Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

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rhornback
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Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by rhornback »

Like many here I am in the Vanguard Total Bond Market Admiral (VBTLX). Interestingly it has been doing pretty well! 1 year return is 7.72%. In my mind this is because every time I feel interest rates cannot go lower, they do. So this return is largely based on declining interest rates, not yield.

But primarily I am in VBTLX is a safe haven. In case the market takes a tumble I have tried to build enough VBTLX to outlast the market downturn. In other words I would sell VBTLX (even at a loss) in an effort not to sell equities at a loss. That is the strategy.

OK so far so good. You may even agree with my premise (or not). But my problem now is I find VBTLX incredibly risky and as a safe haven fund I am no longer sure. Why? Because the 30 day yield is 1.11% and the average holding duration is 6.7 years.

I read a good rule of thumb is a 1% increase in interest rate can cause a decline equal to the bond duration. In other words a 1% increase in interest rate could cause a 6.7% loss on VBTLX. Maybe you disagree with this rule of thumb. If so, please educate me.

So my problem is at this yield (1.11%) I no longer am even keeping up with inflation. This is a risk vs reward calculation. At 1.11% I I thinking I would rather be in cash (money market or FDIC insured account). I know that in case I will also lose to inflation but at a lower risk level.

I am sure this topic has been discussed already so apologies in advance if I am bring it up (again). If there are other threads you can suggest could you point them out to me?

Thank you.
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by anon_investor »

rhornback wrote: Sat Jan 09, 2021 4:15 pm Like many here I am in the Vanguard Total Bond Market Admiral (VBTLX). Interestingly it has been doing pretty well! 1 year return is 7.72%. In my mind this is because every time I feel interest rates cannot go lower, they do. So this return is largely based on declining interest rates, not yield.

But primarily I am in VBTLX is a safe haven. In case the market takes a tumble I have tried to build enough VBTLX to outlast the market downturn. In other words I would sell VBTLX (even at a loss) in an effort not to sell equities at a loss. That is the strategy.

OK so far so good. You may even agree with my premise (or not). But my problem now is I find VBTLX incredibly risky and as a safe haven fund I am no longer sure. Why? Because the 30 day yield is 1.11% and the average holding duration is 6.7 years.

I read a good rule of thumb is a 1% increase in interest rate can cause a decline equal to the bond duration. In other words a 1% increase in interest rate could cause a 6.7% loss on VBTLX. Maybe you disagree with this rule of thumb. If so, please educate me.

So my problem is at this yield (1.11%) I no longer am even keeping up with inflation. This is a risk vs reward calculation. At 1.11% I I thinking I would rather be in cash (money market or FDIC insured account). I know that in case I will also lose to inflation but at a lower risk level.

I am sure this topic has been discussed already so apologies in advance if I am bring it up (again). If there are other threads you can suggest could you point them out to me?

Thank you.
I think it depends where your VBTLX is located. If it is a taxable account, there may be a few good alternatives (for example Series I US Savings Bonds). If it is in an IRA, then maybe you can get some short term bond funds, money market or FDIC insured (including CDs). But if it is in an employer sponsored retirement account (401k, 403(b), etc.) there literally may not be any alternative to VBTLX (or similar "Total Bond Market" index funds.
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rhornback
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by rhornback »

I would like to add to my posting a little. In a normal situation I would expect VBTLX to pay an interest rate equal to inflation + risk. But my understanding is the government is buying bonds to ARTIFICIALLY keep interest rates low.

https://www.cnbc.com/2020/12/16/fed-dec ... yment.html

So I wonder if VBTLX is really paying inflation + risk. It seems to me that this is not really the case. Inherently it seems to me the risk premium is being covered by the US government and I am not convinced regardless of what the 'Fed policy makers SAY' that this will continue indefinitely or that the Fed really has that much control over the markets.

So I wonder if am carrying more risk than anticipated by large holdings of VBTLX.
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by Tamalak »

It seems like for the duration of the bond (or average in the basket), you are 95% guaranteed the yield on the tin. If rates go up while you're holding it the returns will be backloaded. If they go down while you're holding it they will be frontloaded (as they were in the 1 year returns). But I wouldn't call that 'high risk' unless your horizon is quite short. BND is something like 3-5 year bonds primarily I think.
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by geerhardusvos »

There’s nowhere to hide for the next 10 years at least. Just stick with the asset allocation in your individual policy statement and investment plan. Bonds are not there to give you any returns, only to hopefully smooth the ride.
VTSAX and chill
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rhornback
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by rhornback »

Tamalak wrote: Sat Jan 09, 2021 4:28 pm It seems like for the duration of the bond (or average in the basket), you are 95% guaranteed the yield on the tin. If rates go up while you're holding it the returns will be backloaded. If they go down while you're holding it they will be frontloaded (as they were in the 1 year returns). But I wouldn't call that 'high risk' unless your horizon is quite short. BND is something like 3-5 year bonds primarily I think.
I absolutely agree that as long as I hold the bond fund, when interest rates rise ultimately the bond fund will recover as old bonds mature and new ones are purchased at a higher interest rate). My problem is I am using VBTLX as cash replacement with the expectation that if the market tumbles and I need money for expenses that I will sell the VBTLX first in an effort to not take a loss on equities.

So with this in mind my horizon is short. You could make the argument that I should have cash for this replacement. But that would require holding a lot of cash.
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rhornback
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by rhornback »

geerhardusvos wrote: Sat Jan 09, 2021 4:30 pm There’s nowhere to hide for the next 10 years at least. Just stick with the asset allocation in your individual policy statement and investment plan. Bonds are not there to give you any returns, only to hopefully smooth the ride.
I am thinking for the next year the place to be is VHYAX Vanguard High Dividend Yield (30 day yield is 3.3%). The reason is in a market downturn I would still get this yield. And if I can wait long enough the expectation is the market will recover. I realize that yield is not guaranteed and in a depression companies will cut dividends. But if the storm is big enough I am not convinced anyone is safe.

Is VHYAX risky. Absolutely. But the premise of my posting is that VBTLX also seems risky.

I would like to share that I am 52 and would like to work to 65 (though you never know with Big Corp.). Someone who is retired or more conservative would have different risk profile than me.
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by livesoft »

Don't look now, but VBTLX lost a full 1% of its value so far in 2021. That is, in the past 5 trading days. It could be a tremendous buying opportunity ... or not.
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aristotelian
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by aristotelian »

What is your alternative? There are few free lunches, so there is no way to increase return without increasing risk.

While the yield is low, I don't see the downside risk as any higher than any other time. It is true that the expected return is low but that is different than saying it is higher risk.
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by retired@50 »

rhornback wrote: Sat Jan 09, 2021 4:15 pm
So my problem is at this yield (1.11%) I no longer am even keeping up with inflation.
According to who?

CPI is up 1.2% over the past 12 months and the fund (VBTLX) returned over 7%

Inflation in the future is unknown.

Sources: https://www.bls.gov/cpi/
https://investor.vanguard.com/mutual-fu ... ance/vbtlx

Regards,
This is one person's opinion. Nothing more.
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by vineviz »

rhornback wrote: Sat Jan 09, 2021 4:43 pm
Tamalak wrote: Sat Jan 09, 2021 4:28 pm It seems like for the duration of the bond (or average in the basket), you are 95% guaranteed the yield on the tin. If rates go up while you're holding it the returns will be backloaded. If they go down while you're holding it they will be frontloaded (as they were in the 1 year returns). But I wouldn't call that 'high risk' unless your horizon is quite short. BND is something like 3-5 year bonds primarily I think.
I absolutely agree that as long as I hold the bond fund, when interest rates rise ultimately the bond fund will recover as old bonds mature and new ones are purchased at a higher interest rate). My problem is I am using VBTLX as cash replacement with the expectation that if the market tumbles and I need money for expenses that I will sell the VBTLX first in an effort to not take a loss on equities.

So with this in mind my horizon is short. You could make the argument that I should have cash for this replacement. But that would require holding a lot of cash.
Your trapped in a loop of circular logic, albeit a common one.

If you to hold an asset that is most like to buffer against a stock market decline, then you want bonds which have as low a correlation with stocks as you can find and as much variance S possible. That’s long-term Treasury bonds. Definitely NOT cash.

But that might seem scary because someone convinced you that “bonds are safety” or that “you should take risk on the stock side” or something.

So you fly to cash, which does nothing but make you feel better about being less wealthy. Don’t do that.

Your investment horizon is determined by when you will spend your money, not from which fund the money is spent. If you’re a long-term investor, long-term bonds reduce your interest rate risk relative to shorter bonds or cash.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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rhornback
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by rhornback »

aristotelian wrote: Sat Jan 09, 2021 5:44 pm What is your alternative? There are few free lunches, so there is no way to increase return without increasing risk.

While the yield is low, I don't see the downside risk as any higher than any other time. It is true that the expected return is low but that is different than saying it is higher risk.
If you are willing to incur moderate risk then I suggest Vanguard High Dividend Yield Index Fund Admiral Shares (VHYAX). If you want low risk then I recommend Vanguard Cash Reserves Federal Money Market Fund (VMMXX).

The question in mind is looking forward is Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) higher risk then anticipated? Is VBTLX risk high enough to consider VHYAX or VMMXX as alternatives either as a whole or in some sort of split (50% VHYAX, 50% VMMXX), etc.
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by rhornback »

vineviz wrote: Sat Jan 09, 2021 5:48 pm
rhornback wrote: Sat Jan 09, 2021 4:43 pm
Tamalak wrote: Sat Jan 09, 2021 4:28 pm It seems like for the duration of the bond (or average in the basket), you are 95% guaranteed the yield on the tin. If rates go up while you're holding it the returns will be backloaded. If they go down while you're holding it they will be frontloaded (as they were in the 1 year returns). But I wouldn't call that 'high risk' unless your horizon is quite short. BND is something like 3-5 year bonds primarily I think.
I absolutely agree that as long as I hold the bond fund, when interest rates rise ultimately the bond fund will recover as old bonds mature and new ones are purchased at a higher interest rate). My problem is I am using VBTLX as cash replacement with the expectation that if the market tumbles and I need money for expenses that I will sell the VBTLX first in an effort to not take a loss on equities.

So with this in mind my horizon is short. You could make the argument that I should have cash for this replacement. But that would require holding a lot of cash.
Your trapped in a loop of circular logic, albeit a common one.

If you to hold an asset that is most like to buffer against a stock market decline, then you want bonds which have as low a correlation with stocks as you can find and as much variance S possible. That’s long-term Treasury bonds. Definitely NOT cash.

But that might seem scary because someone convinced you that “bonds are safety” or that “you should take risk on the stock side” or something.

So you fly to cash, which does nothing but make you feel better about being less wealthy. Don’t do that.

Your investment horizon is determined by when you will spend your money, not from which fund the money is spent. If you’re a long-term investor, long-term bonds reduce your interest rate risk relative to shorter bonds or cash.
Insightful answer. Appreciated. Thank you.
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rhornback
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by rhornback »

retired@50 wrote: Sat Jan 09, 2021 5:47 pm
rhornback wrote: Sat Jan 09, 2021 4:15 pm
So my problem is at this yield (1.11%) I no longer am even keeping up with inflation.
According to who?

CPI is up 1.2% over the past 12 months and the fund (VBTLX) returned over 7%

Inflation in the future is unknown.

Sources: https://www.bls.gov/cpi/
https://investor.vanguard.com/mutual-fu ... ance/vbtlx

Regards,
Yes I received 7% on VBTLX last year which I am very happy about. But buried in that 7% is a little over 2% in yield and about 5% in share price increase caused by decreasing interest rates. To get another 7% next year IMO would require interest rates to turn negative. I do not see this possibility. And as I posted earlier my concern is government intervention artificially causing the low interest rate. So I feel you can thank Uncle Sam (Fed) and his bond buying for the 7% return in the last year.
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by aristotelian »

rhornback wrote: Sat Jan 09, 2021 5:52 pm
aristotelian wrote: Sat Jan 09, 2021 5:44 pm What is your alternative? There are few free lunches, so there is no way to increase return without increasing risk.

While the yield is low, I don't see the downside risk as any higher than any other time. It is true that the expected return is low but that is different than saying it is higher risk.
If you are willing to incur moderate risk then I suggest Vanguard High Dividend Yield Index Fund Admiral Shares (VHYAX). If you want low risk then I recommend Vanguard Cash Reserves Federal Money Market Fund (VMMXX).

The question in mind is looking forward is Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) higher risk then anticipated? Is VBTLX risk high enough to consider VHYAX or VMMXX as alternatives either as a whole or in some sort of split (50% VHYAX, 50% VMMXX), etc.
The year to year downside risk is still the same. The duration is no different so a rise in rates would have the same impact as in any other year. I think it has less upside due to lower chances of interest rates declining.

Going to either cash or stocks seems to me a form of market timing. If you believe you can time the market, go for it. I will stick with my long term allocation and won't sweat it if bonds go down. I am prepared for all assets classes to lose money at times.
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by Admiral »

rhornback wrote: Sat Jan 09, 2021 5:54 pm
vineviz wrote: Sat Jan 09, 2021 5:48 pm
rhornback wrote: Sat Jan 09, 2021 4:43 pm
Tamalak wrote: Sat Jan 09, 2021 4:28 pm It seems like for the duration of the bond (or average in the basket), you are 95% guaranteed the yield on the tin. If rates go up while you're holding it the returns will be backloaded. If they go down while you're holding it they will be frontloaded (as they were in the 1 year returns). But I wouldn't call that 'high risk' unless your horizon is quite short. BND is something like 3-5 year bonds primarily I think.
I absolutely agree that as long as I hold the bond fund, when interest rates rise ultimately the bond fund will recover as old bonds mature and new ones are purchased at a higher interest rate). My problem is I am using VBTLX as cash replacement with the expectation that if the market tumbles and I need money for expenses that I will sell the VBTLX first in an effort to not take a loss on equities.

So with this in mind my horizon is short. You could make the argument that I should have cash for this replacement. But that would require holding a lot of cash.
Your trapped in a loop of circular logic, albeit a common one.

If you to hold an asset that is most like to buffer against a stock market decline, then you want bonds which have as low a correlation with stocks as you can find and as much variance S possible. That’s long-term Treasury bonds. Definitely NOT cash.

But that might seem scary because someone convinced you that “bonds are safety” or that “you should take risk on the stock side” or something.

So you fly to cash, which does nothing but make you feel better about being less wealthy. Don’t do that.

Your investment horizon is determined by when you will spend your money, not from which fund the money is spent. If you’re a long-term investor, long-term bonds reduce your interest rate risk relative to shorter bonds or cash.
Insightful answer. Appreciated. Thank you.
Insightful perhaps but unhelpful for your situation. If you're concerned with interest rate risk, then there is no WAY you should put money in long Treasuries. All you need to do it look at the volatility to see that you can take a serious loss if you move to LT Treasuries but need this money to live on in the near future. Your investing horizon is not 20+ years. You may see some slight loss with TBM due to inflation (or not, no one knows what total return will be going forward, and if they claim to they are lying) but that loss will likely pale in comparison to what you'd see in a market meltdown in equities... or in long term Treasuries:

https://investor.vanguard.com/mutual-fu ... ance/vlgsx
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by KlangFool »

rhornback wrote: Sat Jan 09, 2021 4:50 pm
geerhardusvos wrote: Sat Jan 09, 2021 4:30 pm There’s nowhere to hide for the next 10 years at least. Just stick with the asset allocation in your individual policy statement and investment plan. Bonds are not there to give you any returns, only to hopefully smooth the ride.
I am thinking for the next year the place to be is VHYAX Vanguard High Dividend Yield (30 day yield is 3.3%). The reason is in a market downturn I would still get this yield. And if I can wait long enough the expectation is the market will recover. I realize that yield is not guaranteed and in a depression companies will cut dividends. But if the storm is big enough I am not convinced anyone is safe.

Is VHYAX risky. Absolutely. But the premise of my posting is that VBTLX also seems risky.

I would like to share that I am 52 and would like to work to 65 (though you never know with Big Corp.). Someone who is retired or more conservative would have different risk profile than me.
rhornback,


1) What is your AA? If it is not 100% VBTLX, why should you care?


2) If you believe that VBTLX is risky, so does VTSAX. Some folks believe that the stock market is overvalued too.


3) My AA is 60/40. As long VBTLX does not drop as much as VTSAX, it is good enough for me as a safe haven.


4) Before you go down this road, check out how VHYAX does as compared to VBTLX in each market crash. I went down this road around 2002. I paid dearly for my lesson.

<<<The reason is in a market downturn I would still get this yield. And if I can wait long enough the expectation is the market will recover. >>


5) How much did VHYAX drop in March 2020? 35%.

6) How much did VBTLX drop in March 2020? 7%.

7) Which one is riskier?

8) How does the 2+% yield help when you lose 27+% of the asset value?


KlangFool
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by vineviz »

Admiral wrote: Sat Jan 09, 2021 6:06 pm

Insightful perhaps but unhelpful for your situation. If you're concerned with interest rate risk, then there is no WAY you should put money in long Treasuries. All you need to do it look at the volatility to see that you can take a serious loss if you move to LT Treasuries but need this money to live on in the near future.
I was not suggesting the OP put 100% of the portfolio in long-term Treasuries.

The OP said they were investing in stocks, which can also “take a serious loss”. So I was addressing the fact that only way to diversify the risk of stocks is to invest in another asset with DIFFERENT risks. Investing in something without risk just means throwing money away.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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rhornback
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by rhornback »

KlangFool wrote: Sat Jan 09, 2021 6:14 pm
rhornback wrote: Sat Jan 09, 2021 4:50 pm
geerhardusvos wrote: Sat Jan 09, 2021 4:30 pm There’s nowhere to hide for the next 10 years at least. Just stick with the asset allocation in your individual policy statement and investment plan. Bonds are not there to give you any returns, only to hopefully smooth the ride.
I am thinking for the next year the place to be is VHYAX Vanguard High Dividend Yield (30 day yield is 3.3%). The reason is in a market downturn I would still get this yield. And if I can wait long enough the expectation is the market will recover. I realize that yield is not guaranteed and in a depression companies will cut dividends. But if the storm is big enough I am not convinced anyone is safe.

Is VHYAX risky. Absolutely. But the premise of my posting is that VBTLX also seems risky.

I would like to share that I am 52 and would like to work to 65 (though you never know with Big Corp.). Someone who is retired or more conservative would have different risk profile than me.
rhornback,


1) What is your AA? If it is not 100% VBTLX, why should you care?


2) If you believe that VBTLX is risky, so does VTSAX. Some folks believe that the stock market is overvalued too.


3) My AA is 60/40. As long VBTLX does not drop as much as VTSAX, it is good enough for me as a safe haven.


4) Before you go down this road, check out how VHYAX does as compared to VBTLX in each market crash. I went down this road around 2002. I paid dearly for my lesson.

<<<The reason is in a market downturn I would still get this yield. And if I can wait long enough the expectation is the market will recover. >>


5) How much did VHYAX drop in March 2020? 35%.

6) How much did VBTLX drop in March 2020? 7%.

7) Which one is riskier?

8) How does the 2+% yield help when you lose 27+% of the asset value?


KlangFool
Food for thought. Thanks.
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by Triple digit golfer »

KlangFool wrote: Sat Jan 09, 2021 6:14 pm
rhornback wrote: Sat Jan 09, 2021 4:50 pm
geerhardusvos wrote: Sat Jan 09, 2021 4:30 pm There’s nowhere to hide for the next 10 years at least. Just stick with the asset allocation in your individual policy statement and investment plan. Bonds are not there to give you any returns, only to hopefully smooth the ride.
I am thinking for the next year the place to be is VHYAX Vanguard High Dividend Yield (30 day yield is 3.3%). The reason is in a market downturn I would still get this yield. And if I can wait long enough the expectation is the market will recover. I realize that yield is not guaranteed and in a depression companies will cut dividends. But if the storm is big enough I am not convinced anyone is safe.

Is VHYAX risky. Absolutely. But the premise of my posting is that VBTLX also seems risky.

I would like to share that I am 52 and would like to work to 65 (though you never know with Big Corp.). Someone who is retired or more conservative would have different risk profile than me.
rhornback,


1) What is your AA? If it is not 100% VBTLX, why should you care?


2) If you believe that VBTLX is risky, so does VTSAX. Some folks believe that the stock market is overvalued too.


3) My AA is 60/40. As long VBTLX does not drop as much as VTSAX, it is good enough for me as a safe haven.


4) Before you go down this road, check out how VHYAX does as compared to VBTLX in each market crash. I went down this road around 2002. I paid dearly for my lesson.

<<<The reason is in a market downturn I would still get this yield. And if I can wait long enough the expectation is the market will recover. >>


5) How much did VHYAX drop in March 2020? 35%.

6) How much did VBTLX drop in March 2020? 7%.

7) Which one is riskier?

8) How does the 2+% yield help when you lose 27+% of the asset value?


KlangFool
Wonderful post, KlangFool.

Yield won't make you feel better when the value of your fund is dropping 30% or more!

Bonds are for safety and diversification in a falling equity market. Stocks are NOT a substitute for this function.
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by David Jay »

rhornback wrote: Sat Jan 09, 2021 4:50 pm
geerhardusvos wrote: Sat Jan 09, 2021 4:30 pm There’s nowhere to hide for the next 10 years at least. Just stick with the asset allocation in your individual policy statement and investment plan. Bonds are not there to give you any returns, only to hopefully smooth the ride.
I am thinking for the next year the place to be is...
And that is your problem. You are selecting products based on a 12 month investment horizon.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by 000 »

I agree, but everything else has risk too.

That said, I am more partial to the Permanent Portfolio style of diversification holding Long Term Treasuries, Cash, and Gold as Stock diversifiers. You don't have to hold them in equal weight.
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by KlangFool »

OP,

Did you rebalance in March 2020? My AA is 60/40. In March 2020, both the stock and the bond drop. But, VBTLX drops much less than VTSAX. And, I was forced to rebalance by selling VBTLX to buy VTSAX. I made money from my March rebalancing a few months later by selling the VTSAX to buy VTBLX.


So, where is the problem? Did you "buy, hold, and rebalance"? What is your AA?


KlangFool
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by ivgrivchuck »

rhornback wrote: Sat Jan 09, 2021 4:15 pm I am sure this topic has been discussed already so apologies in advance if I am bring it up (again). If there are other threads you can suggest could you point them out to me?
Many people in the forum (including me) agree with your assessment, and some don't.

The usual list of alternatives to consider are:
HYSAs, CDs, I-bonds, EE-bonds, MYGAs

To avoid the one-sided duration risk some have decided to move into these alternatives and some have decided against it.
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by ivgrivchuck »

vineviz wrote: Sat Jan 09, 2021 5:48 pm
rhornback wrote: Sat Jan 09, 2021 4:43 pm
Tamalak wrote: Sat Jan 09, 2021 4:28 pm It seems like for the duration of the bond (or average in the basket), you are 95% guaranteed the yield on the tin. If rates go up while you're holding it the returns will be backloaded. If they go down while you're holding it they will be frontloaded (as they were in the 1 year returns). But I wouldn't call that 'high risk' unless your horizon is quite short. BND is something like 3-5 year bonds primarily I think.
I absolutely agree that as long as I hold the bond fund, when interest rates rise ultimately the bond fund will recover as old bonds mature and new ones are purchased at a higher interest rate). My problem is I am using VBTLX as cash replacement with the expectation that if the market tumbles and I need money for expenses that I will sell the VBTLX first in an effort to not take a loss on equities.

So with this in mind my horizon is short. You could make the argument that I should have cash for this replacement. But that would require holding a lot of cash.
If you to hold an asset that is most like to buffer against a stock market decline, then you want bonds which have as low a correlation with stocks as you can find and as much variance S possible. That’s long-term Treasury bonds. Definitely NOT cash.
The variance only helps if there is a significantly negative correlation with bonds and stocks, otherwise it only hurts. People hold cash/bond style assets for two reasons:
1) safe haven
2) dynamite against the falling stock prices

Both of these approaches can be justified. And they require very different kind of investments (HYSA/I-Bonds/MYGAs vs. long term treasuries)
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by watchnerd »

livesoft wrote: Sat Jan 09, 2021 4:52 pm Don't look now, but VBTLX lost a full 1% of its value so far in 2021. That is, in the past 5 trading days. It could be a tremendous buying opportunity ... or not.
I'm buying.

But I'm under allocated to LTT at the moment.
Last edited by watchnerd on Sat Jan 09, 2021 8:11 pm, edited 1 time in total.
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by Triple digit golfer »

watchnerd wrote: Sat Jan 09, 2021 7:56 pm
livesoft wrote: Sat Jan 09, 2021 4:52 pm Don't look now, but VBTLX lost a full 1% of its value so far in 2021. That is, in the past 5 trading days. It could be a tremendous buying opportunity ... or not.
I'm buying.
Thought I was reading a post from 2019. Where have you been?!
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by watchnerd »

Triple digit golfer wrote: Sat Jan 09, 2021 8:00 pm
watchnerd wrote: Sat Jan 09, 2021 7:56 pm
livesoft wrote: Sat Jan 09, 2021 4:52 pm Don't look now, but VBTLX lost a full 1% of its value so far in 2021. That is, in the past 5 trading days. It could be a tremendous buying opportunity ... or not.
I'm buying.
Thought I was reading a post from 2019. Where have you been?!
Dealing with life changes.

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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by vineviz »

ivgrivchuck wrote: Sat Jan 09, 2021 7:22 pm The variance only helps if there is a significantly negative correlation with bonds and stocks, otherwise it only hurts.
The variance helps as long as the correlation is less than +1. The lower the correlation the more it helps, but it's not necessary for the correlation to be negative at all much less "significantly" negative in order to reap the benefits of diversification.

ivgrivchuck wrote: Sat Jan 09, 2021 7:22 pm People hold cash/bond style assets for two reasons:
1) safe haven
2) dynamite against the falling stock prices
Both of these approaches can be justified. And they require very different kind of investments (HYSA/I-Bonds/MYGAs vs. long term treasuries)
I agree that both can be justified. Only of them is rational, however.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by Triple digit golfer »

vineviz wrote: Sat Jan 09, 2021 8:27 pm
ivgrivchuck wrote: Sat Jan 09, 2021 7:22 pm People hold cash/bond style assets for two reasons:
1) safe haven
2) dynamite against the falling stock prices
Both of these approaches can be justified. And they require very different kind of investments (HYSA/I-Bonds/MYGAs vs. long term treasuries)
I agree that both can be justified. Only of them is rational, however.
Which one is rational and why do you feel the other is irrational?
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by Uncle Morris »

I've seen posts here and on other threads that, when interest rates rise and bond values go down, over time, bond funds will recover as they buy new bonds.

How long does this take, and how complete is the recovery process?

(Apologies from someone who has been trying to understand how bonds work for a long time.)
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by abuss368 »

I did not even notice the current yield as I have tuned the noise out and I am trying to do a better job of that this year!

There is for good reason that Total Bond is the largest bond fund on the PLANET! I would ignore all of this and simply stay the course. The fund does the job year in and year out. Vanguard recommends it in the Target, LifeStrategy, and PAS portfolios.

Best.
Tony
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by vineviz »

Triple digit golfer wrote: Sat Jan 09, 2021 8:29 pm
vineviz wrote: Sat Jan 09, 2021 8:27 pm
ivgrivchuck wrote: Sat Jan 09, 2021 7:22 pm People hold cash/bond style assets for two reasons:
1) safe haven
2) dynamite against the falling stock prices
Both of these approaches can be justified. And they require very different kind of investments (HYSA/I-Bonds/MYGAs vs. long term treasuries)
I agree that both can be justified. Only of them is rational, however.
Which one is rational and why do you feel the other is irrational?
#2 is rational, because (although stated in kind of an off-hand manner) it integrates the overall performance of the portfolio. The basic premise of modern portfolio theory is that assets may be very risky individually but combining risky assets which are less-than-perfectly correlated results in a portfolio with equivalent return and lower risk.

The "safe haven" school of asset allocation is focused NOT on the behavior of the portfolio at large but on the behavior of just one particular asset (i.e. the bond fund). As as result, this heuristic typically leads to choosing very short-duration assets (with cash being the most extreme example). Taking this "safe haven" approach typically leads to portfolios with both HIGHER expected volatility, LOWER expected returns, and (for investors with longer investment horizons ) MORE interest rate risk. Such a strategy would only be rational for an investor who is risk-seeking and wealth-averse. Most investors have the opposite preference (i.e. they are wealth-seeking and risk-averse).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by Triple digit golfer »

vineviz wrote: Sat Jan 09, 2021 9:11 pm
Triple digit golfer wrote: Sat Jan 09, 2021 8:29 pm
vineviz wrote: Sat Jan 09, 2021 8:27 pm
ivgrivchuck wrote: Sat Jan 09, 2021 7:22 pm People hold cash/bond style assets for two reasons:
1) safe haven
2) dynamite against the falling stock prices
Both of these approaches can be justified. And they require very different kind of investments (HYSA/I-Bonds/MYGAs vs. long term treasuries)
I agree that both can be justified. Only of them is rational, however.
Which one is rational and why do you feel the other is irrational?
#2 is rational, because (although stated in kind of an off-hand manner) it integrates the overall performance of the portfolio. The basic premise of modern portfolio theory is that assets may be very risky individually but combining risky assets which are less-than-perfectly correlated results in a portfolio with equivalent return and lower risk.

The "safe haven" school of asset allocation is focused NOT on the behavior of the portfolio at large but on the behavior of just one particular asset (i.e. the bond fund). As as result, this heuristic typically leads to choosing very short-duration assets (with cash being the most extreme example). Taking this "safe haven" approach typically leads to portfolios with both HIGHER expected volatility, LOWER expected returns, and (for investors with longer investment horizons ) MORE interest rate risk. Such a strategy would only be rational for an investor who is risk-seeking and wealth-averse. Most investors have the opposite preference (i.e. they are wealth-seeking and risk-averse).
How does cash or bonds increase the volatility of a portfolio?

Or are you saying that short term bonds or cash increase volatility compared to adding long term bonds instead?
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by Uncle Morris »

vineviz wrote: Sat Jan 09, 2021 9:11 pm Taking this "safe haven" approach typically leads to portfolios with both HIGHER expected volatility, LOWER expected returns, and (for investors with longer investment horizons ) MORE interest rate risk. Such a strategy would only be rational for an investor who is risk-seeking and wealth-averse. Most investors have the opposite preference (i.e. they are wealth-seeking and risk-averse).
Help me understand this, please. I'm really trying to get my head around it. Cash doesn't go up when rates go down, or when they go up. It's just cash. So I get that it doesn't sometimes move in the opposite direction of stocks, because it just doesn't move. And I get lower expected returns for cash, because all you get is the rate, and no capital move.

What I don't get is (if I got the above right) how cash increases risk and volatility over bonds. Is it because bonds have a negative correlation with stocks, while cash is, I'm guessing, not correlated positively or negatively?

Thanks for your help.
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by Dave55 »

abuss368 wrote: Sat Jan 09, 2021 8:46 pm I did not even notice the current yield as I have tuned the noise out and I am trying to do a better job of that this year!

There is for good reason that Total Bond is the largest bond fund on the PLANET! I would ignore all of this and simply stay the course. The fund does the job year in and year out. Vanguard recommends it in the Target, LifeStrategy, and PAS portfolios.

Best.
Tony
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by rhornback »

KlangFool wrote: Sat Jan 09, 2021 6:51 pm OP,

Did you rebalance in March 2020? My AA is 60/40. In March 2020, both the stock and the bond drop. But, VBTLX drops much less than VTSAX. And, I was forced to rebalance by selling VBTLX to buy VTSAX. I made money from my March rebalancing a few months later by selling the VTSAX to buy VTBLX.


So, where is the problem? Did you "buy, hold, and rebalance"? What is your AA?


KlangFool
Hi KlangFool. No I did not rebalance. I rarely change my investments and only then after a lot of though. I am about 70% stocks, 25% bonds, 5% other. My wife and still work so our expenses are being paid for by Corp America. Frankly I don't think about my investments very much.

I am pretty much in Venguard S&P 500 and Vanguard Total Bond Market. There is some flavor there but basically large US corp and US investment grade bonds.

I have been at Vanguard for over 20 years and generally in downturns I don't pay attention or notice. Maybe I am a Fool or not enough of a fool to be a KlangFool but this has worked for me.
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by KlangFool »

rhornback wrote: Sat Jan 09, 2021 9:54 pm
KlangFool wrote: Sat Jan 09, 2021 6:51 pm OP,

Did you rebalance in March 2020? My AA is 60/40. In March 2020, both the stock and the bond drop. But, VBTLX drops much less than VTSAX. And, I was forced to rebalance by selling VBTLX to buy VTSAX. I made money from my March rebalancing a few months later by selling the VTSAX to buy VTBLX.


So, where is the problem? Did you "buy, hold, and rebalance"? What is your AA?


KlangFool
Hi KlangFool. No I did not rebalance. I rarely change my investments and only then after a lot of though. I am about 70% stocks, 25% bonds, 5% other. My wife and still work so our expenses are being paid for by Corp America. Frankly I don't think about my investments very much.
rhornback,


1) If you do not "buy, hold, and rebalance", you should not use the 3-funds portfolio.


2) If you do not want to rebalance and maintain your AA, you would not "Buy Low and Sell High".


3) If you do not maintain your AA, you do not have an AA.


<<I rarely change my investments>>

4) You had changed your investment by doing nothing in March 2020. The stock market had dropped 30+%. If you did nothing, your AA is no longer "70% stocks, 25% bonds, 5% other".


5) You should use a target retirement fund or Life Strategy Fund. The fund rebalanced itself.

6) You are asking the VBTLX question on this topic because you did not REBALANCE. If you did, you would know that VBTLX did its job very well.

7) Why are you using the 3 funds portfolio if you do not rebalance? That is the key question.

8) I made good money from my 60/40 AA in 2020. I rebalanced twice. I had no problem.

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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by rhornback »

1) If you do not "buy, hold, and rebalance", you should not use the 3-funds portfolio.

> I am not in the 3 fund portfolio. I do not own international stocks!

2) If you do not want to rebalance and maintain your AA, you would not "Buy Low and Sell High".

> Agreed. I am lucky to be a long term investor who has ridden the market up over the last 20 years.

3) If you do not maintain your AA, you do not have an AA.

> Yes

4) You had changed your investment by doing nothing in March 2020. The stock market had dropped 30+%. If you did nothing, your AA is no longer "70% stocks, 25% bonds, 5% other".

> Well it did recover... but I agree at that time I was probably not 70/25/5 during March 2020. But I was not really paying attention

5) You should use a target retirement fund or Life Strategy Fund. The fund rebalanced itself.

> Probably, but I like to be in control and my risk tolerance is greater than a target retirement fund.

6) You are asking the VBTLX question on this topic because you did not REBALANCE. If you did, you would know that VBTLX did its job very well.

> As we get closer to retirement I have been selling stock funds and buying VBTLX in our IRA accounts. I have also increased VBTLX in our taxable account. So I did notice that VBTLX has done well for me. I used to be 80% stocks.

7) Why are you using the 3 funds portfolio if you do not rebalance? That is the key question.

> I am not...

8) I made good money from my 60/40 AA in 2020. I rebalanced twice. I had no problem.

> You probably have more discipline in this area then I do. I go through phases when I am really interested in my investments and then months when I don't care. Though as I get closer to retirement I seem to care more.

> I have found I seem to do worse when I mess with my portfolio more. Frankly if I can make 10% a year I am very happy. My 10 year rate of return at Vanguard is 13%. If someone makes more then me I am happy for them. But I am thrilled to have made 13%.
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by dwickenh »

I use the same fund in my IRA, along with Vanguard Intermediate Index VBILX. I understand that the duration on both funds(VBTLX and VBILX) is about 6.5 years. I don't need to draw from my IRA until RMDs at age 72(6 years). I am not willing to try to guess interest rate movement. I will shorten the duration when I get 3 years away from 72.

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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by KlangFool »

rhornback wrote: Sat Jan 09, 2021 10:19 pm 1) If you do not "buy, hold, and rebalance", you should not use the 3-funds portfolio.

> I am not in the 3 fund portfolio. I do not own international stocks!

2) If you do not want to rebalance and maintain your AA, you would not "Buy Low and Sell High".

> Agreed. I am lucky to be a long term investor who has ridden the market up over the last 20 years.

3) If you do not maintain your AA, you do not have an AA.

> Yes

4) You had changed your investment by doing nothing in March 2020. The stock market had dropped 30+%. If you did nothing, your AA is no longer "70% stocks, 25% bonds, 5% other".

> Well it did recover... but I agree at that time I was probably not 70/25/5 during March 2020. But I was not really paying attention

5) You should use a target retirement fund or Life Strategy Fund. The fund rebalanced itself.

> Probably, but I like to be in control and my risk tolerance is greater than a target retirement fund.

6) You are asking the VBTLX question on this topic because you did not REBALANCE. If you did, you would know that VBTLX did its job very well.

> As we get closer to retirement I have been selling stock funds and buying VBTLX in our IRA accounts. I have also increased VBTLX in our taxable account. So I did notice that VBTLX has done well for me. I used to be 80% stocks.

7) Why are you using the 3 funds portfolio if you do not rebalance? That is the key question.

> I am not...

8) I made good money from my 60/40 AA in 2020. I rebalanced twice. I had no problem.

> You probably have more discipline in this area then I do. I go through phases when I am really interested in my investments and then months when I don't care. Though as I get closer to retirement I seem to care more.

> I have found I seem to do worse when I mess with my portfolio more. Frankly if I can make 10% a year I am very happy. My 10 year rate of return at Vanguard is 13%. If someone makes more then me I am happy for them. But I am thrilled to have made 13%.
rhornback,

A) If you do not like a target retirement fund, you can just pick a Vanguard LifeStrategy Fund that matches your AA.


B) If you do not like or want to rebalance, you should not use separate stock and bond funds.

<<> I have found I seem to do worse when I mess with my portfolio more. Frankly if I can make 10% a year I am very happy. My 10 year rate of return at Vanguard is 13%. If someone makes more then me I am happy for them. But I am thrilled to have made 13%.>>


C) But, you have no choice but to rebalance if you have a separate stock and bond fund. Can you sleep at night if your AA is 90/10? Whether you know it (90/10) or not, you could lose 45% at any time. Do you know what is your actual AA now?


D) Your portfolio is big enough that you can no longer afford to lose it. And, you do not have the time to wait for recovery.


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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by Admiral »

rhornback wrote: Sat Jan 09, 2021 10:19 pm 1) If you do not "buy, hold, and rebalance", you should not use the 3-funds portfolio.

> I am not in the 3 fund portfolio. I do not own international stocks!

2) If you do not want to rebalance and maintain your AA, you would not "Buy Low and Sell High".

> Agreed. I am lucky to be a long term investor who has ridden the market up over the last 20 years.

3) If you do not maintain your AA, you do not have an AA.

> Yes

4) You had changed your investment by doing nothing in March 2020. The stock market had dropped 30+%. If you did nothing, your AA is no longer "70% stocks, 25% bonds, 5% other".

> Well it did recover... but I agree at that time I was probably not 70/25/5 during March 2020. But I was not really paying attention

5) You should use a target retirement fund or Life Strategy Fund. The fund rebalanced itself.

> Probably, but I like to be in control and my risk tolerance is greater than a target retirement fund.

6) You are asking the VBTLX question on this topic because you did not REBALANCE. If you did, you would know that VBTLX did its job very well.

> As we get closer to retirement I have been selling stock funds and buying VBTLX in our IRA accounts. I have also increased VBTLX in our taxable account. So I did notice that VBTLX has done well for me. I used to be 80% stocks.

7) Why are you using the 3 funds portfolio if you do not rebalance? That is the key question.

> I am not...

8) I made good money from my 60/40 AA in 2020. I rebalanced twice. I had no problem.

> You probably have more discipline in this area then I do. I go through phases when I am really interested in my investments and then months when I don't care. Though as I get closer to retirement I seem to care more.

> I have found I seem to do worse when I mess with my portfolio more. Frankly if I can make 10% a year I am very happy. My 10 year rate of return at Vanguard is 13%. If someone makes more then me I am happy for them. But I am thrilled to have made 13%.
VBTLX is, in general terms, a poor choice to hold in a taxable account. Bond coupons are treated as taxable income and taxed at your marginal tax rate. If you must hold bonds in taxable (and it's unclear why you need to do so) tax free muni bonds are generally a better choice.
Probably, but I like to be in control and my risk tolerance is greater than a target retirement fund.
If you choose a TR date fund decades in the future (TD 2050, for example) those funds hold almost all stocks. There's your risk.
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by abuss368 »

Dave55 wrote: Sat Jan 09, 2021 9:43 pm
abuss368 wrote: Sat Jan 09, 2021 8:46 pm I did not even notice the current yield as I have tuned the noise out and I am trying to do a better job of that this year!

There is for good reason that Total Bond is the largest bond fund on the PLANET! I would ignore all of this and simply stay the course. The fund does the job year in and year out. Vanguard recommends it in the Target, LifeStrategy, and PAS portfolios.

Best.
Tony
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Priceless.
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by averagedude »

I agree with your premise of bonds vs stocks. I would advise that you keep your goals as your centerpiece of how you invest. Don't disregard bonds, as this asset class can be a ballast to your stock portfolio. Nobody knows nothing and nobody has a crystal ball that will predict the future with 100% accuracy. I personally have a huge risk tolerance, and I have no problem with a 30% or higher drawdowns in my networth. I kinda believe that bonds will give me a lower rate of return, but I am willing to accept this because I believe my goals of a safe withdrawal rate in retirement combined with never running out of money in my lifetime is what I am trying to achieve out of my personal investments. Don't invest your money to get maximum return (greed) and don't invest your money to never lose any principle (fear). Also in my opinion, never reassess your tolerance to risk when markets crash (selling stocks) and never reassess your tolerance to risk when markets are at frothy levels (buying stocks). Always, and I mean always, invest your money with your goals in mind. 1.11% yields in the bond market doesn't concern me at all. Of course if the yields of the bond markets remain low, with inflation reaching in the high single digits happen in the future, I may have some concern. Investors have been talking of inflation for a couple of decades. Me personally, I am not going to shoot until I see the white's of it's eye's.
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by ivgrivchuck »

vineviz wrote: Sat Jan 09, 2021 8:27 pm
ivgrivchuck wrote: Sat Jan 09, 2021 7:22 pm The variance only helps if there is a significantly negative correlation with bonds and stocks, otherwise it only hurts.
The variance helps as long as the correlation is less than +1. The lower the correlation the more it helps, but it's not necessary for the correlation to be negative at all much less "significantly" negative in order to reap the benefits of diversification.

I agree that both can be justified. Only of them is rational, however.
I strongly disagree.

Let's consider a very simple set up:
Stocks: Expected return: 7%, Variance: 20%
Long bonds: Expected return 3%, Variance 10%
Short bonds: Expected return 3%, Variance 0.1%

And let's assume that stocks and long bonds have correlation of +0.5 (<+1). If what you are saying is correct, then investor should always prefer a combination of stocks and long bonds.

Well, here is the efficient frontier and optimal allocation given by the efficient frontier solver:
Image
Image

If I change the correlation to 0.0, it doesn't change the result.

Now let's change the correlation between long bonds and stocks to -0.5:
Image

Now we start talking!

With the expected strong negative correlation, there is some room for this asset with low expected return and high volatility.

So, yes, if you bet on strong negative correlation, using "the dynamite strategy" makes sense.

If you are concerned that the historical negative correlation might not hold in the next recession, then the safe heaven strategy makes sense.

Also a barbell strategy (taking the middle route; see all-weather, golden butterfly) has its merit.
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Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by rhornback »

Admiral wrote: Sat Jan 09, 2021 10:34 pm
rhornback wrote: Sat Jan 09, 2021 10:19 pm 1) If you do not "buy, hold, and rebalance", you should not use the 3-funds portfolio.

> I am not in the 3 fund portfolio. I do not own international stocks!

2) If you do not want to rebalance and maintain your AA, you would not "Buy Low and Sell High".

> Agreed. I am lucky to be a long term investor who has ridden the market up over the last 20 years.

3) If you do not maintain your AA, you do not have an AA.

> Yes

4) You had changed your investment by doing nothing in March 2020. The stock market had dropped 30+%. If you did nothing, your AA is no longer "70% stocks, 25% bonds, 5% other".

> Well it did recover... but I agree at that time I was probably not 70/25/5 during March 2020. But I was not really paying attention

5) You should use a target retirement fund or Life Strategy Fund. The fund rebalanced itself.

> Probably, but I like to be in control and my risk tolerance is greater than a target retirement fund.

6) You are asking the VBTLX question on this topic because you did not REBALANCE. If you did, you would know that VBTLX did its job very well.

> As we get closer to retirement I have been selling stock funds and buying VBTLX in our IRA accounts. I have also increased VBTLX in our taxable account. So I did notice that VBTLX has done well for me. I used to be 80% stocks.

7) Why are you using the 3 funds portfolio if you do not rebalance? That is the key question.

> I am not...

8) I made good money from my 60/40 AA in 2020. I rebalanced twice. I had no problem.

> You probably have more discipline in this area then I do. I go through phases when I am really interested in my investments and then months when I don't care. Though as I get closer to retirement I seem to care more.

> I have found I seem to do worse when I mess with my portfolio more. Frankly if I can make 10% a year I am very happy. My 10 year rate of return at Vanguard is 13%. If someone makes more then me I am happy for them. But I am thrilled to have made 13%.
VBTLX is, in general terms, a poor choice to hold in a taxable account. Bond coupons are treated as taxable income and taxed at your marginal tax rate. If you must hold bonds in taxable (and it's unclear why you need to do so) tax free muni bonds are generally a better choice.
Probably, but I like to be in control and my risk tolerance is greater than a target retirement fund.
If you choose a TR date fund decades in the future (TD 2050, for example) those funds hold almost all stocks. There's your risk.
I may be mistaken but I thought VBTLX declared dividends. At least this is what I thought I saw when I did my taxes last year. I was a little surprised because it holds bonds. But I remember looking at this last year when I was doing my taxes.

I agree VBTLX is a poor choice in a taxable account. My purpose for it is not for investment or tax purposes but as a holder of cash. It is what I will sell first in the perfect storm. I recognize this is riskier then some other choices.

I did look into tax free muni bonds but what I saw is they paid a lower interest rate. My analysis showed that tax free muni bonds have the lower tax rate built into their yield. Not to say this is not a good strategy for you. But this is what I decided.
BabaWawa
Posts: 162
Joined: Sun Sep 06, 2020 2:47 pm

Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by BabaWawa »

I view it (BND) as the anchor in my 60/40 portfolio, reducing volatility. Despite stated SEC yields it still had a nice return last year and continues to sends me 2% checks every month. I'll continue to stay the course and rebalance.
Topic Author
rhornback
Posts: 158
Joined: Tue Mar 07, 2017 9:59 am

Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by rhornback »

Hi KlangFool, I have seen your posting on this web site over the years and I always enjoy them. So thanks for going back and forth with me.

A) If you do not like a target retirement fund, you can just pick a Vanguard LifeStrategy Fund that matches your AA.

> Agreed. But I have a little bit of control freak in me.


B) If you do not like or want to rebalance, you should not use separate stock and bond funds.

> Mathematically you are right. I have seen the numbers. And last time (March 2020) asset allocation once again showed to work. But last time the market went down (March 2020) also worked for me because I did nothing and the market recovered.

So my strategy frankly is to have a big enough nest egg that a 20% drop in the market does not cause me to lose sleep. Now a 45% market drop would be a different story. But in that type of environment I feel we are all ...not sure what word to substitute here... in trouble.

Why are my thoughts like this? I have one kid working and self sufficient. I have another in college. I am getting to the end of my financial responsibilities. And I like to work! (see I am a fool). I have a friend who owns his own business and is working at 75. He is a model for me. I am a desk jockey and plan to be one for as long as I can.

My other observation is I feel smart financial people (lots on this board) overestimate how much they need in retirement. I look at my parents who are mid 80s and they do not spend much. My needs are fairly simple and I am OK living a lower lifestyle if I need to.


C) But, you have no choice but to rebalance if you have a separate stock and bond fund. Can you sleep at night if your AA is 90/10? Whether you know it (90/10) or not, you could lose 45% at any time. Do you know what is your actual AA now?

> I am pretty good at tracking my finances at Vanguard and Vanguard computes AA. So yes my actual AA is 73.6% stock, 22.2% bond, 1.4% short term, 2.8% uncategorized. I was at 70% stock but have been fortunate that the market has been rising. at 75% stock I might take action but for now I will simply let my AA float around.

If I was really gutsy I would put my thoughts into action on selling VBTLX and putting 50% in Vanguard High Dividend and 50% in Prime Money Market. But I am not that gutsy. I am not that sure of myself. And I do not like making frequent changes. I have probably already made all my changes for 2021.

D) Your portfolio is big enough that you can no longer afford to lose it. And, you do not have the time to wait for recovery.

> At 52 with my risk tolerance and current financial responsibilities I am willing to accept a 10 year market downturn if it occurs. I hope not! I am assuming the market would recover in 10 years and this would still allow me flexibility to retire at 65. Maybe at 55 I will change my mind.

Or maybe not if at 55 my second kid will be done with college, working, and self sufficient. I would also like to sell my house after my kids leave and for my wife and I to rent. So maybe at 55 my financial responsibilities might be very few and my risk tolerance will stay high.

Or maybe in a few years my wife my stop working, I am may get fired and have trouble getting another job. One of us may get disabled. Who knows! At that time I would probably be more likely to change my AA.

Hopefully I will not be changing my AA in the middle of a market downturn. That would be bad. But I am not really going to worry about life that much. In the long term I will be dead.
KlangFool
Posts: 19172
Joined: Sat Oct 11, 2008 12:35 pm

Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by KlangFool »

rhornback wrote: Sun Jan 10, 2021 7:59 am Hi KlangFool, I have seen your posting on this web site over the years and I always enjoy them. So thanks for going back and forth with me.

A) If you do not like a target retirement fund, you can just pick a Vanguard LifeStrategy Fund that matches your AA.

> Agreed. But I have a little bit of control freak in me.


B) If you do not like or want to rebalance, you should not use separate stock and bond funds.

> Mathematically you are right. I have seen the numbers. And last time (March 2020) asset allocation once again showed to work. But last time the market went down (March 2020) also worked for me because I did nothing and the market recovered.

So my strategy frankly is to have a big enough nest egg that a 20% drop in the market does not cause me to lose sleep. Now a 45% market drop would be a different story. But in that type of environment I feel we are all ...not sure what word to substitute here... in trouble.

Why are my thoughts like this? I have one kid working and self sufficient. I have another in college. I am getting to the end of my financial responsibilities. And I like to work! (see I am a fool). I have a friend who owns his own business and is working at 75. He is a model for me. I am a desk jockey and plan to be one for as long as I can.

My other observation is I feel smart financial people (lots on this board) overestimate how much they need in retirement. I look at my parents who are mid 80s and they do not spend much. My needs are fairly simple and I am OK living a lower lifestyle if I need to.


C) But, you have no choice but to rebalance if you have a separate stock and bond fund. Can you sleep at night if your AA is 90/10? Whether you know it (90/10) or not, you could lose 45% at any time. Do you know what is your actual AA now?

> I am pretty good at tracking my finances at Vanguard and Vanguard computes AA. So yes my actual AA is 73.6% stock, 22.2% bond, 1.4% short term, 2.8% uncategorized. I was at 70% stock but have been fortunate that the market has been rising. at 75% stock I might take action but for now I will simply let my AA float around.

If I was really gutsy I would put my thoughts into action on selling VBTLX and putting 50% in Vanguard High Dividend and 50% in Prime Money Market. But I am not that gutsy. I am not that sure of myself. And I do not like making frequent changes. I have probably already made all my changes for 2021.

D) Your portfolio is big enough that you can no longer afford to lose it. And, you do not have the time to wait for recovery.

> At 52 with my risk tolerance and current financial responsibilities I am willing to accept a 10 year market downturn if it occurs. I hope not! I am assuming the market would recover in 10 years and this would still allow me flexibility to retire at 65. Maybe at 55 I will change my mind.

Or maybe not if at 55 my second kid will be done with college, working, and self sufficient. I would also like to sell my house after my kids leave and for my wife and I to rent. So maybe at 55 my financial responsibilities might be very few and my risk tolerance will stay high.

Or maybe in a few years my wife my stop working, I am may get fired and have trouble getting another job. One of us may get disabled. Who knows! At that time I would probably be more likely to change my AA.

Hopefully I will not be changing my AA in the middle of a market downturn. That would be bad. But I am not really going to worry about life that much. In the long term I will be dead.
Can you handle a 10 years of down turn plus unemployment?

I am prepared for the stock market to go down 50% at any time and stay down for 5 years plus unemployment.

In a market downturn, if you do not rebalance to maintain your AA, you are changing your AA.

KlangFool
Last edited by KlangFool on Sun Jan 10, 2021 8:31 am, edited 1 time in total.
KlangFool
Posts: 19172
Joined: Sat Oct 11, 2008 12:35 pm

Re: Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

Post by KlangFool »

OP,

When would you rebalance and sell the stock to buy the bond? 80/20? 85/15? 90/10?

KlangFool
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