How are folks feeling about the Vanguard Tot. Bond Mkt Index

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
boglebob
Posts: 32
Joined: Wed Jun 11, 2008 4:08 pm
Location: TIBURON, CA

How are folks feeling about the Vanguard Tot. Bond Mkt Index

Post by boglebob » Thu Nov 06, 2008 6:47 pm

As a recent retiree with approx. 60% of my 401 in the Vanguard Total Bond Market Index fund, I'm concerned about 39% of its holdings being in Fanny Mae and Freddy Mac. (The remaining 40% is in stock indexes and cash.)

Has the government's intervention made those bonds still a good choice to hold so much of my retirement in?

Can anyone suggest an alternative. I have a pension (my wife does not) and I am interested in a safe portfolio that will just beat inflation.

User avatar
Quasimodo
Posts: 1357
Joined: Thu May 03, 2007 1:58 pm

Post by Quasimodo » Thu Nov 06, 2008 7:02 pm

I prefer a treasury bond fund for safety, and probably short term for lower interest rate risk. So short term treasury looks better to me than total bond market.

Now that Vanguard's Precious Metals and Mining fund is open again, I would consider that for some of your stock allocation for inflation protection.

As a still-working 70-year-old, I am certainly no beacon of enlightenment, however.

John
Many wealthy people are little more than janitors of their possessions. | | Frank Lloyd Wright, architect (1867-1959)

Topic Author
boglebob
Posts: 32
Joined: Wed Jun 11, 2008 4:08 pm
Location: TIBURON, CA

Thanks, Quas

Post by boglebob » Thu Nov 06, 2008 7:13 pm

Yes the Treasuries are looking better.

Take care

User avatar
Taylor Larimore
Advisory Board
Posts: 28818
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: How are folks feeling about the Vanguard Tot. Bond Mkt I

Post by Taylor Larimore » Thu Nov 06, 2008 9:04 pm

boglebob wrote:As a recent retiree with approx. 60% of my 401 in the Vanguard Total Bond Market Index fund, I'm concerned about 39% of its holdings being in Fanny Mae and Freddy Mac. (The remaining 40% is in stock indexes and cash.)

Has the government's intervention made those bonds still a good choice to hold so much of my retirement in?

Can anyone suggest an alternative. I have a pension (my wife does not) and I am interested in a safe portfolio that will just beat inflation.


Hi Boglebob:

In my opinion, you should stick with your Total Bond Market Index Fund. This high-quality, very diversified bond fund is doing exactly what it was supposed to do--provide income and safety during rocky times.

TBM is down less than one-tenth of one percent year-to-date (U.S. stocks are down -37%). TBM is in the top 14% of all intermediate-term bond funds. It is yielding 5%.

Mr. Bogle recommended TBM in his recently published, "The Little Book of Common Sense Investing."

Avoid media noise and "recency." Stay the course.

Best wishes.
Taylor

Topic Author
boglebob
Posts: 32
Joined: Wed Jun 11, 2008 4:08 pm
Location: TIBURON, CA

Thanks

Post by boglebob » Thu Nov 06, 2008 9:56 pm

Thank you. That's reassuring.

BR

User avatar
simplesimon
Posts: 3431
Joined: Mon Feb 25, 2008 8:53 pm
Location: Boston, MA

Post by simplesimon » Thu Nov 06, 2008 11:29 pm

Does the idea of stock diversification apply to bonds? Owning all the bonds is better than owning just treasuries?

Ddiego
Posts: 4
Joined: Wed Jul 23, 2008 11:12 am

Post by Ddiego » Fri Nov 07, 2008 12:15 am

I transferred all of my IRA from AGTHX(Amer. Growth Fund) a year or so ago to TBM and boy am I glad I did. It took me 25yrs to accummulate. I got a little nervous too when TBM dropped a bit but it does sure beat where AGTHX is today. I am going to hang in...

plake15
Posts: 1043
Joined: Sat Oct 06, 2007 8:28 am

Post by plake15 » Fri Nov 07, 2008 12:16 am

simplesimon wrote:Does the idea of stock diversification apply to bonds? Owning all the bonds is better than owning just treasuries?
sure it does..during rough economic stretches,treasuries will be the safe haven people run to,but treasuries can become overvalued and when the herd comes running out of the safety cave,treasuries could take a good size hit..

look at bonds in 2003 and even into 2004 after the tech bubble burst and people came charging out the safety cave.. I think you wanna leave a portion,like a quarter of your bond portfolio to soak up some the big returns when they come about..that's what TBM does.

High yield corporate VWEHX returns..
2003 +17.20%
2004 +8.52%

Vanguard Intermediate-Term Treasury (VFITX)
2003 +2.37%
2004 +3.40%

I think diversifcation works just as well with bonds just as in does with almost anything,I think treasuries should the majority of bonds you own no doubt,but I don;t think it should be your sole holding..Vanguard Total bond fund has been in the top 15% of intermediate bond funds in it's history cause it works well in both strong economic and weaker economic times with it's diversifcation.
Last edited by plake15 on Fri Nov 07, 2008 12:36 am, edited 2 times in total.

User avatar
FrugalInvestor
Posts: 5271
Joined: Fri Nov 07, 2008 12:20 am

Post by FrugalInvestor » Fri Nov 07, 2008 12:30 am

What is the risk of significant defaults in the Total Bond Fund given that we are apparently heading into a global economic recession and how might this impact the fund?

dumbmoney
Posts: 2321
Joined: Sun Mar 16, 2008 8:58 pm

Post by dumbmoney » Fri Nov 07, 2008 12:38 am

plake15 wrote:look at bonds in 2003 and even into 2004 after the tech bubble burst and people came charging out the safety cave.. I think you wanna leave a portion,like a quarter of your bond portfolio to soak up some the big returns when they come about..that's what TBM does.

High yield corporate VWEHX returns..
2003 +17.20%
2004 +8.52%

Vanguard Intermediate-Term Treasury (VFITX)
2003 +2.37%
2004 +3.40%
Vanguard Total Stock Market:
2003 +31.35%
2004 +12.52%

You don't need corporate bonds if you own stocks.
I am pleased to report that the invisible forces of destruction have been unmasked, marking a turning point chapter when the fraudulent and speculative winds are cast into the inferno of extinction.

plake15
Posts: 1043
Joined: Sat Oct 06, 2007 8:28 am

Post by plake15 » Fri Nov 07, 2008 12:46 am

If you look at the fund returns over the past 15 years of both VG Intermediate term treasuries and Total bond bond they both are almost exactly the same..around 6.50%

Total bond fund did better than treasuries in 1990's cause of stronger economic period...

Treasuries have done better than Total bond in this decade cause of weaker economic period and flight to safety...

but they both end up almost exactly the same in return :)

User avatar
PiperWarrior
Posts: 4068
Joined: Fri Dec 21, 2007 4:55 am
Location: right on course

Post by PiperWarrior » Fri Nov 07, 2008 1:53 am

Here is some fun with backtesting.

I'm sweeping from:

40% Vanguard Total Stock Mkt Idx (VTSMX) (0.15%)
10% Vanguard Total Intl Stock Index (VGTSX) (0.27%)
50% Vanguard Interm-Term Treasury (VFITX) (0.26%)
0% Vanguard High-Yield Corporate (VWEHX) (0.25%)

to:

40% Vanguard Total Stock Mkt Idx (VTSMX) (0.15%)
10% Vanguard Total Intl Stock Index (VGTSX) (0.27%)
0% Vanguard Interm-Term Treasury (VFITX) (0.26%)
50% Vanguard High-Yield Corporate (VWEHX) (0.25%)

Each color represents one time period specified in the upper right corner. For each color, the leftmost point represents the portfolio without VWEHX. Each dot represents 2.5% IT Treasury replaced with VWEHX. For VWEHX, the real Vanguard data was used. For others, data are supplemented with respective indexes for years in which corresponding Vanguard funds weren't available. Annual rebalancing is assumed.

Image

Historically, replacing intermediate-term Treasury with Vanguard High-Yield Corporate (VWEHX) (0.25%) made an otherwise diversified beta-only portfolio more volatitle without changing the CAGR (compound annual growth rate) very much.

If we replace IT Treasury with TBM, things are not as clear cut as the junk bond case. Points are so clustered, so I am plotting:

40% Vanguard Total Stock Mkt Idx (VTSMX) (0.15%)
10% Vanguard Total Intl Stock Index (VGTSX) (0.27%)
50% Vanguard Interm-Term Treasury (VFITX) (0.26%)
0% Vanguard Total Bond Market Index (VBMFX) (0.19%)

and then sweeping from:

40% Vanguard Total Stock Mkt Idx (VTSMX) (0.15%)
10% Vanguard Total Intl Stock Index (VGTSX) (0.27%)
25% Vanguard Interm-Term Treasury (VFITX) (0.26%)
25% Vanguard Total Bond Market Index (VBMFX) (0.19%)

to:

40% Vanguard Total Stock Mkt Idx (VTSMX) (0.15%)
10% Vanguard Total Intl Stock Index (VGTSX) (0.27%)
0% Vanguard Interm-Term Treasury (VFITX) (0.26%)
50% Vanguard Total Bond Market Index (VBMFX) (0.19%)

to indicate which end is filled with IT Treasuries.

Image

Historically, replacing IT Treasuries with TBM:
  • reduced the volatility while retaining the CAGR in 1990's,
  • kept the risk adjusted return more or less in 1985-1994, and
  • reduced the risk adjusted return in other periods.
Again, points are very clustered. Some might say that the difference is not significant. Others might say it's a matter of taste. Yet others might say no way.

As always, the past performance is not a guarantee of the future performance.

PaPaw
Posts: 400
Joined: Mon Mar 10, 2008 4:18 pm

Post by PaPaw » Fri Nov 07, 2008 6:17 am

PiperWarrior wrote:
Historically, replacing IT Treasuries with TBM:
  • reduced the volatility while retaining the CAGR in 1990's,
  • kept the risk adjusted return more or less in 1985-1994, and
  • reduced the risk adjusted return in other periods.
Again, points are very clustered. Some might say that the difference is not significant. Others might say it's a matter of taste. Yet others might say no way.

As always, the past performance is not a guarantee of the future performance.
Piper, Excellent description. Thanks for sharing.

Have you by any chance done this study graphically with ST Treasuries and TBM? I'm guessing the volatility will be less and the CAGR less with ST vs IT Treasuries?

.... PaPaw

User avatar
Tall Grass
Posts: 1205
Joined: Mon Jul 07, 2008 8:11 pm
Location: Kansas

Re: How are folks feeling about the Vanguard Tot. Bond Mkt I

Post by Tall Grass » Fri Nov 07, 2008 12:32 pm

boglebob wrote:As a recent retiree with approx. 60% of my 401 in the Vanguard Total Bond Market Index fund, I'm concerned about 39% of its holdings being in Fanny Mae and Freddy Mac. (The remaining 40% is in stock indexes and cash.)

Has the government's intervention made those bonds still a good choice to hold so much of my retirement in?

Can anyone suggest an alternative. I have a pension (my wife does not) and I am interested in a safe portfolio that will just beat inflation.
I prefer a mix of Vanguard Short-Term Bond Index Fund and Vanguard Intermediate-Term Bond Index Fund.

There is considerably less exposure to mortgage-backed securities and long bonds, which I don't feel are worth the extra risk for the very small difference in return compared to intermediate bonds.
"A wise man should have money in his head, but not in his heart." - Jonathan Swift

User avatar
PiperWarrior
Posts: 4068
Joined: Fri Dec 21, 2007 4:55 am
Location: right on course

Post by PiperWarrior » Sun Nov 09, 2008 3:32 am

PaPaw wrote:Piper, Excellent description. Thanks for sharing.
You are welcome.
PaPaw wrote:Have you by any chance done this study graphically with ST Treasuries and TBM? I'm guessing the volatility will be less and the CAGR less with ST vs IT Treasuries?
I am guessing that you'd like to see all three (ST Treasury, IT Treasury, and TBM) in one place. I struggled a bit with presentation, but here is the least bad one I came up with. The graph should be self-explanatory.

Each point corresponds to:

40% Vanguard Total Stock Market (VTSMX) (0.05%)
10% Vanguard Total International Market (VGTSX) (0.27%)
50% one of the bond funds

for the specified time period.

Here are fund names.

Vanguard Short-Term Treasury (VFISX) (0.22%)
Vanguard Interm-Term Treasury (VFITX) (0.26%)
Vanguard Total Bond Market Index (VBMFX) (0.19%)

Image

So, the portfolios with ST Treasury didn't perform badly. There are a few periods where IT Treasury (term risk) and/or TBM (the combination of term risk, credit risk, and prepayment risk) did help. I don't know the historical composition of TBM, so I don't have many insightful things to say.

In any case, all this is history.

These days, we have a strange beast called TIPS. Given the introduction of TIPS, the bond market (or even the entire financial market) may behave slightly differently than in the past. (Needless to say, a lot of black swans seem to be hiding everywhere.)

Another thing is that if you switch to "safe" bonds like ST Treasury from IT Treasury or TBM, you could take a tiny bit more risk on the equity side without affecting the volatility too much.

Personally, I don't want to be beaten by the term risk too hard, so I'm sticking to Larry Swedroe's advice to extend the maturity only if I get 20bp/annum extra and shift between ST Treasury and IT Treasury (in addition to TIPS). I haven't fully understood his argument to dominate the fixed income portfolio with TIPS, so I haven't got rid of nominal Treasuries.

As always, the past performance is not a guarantee of the future performance.

User avatar
Kenkat
Posts: 5352
Joined: Thu Mar 01, 2007 11:18 am
Location: Cincinnati, OH

Post by Kenkat » Sun Nov 09, 2008 10:13 am

I too am an advocate of Total Bond Index. I like the fact that it holds a wide range of bonds; short term, long term, treasuries, GNMA, etc. I think you can always point to some portion of it's portfolio and raise a red flag based on current events, but it is highly diversified and that is it's strength.

I was reading posts recently lamenting corporate bonds and was quite honestly confused until I looked into some of the other Vanguard bond funds. As Taylor mentioned, Total Bond Index shows a miniscule loss YTD; alternate funds such as Intermediate Investment Grade have losses in excess of 10%.

We can never know what the next crisis may be so I like the fact that Total Bond Index gives me both exposure to and diverification away from specific bond sectors.

Best regards,
Ken

User avatar
soaring
Posts: 1440
Joined: Sun Nov 18, 2007 9:09 am
Location: North Central Florida

Post by soaring » Sun Nov 09, 2008 12:20 pm

I'm not really smart enough to know which way to lean TMB(VBMFX) or combination of ST index (VBISX) / IT index (VBIIX) as one poster mentioned. I made a side by side comparison of combined 50% each ST & IT index and TBM.

You can view result at this link.

http://sites.google.com/site/soaringproject/

gene
Desiderata

Gregory
Posts: 1554
Joined: Tue Feb 20, 2007 2:26 pm

Post by Gregory » Sun Nov 09, 2008 1:09 pm

What I find tough to sort out is the divergence of opinion from experienced, erudite investors like Mr. Bogle (rec's TSM in his latest book; has also rec'd intermed-term bond index fund); Swensen (50%:50% LT Treas & TIPS); Larry (speaks well of ST corp's, very fond of TIPS); Rick Ferri (diversify among types of bond funds). These are all really, really smart people who manage big money for a living.
Pecuniae imperare oportet, non servire. | Fortuna vitrea est; tum cum splendit frangitur. -Syrus

User avatar
mickeyd
Posts: 4758
Joined: Fri Feb 23, 2007 3:19 pm
Location: Deep in the Heart of South Texas

Post by mickeyd » Sun Nov 09, 2008 1:25 pm

I have always preferred the I-T Bond Idx to the TBM because of it's lack of mortgage backed bonds. I have my FI divided about 50/50 between TIPS and I-T, which has seemed to be a good mix for my portfolio.
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle

grok87
Posts: 8865
Joined: Tue Feb 27, 2007 9:00 pm

Vanguard Bond Index vs. 50/50 Treasuries/TIPs

Post by grok87 » Sun Nov 09, 2008 9:03 pm

I like the 50/50 Treasuries/TIPs approach too and think it is better than the Total Bond Index.
It has to be said though, that the bond index is currently outperforming the 50/50 Treasuries/TIPs mix on a year to date basis. I think roughly treasuries are up 5%, Tips are down 6.5% and the bond index is flat.
cheers,
RIP Mr. Bogle.

Post Reply