Critique Our Bond Portfolio, Please!

[JaneyLH]

I would greatly appreciate any feedback you all can provide on whether I should make any changes to the bond portion of our portfolio – - which I really don’t understand very well, despite diligent reading here.

My husband and I are 65 and 66, and we have essentially been retired 10 years/6 years.
I became a Boglehead a bit over 6 years ago, with wonderful assistance and support from members of this forum (especially retiredjg, cherijoh, 123, BL, Vitalspark, sls239, Faith20879, and simpleton – thank you from the bottom of my heart!).

From a completely crazy, convoluted, and expensive portfolio of 88 different investments built by a FA to (almost) a 3-fund self-managed portfolio, it’s been a great transition. Looking back at my original post asking for help, our portfolio has grown from $2.9 M to $4.0 M while withdrawing between $100-150 K from the portfolio each year.

Last November my husband and I discussed our 70/30 asset allocation and decided we didn’t require that much risk anymore. We moved to a 55/45 asset allocation, and that has considerably smoothed the market pattern we have experienced recently. We are comfortable now with that allocation and feel we are now in a position to continue our lifestyle despite the ups and downs of the stock market.

The bond portion of our portfolio includes:

Vanguard Total Bond Market: $785K (44%)
Vanguard Total International Bond Market: $210K (12%)
Vanguard Intermediate-Term Investment-Grade Fund $237K (13%)
Vanguard Wellington Fund $98K (6%)*
*Bond component of Wellington Fund, approximately one third of total fund balance
TSP G Fund $445K (25%)*
*entire TSP investment

The only reason for the Intermediate-Term Investment-Grade fund is because our initial Vanguard representative highly recommended it in addition to Total Stock Market. The only reason for the large investment in Wellington Fund is that I ran out of carry-forward losses and had to focus on transitioning more expensive funds out of the taxable portfolio when we moved to Vanguard.

I have read many discussions of TIPS and other bond strategies but it mostly gives me a headache. I want us to have a generally “good enough” portfolio here, to balance the risk on the equities side while prudently protecting against inflation risk. So, again, I turn to my Boglehead friends! Do we need TIPS or does TSP G Fund give us sufficient inflation protection. Is the Intermediate-Term fund needed? I would be happy to reduce the funds to just Total Bond Market and TSP G Fund if that would be "good enough". (All the bond holdings except for Wellington are in retirement accounts, so other than that no tax implications of changing things around.)

Your observations and suggestions would be most welcome!

[vineviz]

I have read many discussions of TIPS and other bond strategies but it mostly gives me a headache. I want us to have a generally “good enough” portfolio here, to balance the risk on the equities side while prudently protecting against inflation risk. So, again, I turn to my Boglehead friends! Do we need TIPS or does TSP G Fund give us sufficient inflation protection. Is the Intermediate-Term fund needed?

"Sufficient" is in the eye of the beholder, but I'd say "no" the G Fund is not sufficient inflation protection. I know some people are attached to it, so if you want to keep it I think my solution would actually be to replace all the Vanguard funds with two new ones

25% TSP G Fund
30% Vanguard Long-Term Investment-Grade Fund Admiral Shares (VWETX)
45% Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)

This would result in a little less interest rate risk than you're currently exposed to and much less inflation risk. Put the rest in Vanguard Total World Stock Index Fund Admiral Shares (VTWAX) or Vanguard Global Minimum Volatility Fund Admiral Shares (VMNVX) and you've got a tidy four fund portfolio.

[dbr]

Inflation "protection" has to apply to the whole portfolio. There is no investment in bonds that as part of a portfolio protects the whole thing against inflation. Your question is whether or not the real return distribution* for your portfolio is generally positive so that your portfolio will run ahead of inflation on the long term outcome. At 55/45 with those investments I would say you should not worry.

If you do think you want more definite "protection" against inflation by doing something with your bonds, you could invest half or even all your bonds in an intermediate TIPS fund such as VAIPX. One never knows exactly how any single concentrated investment in bonds will perform, so some people would not put all the fixed income in TIPS even though that might be a logical thing to do. My fixed income is half in intermediate Treasuries and half in intermediate TIPS. If you want more return against that fixed income plan, allocate a little more to stocks, like 60/40.

*Distribution means the probability distribution of annual (real) returns. You can think of this as the universe from which each year's return is a random pick. Expected return is the average value of that distribution and the range of that distribution around the average is the risk.

Note vineviz and I are making about the same overall recommendation.

[livesoft]

Frankly, I wouldn't change a thing.

Don't forget that TIPS cost extra in order to "insure" against "unexpected" inflation. All bonds (non-TIPS and TIPS) take into account expected inflation. That is, all bonds hold up their pants with belts, but TIPS hold up their pants with belts and suspenders.

[vineviz]

Don't forget that TIPS cost extra in order to "insure" against "unexpected" inflation.

It's not literally true that TIPS "cost extra", and even if it were true that wouldn't lead to a conclusion that the risk of unexpectedly high inflation can safely be ignored.

[fishnskiguy]

It looks good to me. I think you can leave it as it is.

I am of the opinion that there are thousands of good portfolios for each of us and probably no perfect portfolio for any of us.

At one time we held Total Stock Market, Small Cap Value Index, Large Cap Value Index , Emerging Market Index, Total Bond Index, Intermediate Bond Index and Short Term Bond Index, Inflation Protected Securities Fund ,and Precious Metals and Mining at Vanguard. It was kind of fun to fuss around with those holding, checking in frequently and rebalance as necessary according to our plan.

After a number of years with that plan I came to realize that my wife would be lost if I was not around. My wife is plenty bright but finance is not her strong suit. She has seen Trading Places at least twenty times and still doesn't understand the concept that you can sell something you don't own.

So a while back I moved everything at Vanguard into either Life Strategy Moderate Growth or Short Term Bond Index. Our portfolio is now 44% Life Strategy Moderate Growth, 12% Short Term Bond Index, 25% in a five year CD ladder at Navy Federal Credit Union, and 19% in Series I bonds purchased in 2000 at 3% real return. I am 76 and DW is 73. Our portfolio works out to about 25% stock and 75% bonds which is where I think we should be. Do I think it is perfect? No, but I think it is good enough.

Chris

[JaneyLH]

After a number of years with that plan I came to realize that my wife would be lost if I was not around. My wife is plenty bright but finance is not her strong suit. She has seen Trading Places at least twenty times and still doesn't understand the concept that you can sell something you don't own.

I understand... I spent some time this weekend explaining tax loss harvesting to my husband, and he could not visualize how it could be possible to get any benefit from selling a stock that is under water.