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.