Rethinking the use of Vanguard Total Bond Fund in my 3 Fund Porfolio

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Finridge
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Rethinking the use of Vanguard Total Bond Fund in my 3 Fund Porfolio

Post by Finridge » Sat Jan 13, 2018 4:38 pm

I'm revisiting my bond strategy.

I have never been enamored by the Vanguard Total Bond Market Fund in the way I have by Vanguard's Total Stock Index Fund and Total International Stock Index Fund, but have had a hard time articulating, even to myself, why this is the case. But I think it's largely because it's one thing to own stock in companies, and another to own debt. Stock is stock. Debt, on the other hand, is structured to suit the needs of the lender the debtor, over different timespans.

[EDIT: I was wrong about the taxes on treasuries - so I am deleting the erroneous paragraph. Thanks for correcting me.]

I'm thinking of completely or partially replacing the Vanguard Total Bond Market Fund with Vanguard Intermediate-Term Corporate Bond Index Admiral Shares (VICSX) or the Vanguard Intermediate-Term Investment-Grade (VFICX)

I have compared the performance of these funds in https://www.portfoliovisualizer.com/ and over the last 20 years I can't find any point in time where there is any two year period where the Total Bond Fund outperformed either of them.

What am I missing? Please feel free to point out any flaws or mistakes you see in my reasoning. If you think staying with the Total Bond Bund is best, why is that? Or if you have other bond funds that you prefer, I'd like to hear about them.
Last edited by Finridge on Sat Jan 13, 2018 4:59 pm, edited 1 time in total.

livesoft
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Re: Rethinking the use of Vanguard Total Bond Fund in my 3 Fund Porfolio

Post by livesoft » Sat Jan 13, 2018 4:50 pm

A clarification: Treasuries are not exempt from Federal taxes, but are exempt from State taxes.

Do not forget to look at not only "outperform", but also "underperform" because many people do not like to have a drop more than total bond index.
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lack_ey
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Re: Rethinking the use of Vanguard Total Bond Fund in my 3 Fund Porfolio

Post by lack_ey » Sat Jan 13, 2018 4:52 pm

Finridge wrote:
Sat Jan 13, 2018 4:38 pm
With the exception that treasuries and munis are exempt from federal taxes. The Total Bond Fund is mostly treasuries, but also has corporate bonds, so it's not tax exempt and is usually put in tax-advantaged accounts (which is where I have mine).
Treasury bonds are exempt from state income tax, not federal income tax, so part of the premise is false.
Finridge wrote:
Sat Jan 13, 2018 4:38 pm
I'm thinking of completely or partially replacing the Vanguard Total Bond Market Fund with Vanguard Intermediate-Term Corporate Bond Index Admiral Shares (VICSX) or the Vanguard Intermediate-Term Investment-Grade (VFICX)

I have compared the performance of these funds in https://www.portfoliovisualizer.com/ and over the last 20 years I can't find any point in time where there is any two year period where the Total Bond Fund outperformed either of them.
Even going by calendar years and not looking for inter-year periods, I see 1993-1994 being better for Total Bond relative to Intermediate-Term Investment Grade, and same for all two-year periods in 1996-2000 and 2005-2008.

Not so coincidentally, guess when corporate spreads were a bit lower and the periods they trended up?

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In any case, this is far from a make-or-break kind of scenario.

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ruralavalon
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Re: Rethinking the use of Vanguard Total Bond Fund in my 3 Fund Porfolio

Post by ruralavalon » Sat Jan 13, 2018 4:54 pm

Finridge wrote:
Sat Jan 13, 2018 4:38 pm
I'm revisiting my bond strategy.

I have never been enamored by the Vanguard Total Bond Market Fund in the way I have by Vanguard's Total Stock Index Fund and Total International Stock Index Fund, but have had a hard time articulating, even to myself, why this is the case. But I think it's largely because it's one thing to own stock in companies, and another to own debt. Stock is stock. Debt, on the other hand, is structured to suit the needs of the lender the debtor, over different timespans.

Also debt instruments have a greater range of tax consequences. Because bonds throw out interest that is taxed as ordinary income (higher than qualified dividends or long-term capital gains), bonds are generally not tax efficient. With the exception that treasuries and munis are exempt from federal taxes. The Total Bond Fund is mostly treasuries, but also has corporate bonds, so it's not tax exempt and is usually put in tax-advantaged accounts (which is where I have mine). But of course having treasures in a tax advantaged account is a bit of waste--treasuries' tax exempt goes hand in hand with a lower return, but by having them in a tax-advantaged account you are not getting the benefit of their being tax exempt.

I'm thinking of completely or partially replacing the Vanguard Total Bond Market Fund with Vanguard Intermediate-Term Corporate Bond Index Admiral Shares (VICSX) or the Vanguard Intermediate-Term Investment-Grade (VFICX)

I have compared the performance of these funds in https://www.portfoliovisualizer.com/ and over the last 20 years I can't find any point in time where there is any two year period where the Total Bond Fund outperformed either of them.

What am I missing? Please feel free to point out any flaws or mistakes you see in my reasoning. If you think staying with the Total Bond Bund is best, why is that? Or if you have other bond funds that you prefer, I'd like to hear about them.
I wouldn't want to use corporate bonds entirely and so lose the diversification of government bonds.

Vanguard has a number of good intermediate-term bond funds. Sometimes I think that Vanguard is just trying to make choosing difficult. We use Vanguard Intermediate-term Bond Index Fund Admiral Shares (VBILX) as our only bond fund.

If you want to add more corporate bonds then VBILX will work, it is about 50/50 government/corporate. Or either of the two funds you mention could be used to partially replace Vanguard Total Bond Market Index Fund.

In my opinion the primary purpose of the bond allocation is to limit volatility and risk.
Last edited by ruralavalon on Sat Jan 13, 2018 4:57 pm, edited 1 time in total.
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Dandy
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Re: Rethinking the use of Vanguard Total Bond Fund in my 3 Fund Porfolio

Post by Dandy » Sat Jan 13, 2018 4:57 pm

With the exception that treasuries and munis are exempt from federal taxes
Treasuries are not exempt from Federal Taxes - state taxes but not Federal. People who do not favor Total Bond often use the Intermediate Bond Index. Mr. Bogle feels that total bond has too much Treasuries and would suggest adding some Corporate bonds -- but I don't believe he recommends all the fixed income in a Corporate Bond Fund just to supplement the Total Bond Fund with some additional Corporate exposure.

Truth be told the Total Bond fund has a very good track record.

BigJohn
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Re: Rethinking the use of Vanguard Total Bond Fund in my 3 Fund Porfolio

Post by BigJohn » Sat Jan 13, 2018 5:43 pm

ruralavalon wrote:
Sat Jan 13, 2018 4:54 pm
We use Vanguard Intermediate-term Bond Index Fund Admiral Shares (VBILX) as our only bond fund.
I’m not a fan of TBM and this is my choice as well. I based my decision on the type and duration of bonds and whether they fit my needs not past performance. That said, I think it’s likely that 20 year’s from now either choice will have generated about the same result.

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