Three fund portfolio ... are there bond "alternatives"?

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ClemsonDad
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Three fund portfolio ... are there bond "alternatives"?

Post by ClemsonDad »

With interest rates near zero and bond funds (from what I have been reading) likely to do poorly in the near-term ... are there alternatives to Vanguard Total Bond in a three fund portfolio? I am looking at 40% of my retirement funds being invested in a "non-stock" Vanguard fund and I would rather make a good choice if another option was available.

Thanks in advance for any/all input!
UpperNwGuy
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by UpperNwGuy »

This is about the 75th thread in the last few months asking this same exact question. Did you read any of the prior threads?
000
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by 000 »

There are a variety of fixed income alternatives:
FDIC-insured cash and CD products (FDIC insurance limits)
Stable value funds in some employer plans (more credit risk)
MYGAs (more credit risk, illiquidity, and poor tax treatment if young)

And there are true alternatives like precious metals, commodities, or cryptocurrencies. Probably not what you meant?
ivgrivchuck
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by ivgrivchuck »

ClemsonDad wrote: Tue Dec 08, 2020 8:12 pm With interest rates near zero and bond funds (from what I have been reading) likely to do poorly in the near-term ... are there alternatives to Vanguard Total Bond in a three fund portfolio? I am looking at 40% of my retirement funds being invested in a "non-stock" Vanguard fund and I would rather make a good choice if another option was available.

Thanks in advance for any/all input!
You can't get more return without taking more risk. So as long as you want to stick with bonds, there isn't much you can do.

Some/Many bogleheads have switched into cash alternatives:
CDs, Savings accounts, MYGAs, I-bonds, EE-bonds
44% VTI | 36% VXUS | 10% I-bonds | 10% EE-bonds
Kookaburra
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by Kookaburra »

UpperNwGuy wrote: Tue Dec 08, 2020 8:15 pm This is about the 75th thread in the last few months asking this same exact question. Did you read any of the prior threads?
Why don’t you summarize them for us, since you clearly have enough time.
bikechuck
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by bikechuck »

UpperNwGuy wrote: Tue Dec 08, 2020 8:15 pm This is about the 75th thread in the last few months asking this same exact question. Did you read any of the prior threads?
When I read responses like this one (and they come up often) they concern me because they can turn off people that are just joining our community or that only visit infrequently. If you have no interest in a thread just skip it, there is no need to chastise anyone for asking a question.
Topic Author
ClemsonDad
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by ClemsonDad »

UpperNwGuy wrote: Tue Dec 08, 2020 8:15 pm This is about the 75th thread in the last few months asking this same exact question. Did you read any of the prior threads?
I did try to do that ... maybe you could help me (and others) by suggesting how I "find" these prior threads?

I search for "bonds" ... first issue in my opinion is I get every post in every thread related to my search. Better if I got just a list of threads so I could read the original post to judge whether the topic is what I am thinking.

I tried "bonds three fund portfolio" and I get all kinds of info on how the three fund approach works. Since I am sold I don't need that.

Mostly the forum suffers from being awesome ... so many threads that increase so fast ... it is hard to tease out the info I am after.
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ClemsonDad
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by ClemsonDad »

000 wrote: Tue Dec 08, 2020 8:17 pm And there are true alternatives like precious metals, commodities, or cryptocurrencies. Probably not what you meant?
Not so much ... maybe I am thinking something like bonds but not bonds? I have "cash" as a separate thing ... high-yield savings (an oxymoron right now) specifically.

Is a money market fund an good option or is this like "cash" pretty much?

I am a bit anxious going in to bonds with 200K in retirement funds if they can only go down for the next 2-4 years!
bikechuck
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by bikechuck »

ClemsonDad wrote: Tue Dec 08, 2020 8:37 pm
UpperNwGuy wrote: Tue Dec 08, 2020 8:15 pm This is about the 75th thread in the last few months asking this same exact question. Did you read any of the prior threads?
I did try to do that ... maybe you could help me (and others) by suggesting how I "find" these prior threads?

I search for "bonds" ... first issue in my opinion is I get every post in every thread related to my search. Better if I got just a list of threads so I could read the original post to judge whether the topic is what I am thinking.

I tried "bonds three fund portfolio" and I get all kinds of info on how the three fund approach works. Since I am sold I don't need that.

Mostly the forum suffers from being awesome ... so many threads that increase so fast ... it is hard to tease out the info I am after.
I appreciate you asking this question and starting this thread. It is a timely and important question. Yes, it has been asked in other threads as well but I clicked on this thread too because you never know when a new/good idea might surface.
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ClemsonDad
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by ClemsonDad »

bikechuck wrote: Tue Dec 08, 2020 8:30 pm
UpperNwGuy wrote: Tue Dec 08, 2020 8:15 pm This is about the 75th thread in the last few months asking this same exact question. Did you read any of the prior threads?
When I read responses like this one (and they come up often) they concern me because they can turn off people that are just joining our community or that only visit infrequently. If you have no interest in a thread just skip it, there is no need to chastise anyone for asking a question.
As the original poster I can see this point of view ... but as an old guy I have a pretty thick hide so I am good.

One thing I will say in general ... it would be very (VERRY) helpful if there were a post/link/page that listed topics and searches that would return relevant threads. Part of the issue I have is I am not fluent in investing terminology so I don't know the best words to search for and the ones I use return a lot of misses.
lakpr
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by lakpr »

ClemsonDad wrote: Tue Dec 08, 2020 8:12 pm With interest rates near zero and bond funds (from what I have been reading) likely to do poorly in the near-term ... are there alternatives to Vanguard Total Bond in a three fund portfolio? I am looking at 40% of my retirement funds being invested in a "non-stock" Vanguard fund and I would rather make a good choice if another option was available.

Thanks in advance for any/all input!
I have said this in many past threads: if you have a mortgage, pay down your mortgage and think that to be your "bond" portfolio. Firstly calculate how much you can contribute per year. Let's say that's maxing out the 401k plan + maxing out the Roth IRA + $4000 on top. That comes out to be about $30k per year. Then, if 30% is your "allocation to bonds", that comes out to be $9k per year.

Pay down your mortgage by an additional $9k per year, and you will have earned what your mortgage interest rate is, and that SURELY beats any CDs or money market funds or total bond index fund or treasuries or what have you.

Now, there IS a disadvantage to paying down the mortgage. Unlike a bond fund or CD where you can sell a piece of to raise funds, you cannot sell a brick or two of the house to raise cash. This is called "liquidity risk". Which is why, if you do want to take this advice, you need to first beef up your emergency fund to at least 1 year of expenses. THEN, start paying down the mortgage.

There are also ways to minimize the liquidity risk (you cannot eliminate it fully). If your lender allows, you can "recast" your mortgage, lowering your required monthly payment. Or you can take a HELOC, but that has the disadvantage of being at risk to be closed just when you need it the most (such as when you have a job loss and relying on the funds). BUT, getting twice or thrice the yield than a total bond market index fund, is worth taking the liquidity risk in my opinion.

Edited to add: The other alternatives are Rewards Checking Accounts. That requires making a certain number of debit transactions per month. One such account I am very happy to recommend is Lake Michigan Credit Union, and their Max-Rewards checking account. You need to have at least $50 direct deposit per month (and an ACH from another bank like Ally counts!), agree for e-Statements only, login at least 4 times per month and make at least 10 debit card purchases per yearmonth. In return, you can earn 3% on balances up to $15k per SSN. Per-SSN, since you cannot game the system to open multiple max-rewards checking accounts at the institution. But if you are a couple, that's 3% on $30k, or $900 per year.

The 4-logins per month and the 10 debit card purchases can be met through login/logout/login/logout (repeat 4 times) on a Sunday evening, and charging an Amazon gift card with $1, $1.05, $1.10 . ... 10 times. about 15 to 20 minutes work per month.
Last edited by lakpr on Wed Dec 09, 2020 2:39 am, edited 2 times in total.
exigent
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by exigent »

ClemsonDad wrote: Tue Dec 08, 2020 8:42 pm
000 wrote: Tue Dec 08, 2020 8:17 pm And there are true alternatives like precious metals, commodities, or cryptocurrencies. Probably not what you meant?
Not so much ... maybe I am thinking something like bonds but not bonds? I have "cash" as a separate thing ... high-yield savings (an oxymoron right now) specifically.

Is a money market fund an good option or is this like "cash" pretty much?

I am a bit anxious going in to bonds with 200K in retirement funds if they can only go down for the next 2-4 years!
Money market is essentially cash. Sure, bonds prices will drop if rates rise, and they can’t really get much lower. So yeah, there’s some downside risk there. But if that happens and you have a decent time horizon, you will make it up over time thanks to the higher rates that your bond fund will pay. And don’t forget that stocks can go down, too. And sometimes they can go *way* down.

Also: try searching the site for ‘bond alternatives’ — this will turn up a a lot of threads. Not all are super recent, but the discussion are always similar in a low rate environment.
Northern Flicker
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by Northern Flicker »

ClemsonDad wrote: Tue Dec 08, 2020 8:12 pm With interest rates near zero and bond funds (from what I have been reading) likely to do poorly in the near-term ... are there alternatives to Vanguard Total Bond in a three fund portfolio? I am looking at 40% of my retirement funds being invested in a "non-stock" Vanguard fund and I would rather make a good choice if another option was available.

Thanks in advance for any/all input!
Are you trying to boost return or lower risk? If neither, then might as well stick with what you have.

If your concern is with inflation risk and term risk with intermediate bonds, you could consider diversifying the bond portfolio, by holding, say:

60% equities
30% total bond VBTLX/BND
10% short TIPS VTAPX/VTIP

This will not boost, and may even lower expected return, however.
Risk is not a guarantor of return.
Topic Author
ClemsonDad
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by ClemsonDad »

lakpr wrote: Tue Dec 08, 2020 8:52 pm I have said this in many past threads: if you have a mortgage, pay down your mortgage and think that to be your "bond" portfolio.
I am debt free ... in our retirement/move/downsize everything was paid off. Finding out my previous home was worth way more than I thought is what triggered retirement. Even with this (which lowers my monthly budget) I'm still thinking three fund portfolio with 60% stock and 40% bond.

But your thoughts are very timely for my daughter thinking about getting here investing up and running! I will be sharing.
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ClemsonDad
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by ClemsonDad »

Northern Flicker wrote: Tue Dec 08, 2020 8:58 pm
ClemsonDad wrote: Tue Dec 08, 2020 8:12 pm With interest rates near zero and bond funds (from what I have been reading) likely to do poorly in the near-term ... are there alternatives to Vanguard Total Bond in a three fund portfolio? I am looking at 40% of my retirement funds being invested in a "non-stock" Vanguard fund and I would rather make a good choice if another option was available.

Thanks in advance for any/all input!
Are you trying to boost return or lower risk? If neither, then might as well stick with what you have.

If your concern is with inflation risk and term risk with intermediate bonds, you could consider diversifying the bond portfolio, by holding, say:

60% equities
30% total bond VBTLX/BND
10% short TIPS VTAPX/VTIP

This will not boost, and may even lower expected return, however.
At this point it seems I would not have a reasonable expectation of returns on my bond side of things, I am looking to avoid bonds if bonds are likely to tank in the near-term (no matter what stocks do) ... the bonds are the "safe" part I hope.

To your last point ... are you saying that adding TIPS would actually be a little worse than all total bond? If so then it is starting to sound like staying the course is the best answer.
000
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by 000 »

ClemsonDad wrote: Tue Dec 08, 2020 8:42 pm
000 wrote: Tue Dec 08, 2020 8:17 pm And there are true alternatives like precious metals, commodities, or cryptocurrencies. Probably not what you meant?
Not so much ... maybe I am thinking something like bonds but not bonds? I have "cash" as a separate thing ... high-yield savings (an oxymoron right now) specifically.

Is a money market fund an good option or is this like "cash" pretty much?

I am a bit anxious going in to bonds with 200K in retirement funds if they can only go down for the next 2-4 years!
I listed several fixed income options (CDs, MYGAs) that are "like bonds but not bonds". ivgrivchuck added I bonds and EE bonds from Treasury Direct.

I guess I'm not quite sure what you're asking.
UpperNwGuy
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by UpperNwGuy »

ClemsonDad wrote: Tue Dec 08, 2020 8:37 pm
UpperNwGuy wrote: Tue Dec 08, 2020 8:15 pm This is about the 75th thread in the last few months asking this same exact question. Did you read any of the prior threads?
I did try to do that ... maybe you could help me (and others) by suggesting how I "find" these prior threads?

I search for "bonds" ... first issue in my opinion is I get every post in every thread related to my search. Better if I got just a list of threads so I could read the original post to judge whether the topic is what I am thinking.

I tried "bonds three fund portfolio" and I get all kinds of info on how the three fund approach works. Since I am sold I don't need that.

Mostly the forum suffers from being awesome ... so many threads that increase so fast ... it is hard to tease out the info I am after.
Go to the box in the upper right hand corner of this page and type in the phrase "bond alternatives" and it will produce of long list of prior boglehead threads that deal with the question of what to do about low bond yields.
lakpr
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by lakpr »

ClemsonDad wrote: Tue Dec 08, 2020 9:53 pm I am debt free ... in our retirement/move/downsize everything was paid off. Finding out my previous home was worth way more than I thought is what triggered retirement. Even with this (which lowers my monthly budget) I'm still thinking three fund portfolio with 60% stock and 40% bond.

But your thoughts are very timely for my daughter thinking about getting here investing up and running! I will be sharing.
There is one other idea. Historically, a 20% stocks + 80% Treasuries portfolio never lost money; except for 1994 when such portfolio lost 3.2%. Yes, that includes the 2008 Great Recession and the Lost Decade of 2000s and the First and Second Gulf wars and going back even into the 80s, it survived the Black Monday, etc.

The idea for such portfolio comes from Risk Efficient Frontier theory, which states that a 20:80 blend has the least risk, even less risk than 100% bonds, but has higher returns than a 100% bonds portfolio.

Note that the REF theory says "bonds", but using corporate bonds in the portfolio did have money-losing years, roughly once every 5 years. But if we recognize that in times of stress and stock market meltdowns, investor flee to safety and the only instruments that offer such absolute safety are the US treasuries, replace the bonds in the 20:80 blend with US treasuries and then do backtest using Portfolio Visualizer.

Unfortunately there is no single fund that combines 20% stocks and 80% US treasuries, but perhaps you can set up such portfolio at a different brokerage and periodically rebalance (say once every 6 months), view that as a pseudo fixed income portfolio.
Last edited by lakpr on Wed Dec 09, 2020 2:37 am, edited 1 time in total.
absolute zero
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by absolute zero »

Per PV a 20/80 stock/intermediate treasury had a 7.96% drawdown in 1974. It appears that it almost entirely recovered by the end of the year though.
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billthecat
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by billthecat »

lakpr wrote: Tue Dec 08, 2020 8:52 pm Edited to add: The other alternatives are Rewards Checking Accounts. That requires making a certain number of debit transactions per month. One such account I am very happy to recommend is Lake Michigan Credit Union, and their Max-Rewards checking account. You need to have at least $50 direct deposit per month (and an ACH from another bank like Ally counts!), agree for e-Statements only, login at least 4 times per month and make at least 10 debit card purchases per year. In return, you can earn 3% on balances up to $15k per SSN. Per-SSN, since you cannot game the system to open multiple max-rewards checking accounts at the institution. But if you are a couple, that's 3% on $30k, or $900 per year.

The 4-logins per month and the 10 debit card purchases can be met through login/logout/login/logout (repeat 4 times) on a Sunday evening, and charging an Amazon gift card with $1, $1.05, $1.10 . ... 10 times. about 15 to 20 minutes work per month.
Maybe when you signed up it was 10 per year? Their site says 10 debit transactions per month.
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drumboy256
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by drumboy256 »

billthecat wrote: Tue Dec 08, 2020 11:07 pm
lakpr wrote: Tue Dec 08, 2020 8:52 pm Edited to add: The other alternatives are Rewards Checking Accounts. That requires making a certain number of debit transactions per month. One such account I am very happy to recommend is Lake Michigan Credit Union, and their Max-Rewards checking account. You need to have at least $50 direct deposit per month (and an ACH from another bank like Ally counts!), agree for e-Statements only, login at least 4 times per month and make at least 10 debit card purchases per year. In return, you can earn 3% on balances up to $15k per SSN. Per-SSN, since you cannot game the system to open multiple max-rewards checking accounts at the institution. But if you are a couple, that's 3% on $30k, or $900 per year.

The 4-logins per month and the 10 debit card purchases can be met through login/logout/login/logout (repeat 4 times) on a Sunday evening, and charging an Amazon gift card with $1, $1.05, $1.10 . ... 10 times. about 15 to 20 minutes work per month.
Maybe when you signed up it was 10 per year? Their site says 10 debit transactions per month.
I have a HYCA that gives me 1.25% with required 10 debt and 1 ACH per month a my local credit union. Guess what... they don’t enforce it it. Decent return for holding $10k in the accounts.
Promise is one thing. Fulfilling that promise is quite another. - Sir Alex Ferguson
lakpr
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by lakpr »

billthecat wrote: Tue Dec 08, 2020 11:07 pm
lakpr wrote: Tue Dec 08, 2020 8:52 pm Edited to add: The other alternatives are Rewards Checking Accounts. That requires making a certain number of debit transactions per month. One such account I am very happy to recommend is Lake Michigan Credit Union, and their Max-Rewards checking account. You need to have at least $50 direct deposit per month (and an ACH from another bank like Ally counts!), agree for e-Statements only, login at least 4 times per month and make at least 10 debit card purchases per year. In return, you can earn 3% on balances up to $15k per SSN. Per-SSN, since you cannot game the system to open multiple max-rewards checking accounts at the institution. But if you are a couple, that's 3% on $30k, or $900 per year.

The 4-logins per month and the 10 debit card purchases can be met through login/logout/login/logout (repeat 4 times) on a Sunday evening, and charging an Amazon gift card with $1, $1.05, $1.10 . ... 10 times. about 15 to 20 minutes work per month.
Maybe when you signed up it was 10 per year? Their site says 10 debit transactions per month.
typo. It is 10 per month. I edited that previous post. Sorry
Dovahkiin
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by Dovahkiin »

ClemsonDad wrote: Tue Dec 08, 2020 8:12 pm With interest rates near zero and bond funds (from what I have been reading) likely to do poorly in the near-term ... are there alternatives to Vanguard Total Bond in a three fund portfolio? I am looking at 40% of my retirement funds being invested in a "non-stock" Vanguard fund and I would rather make a good choice if another option was available.

Thanks in advance for any/all input!
Go TLT:

It beats the S&P 500 from October 2008 - October 2020.

It also beats out BND
ivgrivchuck
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by ivgrivchuck »

Are you serious? Now when bond yields are at all time lows, you suggest to maximize the duration risk :shock: :shock: :shock:
44% VTI | 36% VXUS | 10% I-bonds | 10% EE-bonds
rossington
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by rossington »

ClemsonDad wrote: Tue Dec 08, 2020 8:12 pm With interest rates near zero and bond funds (from what I have been reading) likely to do poorly in the near-term ... are there alternatives to Vanguard Total Bond in a three fund portfolio? I am looking at 40% of my retirement funds being invested in a "non-stock" Vanguard fund and I would rather make a good choice if another option was available.

Thanks in advance for any/all input!
You hold VBTLX/BND in your portfolio to provide stability when stocks are taking a hit, they are not there to provide substantial income. Stocks provide the income. Look how VBTLX has performed since 2008.
How do you actually KNOW Total Bond will do poorly? You don't. What you do know is that you have diversified your risk across the entire US bond market.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
Dovahkiin
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by Dovahkiin »

ivgrivchuck wrote: Wed Dec 09, 2020 3:14 am
Are you serious? Now when bond yields are at all time lows, you suggest to maximize the duration risk :shock: :shock: :shock:
Yes I'm serious. I'm personally 100% invested in UPRO and TMF, 3x versions of SPY and TLT, in 55% 45% weights.

First off the current yield in the market is the best predictor of bond yield. Second, if rates drop more it'll lead to the hugest capital gains taxes. We may be soon to having a vaccine for COVID but we're certainly not out of this recession yet. I don't expect rates to shoot up anytime soon.

If rates shoot up TLT's convexity is pretty unique in that it'll generally have less losses, as a bond fund it'll start buying new issues at the yields pretty quickly. Generally under the fed policy rates rise slowly and gradually, while rates drop quickly like a hammer. So convexity wise its generally much larger % capital gains and much slower and longer losses.

On it's own it's not a good idea to own 100%, but as a 60/40 re-balancing strategy it's pretty awesome. The bond fund essentially serves as insurance to the equities portion of the portfolio.

The equities market generally responds pretty well to slow and gradual rate increases as it signals confidence in the economy. Signaling confidence is a good sign for stock buyers and can generate a rally. Ultimately long term the stock market will reflect the top 500 powerhouses in the economy that is making most the profits.

The purpose of bonds is to reduce risk of equities. The bonds that do that the best are long term treasuries. Notice the sharp and sortino ratios? For my suggested portfolio for the OP they're 0.96 and 1.47. 100% stocks is 0.58, 0.85. BND is 0.74 1.11.

BND has done really lousy as it has a huge mix of corporate debt (pretty much on the risk of equities), and much shorter 7 years of duration - much less movement to equities crashes.

I personally don't want to buy the "market" of bonds either. People buy bonds for a lot of different reasons... Insurance companies buy corporate bonds lasting 30 years to hedge life insurance premiums to make a profit, thus why you can't buy term life insurance longer than 30 years. For them it's locking in pure profit of yield vs the premiums on the insurance. As an individual investor, why do I want to own the market weight of an asset class that the underlying investors have differing goals and profit motives compared to mine. An insurance company would probably love to own equities instead to hedge life insurance, but they're prohibited from doing so by a lot of regulations.

For equities I love buying the market at market weights. All stock buyers are aligned in one goal - getting the most return possible.

Finally check out the correlation coefficients. Currently .80 vs .98 and 1.00. My 55/45 portfolio is .72. Historically it's been more like 0.50.

It takes view of the entire portfolio vs just looking at one component individually. Equities are more than likely to grow faster than the losses of TLT, when you buy more TLT you'll be buying more at the current yield. Finally, TLT has an average duration of 19 so as long as OP holds TLT for at least 19 years they won't lose any money on today's investment of TLT if they switch no matter what NAV TLT trades at the next day.
onourway
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by onourway »

ClemsonDad wrote: Tue Dec 08, 2020 10:02 pm
At this point it seems I would not have a reasonable expectation of returns on my bond side of things, I am looking to avoid bonds if bonds are likely to tank in the near-term (no matter what stocks do) ... the bonds are the "safe" part I hope.

To your last point ... are you saying that adding TIPS would actually be a little worse than all total bond? If so then it is starting to sound like staying the course is the best answer.
I presume your primary concern is that your bond holdings will rapidly lose value as interest rates inevitably rise? This is a reasonable concern - remember that bond returns are affected by two primary levers - current interest rates - and the direction those rates move over time. In a near zero rate environment the warning is that rates only have one direction to go - up - and as rates go up, the value of your bond fund will fall, and you will lose money.

Technically, this is 100% true - there is even an equation that describes this relationship. However we must also understand that with a total bond market fund, the average duration of the fund is kept relatively short - for the Vanguard Total Bond Index it is currently 6.5 years. That equation then would state that for every 1% rise in interest rates, the fund will lose 6.5% in value. That sounds scary! Yet in practice, I have yet to find a time period in which the fund actually behaves this way.

Let's look at a recent period in which rates rose rather substantially over a short period of time. In July 2016 the 5 year treasury was at 0.94%. (The 5 year Treasury is not a perfect proxy someone will no doubt chime in - however it very closely follows the actual interest rate you will be able to find in a standard high yield savings account and/or CD's). By November 2018 it had risen to 2.96%, so very close to 1% per year. How did our Total Bond Index fare over that time? Portfolio Visualizer reports a CAGR over that exact period of -0.47%. In other words, $10k invested in July 2016 was worth $9,887 in November 2018. That's not great, but it's hardly earth shattering.

Further, if we assume that we continued to hold that same investment to today, our CAGR has improved to 3.76% and we now have $11,769.

Yes, it will drop again when rates inevitably begin to rise again, however we have every reason to expect that the basic performance will hold. Bonds paying near zero rates will slowly be replaced by bonds paying the new higher rates, and held a reasonable amount of time, returns will stabilize.

Historically there are very few periods of time in which holding ones money in a savings account, or even CD's, has out-performed Total Bond. There are some who will jump through all sorts of hoops, constantly looking for the best CD rates, opening new accounts, moving money around in perpetuity, who make eke out a small gain, but in my opinion it's not worth the effort over the long run when I can own Total Bond and literally do nothing, while keeping that portion of my assets reasonably safe.
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by mokaThought »

ClemsonDad wrote: Tue Dec 08, 2020 8:12 pm With interest rates near zero and bond funds (from what I have been reading) likely to do poorly in the near-term ... are there alternatives to Vanguard Total Bond in a three fund portfolio? I am looking at 40% of my retirement funds being invested in a "non-stock" Vanguard fund and I would rather make a good choice if another option was available.

Thanks in advance for any/all input!
Burton Malkiel, author of A Random Walk Down Wall Street, is on record recommending high-dividend stocks as “bond equivalents” in low interest rate environments. A couple of threads here have discussed this in the past week, and the general Boglehead consensus on this suggestion is a big NO, high-dividend stocks are not bond equivalents. Standard advice against yield chasing especially applies since high-dividend stocks are more volatile than bonds. You’ll find these threads if you search “Burton Malkiel dividend stocks bond equivalents” or words to that effect.
I gave in and went SCV. Wish me luck.
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by dbr »

ClemsonDad wrote: Tue Dec 08, 2020 8:12 pm With interest rates near zero and bond funds (from what I have been reading) likely to do poorly in the near-term ... are there alternatives to Vanguard Total Bond in a three fund portfolio? I am looking at 40% of my retirement funds being invested in a "non-stock" Vanguard fund and I would rather make a good choice if another option was available.

Thanks in advance for any/all input!
There is no option that is a better choice, though you can read unending discussion of suggestions. There are lots of choices that are just as good.

The point of the three fund idea is to have a diversified, low cost portfolio with an appropriate balance of risk and return. The balance of risk and return is set by picking a ratio of high risk, high return investments, meaning stocks, and low risk, low return investments, meaning fixed income of all varieties. Total bond is an excellent example of fixed income that suits this purpose, but there are many other choices that do as well with all kinds of marginal advantages and disadvantages.

You question is whether there is anything that can be done about current low interest rates. The answer is, no, there isn't anything that can be done. If this is not tolerable to you then the choices are to take more risk with more stocks and hope for better returns or to reduce your expectations by working longer, saving more, and spending less. Keep in mind, however, that you are in this for the long run. Things change, but from the beginning you recognize that you are going to get what you are going to get. If your need for yield in fixed income is a short term need, then you are not going to get there right now.
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by Northern Flicker »

ClemsonDad wrote: Tue Dec 08, 2020 10:02 pm
Northern Flicker wrote: Tue Dec 08, 2020 8:58 pm
ClemsonDad wrote: Tue Dec 08, 2020 8:12 pm With interest rates near zero and bond funds (from what I have been reading) likely to do poorly in the near-term ... are there alternatives to Vanguard Total Bond in a three fund portfolio? I am looking at 40% of my retirement funds being invested in a "non-stock" Vanguard fund and I would rather make a good choice if another option was available.

Thanks in advance for any/all input!
Are you trying to boost return or lower risk? If neither, then might as well stick with what you have.

If your concern is with inflation risk and term risk with intermediate bonds, you could consider diversifying the bond portfolio, by holding, say:

60% equities
30% total bond VBTLX/BND
10% short TIPS VTAPX/VTIP

This will not boost, and may even lower expected return, however.
At this point it seems I would not have a reasonable expectation of returns on my bond side of things, I am looking to avoid bonds if bonds are likely to tank in the near-term (no matter what stocks do) ... the bonds are the "safe" part I hope.

To your last point ... are you saying that adding TIPS would actually be a little worse than all total bond? If so then it is starting to sound like staying the course is the best answer.
Again it revolves around whether you are trying to boost expected return or reduce risk. You generally cannot do both by evaluating a single asset class. (You may be able to look at the overall portfolio and its risk and return, and improve risk-adjusted return). You seem to be asking for a bond fund product with both higher expected return and lower risk than total bond. That probably does not exist.
Risk is not a guarantor of return.
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by ClemsonDad »

Many thanks to everyone who helped explain this topic to me. I took my 40% and put it in Total Bond ... I'm optimistic than in 2-3 years when I need this money things will turn out just fine.
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by AerialWombat »

I like CDs and high yield savings. 0.5% is better than zero.
For entertainment purposes only.
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by Taylor Larimore »

ClemsonDad wrote: Mon Dec 14, 2020 9:17 pm Many thanks to everyone who helped explain this topic to me. I took my 40% and put it in Total Bond ... I'm optimistic than in 2-3 years when I need this money things will turn out just fine.
ClemsonDad:

Total Bond Market's worst annual return since its inception in 1986 was -2.66% in 1994 (It gained +16% in 1995).

In my opinion you made a good decision.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Deep down, I remain absolutely confident that the vast majority of American families would be well served by owning their equity holdings in a S&P 500 Index fund (or a total stock market index fund) and holding their bonds in a total bond market index fund" underline mine.
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by abuss368 »

ClemsonDad wrote: Mon Dec 14, 2020 9:17 pm Many thanks to everyone who helped explain this topic to me. I took my 40% and put it in Total Bond ... I'm optimistic than in 2-3 years when I need this money things will turn out just fine.
In my opinion you have selected an excellent bond fund and will be able to sleep well.

For good reason Total Bond Market it is the largest bond fund on the PLANET!

Best.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by DSBH »

abuss368 wrote: Tue Dec 15, 2020 7:50 pm
ClemsonDad wrote: Mon Dec 14, 2020 9:17 pm Many thanks to everyone who helped explain this topic to me. I took my 40% and put it in Total Bond ... I'm optimistic than in 2-3 years when I need this money things will turn out just fine.
In my opinion you have selected an excellent bond fund and will be able to sleep well.

For good reason Total Bond Market it is the largest bond fund on the PLANET!

Best.
Tony
And Total Stock Market is the largest stock fund on the Planet, to help build a 2-fund portfolio. And just in case one needs tax exempt for the Taxable account, Vanguard Intermediate Tax Exempt is the largest tax-exempt fund as well I think.
John C. Bogle: "Never confuse genius with luck and a bull market".
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by abuss368 »

DSBH wrote: Tue Dec 15, 2020 9:07 pm
abuss368 wrote: Tue Dec 15, 2020 7:50 pm
ClemsonDad wrote: Mon Dec 14, 2020 9:17 pm Many thanks to everyone who helped explain this topic to me. I took my 40% and put it in Total Bond ... I'm optimistic than in 2-3 years when I need this money things will turn out just fine.
In my opinion you have selected an excellent bond fund and will be able to sleep well.

For good reason Total Bond Market it is the largest bond fund on the PLANET!

Best.
Tony
And Total Stock Market is the largest stock fund on the Planet, to help build a 2-fund portfolio. And just in case one needs tax exempt for the Taxable account, Vanguard Intermediate Tax Exempt is the largest tax-exempt fund as well I think.
All very good funds!
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by IRouteIP »

Taylor Larimore wrote: Mon Dec 14, 2020 9:42 pm
Total Bond Market's worst annual return since its inception in 1986 was -2.66% in 1994 (It gained +16% in 1995).
Just curious... What was the change in interest rate for that 2.66% drop in 1994?
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by Taylor Larimore »

ClemsonDad wrote: Tue Dec 08, 2020 8:12 pm With interest rates near zero and bond funds (from what I have been reading) likely to do poorly in the near-term ... are there alternatives to Vanguard Total Bond in a three fund portfolio? I am looking at 40% of my retirement funds being invested in a "non-stock" Vanguard fund and I would rather make a good choice if another option was available.
ClemsonDad:

Attempting to market-time bonds is as futile as trying to market-time stocks.

I have held Total Bond Market Index Fund since 1986. Several times I was tempted to change and later we were very glad we stayed-the-course. Study the historical inflation and the interaction between stocks and bonds in the Three-Fund Portfolio. You should have nothing to fear except fear itself:

YEAR--INFLATION--BOND INDEX--S&P 500 T.R. INDEX--MSCI EAFE T.R.INDEX
1976-------4.9%--------15.6%------------23.8%--------------------3.6%
1977-------6.7-----------3.0-------------(-7.2)-------------------17.5
1978-------9.0-----------1.4---------------6.6--------------------33.1
1979------13.3-----------1.9--------------18.4-------------------10.9 (Highest Annual Inflation Rate)
1980------12.5-----------2.7--------------32.4-------------------25.4
1981-------8.9-----------6.3-------------(-4.9)------------------(-2.5)
1982-------3.8----------32.6--------------21.6------------------(-0.3) (Highest Bond Index Return)
1983-------3.8-----------8.4--------------22.6-------------------24.8
1984-------3.9----------15.2---------------6.3--------------------3.5
1985-------3.8----------22.1--------------31.7-------------------51.4
1986-------1.1----------15.2--------------18.7-------------------65.8 (Vanguard Total Bond Market Inception )
1987-------4.4-----------2.8----------------5.2-------------------24.6
1988-------4.4-----------7.9---------------16.6-------------------27.8
1989-------4.6----------14.5---------------31.7------------------11.4
1990-------6.1-----------8.9---------------(-3.1)---------------(-22.8)
1991-------3.1----------16.0---------------30.5------------------12.4
1992-------2.9-----------7.4-----------------7.6----------------(-11.9) (Vanguard Total Stock Market Inception)
1993-------2.7-----------9.7----------------10.1------------------32.6
1994-------2.7---------(-2.9)----------------1.3--------------------7.6 (Lowest Bond Index Return)
1995-------2.5----------18.5---------------37.6-------------------11.8 (Highest S&P Index Return)
1996-------3.3-----------3.6----------------23.0--------------------7.2 (Vanguard Total International Stock Market Inception
1997-------1.7-----------9.7----------------33.4--------------------2.6
1998-------1.6-----------8.7----------------28.6-------------------19.1
1999-------2.7---------(-0.8)---------------21.0-------------------28.3
2000-------3.4----------11.6---------------(-9.1)----------------(-15.8)
2001-------1.6-----------8.4--------------(-11.9)----------------(-19.8)
2002-------2.4----------10.3-------------(-22.1)----------------(-15.3)
2003-------1.9-----------4.1----------------28.7-------------------40.4
2004-------3.3-----------4.3----------------10.9-------------------20.9
2005-------3.4-----------2.4-----------------4.9-------------------15.8
2006-------2.5-----------4.3----------------15.8------------------26.8
2007-------4.1-----------7.0-----------------5.5------------------11.6
2008-------0.1-----------5.2--------------(-37.0)---------------(-43.1) (Lowest Stock Returns)
2009-------2.7-----------5.9----------------26.5------------------32.5
2010-------1.5-----------6.5----------------15.1-------------------8.2
2011-------3.0-----------7.7-----------------2.1----------------(-11.7)
2012-------1.7-----------4.3----------------16.0------------------17.9
2013-------1.5---------(-2.0)---------------32.4------------------23.3
2014-------1.6-----------6.0----------------13.7-----------------(-4.5)
2015-------0.7-----------0.5-----------------1.4-----------------(-0.4)
2016-------2.1-----------2.6----------------12.0-------------------1.5
2017-------2.1-----------3.5----------------21.8------------------25.6
2018-------2.5---------(-0.1)--------------(-4.4)---------------(-13.4)
2019 ------2.3-----------8.7----------------31.5------------------22.7

Sources: U.S. Labor Department (CPI-U); Bloomberg Barclays Aggregate Bond Index; Standard & Poors; and dfturner

Lessons learned:

* Past performance does not forecast future performance.

* The Aggregate Bond Index (benchmark for Vanguard Total U.S.Bond Market Index Fund) had only four negative years (all small) reflecting very low risk.

* In 2008 the S&P 500 Stock Index plunged (-38.5%). During the next 2 years it gained +41.52% (stay-the-course).

* Foreign Stocks enjoyed the highest annual return (1986).

* Inflation climbed from 4.9% in 1976 to 13.3% in 1976. During that period a combination of Total Bond Market and stocks beat inflation.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Three fund portfolio ... are there bond "alternatives"?

Post by raiderjkwong »

Great post Taylor. I agree w/ you.
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