's additional risk but it is compensated.
Why not indeed. You are being consistent in your view, and I agree.

What bothers me is when some people preach the gospel of "investing in the market" when it comes to equities, but when it comes to bonds, all of a sudden they have some justification for why they ignore the bond market weightings and selectively pick and choose which bond market allocations should be included,and they ignore the bond market allocations to a significant amount of high yield bonds.
You are not paying attention during the reading of the gospel. The reason to invest in the entire stock market is that every bit of diversification helps and it's the most tax efficient way to get that diversification.

In the bond market, where we do have perfectly safe assets that can be one's entire fixed income portfolio and you can't get around receiving taxable income (i.e. turnover is natural, high, and doesn't matter for tax efficiency), neither of these factors exist. To insist that one must follow the same exact methodology is IMHO an example of Cargo cult investing.

Yes, this also argues against the construction of Total Bond Market in the first place, from the opposite direction as yours. Shrug. Like I said, this stuff mostly doesn't matter -- find a cheap safe fund and stay there.

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Re: TBM too much treasury?

Post by midareff » Thu Oct 16, 2014 12:04 pm

TBM is what TBM is. What it is NOT is a fund covering the TOTAL bond market. It does not contain TIPS, International Developed or Emerging Market Bonds, High Yield, Municipals and it under allocates Corporate. Discussions of it being market weighted are a bit silly in those circumstances. Even though I don't choose to own it at this point in time it is probably a very excellent core bond holding for very many.

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Re: TBM too much treasury?

Post by mptfan » Thu Oct 16, 2014 12:05 pm

ogd wrote:
mptfan wrote:
Call_Me_Op wrote:Yes, I would. Why not? There's additional risk but it is compensated.
Why not indeed. You are being consistent in your view, and I agree.

What bothers me is when some people preach the gospel of "investing in the market" when it comes to equities, but when it comes to bonds, all of a sudden they have some justification for why they ignore the bond market weightings and selectively pick and choose which bond market allocations should be included,and they ignore the bond market allocations to a significant amount of high yield bonds.
You are not paying attention during the reading of the gospel. The reason to invest in the entire stock market is that every bit of diversification helps and it's the most tax efficient way to get that diversification.

In the bond market, where we do have perfectly safe assets that can be one's entire fixed income portfolio and you can't get around receiving taxable income (i.e. turnover is natural, high, and doesn't matter for tax efficiency), neither of these factors exist. To insist that one must follow the same exact methodology is IMHO an example of Cargo cult investing.

Yes, this also argues against the construction of Total Bond Market in the first place, from the opposite direction as yours. Shrug. Like I said, this stuff mostly doesn't matter -- find a cheap safe fund and stay there.
I rest my case.

Apparently diversification is good for equities, but bad for bonds. :oops:

By the way, tax efficiency is not the primary justification for investing in equities according to market weights. I think you were not paying attention during the reading of the gospel.
Last edited by mptfan on Thu Oct 16, 2014 12:07 pm, edited 1 time in total.

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Re: TBM too much treasury?

Post by steve r » Thu Oct 16, 2014 12:06 pm

Mikle wrote:I've come across a few articles ... investors should consider adding Intermediate corporate bonds to achieve a better diversification .....
There is no evidence to suggest that "corporate" bonds obtains better diversification from equities in the same set of "corporations" than treasuries. Theoretically, it is quite the opposite and a century of correlation data backs this up.

This is not to say treasuries are a good buy or bad buy compared corporate bonds, money markets or cash (particularly at the current time) .... only that the diversification appears more robust with treasuries.
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Re: TBM too much treasury?

Post by letsgobobby » Thu Oct 16, 2014 12:07 pm

TBM is my risk free asset. I wonder why I don't just hold treasuries. Corporates went down in 2008. I think Larry has written that the more stocks you own, the more important your bonds be risk-free, ie, treasuries. For those with moderate equity allocations, a little extra corporates may not hurt - but why not just raise equity allocation then?

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Re: TBM too much treasury?

Post by ogd » Thu Oct 16, 2014 12:09 pm

mptfan wrote:Apparently diversification is good for equities, but bad for bonds.
Not bad, just unimportant. Your entire bond portfolio can be in one asset -- a bank account or a single Treasury -- and you'll do just fine. There is no perfectly safe stock that I'm aware of, or sector, or even country.

Don't reduce this to an overly simplistic argument about consistency. Let's aim for a higher reading level.

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Re: TBM too much treasury?

Post by mptfan » Thu Oct 16, 2014 12:11 pm

ogd wrote:
mptfan wrote:Apparently diversification is good for equities, but bad for bonds.
Not bad, just unimportant. Your entire bond portfolio can be in one asset -- a bank account or a single Treasury -- and you'll do just fine. There is no perfectly safe stock that I'm aware of, or sector, or even country.

Don't reduce this to an overly simplistic argument about consistency. Let's aim for a higher reading level.
My reading level is quite high, thank you. And consistency is not a lesser aim.

Apparently diversification is important for stocks, but unimportant for bonds. :oops:

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Re: TBM too much treasury?

Post by mptfan » Thu Oct 16, 2014 12:20 pm

Following is a quote from the Bogleheads Wiki:

"Rather than trying to pick the specific securities or sectors of the market (US stocks, international stocks, and US bonds) that will outperform in the future, Bogleheads buy funds that are widely diversified, or even approximate the whole market. This guarantees they will receive the average return of all investors."

I am simply quoting Boglehead philosophy when I say that you should not try to pick the specific sectors of the bond market that will outperform in the future, but rather, you should attempt to approximate the whole bond market. This should not be a controversial statement. Thus, if the overall bond market allocates some value to high yield bonds, why are Bogleheads "trying to pick the specific securities or sectors of the market" by excluding the bond market allocation to high yield bonds?

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Re: TBM too much treasury?

Post by ogd » Thu Oct 16, 2014 12:29 pm

mptfan wrote:"Rather than trying to pick the specific securities or sectors of the market (US stocks, international stocks, and US bonds) that will outperform in the future, Bogleheads buy funds that are widely diversified, or even approximate the whole market. This guarantees they will receive the average return of all investors."
While it guarantees that it's the average return, this isn't the reason to do it. If I looked at this statement in isolation from everything else I know about the stock market, I'd be unimpressed to say the least. Similarly, averaging in the returns of junk bond investors is unimportant to me.

The real reason is that 1) you can get maximum diversification, 2) with minimum trading.

In the bond market, you have assets that are extremely safe, namely Treasuries and even more so FDIC-insured cash. This makes the bond market qualitatively different than the stock market and diversification is unimportant when these assets are in the picture. Like I said, consistency between strategies in two qualitatively different investments is unimportant to me. I don't feel the need to peel apples like I do oranges either.

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Re: TBM too much treasury?

Post by mptfan » Thu Oct 16, 2014 12:43 pm

ogd wrote:
mptfan wrote:"Rather than trying to pick the specific securities or sectors of the market (US stocks, international stocks, and US bonds) that will outperform in the future, Bogleheads buy funds that are widely diversified, or even approximate the whole market. This guarantees they will receive the average return of all investors."
While it guarantees that it's the average return, this isn't the reason to do it. If I looked at this statement in isolation from everything else I know about the stock market, I'd be unimpressed to say the least. Similarly, averaging in the returns of junk bond investors is unimportant to me.

The real reason is that 1) you can get maximum diversification, 2) with minimum trading.

In the bond market, you have assets that are extremely safe, namely Treasuries and even more so FDIC-insured cash. This makes the bond market qualitatively different than the stock market and diversification is unimportant when these assets are in the picture. Like I said, consistency between strategies in two qualitatively different investments is unimportant to me. I don't feel the need to peel apples like I do oranges either.
You are entitled to your opinion, and you are entitled to invest in whatever way is best for you, but to the extent that diversification of the entire bond market is unimportant to you, and to the extent that you do not seek to "approximate the whole bond market," your view deviates from the Boglehead principle quoted from the Bogleheads wiki above.

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Re: TBM too much treasury?

Post by G-Money » Thu Oct 16, 2014 12:55 pm

mptfan wrote:Thus, if the overall bond market allocates some value to high yield bonds, why are Bogleheads "trying to pick the specific securities or sectors of the market" by excluding the bond market allocation to high yield bonds?
In addition to the reasons eloquently stated by ogd, I would also suggest because the high yield sector is too small to matter. Take a look at the pie chart posted by asset_chaos: http://www.bogleheads.org/forum/viewtopic.php?t=63306

High yield is less than 5% of the domestic fixed income market. So if you allocate 40% of your portfolio to bonds, you'd invest a whopping 1.93% in high yield. An investor would need a portfolio of more than $150,000 just to meet Vanguard's fund minimum without putting the allocation out of whack. And I think most folks here agree that a 2% allocation isn't going to move the needle at the portfolio level in any perceptible way.
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Re: TBM too much treasury?

Post by mptfan » Thu Oct 16, 2014 12:58 pm

G-Money wrote:
mptfan wrote:Thus, if the overall bond market allocates some value to high yield bonds, why are Bogleheads "trying to pick the specific securities or sectors of the market" by excluding the bond market allocation to high yield bonds?
In addition to the reasons eloquently stated by ogd, I would also suggest because the high yield sector is too small to matter. Take a look at the pie chart posted by asset_chaos: http://www.bogleheads.org/forum/viewtopic.php?t=63306

High yield is roughly 5% of the domestic fixed income market. So if you allocate 40% of your portfolio to bonds, you'd invest a whopping 2% in high yield. An investor would need a portfolio of at least $150,000 just to meet Vanguard's fund minimum without putting the allocation out of whack. And I think most folks here agree that a 2% allocation isn't going to move the needle at the portfolio level in any perceptible way.
Or...and I'm just spitballing here... Vanguard could add high yield bonds to the "total" bond market fund in an amount equal to the market allocation, and an investor would not need to do anything and their portfolio would not be out of whack since, by definition, it would be invested in bonds according to the market allocation.

Regarding your "2% of anything doesn't move the needle" argument...I could say the same thing about REITs as a percentage of an investor's overall portfolios...so why does Vanguard include REIT stocks as part of the total market fund? What about utility stocks? What percentage of an investors overall portfolio do they represent? Would you be in favor of removing them from the total stock market fund if it "doesn't move the needle much"? Wait, let me guess, that's different.... ;)

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Re: TBM too much treasury?

Post by G-Money » Thu Oct 16, 2014 1:08 pm

mptfan wrote:
G-Money wrote:
mptfan wrote:Thus, if the overall bond market allocates some value to high yield bonds, why are Bogleheads "trying to pick the specific securities or sectors of the market" by excluding the bond market allocation to high yield bonds?
In addition to the reasons eloquently stated by ogd, I would also suggest because the high yield sector is too small to matter. Take a look at the pie chart posted by asset_chaos: http://www.bogleheads.org/forum/viewtopic.php?t=63306

High yield is roughly 5% of the domestic fixed income market. So if you allocate 40% of your portfolio to bonds, you'd invest a whopping 2% in high yield. An investor would need a portfolio of at least $150,000 just to meet Vanguard's fund minimum without putting the allocation out of whack. And I think most folks here agree that a 2% allocation isn't going to move the needle at the portfolio level in any perceptible way.
Or...and I'm just spitballing here... Vanguard could add high yield bonds to the "total" bond market fund and an investor would not need to do anything and their portfolio would not be out of whack.

Regarding your "2% of anything doesn't move the needle" argument...I could say the same thing about REITs as a percentage of an investor's overall portfolios...so why does Vanguard include REIT funds as part of the total market fund??
Your question was why Bogleheads exclude high yield. I gave you one.

You've now shifted the issue to what Vanguard does and doesn't do. The short answer there is that Vanguard doesn't want to do include HY in its flagship bond fund. If you do, go find another company that offers an index fund that does. Or add a 2% slice. But other Bogleheads can rationally exclude HY without having their membership card revoked.
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Re: TBM too much treasury?

Post by mptfan » Thu Oct 16, 2014 1:18 pm

Fair enough, you can exclude any sector of any market from your portfolio for any reason you wish. I could exclude railroad companies from my portfolio because I don't like trains, but my reason would not be based on Boglehead principles. The difference is I quoted language from the Boglehead Wiki that defines the Boglehead principle that is inconsistent with excluding certain portions of the whole bond market. Again, I am not arguing about my opinion, I am citing language from the Boglehead Wiki. You may have very good reasons for excluding certain portions of the whole bond market from your portfolio, but doing so is inconsistent with investing in such a way as to "approximate the whole bond market."

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Re: TBM too much treasury?

Post by retiredjg » Thu Oct 16, 2014 1:31 pm

Back to the original question...yes, Jack did recommend that people add some corporates. I don't know exactly why. I don't think it matters a lot. To some extent, investment grade bonds of intermediate term are pretty similar in the long run and I doubt that it makes a big difference which 1 fund or which several funds you choose.

For the real bond-phile, maybe analyzing the details is fun, but for the rest of us I think it simply doesn't matter much. Or maybe I just don't know enough about the subject to have a more sophisticated opinion.

I did add some corporates when I found I needed a slice of bonds in one account to make rebalancing easier. It happened to be shortly after what Jack said. I like total bond market and I have a good dose of it, but I'm not married to it so it wasn't a big deal to add a little bit of something else.

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Re: TBM too much treasury?

Post by enc0re » Thu Oct 16, 2014 1:37 pm

As a thought experiment, I am curious what a 'Total Capital Market' fund would look like. A fund that holds stocks (common and preferred; domestic and international) and bonds (government and corporate; safe and junk; domestic and international) in their proportion to total market capitalization.

For example, I have no idea how big the bond market is compared to the stock market; or how big a share junk bonds are compared to the 'safe' kind.

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Re: TBM too much treasury?

Post by G-Money » Thu Oct 16, 2014 1:46 pm

mptfan wrote:Fair enough, you can exclude any sector of any market from your portfolio for any reason you wish. I could exclude railroad companies from my portfolio because I don't like trains, but my reason would not be based on Boglehead principles. The difference is I quoted language from the Boglehead Wiki that defines the Boglehead principle that is inconsistent with excluding certain portions of the whole bond market. Again, I am not arguing about my opinion, I am citing language from the Boglehead Wiki. You may have very good reasons for excluding certain portions of the whole bond market from your portfolio, but doing so is inconsistent with investing in such a way as to "approximate the whole bond market."
So your portfolio looks exactly like asset_chaos's pie chart? Roughly 16% domestic equities, 18% international equities, 10% direct real estate, 2% private equity, 31% international bonds, and 23% domestic bonds? Because otherwise, you are not investing at market weights.

Look past that single sentence in the Bogleheads philosophy. We have a bigger tent here than that. You can overweight asset classes (think the many threads on tilting and slice-and-dice) or shun them altogether (not just HY; a non-negligible portion don't even invest in international equities, and a majority don't invest at all in international bonds). It is not necessary to invest in a completely market-weighted portfolio (howeve defined) to be a Boglehead.
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Re: TBM too much treasury?

Post by G-Money » Thu Oct 16, 2014 1:47 pm

enc0re wrote:As a thought experiment, I am curious what a 'Total Capital Market' fund would look like. A fund that holds stocks (common and preferred; domestic and international) and bonds (government and corporate; safe and junk; domestic and international) in their proportion to total market capitalization.

For example, I have no idea how big the bond market is compared to the stock market; or how big a share junk bonds are compared to the 'safe' kind.
See my link upthread. Values may have changed a bit since then, but probably not dramatically.
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Re: TBM too much treasury?

Post by abuss368 » Thu Oct 16, 2014 1:52 pm

Jack Bogle, who knows more about investing and specifically bond fund investing has said that an investor could allocate a portion to Intermediate Index Fund or Intermediate Investment Grade Fund to move the needle a little in terms of yield.

Let's step back and look at this on a broad level. Mr. Bogle is not recommending emerging market bonds or junk bonds or another bond class that is high risk.

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Re: TBM too much treasury?

Post by mptfan » Thu Oct 16, 2014 1:52 pm

G-Money wrote:Look past that single sentence in the Bogleheads philosophy. We have a bigger tent here than that. You can overweight asset classes (think the many threads on tilting and slice-and-dice) or shun them altogether (not just HY; a non-negligible portion don't even invest in international equities, and a majority don't invest at all in international bonds). It is not necessary to invest in a completely market-weighted portfolio (howeve defined) to be a Boglehead.
Then that "single sentence in the Bogleheads philosophy" should be changed or deleted. Let's not simultaneously espouse it and reject it. Perhaps we can agree that if a sentence does not accurately state Boglehead philosophy, it should not be published on the Bogleheads Wiki as such?

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Re: TBM too much treasury?

Post by G-Money » Thu Oct 16, 2014 2:04 pm

mptfan wrote:
G-Money wrote:Look past that single sentence in the Bogleheads philosophy. We have a bigger tent here than that. You can overweight asset classes (think the many threads on tilting and slice-and-dice) or shun them altogether (not just HY; a non-negligible portion don't even invest in international equities, and a majority don't invest at all in international bonds). It is not necessary to invest in a completely market-weighted portfolio (howeve defined) to be a Boglehead.
Then that "single sentence in the Bogleheads philosophy" should be changed or deleted. Let's not simultaneously espouse and reject it.
Upon rereading it, I don't see anything inconsistent with that sentence and avoiding HY. The sentence is clearly looking at major asset classes, as evidenced by the parenthetical. One could take it to extremes and apply it to small slices of each asset class, but nothing in the sentence suggests that one should do so. Even without HY, I think most people would agree that TBM is widely diversified. So I'm not really sure I understand your problem with either the sentence or most Bogleheads' approach in light of it.
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Re: TBM too much treasury?

Post by longinvest » Thu Oct 16, 2014 2:18 pm

If it's not OK to exclude junk bonds from TBM, I guess it shouldn't be OK to exclude penny stocks (and preferred shares) from TSM...

TBM is a nominal investment-grade bond fund with maturities over 1 year (e.g. excluding cash). As such, it excludes non-nominal bonds (TIPS) and non-investment-grade bonds (junk). It also excludes nominal bonds with weird caracteristics. The "Total" refers to covering all maturities, not to covering all bonds.

TBM is a total market fund and fits well with the Bogleheads philosophy.
Last edited by longinvest on Thu Oct 16, 2014 2:23 pm, edited 1 time in total.
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Re: TBM too much treasury?

Post by enc0re » Thu Oct 16, 2014 2:21 pm

G-Money wrote:
enc0re wrote:As a thought experiment, I am curious what a 'Total Capital Market' fund would look like. A fund that holds stocks (common and preferred; domestic and international) and bonds (government and corporate; safe and junk; domestic and international) in their proportion to total market capitalization.

For example, I have no idea how big the bond market is compared to the stock market; or how big a share junk bonds are compared to the 'safe' kind.
See my link upthread. Values may have changed a bit since then, but probably not dramatically.
Thanks man. I should have followed the link. I assumed it was a pie chart of bond market composition. That was very informative.

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Re: TBM too much treasury?

Post by abuss368 » Thu Oct 16, 2014 2:25 pm

In reviewing a lot of Vanguard's material on their website and reports it is very clear that the TIPS fund has fallen out of favor over the past couple of years. I suspect this is a result of the low interest rate and inflation rate we present find ourselves in. On the flip side, they are recommending to Total International Bond Index Fund.
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Re: TBM too much treasury?

Post by ruralavalon » Thu Oct 16, 2014 3:11 pm

retiredjg wrote:Back to the original question...yes, Jack did recommend that people add some corporates. I don't know exactly why. I don't think it matters a lot. To some extent, investment grade bonds of intermediate term are pretty similar in the long run and I doubt that it makes a big difference which 1 fund or which several funds you choose.

For the real bond-phile, maybe analyzing the details is fun, but for the rest of us I think it simply doesn't matter much. Or maybe I just don't know enough about the subject to have a more sophisticated opinion.

I did add some corporates when I found I needed a slice of bonds in one account to make rebalancing easier. It happened to be shortly after what Jack said. I like total bond market and I have a good dose of it, but I'm not married to it so it wasn't a big deal to add a little bit of something else.
I just hate it when people forget the original question, and turn aside to debate some supposed point of dogma. To quote the philosopher Bluto Blutarsky (7 years an undergraduate, GPA 0.0) in the movie Animal House, "it just doesn't matter, it just doesn't matter, it just doesn't matter".
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Re: TBM too much treasury?

Post by Bubbagump » Thu Oct 16, 2014 8:27 pm

So apparently there are orthodox and reformed Bogleheads... who knew?

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Re: TBM too much treasury?

Post by etarini » Thu Oct 16, 2014 8:46 pm

I have no problem holding lots of Treasuries in Total Bond Market. If it had fewer Treasuries, I'd want to add some Intermediate Treasuries fund, so that when stocks crash, my bond fund will likely bounce up. (Is any other bond better suited to offsetting stock drops than Treasuries?)

As it is, I add some corporates (VFIDX) to go along with my TBM and my intermediate municipals, BMBIX and VWIUX.

But at least I don't have to hold junk bonds.

Eric

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Does Total Bond Market have too much Treasury?

Post by Taylor Larimore » Thu Oct 16, 2014 9:31 pm

Mikle wrote:I've come across a few articles ( one quoting Jack Bogle ) suggesting that the Total Bond Index Fund is too heavy in government bonds and investors should consider adding Intermediate corporate bonds to achieve a better diversification .
Any opinions on this?
Mikle:

Bonds are primarily for safety. Treasuries and guaranteed government bonds are usually considered 100% safe--more than any other type bond. Although past performance is seldom repeated, it is interesting to see how Vanguard stock and bond funds behaved in 2008:

-56% Precious Metals
-53% Emerging Markets
-44% Total International Index
-38% Growth Index
-37% Total Stock Market Index
-37% REIT Index
-36% Small Cap Index
-36% Value Index
-21% High Yield Corporate Bond Fund
-6% Intermediate-Term Corporate Bond Fund
-3% Inflation-Protected Securities Fund
+5% Total Bond Market Index Fund

Best wishes.
Taylor
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Re: Does Total Bond Market have too much Treasury?

Post by abuss368 » Fri Oct 17, 2014 8:35 am

Taylor Larimore wrote:
Mikle wrote:I've come across a few articles ( one quoting Jack Bogle ) suggesting that the Total Bond Index Fund is too heavy in government bonds and investors should consider adding Intermediate corporate bonds to achieve a better diversification .
Any opinions on this?
Mikle:

Bonds are primarily for safety. Treasuries and guaranteed government bonds are usually considered 100% safe--more than any other type bond. Although past performance is seldom repeated, it is interesting to see how Vanguard stock and bond funds behaved in 2008:

-56% Precious Metals
-53% Emerging Markets
-44% Total International Index
-38% Growth Index
-37% Total Stock Market Index
-37% REIT Index
-36% Small Cap Index
-36% Value Index
-21% High Yield Corporate Bond Fund
-6% Intermediate-Term Corporate Bond Fund
-3% Inflation-Protected Securities Fund
+5% Total Bond Market Index Fund

Best wishes.
Taylor
Hi Taylor,

Thank you for providing the performance information. I have learned that any good low cost, diversified, intermediate term bond fund will provide safety and income to a portfolio.

Best.
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The important things.

Post by Taylor Larimore » Fri Oct 17, 2014 11:30 am

I have learned that any good low cost, diversified, intermediate term bond fund will provide safety and income to a portfolio.
Abuss:

That is also my conclusion. When experts disagree it is often because there is little (if any) foreseeable difference.

Knowledgeable investors concentrate on the important things they can control: Asset Allocation (particularly the stock/bond ratio); Diversification; Low-Cost; Tax-Efficiency; Simplicity.

Best wishes.
Taylor
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Re: TBM too much treasury?

Post by Geologist » Fri Oct 17, 2014 12:04 pm

The proportion of Treasuries in the Total Bond index goes up and down over time. Twenty years ago, the proportion was a little higher than it is now, I think. Twelve years ago, the proportion of Treasuries was much lower than before or now. This just represents the fluctuations in the debt market. I'm perfectly happy with investing in the Total Bond Index.

Annette Thau did write in the most recent edition of her Bond Book that the proportion of US corporates that were rated as junk had gone up considerably from the early 1990's to the mid-2000's (even before the financial crisis). Does that mean there are "fewer" US corporate bonds rated as investment grade to be included in the Index?

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Re: TBM too much treasury?

Post by bargainhuntingking » Fri Oct 17, 2014 12:17 pm

No, not enough, hence in addition to TBM I tilt substantially toward more intermediate treasuries.

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Re: The important things.

Post by abuss368 » Fri Oct 17, 2014 1:43 pm

Taylor Larimore wrote:
I have learned that any good low cost, diversified, intermediate term bond fund will provide safety and income to a portfolio.
Abuss:

That is also my conclusion. When experts disagree it is often because there is little (if any) foreseeable difference.

Knowledgeable investors concentrate on the important things they can control: Asset Allocation (particularly the stock/bond ratio); Diversification; Low-Cost; Tax-Efficiency; Simplicity.

Best wishes.
Taylor
Hi Taylor,

Excellent advice! I have never understood the "need" for anymore than one or two bond funds maximum in a portfolio.

Thanks.
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Re: TBM too much treasury?

Post by abuss368 » Fri Oct 17, 2014 1:44 pm

As soon as there is market trauma Treasuries are invaluable in a portfolio and investors can not get enough.
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Re: TBM too much treasury?

Post by BigJohn » Fri Oct 17, 2014 11:30 pm

mptfan wrote:Apparently diversification is important for stocks, but unimportant for bonds.
To me it's far less about diversification and much more about wanting control of my risk in bonds. Here's a thread on the exact same subject from a couple of months back with additional data and good discussion http://www.bogleheads.org/forum/viewtop ... 0&t=145291.

Note that relatively arbitrary decisions by the Fed have had a noticeable impact that has increased duration. For the bond portion of my portfolio I want to choose my risk level (duration, credit rating, convexity) and then hold it constant. Certainly not saying that TBM is a bad choice, it just doesn't accomplish this objective as well as other options because the risk level moves around.

I also agree with ogd and think the case for diversification is very different for bonds than for stocks. As a result I'm not giving up much, if anything, with a less diverse approach but gain a more stable risk profile.
Geologist wrote:The proportion of Treasuries in the Total Bond index goes up and down over time.
Geologist, see graphic from Simplegift in linked thread above for how TBM has varied over time.

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Re: TBM too much treasury?

Post by ruralavalon » Sat Oct 18, 2014 4:53 am

See graph: "Sector History of the Barclays Capital U.S. Aggregate Bond Index", its really "too much" (increased) agency Mortgage Backed Securities?.

See Style map: Vanguard Total Bond Market index Fund (VBMFX), increased duration = more interest-rate risk, and increased credit quality = less credit risk?
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Re: TBM too much treasury?

Post by Dandy » Sat Oct 18, 2014 6:35 am

Treasuries are a bit overdone but that isn't a real problem. The real problem is Total Bond isn't the complete answer to fixed income. It is a good fund and if you are stuck on only having one fixed income option not a bad choice. But there are an array of fixed income products all with different pros and cons.


We applaud diversity and tilting in equities but many are satisfied with just one somewhat diversified bond fund. When 10 yr CDs are paying 1% more than a 10 yr Treasury maybe some diversity or tilting is warranted. Not just CDs but tilting to more corporates, TIPs, etc.

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Re: TBM too much treasury?

Post by longinvest » Sat Oct 18, 2014 7:53 am

Dandy wrote: We applaud diversity and tilting in equities but many are satisfied with just one somewhat diversified bond fund. When 10 yr CDs are paying 1% more than a 10 yr Treasury maybe some diversity or tilting is warranted. Not just CDs but tilting to more corporates, TIPs, etc.
"somewhat diversified bond fund": Are you saying that 7584 bonds of a wide range of maturities (all maturities over 1 year) is not enough diversification? What bond fund would you recommend as an alternative?

By the way, I do not applaud tilting. I am a fan of plain total market funds for bonds and stocks. I do believe in the Costs Matter Hypothesis and in the Relentless Rules of Humble Arithmetic advocated by our mentor Jack Bogle.
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Re: TBM too much treasury?

Post by Dandy » Sat Oct 18, 2014 10:01 am

somewhat diversified bond fund": Are you saying that 7584 bonds of a wide range of maturities (all maturities over 1 year) is not enough diversification? What bond fund would you recommend as an alternative?


You are focused on bond funds I am looking at fixed income including bond funds. As mentioned CDs, TIPs and also you could include munis, I bonds, EE bonds, Savings accounts, High Yield bonds (not my favorite), more exposure to US corporate bonds and international bonds.


I am also a fan to total market funds for stocks and bonds and hold a decent allocation to the Total bond fund. But even our mentor Jack Bogle has issues with the Total Bond fund and suggests it has too much government bonds and advocates adding more US corporate bonds. So, he feels it needs more diversity. After careful evaluation if people want to hold just the Total Bond fund. That's ok. But don't be fooled that it covers the fixed income product offering.

If the purpose of your fixed income allocation is lower risk so that you can take the risk on the equity side there are many fixed income choices in addition to the Total bond fund. In addition to Total Bond I own TIPS fund, Intermediate and short term corporate funds, Ltd term tax exempt fund, and a decent VG brokerage CD ladder. About 1/3 in intermediate and TIPS and 2/3 for short term and FDIC products.

You surely don't have to follow everything our mentor says but can't just dismiss without some consideration either.

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Re: TBM too much treasury?

Post by nisiprius » Sat Oct 18, 2014 10:42 am

Vanguard can be criticized for using the word "Total" in their bond fund (just as they could have been criticized for years for using the word "Total International Stock Index Fund" for a fund that did not include Canada).

Nevertheless, the Lehman, I mean Barclay's Aggregate Bond Index has been the culturally-accepted benchmark for "the" bond market, just as the EAFE index was long accepted for "the" international stock market.

In BOTH cases, there are issues because there isn't really any single unified market, and in BOTH cases there are decisions to be made as to what should "count." The Aggregate Index has never claimed to include everything that anyone has called a bond. Barclay's says that it
measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.
Again, perhaps Vanguard is being loose in calling that "total," but it is certainly wide.
The index includes
Treasuries,
government-related and corporate securities,
MBS (agency fixed-rate
and hybrid ARM pass-throughs),
ABS
and CMBS (agency
and non-agency).
That is obviously "diversified."

I see a glaring omission in the comments the critics above. You say you do not personally wish your investments to match the composition of Barclay's Aggregate Index. Fine.

Please name the index you would prefer.
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