3-fund portfolio - bond fund options

GaryA505 · Post by **GaryA505** » Sun Jul 16, 2017 7:06 pm

I've pretty much decided on a 3-fund portfolio for one of my accounts and I'll use a total US stock, a toal international fund, and a bond fund. What I am wondering is what ard the options for type of bond fund. I see that that the usual choice is just a total US bond market fund. Are there any other choices that might work for a 3-fund portfolio? What are the trade-offs?

indexonlyplease · Post by **indexonlyplease** » Sun Jul 16, 2017 7:35 pm

When I set up my 3 fund portfolio in my 457 plan, I used the Stable value Fixed account paying 3.5%. I got the ok here. So if you have a good fixed account in your plan that would be an option.

trueblueky · Post by **trueblueky** » Sun Jul 16, 2017 7:47 pm

What are in the other accounts?
What is your tax rate? That would helps decide taxable or tax-exempt bond fund.

GaryA505 · Post by **GaryA505** » Sun Jul 16, 2017 8:12 pm

I should have mentioned that I need a taxable bond fund for this 3-fund combo. It's in an IRA so the tax efficiency is irrelevant. Unless somebody tells me it's a bad idea, I would just use Pimco Total Return (PONDX). VTSMX/VTIAX/PONDX

Taylor Larimore · Post by **Taylor Larimore** » Sun Jul 16, 2017 8:15 pm

GaryA505 wrote:I've pretty much decided on a 3-fund portfolio for one of my accounts and I'll use a total US stock, a total international fund, and a bond fund. What I am wondering is what are the options for type of bond fund. I see that that the usual choice is just a total US bond market fund. Are there any other choices that might work for a 3-fund portfolio? What are the trade-offs?

GaryA505:

This forum has had many discussions about which bond fund is best. In my opinion, nearly any low-cost, good quality, diversified, short or intermediate-term bond fund will do the job of providing safety in a portfolio. This is one reason why we have so many discussions -- because it doesn't make much difference.

The "trade-off" is that any higher expected return almost always reflects higher risk. The bond market is extremely efficient in this regard.

I decided that Total Bond Market Index Fund is nearly ideal for inclusion in The Three-Fund Portfolio for two primary reasons:

1. It is very diversified (often called the only free-lunch in investing).

2. It is very safe. It's worst annual loss since inception was -2.66%. In the 2008 bear market (when bonds are needed) Total Bond Market gained +5%.

Past performance does not forecast future performance.

Best wishes.
Taylor

GaryA505 · Post by **GaryA505** » Sun Jul 16, 2017 8:27 pm

Thanks Taylor. I don't mind taking more risk on the bond side. Pimco Total Return took a -5.79% hit in 2008 and I'm ok with that, given the overall track record.

mhalley · Post by **mhalley** » Sun Jul 16, 2017 8:31 pm

Looking at the returns of pondx, I can only assume it is much riskier than a "normal" bond fund and might not play the role bond funds are designed to have in your portfolio. It has a high expense ratio and uses hedging and who knows what else to achieve its returns.
Bond funds That I feel would perform the role of a bond fund better would be
Total bond market
Intermediate term bond market
intermediate term treasury
But when you look at their returns compared to pondx you will want to turn your nose up.

GaryA505 · Post by **GaryA505** » Sun Jul 16, 2017 8:35 pm

Um, I mistyped earlier. This 3-fund port will be in an IRA at Fidelity, so the stock will be in their total stock and total international stock which is fine by me. I just saw news from 4 hours ago that they are reducing their total bond fund's exposure to some bond sectors but I don't know if this is good or bad.

GaryA505 · Post by **GaryA505** » Sun Jul 16, 2017 8:43 pm

mhalley wrote:Looking at the returns of pondx, I can only assume it is much riskier than a "normal" bond fund and might not play the role bond funds are designed to have in your portfolio. It has a high expense ratio and uses hedging and who knows what else to achieve its returns.
Bond funds That I feel would perform the role of a bond fund better would be
Total bond market
Intermediate term bond market
intermediate term treasury
But when you look at their returns compared to pondx you will want to turn your nose up.

That's sort of what I was wondering. If I use a total return bond fund like PONDX what have I done to the balance? As I mentioned, I don't mind the extra risk, since it was only down -5.79% in 2008 anyway. Since I have heard that the correlation between stocks and bonds has increased, I'm not sure that matters anymore either, in terms of the balance.

Avo · Post by **Avo** » Sun Jul 16, 2017 8:58 pm

GaryA505 wrote: Unless somebody tells me it's a bad idea, I would just use Pimco Total Return (PONDX).

PONDX is Class D of Pimco Income, not Pimco Total Return; Class D of Pimco Total Return is PTTDX. These are vey different funds. Look at some charts on M*. To my eye, PONDX has a hefty dose of equity-correlated risk. Not to mention manager risk (a lot of Pimco's reputation was earned by Bill Gross, who departed a few years ago; are the new guys just as good? Why should they be?)

Taylor Larimore · Post by **Taylor Larimore** » Sun Jul 16, 2017 9:00 pm

If I use a total return bond fund like PONDX what have I done to the balance? As I mentioned, I don't mind the extra risk, since it was only down -5.79% in 2008 anyway.

GaryA505:

In the 2008 Bear Market when stocks were down nearly 50%, When investors needed bond protection PONDX was also down -5.79%. Meanwhile, Total Bond Market (VBMFX) was up +5%--over 10% difference.

If you are selecting PONDX for its past higher return, it is more efficient to increase your stock allocation.

Stocks let us eat well. Bonds let us sleep well.

Best wishes.
Taylor

SpringMan · Post by **SpringMan** » Sun Jul 16, 2017 9:12 pm

Avo wrote:
GaryA505 wrote: Unless somebody tells me it's a bad idea, I would just use Pimco Total Return (PONDX).
PONDX is Class D of Pimco Income, not Pimco Total Return; Class D of Pimco Total Return is PTTDX. These are vey different funds. Look at some charts on M*. To my eye, PONDX has a hefty dose of equity-correlated risk. Not to mention manager risk (a lot of Pimco's reputation was earned by Bill Gross, who departed a few years ago; are the new guys just as good? Why should they be?)

Daniel Ivascyn has managed this fund, PIMCO Income, along with Alfred Murata since its inception and were managers of the year in 2013 not Bill Gross. Not new guys replacing Gross.

GaryA505 · Post by **GaryA505** » Sun Jul 16, 2017 9:18 pm

Avo wrote:
GaryA505 wrote: Unless somebody tells me it's a bad idea, I would just use Pimco Total Return (PONDX).
PONDX is Class D of Pimco Income, not Pimco Total Return; Class D of Pimco Total Return is PTTDX. These are vey different funds. Look at some charts on M*. To my eye, PONDX has a hefty dose of equity-correlated risk. Not to mention manager risk (a lot of Pimco's reputation was earned by Bill Gross, who departed a few years ago; are the new guys just as good? Why should they be?)

Ah thanks. Another mistype. Thanks for the input on the equity-correlation.

GaryA505 · Post by **GaryA505** » Sun Jul 16, 2017 9:20 pm

Taylor Larimore wrote:
If I use a total return bond fund like PONDX what have I done to the balance? As I mentioned, I don't mind the extra risk, since it was only down -5.79% in 2008 anyway.
GaryA505:

In the 2008 Bear Market when stocks were down nearly 50%, When investors needed bond protection PONDX was also down -5.79%. Meanwhile, Total Bond Market (VBMFX) was up +5%--over 10% difference.

If you are selecting PONDX for its past higher return, it is more efficient to increase your stock allocation.

Stocks let us eat well. Bonds let us sleep well.

Best wishes.
Taylor

Thanks again Taylor. Sometimes l am a slow learner.

GaryA505 · Post by **GaryA505** » Sun Jul 16, 2017 10:31 pm

Ok, I think it would be FSITX or AGG then. Maybe BND but I think Fidelity would charge me for that.

Avo · Post by **Avo** » Mon Jul 17, 2017 12:42 am

SpringMan wrote:Daniel Ivascyn has managed this fund, PIMCO Income, along with Alfred Murata since its inception and were managers of the year in 2013

I used to have some money in Fairholme Fund, whose manager Bruce Berkowitz was M*'s manager of the decade in 2010! How could anything go wrong??

GaryA505 wrote:Ok, I think it would be FSITX or AGG then. Maybe BND but I think Fidelity would charge me for that.

FSITX is the bond fund at Fidelity recommended in the bogleheads wiki.

SpringMan · Post by **SpringMan** » Mon Jul 17, 2017 2:19 pm

Avo wrote:
SpringMan wrote:Daniel Ivascyn has managed this fund, PIMCO Income, along with Alfred Murata since its inception and were managers of the year in 2013
I used to have some money in Fairholme Fund, whose manager Bruce Berkowitz was M*'s manager of the decade in 2010! How could anything go wrong??

GaryA505 wrote:Ok, I think it would be FSITX or AGG then. Maybe BND but I think Fidelity would charge me for that.
FSITX is the bond fund at Fidelity recommended in the bogleheads wiki.

It is true manager of the year means little. Vanguard does not offer a multi-sector bond fund. I hold 5% in multi-sector PIMIX, Pimco Income with an ER of .45%. My point was Bill Gross departing Pimco had no effect on PIMIX. Another good thing is VBS allows minimum purchase of PIMIX at $25K. Morningstar shows $1M as the minimum. PIMIX is the institutional share class of PONDX mentioned earlier in the thread.

Taylor Larimore · Post by **Taylor Larimore** » Mon Jul 17, 2017 2:43 pm

Vanguard does not offer a multi-sector bond fund.

Springman:

Vanguard Total Bond Market holds good quality bonds in many sectors. What am I missing?

https://personal.vanguard.com/us/funds/ ... =INT#tab=2

Thank you and best wishes.
Taylor

ruralavalon · Post by **ruralavalon** » Mon Jul 17, 2017 2:48 pm

GaryA505 wrote:Um, I mistyped earlier. This 3-fund port will be in an IRA at Fidelity, so the stock will be in their total stock and total international stock which is fine by me. I just saw news from 4 hours ago that they are reducing their total bond fund's exposure to some bond sectors but I don't know if this is good or bad.

In an IRA at Fidelity I suggest Fidelity U.S. Bond Index Fund Premium Class (FSITX) ER 0.05%. It's a total bond market index fund, and tracks the Bloomberg Barclays U.S. Aggregate Bond Index.

There is no reason you have to look elsewhere like AGG or BND or Vanguard Total Bond Market Index Fund.

GaryA505 · Post by **GaryA505** » Mon Jul 17, 2017 3:10 pm

I guess if I had understood the role of the bonds in a bogle 3-fund portfolio better, I might have been able to answer my own question. I did find some info on this and now understand it a little better. This is what is think I've read. Please tell me if I'm wrong.

Bonds are not in a bogle 3-fund portfolio because of a negative correlation to stocks, in fact, sometimes the correlation is positive and sometimes it's negative, and the average correlation over time is close to 0 (for total stock market and total bond market). So that leaves only two other possible roles - 1) to reduce the overall volatility of the portfolio and 2) provide safety in case of a big downturn in stocks. Correct?

So, that's why the correlation of the bond fund to total stock is relevant - it effects the dampening effect and also the safety in a big stock downturn. And this is why a boglehead "purist" is only going to recommend a total bond fund, since it's average correlation to stocks is near 0. I get that.

Now, if you choose a bond fund that has more returns than total bond, you get more volatility, more positive correlation with stocks, and less safety, yes?

If that is all true, than wouldn't an investor who is at least several years from retirement benefit from selecting a more volatile bond fund, since they are still in the accumulation phase and are not selling anything yet. I mean, who cares if we have another 2008, your not selling anything, and you have 5 or more years to recover? Certainly in the decumulation phase you want to be in bonds that have the least downside, moving first to total bond, and then maybe even to short-term bonds or treasuries?

ruralavalon · Post by **ruralavalon** » Mon Jul 17, 2017 3:29 pm

GaryA505 wrote:I guess if I had understood the role of the bonds in a bogle 3-fund portfolio better, I might have been able to answer my own question. I did find some info on this and now understand it a little better. This is what is think I've read. Please tell me if I'm wrong.

Bonds are not in a bogle 3-fund portfolio because of a negative correlation to stocks, in fact, sometimes the correlation is positive and sometimes it's negative, and the average correlation over time is close to 0 (for total stock market and total bond market). So that leaves only two other possible roles - 1) to reduce the overall volatility of the portfolio and 2) provide safety in case of a big downturn in stocks. Correct?

That's correct.

GaryA505 wrote:So, that's why the correlation of the bond fund to total stock is relevant - it effects the dampening effect and also the safety in a big stock downturn. And this is why a boglehead "purist" is only going to recommend a total bond fund, since it's average correlation to stocks is near 0. I get that.

Now, if you choose a bond fund that has more returns than total bond, you get more volatility, more positive correlation with stocks, and less safety, yes?

That's correct.

GaryA505 wrote:If that is all true, than wouldn't an investor who is at least several years from retirement benefit from selecting a more volatile bond fund, since they are still in the accumulation phase and are not selling anything yet. I mean, who cares if we have another 2008, your not selling anything, and you have 5 or more years to recover? Certainly in the decumulation phase you want to be in bonds that have the least downside, moving first to total bond, and then maybe even to short-term bonds or treasuries?

No. Five more years might not be enough to recover. A lot of people panic and sell off when the stock market crashes. It is an emotional reaction, even if they believe in advance they would not panic.

Soon before retirement is one of the worst times to abandon the safety of a good well diversified, high credit quality, intermediate-term or short-term bond fund.

FelixTheCat · Post by **FelixTheCat** » Mon Jul 17, 2017 3:38 pm

Taylor Larimore wrote: I decided that Total Bond Market Index Fund is nearly ideal for inclusion in The Three-Fund Portfolio for two primary reasons:

1. It is very diversified (often called the only free-lunch in investing).

2. It is very safe. It's worst annual loss since inception was -2.66%. In the 2008 bear market (when bonds are needed) Total Bond Market gained +5%.

Past performance does not forecast future performance.

Best wishes.
Taylor

I've read countless articles where Jack Bogle recommends Vanguard Intermediate-Term Bond Index Fund Investor Shares (VBIIX). Since we are Bogleheads, why is the Total Bond Market Index a recommendation over Jack's suggestion?

GaryA505 · Post by **GaryA505** » Mon Jul 17, 2017 3:42 pm

ruralavalon wrote:
GaryA505 wrote:I guess if I had understood the role of the bonds in a bogle 3-fund portfolio better, I might have been able to answer my own question. I did find some info on this and now understand it a little better. This is what is think I've read. Please tell me if I'm wrong.

Bonds are not in a bogle 3-fund portfolio because of a negative correlation to stocks, in fact, sometimes the correlation is positive and sometimes it's negative, and the average correlation over time is close to 0 (for total stock market and total bond market). So that leaves only two other possible roles - 1) to reduce the overall volatility of the portfolio and 2) provide safety in case of a big downturn in stocks. Correct?
That's correct.

GaryA505 wrote:So, that's why the correlation of the bond fund to total stock is relevant - it effects the dampening effect and also the safety in a big stock downturn. And this is why a boglehead "purist" is only going to recommend a total bond fund, since it's average correlation to stocks is near 0. I get that.

Now, if you choose a bond fund that has more returns than total bond, you get more volatility, more positive correlation with stocks, and less safety, yes?
That's correct.

GaryA505 wrote:If that is all true, than wouldn't an investor who is at least several years from retirement benefit from selecting a more volatile bond fund, since they are still in the accumulation phase and are not selling anything yet. I mean, who cares if we have another 2008, your not selling anything, and you have 5 or more years to recover? Certainly in the decumulation phase you want to be in bonds that have the least downside, moving first to total bond, and then maybe even to short-term bonds or treasuries?
No. Five more years might not be enough to recover. A lot of people panic and sell off when the stock market crashes. It is an emotional reaction, even if they believe in advance they would not panic.

Soon before retirement is one of the worst times to abandon the safety of a good well diversified, high credit quality, intermediate-term or short-term bond fund.

Thanks for the feedback.

Sorry, I guess I wasn't clear. I was referring to the bonds recovering in 5 years (I know stocks can take A LOT longer). I was also assuming there would be no selling at all during that period, but of course that would unfortunately mean no rebalancing either. FWIW, I held a lot of stocks in 2008-2009 and didn't sell anything because I was still accumulating then, as now.

GaryA505 · Post by **GaryA505** » Mon Jul 17, 2017 3:45 pm

FelixTheCat wrote:
Taylor Larimore wrote: I decided that Total Bond Market Index Fund is nearly ideal for inclusion in The Three-Fund Portfolio for two primary reasons:

1. It is very diversified (often called the only free-lunch in investing).

2. It is very safe. It's worst annual loss since inception was -2.66%. In the 2008 bear market (when bonds are needed) Total Bond Market gained +5%.

Past performance does not forecast future performance.

Best wishes.
Taylor
I've read countless articles where Jack Bogle recommends Vanguard Intermediate-Term Bond Index Fund Investor Shares (VBIIX). Since we are Bogleheads, why is the Total Bond Market Index a recommendation over Jack's suggestion?

Felix, are you trying to make trouble? I think you're going to stir up a hornet's nest.

FelixTheCat · Post by **FelixTheCat** » Mon Jul 17, 2017 3:51 pm

GaryA505 wrote:Felix, are you trying to make trouble? I think you're going to stir up a hornet's nest.

We are supposed to understand the role of each fund in our portfolio.

indexonlyplease · Post by **indexonlyplease** » Mon Jul 17, 2017 3:51 pm

Taylor Larimore wrote:
If I use a total return bond fund like PONDX what have I done to the balance? As I mentioned, I don't mind the extra risk, since it was only down -5.79% in 2008 anyway.
GaryA505:

In the 2008 Bear Market when stocks were down nearly 50%, When investors needed bond protection PONDX was also down -5.79%. Meanwhile, Total Bond Market (VBMFX) was up +5%--over 10% difference.

If you are selecting PONDX for its past higher return, it is more efficient to increase your stock allocation.

Stocks let us eat well. Bonds let us sleep well.

Best wishes.
Taylor

Now that is a great: Stocks let us eat well. Bonds let us sleep well. Awesome never heard that one.

Avo · Post by **Avo** » Mon Jul 17, 2017 3:54 pm

Taylor Larimore wrote:Vanguard Total Bond Market holds good quality bonds in many sectors. What am I missing?

In addition to the domestic high-quality bonds held by "total market" bond funds, so-called "multi-sector" bond funds usually also hold a lot of junk bonds and foreign bonds (especially emerging-market bonds), and actively juggle the percentages allocated to each sector in an attempt to maximize return (as well as by doing security selection).

ruralavalon · Post by **ruralavalon** » Mon Jul 17, 2017 4:29 pm

Avo wrote:
Taylor Larimore wrote:Vanguard Total Bond Market holds good quality bonds in many sectors. What am I missing?
In addition to the domestic high-quality bonds held by "total market" bond funds, so-called "multi-sector" bond funds usually also hold a lot of junk bonds and foreign bonds (especially emerging-market bonds), and actively juggle the percentages allocated to each sector in an attempt to maximize return (as well as by doing security selection).

Total bond market index funds omit junk bonds, TIPS, municipal, and foreign bonds. I am glad that those types are omitted.

saltycaper · Post by **saltycaper** » Mon Jul 17, 2017 4:40 pm

indexonlyplease wrote:
Now that is a great: Stocks let us eat well. Bonds let us sleep well. Awesome never heard that one.

Don't go too far with it. When times are tough, it's the bonds that may let you eat at all. And you'd do well to have a nightmare over bonds every now and then, too, particularly when the safest issues are offering negative real returns. That's nothing to sleep soundly over.

saltycaper · Post by **saltycaper** » Mon Jul 17, 2017 4:46 pm

GaryA505 wrote:
Are there any other choices that might work for a 3-fund portfolio? What are the trade-offs?

There's lots of options that work. The main considerations are how much credit risk and term risk you want to take, as well as expenses. More corporate bonds = more credit risk. Longer-duration fund = more term risk. ER exceeding .20 or so for less than 10K or exceeding .10 or so for more than 10K and you're probably paying too much. I think FSITX is fine.

GaryA505 · Post by **GaryA505** » Mon Jul 17, 2017 4:52 pm

saltycaper wrote:
indexonlyplease wrote:
Now that is a great: Stocks let us eat well. Bonds let us sleep well. Awesome never heard that one.
Don't go too far with it. When times are tough, it's the bonds that may let you eat at all. And you'd do well to have a nightmare over bonds every now and then, too, particularly when the safest issues are offering negative real returns. That's nothing to sleep soundly over.

This is what is sort of disturbing about total bonds. If interest rates rise, the value will go down, resulting 0 or negative real returns. Remember, we're not counting on a negative correlation with stocks. So, to moderate the volatility of our stock fund holdings, we include something that actually does nothing. Seems like if you're still in the accumulation phase it would be better to put it in a higher-yielding (higher risk) bond fund, and if your'e in decumulation just put it in short-term bonds, CDs, or an online bank. After all, if we change the stock/bond allocation (we are betting on the gain/risk of each) by age, why not do the same with the bonds?

saltycaper · Post by **saltycaper** » Mon Jul 17, 2017 4:56 pm

GaryA505 wrote:
So, that's why the correlation of the bond fund to total stock is relevant - it effects the dampening effect and also the safety in a big stock downturn. And this is why a boglehead "purist" is only going to recommend a total bond fund, since it's average correlation to stocks is near 0. I get that.

Now, if you choose a bond fund that has more returns than total bond, you get more volatility, more positive correlation with stocks, and less safety, yes?

I don't think a Boglehead "purist" would recommend a total bond fund for its near 0 correlation. If that was the goal, a Treasury-only fund would be recommended. Honestly, I think the main reason Total Bond is recommended here is because it has the word "Total" in its name. (Not arguing that it isn't well diversified.)

GaryA505 wrote:
If that is all true, than wouldn't an investor who is at least several years from retirement benefit from selecting a more volatile bond fund, since they are still in the accumulation phase and are not selling anything yet. I mean, who cares if we have another 2008, your not selling anything, and you have 5 or more years to recover?

Not necessarily. If you're okay with the extra volatility, you could just increase your stock allocation. Pairing very safe with very risky oftentimes offers the best risk-adjusted return than using assets that are somewhere in the middle. You can find out more be researching opinions and studies on whether there exists a credit risk premium.

GaryA505 · Post by **GaryA505** » Mon Jul 17, 2017 4:59 pm

saltycaper wrote:
GaryA505 wrote:
Are there any other choices that might work for a 3-fund portfolio? What are the trade-offs?
There's lots of options that work. The main considerations are how much credit risk and term risk you want to take, as well as expenses. More corporate bonds = more credit risk. Longer-duration fund = more term risk. ER exceeding .20 or so for less than 10K or exceeding .10 or so for more than 10K and you're probably paying too much. I think FSITX is fine.

This is sort of what I was getting at in my previous post. By selecting between VBMFX or VBIIX (or in my vase FSITX or a Fid. Corp Bond), we are already making a risk-based selection, so why stop there?

saltycaper · Post by **saltycaper** » Mon Jul 17, 2017 5:02 pm

GaryA505 wrote:
This is what is sort of disturbing about total bonds. If interest rates rise, the value will go down, resulting 0 or negative real returns.

I wouldn't worry too much about interest rates going up if the real rate is going up. In the end, real rates going up is a good thing for bond investors, even if there are some losses along the way. I was referring to inflation, which can be insidious, even if it's a slow bleed.

GaryA505 wrote:
Remember, we're not counting on a negative correlation with stocks. So, to moderate the volatility of our stock fund holdings, we include something that actually does nothing. Seems like if you're still in the accumulation phase it would be better to put it in a higher-yielding (higher risk) bond fund, and if your'e in decumulation just put it in short-term bonds, CDs, or an online bank. After all, if we change the stock/bond allocation (we are betting on the gain/risk of each) by age, why not do the same with the bonds?

It's important to look at the performance of the portfolio as a whole. I mentioned my above post that it often has been more efficient to use high-quality bonds to complement stocks, due to the correlation. Correlation doesn't have to be negative to be beneficial.

saltycaper · Post by **saltycaper** » Mon Jul 17, 2017 5:13 pm

GaryA505 wrote:
This is sort of what I was getting at in my previous post. By selecting between VBMFX or VBIIX (or in my vase FSITX or a Fid. Corp Bond), we are already making a risk-based selection, so why stop there?

Some don't. Some use high-yield (junk) bonds as part of their bond portfolio. If you're going to do something like that, I think it's worth considering some portion of your bonds as stocks, since they have stock-like risk. (I don't know how to figure a number, as I don't hold junk bonds myself.) Then you can ask yourself, "Wait. If I'm counting this portion of junk bonds as stocks, why don't I just invest a bit more in stocks instead?"

You're right to be curious about the logic people use to select Total Bond. Do they want to take credit risk, or don't they? I think a lot of it comes down to things like fund availability in retirement plans and popularity, low cost, and some people just go along with it, but also because it does kinda sorta follow the US bond market as a whole, excluding a bunch of niches for reasons I will not judge as good or bad.

You might search the forum for user Larry Swedroe, who used to post here, and search his many posts on the topic of credit risk and Total Bond. He did not favor Total Bond, both because of the credit risk and the convexity of mortgage-backed securities. Still, I think it's an "okay" choice.

GaryA505 · Post by **GaryA505** » Mon Jul 17, 2017 5:26 pm

saltycaper wrote:
GaryA505 wrote:
This is sort of what I was getting at in my previous post. By selecting between VBMFX or VBIIX (or in my vase FSITX or a Fid. Corp Bond), we are already making a risk-based selection, so why stop there?
Some don't. Some use high-yield (junk) bonds as part of their bond portfolio. If you're going to do something like that, I think it's worth considering some portion of your bonds as stocks, since they have stock-like risk. (I don't know how to figure a number, as I don't hold junk bonds myself.) Then you can ask yourself, "Wait. If I'm counting this portion of junk bonds as stocks, why don't I just invest a bit more in stocks instead?"

I'd say, "Because junk bonds are not as positively-correlated with stocks, as stocks are correlated with stocks". Would I be wrong?

And yes, I've looked at Larry's stuff.

saltycaper · Post by **saltycaper** » Mon Jul 17, 2017 5:53 pm

GaryA505 wrote:
I'd say, "Because junk bonds are not as positively-correlated with stocks, as stocks are correlated with stocks". Would I be wrong?

And yes, I've looked at Larry's stuff.

I don't think you'd be wrong in the general sense, and I think the degree to which there exists a credit risk premium continues to be studied and debated. But you might be wrong in this specific sense. I forget the very simple formula for why. I think it is because the higher return on junk bonds over Treasuries is not sufficiently higher to compensate for the higher correlation that junk bonds have with stocks. In other words, the correlation would need to be lower or the return would have to be higher in order to make the math work. It does seem that in the past, you've been able to get a slightly higher return with the same standard deviation, or the same return with a slightly lower standard deviation, by avoiding high yield bonds and credit risk in general. I cheat a little, but I stick to short-term high-quality corporate bonds for my credit risk.

GaryA505 · Post by **GaryA505** » Mon Jul 17, 2017 5:56 pm

As this discussion progressed, a question occurred to me. If we don't think past performance of a fund (or asset class) is a good predictor of future performance, why would we think past risk is a good predictor of future risk? And, if we really can't predict future risk, than how can we choose stock/bond allocations based on risk?

saltycaper · Post by **saltycaper** » Mon Jul 17, 2017 6:02 pm

GaryA505 wrote:As this discussion progressed, a question occurred to me. If we don't think past performance of a fund (or asset class) is a good predictor of future performance, why would we think past risk is a good predictor of future risk? And, if we really can't predict future risk, than how can we choose stock/bond allocations based on risk?

I myself think past performance and risk is the best indicator of future performance and risk that we have, modified by our limited explanatory powers. (I'm referring to asset classes in general, not Fund Manager X.) Can't speak for others.

GaryA505 · Post by **GaryA505** » Mon Jul 17, 2017 6:19 pm

Salty - Thanks for all the info. I'm going to (as my master's thesis advisor put it) "mull it over" for a while.

SpringMan · Post by **SpringMan** » Tue Jul 18, 2017 11:05 am

Taylor Larimore wrote:
Vanguard does not offer a multi-sector bond fund.
Springman:

Vanguard Total Bond Market holds good quality bonds in many sectors. What am I missing?

https://personal.vanguard.com/us/funds/ ... =INT#tab=2

Thank you and best wishes.
Taylor

I was using Morningstar's definition of multi-sector bond funds. Here is a list of them, no Vanguard funds are included.
http://news.morningstar.com/fund-catego ... ca$mu.aspx
My largest holding is VBTLX, Total Bond Market Index, but still have some other bond funds like Vanguard Short Term Corp, Vanguard Intermediate Investment grade, and a dash of High Yield and multi-sector. Some of these are in spouse's IRA accounts. I know simplicity is a virtue, my bad.

Thesaints · Post by **Thesaints** » Tue Jul 18, 2017 11:17 am

GaryA505 wrote:As this discussion progressed, a question occurred to me. If we don't think past performance of a fund (or asset class) is a good predictor of future performance, why would we think past risk is a good predictor of future risk? And, if we really can't predict future risk, than how can we choose stock/bond allocations based on risk?

Past risk is a better (but certainly not perfect) predictor of future risk than past average returns are of future returns.

Daily average temperature is a lousy predictor of future temperature at any one moment. On the other hand, daily temperature variance (taken hourly, for instance) is a pretty good one, until the season changes.

GaryA505 · Post by **GaryA505** » Tue Jul 18, 2017 11:51 am

Thinking on this a bit more, especially regarding the role of bonds (or bond-like investments) in an AA, I recall that some investors (Michael Kitces for one) like to talk about "human capital" as a bond-like asset for those still working. This of course assumes that you are still working and that your employment is more bond-like than stock-like.

Shouldn't that that impact the AA goal, and the types of bond-like investments you buy? I mean, wouldn't it be very different for these situations:
1. Retired (living off investments)
2. Working, employment is high-paying but insecure (stock-like)
3. Working, employment is low-paying but secure (bond-like)

trueblueky · Post by **trueblueky** » Tue Jul 18, 2017 12:16 pm

GaryA505 wrote:Thinking on this a bit more, especially regarding the role of bonds (or bond-like investments) in an AA, I recall that some investors (Michael Kitces for one) like to talk about "human capital" as a bond-like asset for those still working. This of course assumes that you are still working and that your employment is more bond-like than stock-like.

Shouldn't that that impact the AA goal, and the types of bond-like investments you buy? I mean, wouldn't it be very different for these situations:
1. Retired (living off investments)
2. Working, employment is high-paying but insecure (stock-like)
3. Working, employment is low-paying but secure (bond-like)

Milevsky wrote the book on this. He says, if your job is bond-like (e.g., tenured professor), you can afford to take more risk, but if your job is stock-like (e.g., entrepreneur), you can't afford as much risk. The irony is that people in safe jobs tend toward safe investments, and the adrenaline junkies go for risky jobs and risky investments.

https://www.amazon.com/dp/B009EC7K0S/re ... TF8&btkr=1

ruralavalon · Post by **ruralavalon** » Tue Jul 18, 2017 12:23 pm

GaryA505 wrote:As this discussion progressed, a question occurred to me. If we don't think past performance of a fund (or asset class) is a good predictor of future performance, why would we think past risk is a good predictor of future risk? And, if we really can't predict future risk, than how can we choose stock/bond allocations based on risk?

GaryA505 wrote:Thinking on this a bit more, especially regarding the role of bonds (or bond-like investments) in an AA, I recall that some investors (Michael Kitces for one) like to talk about "human capital" as a bond-like asset for those still working. This of course assumes that you are still working and that your employment is more bond-like than stock-like.

Shouldn't that that impact the AA goal, and the types of bond-like investments you buy? I mean, wouldn't it be very different for these situations:
1. Retired (living off investments)
2. Working, employment is high-paying but insecure (stock-like)
3. Working, employment is low-paying but secure (bond-like)

These are all interesting questions, worthy of discussion.

But it seems to me that you may be over thinking this. Don't get bogged down in analysis paralysis.

Fidelity U.S. Bond Index Fund Premium Class (FSITX) is available in your 401k, and is a very good bond fund to use.