Why advisor likes corporate bonds vs government?

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Austhuds
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Why advisor likes corporate bonds vs government?

Post by Austhuds »

My financial advisor recently gave me "free" advice concerning my self directed investments at Vanguard and comany 401(k) not under her management. Several times she mentioned getting my bond funds out of taxable and Roth IRA and move them to traditional IRAs.

I was focused so much on the logistics of where to move my bonds that I failed to realize at the time that she consistently mentioned my bonds had too much government bonds in BND . I can't quiz her too much because these aren't investments she manages.

I'm looking to buy a bond fund in my traditional IRA and wondering if a DODIX - Dodge & Cox Income is the type of non government bond she might be suggesting? It seems to be a bond fund offered in many 401k company plans.

Any thoughts on why a financial advisor would prefer that I not have so many government bonds in BND?
Last edited by Austhuds on Tue May 14, 2024 9:14 pm, edited 1 time in total.
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arcticpineapplecorp.
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Re: Why advisor likes corporate bonds vs government?

Post by arcticpineapplecorp. »

dunno, you'd really have to ask her. Probably she'll say the expected return of corporates are higher than governments I'd imagine but the risk is probably commensurate. Vanguard's total corporate bond yield to maturity and average coupons are higher than total bond index, but total corporate's average duration is 7 years as opposed to total bond index's 6.1 years so there's greater interest rate sensitivity with total corporate over total bond index.
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Beensabu
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Re: Why advisor likes corporate bonds vs government?

Post by Beensabu »

Austhuds wrote: Tue May 14, 2024 7:54 pm Any thoughts on why a financial advisor would prefer that I not have so many government bonds in BND?
Higher yield with more corporate.

As an aside, Jack Bogle thought total bond had too many government bonds, and it had less then than it does now.
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billfromct
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Re: Why advisor likes corporate bonds vs government?

Post by billfromct »

Even though “past performance is no guarantee of future results”, the Vanguard Intermediate Term Investment Grade Bond Fund (actively managed) has out performed the Vanguard Total Bond Index Fund by about .7% or so per year over the past 30 years.

Sure, the corporate investment grade bond fund is “reaching” for yield, but it’s working with a higher annual return.

I have the intermediate term & short term corporate investment grade bond funds in my rollover IRA & have been amply rewarded over the past 10 years or so compared to the Vanguard Total Bond Market Index.

Most of the bogleheads like the Total Bond Market Index, but I’m willing to give up the security of some government bonds for a higher annual return.

Edit: according to PortfolioVisualizer the Vanguard Intermediate Term Investment Grade Bond Fund (VFICX) has had a 4.75% CAGR since Oct 1995 while the Vanguard Total Bond Market Index (VBTIX) has had a CAGR of 4.11%, a .64% difference; that higher CAGR is not much of a difference over a 1 year timeframe, but over a 29 year period, that would equate to about a 19% higher total return.

bill
Last edited by billfromct on Wed May 15, 2024 5:01 am, edited 1 time in total.
masterofnothing257
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Re: Why advisor likes corporate bonds vs government?

Post by masterofnothing257 »

I subscribe to Mr. Bernstein's advice on corporate bonds. If the whole point of fixed-income is risk mitigation and security, why would I accept any credit risk for slightly more yield? If I'm willing to sacrifice security for yield, well that's what stocks are for.
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Re: Why advisor likes corporate bonds vs government?

Post by LCX2000 »

billfromct wrote: Tue May 14, 2024 8:44 pm Even though “past performance is no guarantee of future results”, the Vanguard Intermediate Term Investment Grade Bond Fund (actively managed) has out performed the Vanguard Total Bond Index Fund by about .7% or so per year over the past 30 years.

Sure, the corporate investment grade bond fund is “reaching” for yield, but it’s working with a higher annual return.

I have the intermediate term & short term corporate investment grade bond funds in my rollover IRA & have been amply rewarded over the past 10 years or so compared to the Vanguard Total Bond Market Index.

Most of the bogleheads like the Total Bond Market Index, but I’m willing to give up the security of some government bonds for a higher annual return.

bill
Just verifying that you are referring to VFICX, correct? Thanks!
Thesaints
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Re: Why advisor likes corporate bonds vs government?

Post by Thesaints »

It is extremely easy for an individual investor to buy treasuries by themselves. Whereas for corporate issues one has to go through a middleman.
As funds are concerned, corporate bonds have higher ER.
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Re: Why advisor likes corporate bonds vs government?

Post by rossington »

Austhuds wrote: Tue May 14, 2024 7:54 pm My financial advisor recently gave me "free" advice concerning my self directed investments at Vanguard and comany 401(k) not under her management. Several times she mentioned getting my bond funds out of taxable and Roth IRA and move them to traditional IRAs.

I was focused so much on the logistics of where to move my bonds that I failed to realize at the time that she consistently mentioned my bonds had too much government bonds in BND . I can't quiz her too much because these aren't investments she manages.

I'm looking to buy a bond fund in my traditional IRA and wondering if a DODIX - Dodge & Cox Income is the type of non government bond she might be suggesting? It seems to be a bond fund offered in many 401k company plans.

Any thoughts on why a financial advisor would prefer that I not have so many government bonds in BND?
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HomeStretch
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Re: Why advisor likes corporate bonds vs government?

Post by HomeStretch »

Austhuds wrote: Tue May 14, 2024 7:54 pm … Several times she mentioned getting my bond funds out of taxable and Roth IRA and move them to traditional IRAs. …
Your advisor made two suggestions - type of bond to hold and tax-efficient fund placement per the quote, above. This BH wiki page may be helpful:
https://www.bogleheads.org/wiki/Tax-eff ... _placement

Generally I hold equities in my Taxable account (for tax efficiency) and in my Roth account (for highest expected growth). I generally hold my fixed income (and whatever else is needed to meet my desired portfolio allocation) in my tax deferred account.
aristotelian
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Re: Why advisor likes corporate bonds vs government?

Post by aristotelian »

billfromct wrote: Tue May 14, 2024 8:44 pm Even though “past performance is no guarantee of future results”, the Vanguard Intermediate Term Investment Grade Bond Fund (actively managed) has out performed the Vanguard Total Bond Index Fund by about .7% or so per year over the past 30 years.

Sure, the corporate investment grade bond fund is “reaching” for yield, but it’s working with a higher annual return.

I have the intermediate term & short term corporate investment grade bond funds in my rollover IRA & have been amply rewarded over the past 10 years or so compared to the Vanguard Total Bond Market Index.

Most of the bogleheads like the Total Bond Market Index, but I’m willing to give up the security of some government bonds for a higher annual return.

Edit: according to PortfolioVisualizer the Vanguard Intermediate Term Investment Grade Bond Fund (VFICX) has had a 4.75% CAGR since Oct 1995 while the Vanguard Total Bond Market Index (VBTIX) has had a CAGR of 4.11%, a .64% difference; that higher CAGR is not much of a difference over a 1 year timeframe, but over a 29 year period, that would equate to about a 19% higher total return.

bill
Returns arent everything. If you had invested in 100% stocks you also would have been amply rewarded. The question is what you are trying to to achieve with your bond allocation and whether the higher yield is worth the additional risk
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Re: Why advisor likes corporate bonds vs government?

Post by dbr »

A consideration regarding not enough return from any particular set of bonds is to match more conservative lower returning bonds with a little higher allocation to equities. That means you have a holistic approach to assembling all your assets as a single portfolio.
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retiredjg
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Re: Why advisor likes corporate bonds vs government?

Post by retiredjg »

Austhuds wrote: Tue May 14, 2024 7:54 pm My financial advisor recently gave me "free" advice concerning my self directed investments at Vanguard and comany 401(k) not under her management. Several times she mentioned getting my bond funds out of taxable and Roth IRA and move them to traditional IRAs.
There is a great deal of support for this thinking here at BHs.

I was focused so much on the logistics of where to move my bonds that I failed to realize at the time that she consistently mentioned my bonds had too much government bonds in BND . I can't quiz her too much because these aren't investments she manages.
People have preferences about bond funds. In general, the corporate bonds are riskier and will give a greater return. Less government and more corporate is her preference, at least for you.

I'm looking to buy a bond fund in my traditional IRA and wondering if a DODIX - Dodge & Cox Income is the type of non government bond she might be suggesting? It seems to be a bond fund offered in many 401k company plans.
DODIX would probably do for what she is suggesting, but has a relatively high expense ratio. I think Vanguard has a few choices wilh much lower expense ratios.
Any thoughts on why a financial advisor would prefer that I not have so many government bonds in BND?
Perhaps she feels that your bond allocation is a little too conservative.

I think moving bonds into tIRA is a good idea with little or no downside. As for changing bond funds, I don't think it will matter much as long as you stay with intermediate term investment grade funds. More corporates should give a little more juice, but it is not free. There is a little more risk involved to get it.
mikejuss
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Re: Why advisor likes corporate bonds vs government?

Post by mikejuss »

Austhuds wrote: Tue May 14, 2024 7:54 pm My financial advisor recently gave me "free" advice concerning my self directed investments at Vanguard and comany 401(k) not under her management.
This seems odd. What money does your adviser actively manage for you (if not the money in your brokerage account or in your 401[k])?
Last edited by mikejuss on Wed May 15, 2024 7:27 am, edited 1 time in total.
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dbr
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Re: Why advisor likes corporate bonds vs government?

Post by dbr »

You could just as easily find advice that your fixed income should be all Treasuries, in some views short and in some views long, and/or all TIPS . . . or that you should have a lot in cash or in I bonds. Short of asking your advisor exactly why she said that to you your question does not have an answer because there are dozens of different choices you could make in bonds that all serve to different degrees, especially from the point of view of a portfolio as a whole and given your own judgement and preferences.
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Re: Why advisor likes corporate bonds vs government?

Post by Call_Me_Op »

She is apparently more focused on the slightly higher coupons than the considerably higher risk. This is a personal decision that should be addressed in your IPS.
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Re: Why advisor likes corporate bonds vs government?

Post by rkhusky »

Austhuds wrote: Tue May 14, 2024 7:54 pm I'm looking to buy a bond fund in my traditional IRA and wondering if a DODIX - Dodge & Cox Income is the type of non government bond she might be suggesting? It seems to be a bond fund offered in many 401k company plans.
DODIX is closer to Total Bond than it is to a corporate bond fund. According to Morningstar, DODIX has 47% in mortgage bonds, 35% in corporate bonds, and 15% in government bonds, whereas BND has 22% in mortgage bonds, 26% in corporate bonds, and 50% in government bonds. A corporate bond fund, like VICSX, typically has 100% in corporate bonds.

When investing in corporate bonds, it is useful to look at default rates vs credit ratings and then look at the credit distribution of the fund that you are considering. See Tables 3 & 4 in the paper below:
https://www.spglobal.com/ratings/en/res ... y-12702145
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Re: Why advisor likes corporate bonds vs government?

Post by dbr »

I would not choose a bond investment just because an advisor suggests it and you don't even know why that particular person is making that particular suggestion out of dozens of credible alternatives. Or, if that is how you prefer to make investment selections, then do what she suggests.

That said a bond fund such as DODIX may very well be fine for your purposes, together with the properties that that choice presents in terms of duration and credit risk, which are the principle components of risk and return for bonds. An ER of .41% is not a good deal. BND is available at an ER of .03%. The term factor loadings for BND and DODIX have been .30 and .20 respectively and the credit factor loadings have been .25 and .41.

In backtest the respective CAGRs from 2008 to 2024 have been 2.46% and 3.68% and the standard deviations of annual return 4.65% and 4.70% giving DODIX a higher Sharpe ratio of .58 vs .33. Performance is after deduction of ER, so the higher ER does not seem to penalize DODIX in the period tested.

To select bonds by going down the rabbit hole of backtests and statistics is up to you.
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Re: Why advisor likes corporate bonds vs government?

Post by deikel »

The usual advice is to NOT take the risk on the bond side of the portfolio, but on the stock side of the portfolio. If you want more overall return, shift the asset allocation from bond to stock instead

corporate bonds yield higher then government bonds to reflect the higher risk. If you just exchange one bond fund to another, you may delude yourself into thinking they are the same in terms of risk - they are not.

As for having bonds in taxable or Roth, your advisor is correct. It is usually more tax efficient to hold the bond allocation in IRA or 401k or other not yet taxed accounts. simple way to look at it, anything in the Roth is already taxed and comes out eventually tax free - you want the best performing/fastest growing asset in those accounts to enjoy the growth tax free later on. Thats stocks.

For taxable, bond yield pay outs would be taxed every year as they pay out. realized gains from stocks may be taxed as long term gains (possibly not at all), avoid dividend paying stocks for same reason (or funds having them)
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Re: Why advisor likes corporate bonds vs government?

Post by boomer543 »

Dodge & Cox Income Fund is a superb “core plus” bond fund that more than exceeds in performance its .41% annual fee. As shown by Morningstar, D&C Income fund stands in the top 10% of its peer Core plus funds over 3, 5 and 10 years. It has the highest Morningstar rating of “Gold” which is based on continuing to exceed its peer core plus bond funds. And “yes” I recently invested in D&C Income fund.
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Re: Why advisor likes corporate bonds vs government?

Post by Northern Flicker »

The Dodge & Cox fund may be a very good fund, but excess performance of a diversified bond fund generally is achieved by taking more risk, not through active management skill. There are some bond subclasses where active management has with at best moderate consistency been able to deliver some excess return.

Whether or not total bond is too heavy in govt bonds depends on what the rest of one's portfolio looks like. I think Mr. Bogle held a significant cash position that likely was in govt instruments. In that scenario, one might want more credit exposure in a bond portfolio. But in any case, the main point is you should not view total bond as too weighted in govt bonds for your portfolio based on its role in someone else's portfolio.
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Re: Why advisor likes corporate bonds vs government?

Post by Outer Marker »

I think your advisor is dead wrong. Bonds are there for safety and security, with returns as a secondary objective. Take all your risk on the equity side. Personally I'd go with short term treasuries or short term TIPS and up your equity exposure by a few points. ie. instead of 60/40 with Total Bond, go 65/35 with safer fixed income. Backtesting on portfolio visualizer would imply greater expected return with lower expected volatility.
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Re: Why advisor likes corporate bonds vs government?

Post by artbuc »

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Re: Why advisor likes corporate bonds vs government?

Post by artbuc »

Outer Marker wrote: Sun May 19, 2024 3:27 am I think your advisor is dead wrong. Bonds are there for safety and security, with returns as a secondary objective. Take all your risk on the equity side. Personally I'd go with short term treasuries or short term TIPS and up your equity exposure by a few points. ie. instead of 60/40 with Total Bond, go 65/35 with safer fixed income. Backtesting on portfolio visualizer would imply greater expected return with lower expected volatility.
This approach works best for me.
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Re: Why advisor likes corporate bonds vs government?

Post by Mando19 »

DODIX is a excellent fund for fixed assets, and highly rated.
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Re: Why advisor likes corporate bonds vs government?

Post by Outer Marker »

Mando19 wrote: Sun May 19, 2024 5:37 am DODIX is a excellent fund for fixed assets, and highly rated.
Reversion to the mean suggests that 5* funds will be on their way down and 2-3* funds on their way up. Legg Mason Value Fund is the classic example.
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Re: Why advisor likes corporate bonds vs government?

Post by billaster »

Jack Bogle thought that the Total Bond Fund had too many government bonds and not enough corporate bonds.

William Bernstein thinks Total Bond Fund has too many corporate bonds and not enough government bonds.

Two respected people with opposite opinions. I doubt you will go far wrong either way.
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Re: Why advisor likes corporate bonds vs government?

Post by rule of law guy »

If you live in a state with a high state tax you should definitely look into treasuries.
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Re: Why advisor likes corporate bonds vs government?

Post by UpperNwGuy »

Northern Flicker wrote: Sun May 19, 2024 1:08 am The Dodge & Cox fund may be a very good fund, but excess performance of a diversified bond fund generally is achieved by taking more risk, not through active management skill. There are some bond subclasses where active management has with at best moderate consistency been able to deliver some excess return.
Taking more risk is a relative concept. It's still bonds, and still has a lot less risk than stocks. The whole notion of "take your risk on the equity side" is purely arbitrary. It's popular around here, but it is certainly possible to design a portfolio that distributes risk differently. If Portfolio Visualizer will still around, I could design a few portfolios.
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Re: Why advisor likes corporate bonds vs government?

Post by dbr »

UpperNwGuy wrote: Sun May 19, 2024 6:08 pm
Northern Flicker wrote: Sun May 19, 2024 1:08 am The Dodge & Cox fund may be a very good fund, but excess performance of a diversified bond fund generally is achieved by taking more risk, not through active management skill. There are some bond subclasses where active management has with at best moderate consistency been able to deliver some excess return.
Taking more risk is a relative concept. It's still bonds, and still has a lot less risk than stocks. The whole notion of "take your risk on the equity side" is purely arbitrary. It's popular around here, but it is certainly possible to design a portfolio that distributes risk differently. If Portfolio Visualizer will still around, I could design a few portfolios.
I agree that a simple minded mantra like "take your risk in stocks" does not immediately dictate that one's bonds will be only Treasuries or that one should hold only cash in fixed income, or anything like that.
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Re: Why advisor likes corporate bonds vs government?

Post by Outer Marker »

dbr wrote: Sun May 19, 2024 6:21 pm I agree that a simple minded mantra like "take your risk in stocks" does not immediately dictate that one's bonds will be only Treasuries or that one should hold only cash in fixed income, or anything like that.
I don't think it's simple minded at all. Well, unless you think the likes of Warren Buffett are "simple minded." Not to be snarky. Reasonable minds can differ. :sharebeer
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Re: Why advisor likes corporate bonds vs government?

Post by Northern Flicker »

UpperNwGuy wrote: Sun May 19, 2024 6:08 pm
Northern Flicker wrote: Sun May 19, 2024 1:08 am The Dodge & Cox fund may be a very good fund, but excess performance of a diversified bond fund generally is achieved by taking more risk, not through active management skill. There are some bond subclasses where active management has with at best moderate consistency been able to deliver some excess return.
Taking more risk is a relative concept. It's still bonds, and still has a lot less risk than stocks. The whole notion of "take your risk on the equity side" is purely arbitrary. It's popular around here, but it is certainly possible to design a portfolio that distributes risk differently. If Portfolio Visualizer will still around, I could design a few portfolios.
Yes, and you would see that combining equities with more treasury-heavy bond portfolios has in the past resulted in significantly lower portfolio drawdowns in equity bear markets than the drawdowns of portfolios with credit-heavy bond portfolios. There have been many threads on here that demonstrated this.
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Re: Why advisor likes corporate bonds vs government?

Post by Pretsler »

Incidentally, for those of us in states with state-level income taxes, the increase in interest rates over the last several years should potentially instigate another reflection on the relative value of corporate and treasury bonds in taxable accounts themselves. Corporate bond yields are a function of risk free treasury rates plus a credit spread. As interest rates have increased, the tax benefit associated with holding treasuries relative to corporates has grown while credit spreads—which are pricing risk of default and loss given default at present value—have very little relationship to the absolute level of yields (and are low by historical standards).

To illustrate with a concrete example, take a 1.5% treasury, exempt from state taxation. If credit spreads over the same horizon are 1% (ie. an all-in yield of 2.5%, 1.5% risk free + 1% spread), in a state with a 10% marginal rate said corporate bond or index would yield 2.25% after state taxes. Net, the corporate earns 0.75% more after accounting for state taxes of course.

Fast forward to a 4.5% treasury environment with the same 1% credit spread, similar to what we see today. The 4.5% treasury continues to earn the same after state taxes, but the corporate earning 5.5% now losses an entire 0.55% (5.5% x 10%) to state taxes, resulting in an after-state-tax yield of 4.95%, an advantage of just 0.45% relative to the treasury! But of course the risk of default or loss given default haven’t of course improved for the corporate to compensate for the diminished after-tax spread (if anything they’ve arguably deteriorated)!

One implication, particularly for those holding BND with significant unrealized losses, would be to own treasuries and corporates separately in a taxable account in today’s market.
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Re: Why advisor likes corporate bonds vs government?

Post by Outer Marker »

billaster wrote: Sun May 19, 2024 5:32 pm Jack Bogle thought that the Total Bond Fund had too many government bonds and not enough corporate bonds.

William Bernstein thinks Total Bond Fund has too many corporate bonds and not enough government bonds.

Two respected people with opposite opinions. I doubt you will go far wrong either way.
I think dear old Jack liked bonds too much. Not many are "age in bonds" these days. The more bonds you have, the more important it is that they do some of the heavy lifting in the portforlio vs. leaving that up to equities. If you're relying on bonds for stability, the consequences of having too many corporates are potentially more dire than having too few. Corporate bonds can desert you just when you need them most. Not so with treasuries.

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Re: Why advisor likes corporate bonds vs government?

Post by Parkinglotracer »

I think it makes sense to own gov bonds and take corporate risk in my equity portfolio. I do a 5 year treasury ladder and am done with the issue. Obviously different ways to skin the cat.
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Re: Why advisor likes corporate bonds vs government?

Post by Sandtrap »

Austhuds wrote: Tue May 14, 2024 7:54 pm My financial advisor recently gave me "free" advice concerning my self directed investments at Vanguard and comany 401(k) not under her management. Several times she mentioned getting my bond funds out of taxable and Roth IRA and move them to traditional IRAs.

I was focused so much on the logistics of where to move my bonds that I failed to realize at the time that she consistently mentioned my bonds had too much government bonds in BND . I can't quiz her too much because these aren't investments she manages.

I'm looking to buy a bond fund in my traditional IRA and wondering if a DODIX - Dodge & Cox Income is the type of non government bond she might be suggesting? It seems to be a bond fund offered in many 401k company plans.

Any thoughts on why a financial advisor would prefer that I not have so many government bonds in BND?
Is there a motivation for the FA to convince you to move funds from what she does not manage to what she does?

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Re: Why advisor likes corporate bonds vs government?

Post by gavinsiu »

The reason for corporate bond is higher return but for higher risk. The following is a portfolio Visualizer from 2003-2024 LINK

* Sample Portfolio = Total Bond Market
* Portfolio 2 = Intermediate Treasury
* Portfolio 3 = Corporate Bond

Image

You can see that there is a full 1.2% over Total Bond market. This can add up over the decades and provide more income at retirement. However, notice the stddev, corporate bond is twice the volatility. The question you have to ask is if it's worth taking that risk for 1% of return?

Diversification-wise corporate bond is not as good as treasury. Corporate bonds have a higher correlation to Stock at 0.42 compare to Total Bond market at 0.19 and intermediate treasury at -0.07. During periods where the stock market is doing poorly, I am pretty sure investors will attempt to escape to treasury rather than corporate bonds. If your purpose is to buffer against stock market drops, your chance of doing that is better with treasuries.

My personal preference is to go with treasuries during the accumulation phase. Because my bond allocation is smaller, the 1% of extra return is not going to have that much of an effect. The treasury is a better fit with low correlation. Not sure if I feel the same way in retirement with higher bonds but I don't plan to increase my bond after retirement.
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Re: Why advisor likes corporate bonds vs government?

Post by muffins14 »

gavinsiu wrote: Mon May 20, 2024 7:57 am The reason for corporate bond is higher return but for higher risk. The following is a portfolio Visualizer from 2003-2024 LINK

* Sample Portfolio = Total Bond Market
* Portfolio 2 = Intermediate Treasury
* Portfolio 3 = Corporate Bond

Image

You can see that there is a full 1.2% over Total Bond market. This can add up over the decades and provide more income at retirement. However, notice the stddev, corporate bond is twice the volatility. The question you have to ask is if it's worth taking that risk for 1% of return?

Diversification-wise corporate bond is not as good as treasury. Corporate bonds have a higher correlation to Stock at 0.42 compare to Total Bond market at 0.19 and intermediate treasury at -0.07. During periods where the stock market is doing poorly, I am pretty sure investors will attempt to escape to treasury rather than corporate bonds. If your purpose is to buffer against stock market drops, your chance of doing that is better with treasuries.

My personal preference is to go with treasuries during the accumulation phase. Because my bond allocation is smaller, the 1% of extra return is not going to have that much of an effect. The treasury is a better fit with low correlation. Not sure if I feel the same way in retirement with higher bonds but I don't plan to increase my bond after retirement.
I don't think this is the most informative analysis since it ignores the stock portion of the portfolio. It would be best to do the analysis with an 80/20 stock/bond portfolio, or whatever ratio is appropriate for the investor. 100% bonds is likely not a realistic scenario
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Re: Why advisor likes corporate bonds vs government?

Post by gavinsiu »

muffins14 wrote: Mon May 20, 2024 8:03 am I don't think this is the most informative analysis since it ignores the stock portion of the portfolio. It would be best to do the analysis with an 80/20 stock/bond portfolio, or whatever ratio is appropriate for the investor. 100% bonds is likely not a realistic scenario
Fair enough, I was simply showing the asset by itself to show the return over the long term. Actually 2003-2024 isn't that long time period, but that is all that is offered by portfolio Visualizer. As I mentioned in my post, the effect of the bond portion is muted if it's a small part of the total portfolio so your choice of bond isn't going to make that much of a difference. Let's say you go with 80/20. Your portfolio return is now the following (LINK)

Image

At 20% bond, your 1% extra return isn't going to have that much of an effect. Now a 80/20 with corporate bond returns 9.55% instead of 9.35%. A difference of 0.2% may be in the margin of chance. If I had show it in a 80/20 portfolio instead of the 100%, you will conclude that there is no effect.
dbr
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Re: Why advisor likes corporate bonds vs government?

Post by dbr »

If the portfolio has an estimated mean return of 10% and a standard deviation of annual return of 20% then we might off hand suggest the variability in the estimate of the mean is somewhere around 3% or 4%, with lots of SWAG in the case of investment behavior.

The point is that until you can find a change to expected return on the order of several percentage points the difference is just lost in the noise.

A historical illustration of just how big that noise is compared to adjustments one can make to the asset allocation is displayed here:

https://engaging-data.com/visualizing-4-rule/

One can look at how the results change as one changes stock/bond allocation with different spending or saving along the way.
case_of_ennui
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Re: Why advisor likes corporate bonds vs government?

Post by case_of_ennui »

I've read a lot on this forum that your average active investor will fail to beat the market consistently. In this case the market is the bond market so I'll stick with a total bond fund index which includes corporates. I don't believe I or anyone here has any special knowledge of what mix of corporate/government bonds will perform best as part of a mixed stock/bond portolio in the future.

It's looks like 67% of Vanguard Total Bond has a credit rating of "Government". Investing in a GOV only bond fund means intentionally leaving out and tilting away from 1/3rd of the US Bond index. To me thats the equivalent of investing in a Total US Stock Market fund and leaving out a sector that makes up 1/3rd of that fund, like Tech does (32% of VTI).

"take your risk on the equity side" (don't hold any of the more risky bonds) feels like saying "take your safety on the fixed income side" (don't hold any of the less risky stocks). Forgoing consumer staples, utilities, and other defensive equity sectors while instead tilting towards tech and small cap value makes equally little sense to me.
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