Vanguard Bond ETF choices and rebalancing

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toolmon
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Joined: Thu Aug 22, 2019 9:56 am

Vanguard Bond ETF choices and rebalancing

Post by toolmon »

Hello, I am somewhat new to investing, but have in the past year opened a Vanguard account and begun to invest a small amount of money in stock and bond ETFs. I am 67, retired from the Federal government with a pension and social security, and am getting ready to invest roughly $300K in funds I will be receiving as part of an inheritance. I have read several articles and entries about windfall investing. My risk tolerance seems to indicate about a 40% stock: 60% bond/cash split. In anticipation of receiving the funds, I expressed interest in the Vanguard personal advisor service (PAS) and spoke twice with an advisor who as part of their preliminary, no cost offering, outlined a potential plan consisting of a 40:60 stock:bond split with bond categories of 17% US short term bonds, 17% US intermediate term bonds, 8% US long term bonds, and 18% international bonds. He recommended the use of ETFs instead of conventional mutual funds, and I have researched the different bond ETF offerings within Vanguard and come up with my own tentative mix which includes BND (total bond market ETF), BSV (short term bond ETF), BIV (intermed term bond ETF), BLV (long term bond ETF), and also VGSH (short term treasure ETF), VTIP (short term inflation protected securities ETF), and BNDX (total int'l bond index ETF). A month ago I purchased a few shares of each to test the waters, and all except the VTIP and BND have shown losses, which may perhaps be expected in bond funds when stocks are rallying. But my current lack of understanding of how the different bond ETFs work in relation to one another and current market conditions is a serious shortcoming. So do you think that going ahead with the Vanguard PAS once I receive the inheritance and paying the 0.3% fee would be worthwhile for a few years (or for the long term) in order for me to learn from them about allocating and rebalancing the bond fund ETFs in response to shifting market conditions, or could I do just as well by learning on my own and self-managing the funds? I'm a retired scientist and now have the time and interest to focus on investing. And what resources would people suggest other than the PAS to learn how to best choose and balance Vanguard bond ETFs now and in the future? Any advice is much appreciated.
dbr
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Re: Vanguard Bond ETF choices and rebalancing

Post by dbr »

I think it is a mistake to try to parse out all kind of differences, real or imagined, among bond investments. It is sufficient to hold any low cost, diversified, intermediate term bonds just as a general answer. Keep in mind many bond funds, certainly total bond, are intermediate duration on average but actually hold a range of durations. Remember these things are not similar to specing out the performance of an automobile, computer, or audio system based on measurements and data.** That your bond fund might have lost a little money in a short time period is absolutely irrelevant except that it should make you aware that the value of such an investment changes all the time, both up and down. If you don't want to see that happen then an alternative would be to go to a bank and put the money in CDs. In reality there is no reason for a long term investor in stocks and bonds to worry about the constant ups and downs in bond prices.

Regarding this statement " . . . my current lack of understanding of how the different bond ETFs work in relation to one another and current market conditions is a serious shortcoming . . ." you should not even be thinking about these things. You are not flying an airplane and attending to speed, altitude, fuel consumption, ETA and what the effect of the weather will be on that.

You don't need to spend money on VPAS.

My recommendation is to do some reading at getting started: https://www.bogleheads.org/wiki/Main_Page

and then in particular consider three fund investing. Most of the time there is no good reason to go past this: https://www.bogleheads.org/wiki/Three-fund_portfolio

If you are at Vanguard I would see no reason to use ETFs rather than Vanguard mutual funds. People not at Vanguard find Vanguard ETFs a little more practical. It does appear Vanguard is pushing investors to ETFs, but that does not mean you should go there. It doesn't matter much anyway.

** My career experience is in physics, mathematics, and applied science and engineering, so my allergy to doing too much math with investing does not come from a background aversion to math.
Nightowl99
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Re: Vanguard Bond ETF choices and rebalancing

Post by Nightowl99 »

Just to give a different opinion, I don't think there's anything wrong with the choice of bond funds you've selected since I have many of those same funds in my own Vanguard accounts. Many people on this forum believe it simplifies things to have only one bond fund, though, such as BND or BIV, which is probably fine, but I like also having a short-term bond fund for keeping the next few years of expenses in since the short-term bond fund has a shorter duration and stands to lose less when interest rates rise. I think having some VTIP is good too, to provide a degree of inflation protection, and so on.

I'm still learning about investing myself but handle my accounts on my own, in an unscientific, unmathmatical way. I was an English major in college, so if I can do it, I'm sure that you can too. I can recommend a couple of books you may want to check out: The Boglehead's Guide to Investing and Making the Most of Your Money Now. Those are my favorites but there are many others.

Also, while there are some people who prefer either mutual funds or ETFs, you can have both if you want to. There may be a slight tax advantage to keeping ETFs in a taxable account, if I remember correctly, but I favor mutual funds in the traditional IRA and Roth accounts. Someone will be sure to correct me if I'm mistaken about that, though.

Good Luck!
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grabiner
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Re: Vanguard Bond ETF choices and rebalancing

Post by grabiner »

If you are retired from the Federal government, do you still have the TSP? If so, you may want to hold all your bonds in the TSP G fund (or your entire TSP in the G fund if it isn't large enough for your target bond allocation).
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sycamore
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Re: Vanguard Bond ETF choices and rebalancing

Post by sycamore »

toolmon wrote: Thu Aug 27, 2020 10:01 am ...an advisor who as part of their preliminary, no cost offering, outlined a potential plan consisting of a 40:60 stock:bond split with bond categories of 17% US short term bonds, 17% US intermediate term bonds, 8% US long term bonds, and 18% international bonds.
That overall AA is reasonable. I personally don't find international bonds to be compelling but it's unlikely they'd hurt your portfolio.

Regarding the US short/intermediate/long split, 17/17/8 is reasonable and so is 15/15/12, and 10/10/22, and 18/18/6, and 0/42/0, etc. A primarily intermediate-term bond portfolio has much to recommend it, even if it's imperfect.
toolmon wrote: Thu Aug 27, 2020 10:01 am He recommended the use of ETFs instead of conventional mutual funds
Definitely learn about the relative merits of each. In my opinion, the two are very similar and will get the basic job done of investing in bonds. The differences are relatively minor but some people very strongly about the differences; it's a matter of personal preference.
toolmon wrote: Thu Aug 27, 2020 10:01 am ... and I have researched the different bond ETF offerings within Vanguard and come up with my own tentative mix which includes BND (total bond market ETF), BSV (short term bond ETF), BIV (intermed term bond ETF), BLV (long term bond ETF), and also VGSH (short term treasure ETF), VTIP (short term inflation protected securities ETF), and BNDX (total int'l bond index ETF).
There's a lot of overlap and a lot of funds. You should be able to answer the questions "why?" and "am I committed to this fund for the long term?" for each fund.

I suggest you compute your tentative portfolio's exposure to various durations and credit quality. How? Visit Vanguard's portfolio page for each fund, e.g., https://investor.vanguard.com/etf/profile/portfolio/bnd. And see how much of each fund is invested in US Govt bonds, AAA bonds, AA, A, Baa, etc. See how much is in each duration 'bucket" (<1 year, 1-3 years, etc.) Then compute the weighted average. Maybe there's a online tool for doing this, but doing it by hand is a good exercise.

Once you know your own portfolio's overall characteristics, see if you can get the same thing but with fewer funds. For example, start with 75% in BND and then "tilt" to more/less Treasurys or more/less short-term. Maybe 2 or 3 funds is all you need?
toolmon wrote: Thu Aug 27, 2020 10:01 am A month ago I purchased a few shares of each to test the waters, and all except the VTIP and BND have shown losses, which may perhaps be expected in bond funds when stocks are rallying.
Get used to it :) Bonds and stocks sometime move in the same direction, sometimes not. There are many variables at play: good or bad news about economic recovery, what the Fed might do (or not), etc. The market will acts in ways you don't expect. It's not a science.

Regarding VPAS, I think it's a helpful service and a good choice for many people, but others can get by fine without it assuming they have interest, initiative, and an ability to plan and "stay the course". If you go the DIY route, you'll get lots of help from BHers!
retire57
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Re: Vanguard Bond ETF choices and rebalancing

Post by retire57 »

You won't learn anything from the PAS that you can't learn on these forums and on the wiki. The education here is free-of-charge and you don't have to make an appointment to ask a question.

One tenant for us Bogleheads is to keep it simple. Choose one bond fund that suits your time horizon.
Nightowl99
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Re: Vanguard Bond ETF choices and rebalancing

Post by Nightowl99 »

I like Sycamore's way of thinking about narrowing down the number of bond funds you hold. I've been reconsidering the need to have so much in the international bond fund lately and have exchanged a lot of it for more of the intermediate bond fund. You may want to consider buying I bonds too, up to the annual limit. As you probably know already, you can buy them online through Treasury Direct.

I guess what I've liked about having so many different bond funds is that they do have different results. At any given time I can see that while some of them seem to have lost money, others are going up even on the same day. For years I thought the Total Bond Fund was a dog, but it ended up with a lot of capital gains in the past year or so, and it has been steadily earning interest the whole time (although not as much now).

My (54/46) portfolio increased by 8.6% in the past year, mainly due to the stock market doing so well in spite of the high unemployment rate and the pandemic, and I bought a little more Total Stock Market back in March when the price seemed to drop a lot. The best advice I try to remember is to buy low and sell high, and time in the market is better than timing the market. That is, rebalance from time to time instead of making big regrettable changes.

I know a couple of people who have moved a lot of their money into cash, and it just seems like a big mistake to me because how will they know when to get back in the market? I know someone else who has all her investments in individual stocks, which seems a little too risky for someone in her 60s, but everyone has to decide for themselves what the best thing to do is.

What's worked for me so far is starting off being a Boglehead but also trying to think for myself by being a bit of a contrarian. For example, I can see a lot of the Bogleheads saying small cap value is out of favor now, it hasn't done well for years. This makes me want to read more about it, so now my Boglehead portfolio has a bit of a Paul Merriman/Coffeehouse Investor twist to it. This isn't advice to you, though, just rambling because of staying home too much. What I'm doing could be all wrong, and someone could come along at any moment to tell me so.
"Please delete my account" -- jazzmaster | "Yeah, delete my account, too! Also, I'd like an order of flapjacks, thanks. And extra napkins."--Robot Monster
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grobertj
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Re: Vanguard Bond ETF choices and rebalancing

Post by grobertj »

Nightowl99 wrote: Thu Aug 27, 2020 10:27 pm Just to give a different opinion, I don't think there's anything wrong with the choice of bond funds you've selected since I have many of those same funds in my own Vanguard accounts. Many people on this forum believe it simplifies things to have only one bond fund, though, such as BND or BIV, which is probably fine, but I like also having a short-term bond fund for keeping the next few years of expenses in since the short-term bond fund has a shorter duration and stands to lose less when interest rates rise. I think having some VTIP is good too, to provide a degree of inflation protection, and so on.

I'm still learning about investing myself but handle my accounts on my own, in an unscientific, unmathmatical way. I was an English major in college, so if I can do it, I'm sure that you can too. I can recommend a couple of books you may want to check out: The Boglehead's Guide to Investing and Making the Most of Your Money Now. Those are my favorites but there are many others.

Also, while there are some people who prefer either mutual funds or ETFs, you can have both if you want to. There may be a slight tax advantage to keeping ETFs in a taxable account, if I remember correctly, but I favor mutual funds in the traditional IRA and Roth accounts. Someone will be sure to correct me if I'm mistaken about that, though.

Good Luck!
All my current bond investments are in BIV, but I'm considering investing in Short Term Bonds (BSV) to hold my spending for 2 or 3 years as you mentioned. Today, the Fed basically said there would be no rate increases for the next several years, so Short Term Bonds may return as much as any other bond fund.

Am I thinking about that right?
The only constant is CHANGE!!
dbr
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Re: Vanguard Bond ETF choices and rebalancing

Post by dbr »

grobertj wrote: Fri Aug 28, 2020 6:39 pm

All my current bond investments are in BIV, but I'm considering investing in Short Term Bonds (BSV) to hold my spending for 2 or 3 years as you mentioned. Today, the Fed basically said there would be no rate increases for the next several years, so Short Term Bonds may return as much as any other bond fund.

Am I thinking about that right?
The Fed does not set rates across the board. So, probably you are not thinking about this the right way. Also, for example short bonds do not necessarily return as much as any other bond fund. The SEC yield for Vanguard short Treasuries is quoted at -.22% and for long Treasuries at 1.15%. Short corporates are at .86% and long term corporates at 2.23%. This chart of the dynamic yield curve shows bond rates running from about zero at zero maturity to about 1.7% at 30 year maturity. https://stockcharts.com/freecharts/yieldcurve.php Pull the red cursor to see the time history.

What is true is that all those rates are low and the yield curve is not very steep. If you follow the rule of thumb that one would like 20bps yield gain for every year of maturity a thirty year span should get you 6% and a 20 year span about 4%. Those kinds of chances were close in 2002 and 2003 and 2008-2012, at least for 20 year bonds. This is far from true today.
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