TBM too much treasury?

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Valuethinker
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Re: TBM too much treasury?

Post by Valuethinker » Sat Oct 18, 2014 10:52 am

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


Sorry I fell out of my chair laughing. :happy :sharebeer :sharebeer

I have to misquote Mad Magazine at this point:

'There are orthodox, conservative and reformed Bogleheads. Then there are very liberal Bogleheads we like to call Christians'.

Dandy
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Re: TBM too much treasury?

Post by Dandy » Sat Oct 18, 2014 11:14 am

Please name the index you would prefer.

I don't know of a better index. If there isn't one why should my fixed income allocation be limited to a bond fund that, while good, doesn't include some low cost, safe products like TIPS, Stable Value Funds and CDs? There is often an underlying message that Total Bond is all you need. Maybe - Maybe not. Should it be a core holding - sure. Your only fixed income holding - why?

We can all pick "experts" that we want to follow and often don't follow them completely. Wm. Bernstein is one that seems to hit the nail on the head for me. While he is advising young people to go all in for equities his advice for retirees is much more conservative. His keep 20-25 years of residual expenses safe doesn't include intermediate bonds in that calculation (I believe). Bogle is also not a fan of having all your fixed income in Total Bond. So, that is at least 2 respected experts that see some need for more than an intermediate bond fund in at least some portfolios.

Unfortunately, this sounds like Total Bond bashing - it is not in my case. Just a pitch to keep your fixed income options/choices open.

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Re: TBM too much treasury?

Post by SpringMan » Sat Oct 18, 2014 11:44 am

IMO, diversification and market weighing everything can be over rated. An example, Ron Delegge's index investing podcast, he grades one investor, doing a report card in each podcast. Besides disliking his hubris, and his occasional insults against John Bogle, I disagree with the report card marks he gives in the area of diversification. He states an investor is not diversified if they don't hold commodities like gold, silver, other metals, agricultural or CCFs. He also states an investor needs REITs but fails to take into account they are market weighted in REITs due to holding index funds. If the investor does not have TIPS, they too are not diversified, then don't forget foreign real estate. I would never get an A from him. Seems like his goal is to sell his newsletter where he tells how to make income on writing covered calls on ETFs, he consistently brags how well it does. He often advocates leveraged and inverse ETFs, In his case index investor is a misnomer. Sorry for the rant, I have deleted his podcast from my iPod.
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ruralavalon
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Re: TBM too much treasury?

Post by ruralavalon » Sat Oct 18, 2014 12:13 pm

Diversification and low expenses are both very important. Index funds tend to achieve both ends. Most Vanguard IT bond funds have very low expenses, as low as most index funds, but are managed funds. A bond portfolio consisting of individual IT Treasurys is ultra low-expense, an "expense ratio" of 0.00%. Beyond that fixed income investing is not limited to bonds or bond funds, it also includes CDs and even FDIC insured savings accounts. I don't believe there is any Boglehead dogma about this.
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Re: TBM too much treasury?

Post by larmewar » Sat Oct 18, 2014 9:10 pm

The reasons TBM is considered skewed is missing from the thread. My understanding is that all the bonds the Federal Reserve has purchased and held are included in the construction of the total bond index. But if one considers those bonds as just being the government financing itself (printing money), those bonds aren't really in the market. So then TBM is skewed and to make matters worse, interest rates are artificially low. So one can buy funds that do't hold as much government bonds to compensate for the skewed index.

Lar

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Re: TBM too much treasury?

Post by ruralavalon » Sun Oct 19, 2014 11:40 am

larmewar wrote:The reasons TBM is considered skewed is missing from the thread. My understanding is that all the bonds the Federal Reserve has purchased and held are included in the construction of the total bond index. But if one considers those bonds as just being the government financing itself (printing money), those bonds aren't really in the market. So then TBM is skewed and to make matters worse, interest rates are artificially low. So one can buy funds that do't hold as much government bonds to compensate for the skewed index.

Lar

That is also my understanding of the two reasons for questioning the current validity of the Barclays U.S. Aggregate Bond Index and the funds tracking that index.

Thanks for reminding us all of the reasons.
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Re: TBM too much treasury?

Post by nisiprius » Sun Oct 19, 2014 12:16 pm

larmewar wrote:The reasons TBM is considered skewed is missing from the thread. My understanding is that all the bonds the Federal Reserve has purchased and held are included in the construction of the total bond index. But if one considers those bonds as just being the government financing itself (printing money), those bonds aren't really in the market. So then TBM is skewed and to make matters worse, interest rates are artificially low. So one can buy funds that do't hold as much government bonds to compensate for the skewed index.

Lar
I think your understanding is incorrect. I may have been imprecise in earlier postings because I didn't think the difference between the Barclay's US Aggregate Index and the Barclay's US Aggregate Float Adjusted Index mattered.

Total Bond does not track the Barclay's US Aggregate Index.

Since 1/1/2010, it has tracked the Barclay's US Aggregate Float Adjusted Index.

the Barclay's US Aggregate Float Adjusted Index is a
benchmark of the dollar denominated investment grade bond market that excludes Treasuries, agencies and MBS held in Federal Reserve accounts.
Morningstar benchmarks the fund against the plain old non-float-adjusted Barclay's Aggregate index. I don't see much difference in the two, but in any case, if the old index was "skewed" in the way you suggest, Vanguard corrected that issue five years ago.

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nisiprius
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Re: TBM too much treasury?

Post by nisiprius » Sun Oct 19, 2014 12:33 pm

I still want to know: if not the Barclay's Float-Adjusted Aggregate Index, then what index?

If you do not personally wish to invest in "the dollar denominated investment grade bond market, but excluding Treasuries, agencies and MBS held in Federal Reserve accounts" that is your prerogative. But if your objection is that Vanguard Total Bond Market Index doesn't follow the best practices definition of "the bond market," what definition do you want to use, and what index tracks it?

I don't think it's reasonable to say "I personally like TIPS... or junk bonds... or municipal bonds, and they are part of what I think of as 'the bond market,' therefore I expect Vanguard to cook a fund to order, using my own recipe." If you want more salt (VICSX) or tabasco sauce (VWEHX) on yours, they are right out there on the table within easy reach. If you want a widely accepted recipe, tell us where it is in Mrs. Barclay's Philadelphia Cookbook.
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Re: TBM too much treasury?

Post by BigJohn » Sun Oct 19, 2014 1:01 pm

nisiprius wrote:I still want to know: if not the Barclay's Float-Adjusted Aggregate Index, then what index?

Nisi, here's Doc's answer to what bond index he wants to track http://www.bogleheads.org/forum/viewtopic.php?p=2163913#p2163913.

There are funds that track this index. Here's an example http://www.wellsfargoadvantagefunds.com/pdf/collective/FactSheet_IntermediateGovernment-CreditBondIndexFund_N.pdf.

Unfortunately not available at VG so you'd need to create your own as Doc seems to do. Certainly more complex but at least one answer to your question.

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Taylor Larimore
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Bond funds the experts recommend.

Post by Taylor Larimore » Sun Oct 19, 2014 1:45 pm

Bogleheads:

When I am uncertain what to do, I listen to expert recommendations:

William Bernstein -- Total Bond Market

Jack Bogle -- Total Bond Market with Corporate Bonds

Harry Browne -- Vanguard Long-Term Government Bond

Rick Ferri -- Total Bond Market

Harry Markowitz -- Total Bond Market

Allan Roth -- Total Bond Market

Bill Schultheis -- Total Bond Market

Larry Swedroe -- Vanguard Short-Term Bond

David Swensen -- Vanguard Intermediate-Term Government Bond and Barclays TIPS

http://www.obliviousinvestor.com/8-lazy-etf-portfolios/

When experts disagree, it is often because there is little foreseeable difference.

Best wishes.
Taylor
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Re: TBM too much treasury?

Post by Austintatious » Sun Oct 19, 2014 1:51 pm

nisiprius wrote: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.



Yes, it is diversified, just as would be a fund holding just treasuries and corporates. I'd even agree that it's a "widely diversified" domestic bond fund though certainly not that "total" fund one might reasonably expect. But mptfan's basic point about consistency is worth taking. Where I've concluded most bogleheads demonstrate notable inconsistency with the expressed boglehead philosophy (and, yes, consistency and inconsistency are subjects worthy of discussion, even at ogd's very high level) is their willingness to exclude greater than 50% of the world's bond market by rejecting international bonds (hedged or not) even as they've come to embrace international stocks. In this 21st century, is an investor limiting her bond holdings to domestics, as a matter of choice, widely diversified and investing consistently with the Boglehead philosophy or generally accepted principals of diversification?

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Re: TBM too much treasury?

Post by Dandy » Sun Oct 19, 2014 1:54 pm

Why all the focus on a substitute index? Low cost and diversification are usually provided by broad based index funds -- that track someone's index. If there is no index that includes (or can't include) some fixed income products like TIPS, muni's or even CDs does that mean they should be avoided?

Adding TIPs broadens diversity (plus a government guarantee) and can be purchased at no or low cost, CDs also adds diversity (plus a government guarantee) and can be purchased at no cost (some cost/loss for early redemption). So if you want better diversity in your fixed income allocation these are some products that should be considered. The problem? is that no organization has come up with a good index that covers these products in addition what is covered in the index used for the Total Bond Fund.

There are many? respected? investment experts? that recommend that retirees at least consider TIPS and CDs. So I guess the issue is since there is no index investors don't know how much they should allocate to TIPS and CDs?? That is a bit of a concern. I'll opt for making a bit of a mistake of over or under allocating to TIPS and CDs with the idea that I'm a bit more diversified.

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Re: Bond funds the experts recommend.

Post by abuss368 » Sun Oct 19, 2014 9:44 pm

Taylor Larimore wrote:Bogleheads:

When I am uncertain what to do, I listen to expert recommendations:

William Bernstein -- Total Bond Market

Jack Bogle -- Total Bond Market with Corporate Bonds

Harry Browne -- Vanguard Long-Term Government Bond

Rick Ferri -- Total Bond Market

Harry Markowitz -- Total Bond Market

Allan Roth -- Total Bond Market

Bill Schultheis -- Total Bond Market

Larry Swedroe -- Vanguard Short-Term Bond

David Swensen -- Vanguard Intermediate-Term Government Bond and Barclays TIPS

http://www.obliviousinvestor.com/8-lazy-etf-portfolios/

When experts disagree, it is often because there is little foreseeable difference.

Best wishes.
Taylor


Hi Taylor,

I enjoyed your post. I also found it interesting that David Swensen was the only expert to recommend TIPS. In addition, there is no recommendation for Total International Bond!

Good advice. Keep investing simple.
Best.
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Re: TBM too much treasury?

Post by Dandy » Mon Oct 20, 2014 12:14 pm

Most respected financial experts cited by above probably recommend Total bond in many of their portfolios. It is a good fund. But the tag Total Bond Fund next to many names is misleading.
Ferri's 60/40 portfolio also includes TIPS and High Yield
Bernstein while very aggressive for young investors recommends "safe money should be safe" for most retirees. That includes short term treasuries, CDs and money markets (2012 interview with C. Benz). Also TIPS ladder and longevity insurance for some.
Swenson's lazy portfolio - US Treasuries and TIPS
Frank Armstrong Ideal Index portfolio - 30% short term bonds
Alan Roth model core portfolio - moderate risk - also includes 16% I shares TIPS and 6% VG ST bond ETF
Larry Swedroe's Big Rock Portfolio - 40% short term bond funds and his Portfolio 1 40% 5yr Treasury Notes
Shultes - fixed income allocation to VG short term bond fund

Harry Browne - 25% cash and 25% VG LT Gov. Bond
Harry Sit (Finance Buff) bought 5yr 3% CD vs Total bond fund
Jonathan Clements (july 2014) - Opting for short term corporate bonds and a substantial "bond" money in short term CDs

Also, when trying to design a portfolio with few funds many of the above defer to having one bond fund and the Total Bond fund is often the choice. In addition they are usually addressing mutual fund choices not CDs, I bonds, etc.

The fact that many investment experts have different takes and many generally like the Total Bond fund (our mentor being a very notable exception) doesn't mean most of us should be satisfied that one fixed income choice is all we need. The relatively recent low interest rates, the decline of mutual fund money markets and the relative increase in value of CDs have altered the fixed income landscape a bit. Core holding - yes Only holding Maybe - Maybe not. As always it depends.

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Re: TBM too much treasury?

Post by nisiprius » Mon Oct 20, 2014 7:53 pm

Austintatious wrote:[...their willingness to exclude greater than 50% of the world's bond market by rejecting international bonds (hedged or not) even as they've come to embrace international stocks. In this 21st century, is an investor limiting her bond holdings to domestics, as a matter of choice, widely diversified and investing consistently with the Boglehead philosophy or generally accepted principals of diversification?...
First of all, Bogleheads are not at all uniform in their opinions or approach to international stock investing. I would not be so sure that the Bogleheads who reject international bonds are the same ones who "embrace" international stocks. I plead guilty to owning zero international bonds and a nonzero amount of international stocks, mostly because I'm too timid to stray too far from the conventional wisdom--but I dance with them at arm's length like we did at the junior high school tea dance, I don't embrace them.

Second, diversification is there for a purpose. The purpose is not some abstract idea of sampling everything from the buffet, the purpose is to lower portfolio volatility while sustaining the same return. Since no two investments are absolutely identical, there is no investment that cannot be claimed to be a "diversifier" in the abstract sense. But an asset that doesn't lower portfolio volatility serves no investing purpose, "generally accepted principals of diversification" do not mandate that we include it.

Vanguard's own paper, Global fixed income: Considerations for U.S. investors says, in the caption for Figure 7, that "Adding hedged international bonds historically has decreased the volatility of balanced portfolios." But look at the actual numbers! Vanguard in its own all-in-one funds allocates 30% of its stock to international. According to their table, without international bonds the standard deviation of the portfolio was 9.7. Adding international bonds, making 20% of the bonds international--the amount Vanguard uses--reduced the standard deviation... to 9.6! That is not an important effect, and Samuel Lee of Morningstar has criticized them as Diversification for the sake of diversification.
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Re: TBM too much treasury?

Post by Austintatious » Tue Oct 21, 2014 12:58 pm

nisiprius wrote:
Austintatious wrote:[...their willingness to exclude greater than 50% of the world's bond market by rejecting international bonds (hedged or not) even as they've come to embrace international stocks. In this 21st century, is an investor limiting her bond holdings to domestics, as a matter of choice, widely diversified and investing consistently with the Boglehead philosophy or generally accepted principals of diversification?...
First of all, Bogleheads are not at all uniform in their opinions or approach to international stock investing. I would not be so sure that the Bogleheads who reject international bonds are the same ones who "embrace" international stocks. I plead guilty to owning zero international bonds and a nonzero amount of international stocks, mostly because I'm too timid to stray too far from the conventional wisdom--but I dance with them at arm's length like we did at the junior high school tea dance, I don't embrace them.

Second, diversification is there for a purpose. The purpose is not some abstract idea of sampling everything from the buffet, the purpose is to lower portfolio volatility while sustaining the same return. Since no two investments are absolutely identical, there is no investment that cannot be claimed to be a "diversifier" in the abstract sense. But an asset that doesn't lower portfolio volatility serves no investing purpose, "generally accepted principals of diversification" do not mandate that we include it.

Vanguard's own paper, Global fixed income: Considerations for U.S. investors says, in the caption for Figure 7, that "Adding hedged international bonds historically has decreased the volatility of balanced portfolios." But look at the actual numbers! Vanguard in its own all-in-one funds allocates 30% of its stock to international. According to their table, without international bonds the standard deviation of the portfolio was 9.7. Adding international bonds, making 20% of the bonds international--the amount Vanguard uses--reduced the standard deviation... to 9.6! That is not an important effect, and Samuel Lee of Morningstar has criticized them as Diversification for the sake of diversification.


Rightly or wrongly, it's been my impression (just a best guess, based only on member commentary) that most bogleheads have, enthusiastically or not, determined that ownership of international stocks is worthwhile (despite senior mentor Jack Bogle's having no use for them) even as a majority (if not that same majority) rejects, at least for now, owning international bonds. And I've perceived that to be an inconsistency. l certainly agree that diversification merely for the sake of diversification is meaningless and potentially harmful, though I do tend toward a presumption that broad diversification (as opposed to broadest possible diversification) is generally a desirable practice and always deserving of at least consideration. I'd assumed that Vanguard's Total International Bond Index Admiral Shares Index Fund (VTABX) was at least a widely diversified fund of the investment-grade bonds of other developed nations. Those words "Total" and "Index" ought to mean something.

But your response has caused me to revisit the VTABX prospectus, and to conclude that my assumption about the diversification benefit of this fund may have been flat wrong, and that it's not a "widely diversified" fund at all. Clearly, I'd not carefully read the part of the prospectus that lists fund risks, which just as clearly includes is a "non diversification risk". Specifically, it says that nondiversification risk is

"... the chance that the Fund's performance may be hurt disproportionately by the poor performance of bonds issued by just a few or even a single issuer. The Fund is considered nondiversified, which means that it may invest a significant percentage of its assets in bonds issued by a small number of issuers. Nondiversification risk for the Fund is high." the italics are mine

And certainly, the fund does not remotely approximate the numbers of bonds in its benchmark index. So, now I'm thinking that despite that word "Total" and that word word "Index", that we're looking at a fund that is not widely diversified and that is essentially an actively managed fund, at least as we typically define the concept. It's back to the drawing board for me on Total International Bond. Thanks for the response.

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Re: TBM too much treasury?

Post by abuss368 » Tue Oct 21, 2014 3:28 pm

I believe when most investing experts disagree, it probably does not matter much.
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Re: TBM too much treasury?

Post by Bubbagump » Tue Oct 21, 2014 8:35 pm

Valuethinker wrote:
Bubbagump wrote:So apparently there are orthodox and reformed Bogleheads... who knew?


Sorry I fell out of my chair laughing. :happy :sharebeer :sharebeer



I calls em as I sees em. I still say I am funnier than my girlfriend will give me credit for.

To all of the above, I wrestled with the bond question myself. I think it comes down to the same questions you have to ask about stocks. How much tilt and diversification do you want? For some, Total Stock Market is plenty, others want REITs and SCV. At the end if the day it is a gamble which strategy will win out over the other. (Luckily, Boglehead investing means neither is a loser game). So I dunno. Personally, I am looking at intermediate term muni. My mom and sister in very different parts of their life I would probably recommend 50TIPS/50TBM and TBM respectively. I am in a high tax bracket, my mom is in retirement, my sister is a young saver starting out with a lot of tax advantaged space relatively speaking. Then in my estimation, more corporate or high yield are essentially tilts. Do the regressions and efficient frontiers and decide if you think they have an edge or not and if you care to deal with the extra complication. Seems easy enough to me and just a personal preference.

I would say regarding international bonds, I think the difference is that bonds are debt. Folks can default on debts and not all countries have as strong a rule of law or reporting demand that the US does, therefore I can see why folks might be concerned. I suppose international stocks have similar risks (we all remember Enron and that was domestic), but I think the fact we "trust" bond ratings and know that you can lose it all in stocks is certainly a mental hurdle to deal with.

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