POLL: Fixed Asset Allocation

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What Fixed Asset Allocation strategy do you use in your portfolio:

Single: Duration Tilt only
3
6%
Single: Duration Tilt only
3
6%
Single: Credit Quality Tilt only
0
No votes
Single: Credit Quality Tilt only
0
No votes
Single: Inflation Protection Tilt only
14
27%
Double: Duration + Credit Quality Tilt only
9
17%
Double: Duration + Inflation Protection Tilt only
5
10%
Double: Credit Quality + Inflation Protection Tilt only
3
6%
Triple: Duration Tilt + Credit Quality Tilt + Inflation Protection Tilt
15
29%
 
Total votes: 52

Topic Author
Eric White
Posts: 54
Joined: Fri May 18, 2007 10:09 am

POLL: Fixed Asset Allocation

Post by Eric White »

I'd like to benchmark Bogleheads for fixed asset allocation strategies. I've seen many different scenarios of the strategies below in various commonly-read Boglehead books and threads, but I don't believe I've seen any hard voting for the most common strategy in use from forum members.

Tilt Types:
Duration Tilt = short and/or intermediate allocation larger than long allocation
Credit Quality Tilt = high quality allocation larger than low quality allocation; i.e. Treasuries preferred over corporates
Inflation Protection Tilt = inflation protected allocation larger than nominal allocation

To limit options to a reasonable number, I'm excluding tactics of whether tilts should be executed via Total Bond Market Index + weights or if they should be Sliced & Diced without TBM. Although I'm interested in this topic, I'd like to understand basic Boglehead strategy for their fixed allocations first.

The resulting Fixed Allocation Strategies include:
No Tilt: Total Bond Index only
Single: Duration Tilt only
Single: Credit Quality Tilt only
Single: Inflation Protection Tilt only
Double: Duration + Credit Quality Tilt only
Double: Duration + Inflation Protection Tilt only
Double: Credit Quality + Inflation Protection Tilt only
Triple: Duration Tilt + Credit Quality Tilt + Inflation Protection Tilt

Please share tradeoffs you see (e.g. cost/benefit analysis, portfolio variance reduction).

Thanks!

Cheers,
Eric White
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fishnskiguy
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Post by fishnskiguy »

One minor problem with the poll. If you do a tilt toward inflation protection you will be doing a tilt toward higher credit quality since TIPS are Treasuries.

Chris
Trident D-5 SLBM- "When you care enough to send the very best."
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asset_chaos
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Post by asset_chaos »

If I hold short term treasury that's a credit quality and duration tilt from total bond market. If I hold long term corporate that's also a credit quality and duration tilt from total bond market. I'm not sure the poll question, as worded, will capture the information you're seeking to capture. As the M* box for total bond market is (high quality,intermediate duration), maybe a better question is what other boxes do people's bond portfolio's inhabit, with a TIPs question added on.
Regards, | | Guy
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Sunny Sarkar
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Post by Sunny Sarkar »

fishnskiguy wrote:One minor problem with the poll. If you do a tilt toward inflation protection you will be doing a tilt toward higher credit quality since TIPS are Treasuries.
I hold Taylor suggested 50/50 index/tips. Wondering if it'd be worthwhile to move from index to investment-grade to offset the quality tilt due to tips.
mikep
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Post by mikep »

Is 50/50 TIPS/TBM no tilt or inflation protected tilt? None of the choices fit the answer.
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Sunny Sarkar
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Post by Sunny Sarkar »

mikep wrote:Is 50/50 TIPS/TBM no tilt or inflation protected tilt? None of the choices fit the answer.
That'd be inflation tilt acc to OP.
bluto
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Post by bluto »

mikep wrote:Is 50/50 TIPS/TBM no tilt or inflation protected tilt? None of the choices fit the answer.
You are tilted towards inflation protection and credit quality because of your TIPs allocation.
mikep
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Re: POLL: Fixed Asset Allocation

Post by mikep »

bluto wrote:
mikep wrote:Is 50/50 TIPS/TBM no tilt or inflation protected tilt? None of the choices fit the answer.
You are tilted towards inflation protection and credit quality because of your TIPs allocation.
Eric White wrote:Inflation Protection Tilt = inflation protected allocation larger than nominal allocation
But my inflation protected allocation is not larger than my nominal bond allocation. ?? I guess just credit tilt?
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goggles
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Post by goggles »

I follow Bill Bernstein's advice to keep it short.

Also, I don't have TIPS because for the life of me I can't understand them.
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tetractys
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Post by tetractys »

Hmm? Well I only have 50% inflation protected, so no tilt there according to the OP, although it does up the credit quality. And the duration is basically intermediate, which is a duration tilt according to the OP. So that's two I guess, duration and credit quality. -- Tet
RESISTANCE IS FRUITFUL
Topic Author
Eric White
Posts: 54
Joined: Fri May 18, 2007 10:09 am

Initial poll results

Post by Eric White »

Thanks everybody for voting your allocation strategies. I know it was a little tough to comprehend subtle differences, but I wanted to make it as comprehensive in scope as possible (e.g. including inflation protection) without proliferating the options too much (e.g. qualifying inflation protection secondary effects on credit quality). Basically, I wanted to understand if people were moving away from TBM directionally how they were moving.

I'm amazed at the trimodal response. I think I can understand the no tilt & triple tilt. I'm intrigued at the competitiveness of the inflation tilt only option.

Can posters from each strategy post some reasons why that allocation strategy is the best? I'd love to see some rational explanations/backtests/scenario analysis for preferring one of the three dominant strategies.

Thanks!
Eric
Topic Author
Eric White
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Opportunity costs of credit quality tilting

Post by Eric White »

I'm pretty confident I don't want to take duration risk. It seems like many Bogleheads are hesitant to go long due to repricing risk. If people have arguments in favor of taking the duration risk inherent in TBM, I'd love to hear them!

The issue that made me consider requesting this poll was a divergence I saw in 2009 results from credit quality tilting. I thought I was doing the prudent thing when I set up my fixed allocation for the first time last year to use Treasuries instead of TBM. I thought it would help me minimize credit quality risk due to inclusion of corporates in TBM. The flipside of this was outperformance in corporates and underperformance in Treasuries. TBM sailed through this fine since it didn't tilt. I don't want to chase performance and really don't care if I missed out in a returns spike in my fixed portfolio; I just want it as stable as possible while being moderately positive (1% to 4%). However, negative returns in intermediate Treasuries really made me wonder if throwing away corporates, although risky in themselves, is an appropriate decision at a portfolio level. I need to understand if the rebalancing improvement from uncorrelated corporate/Treasury returns is greater than the unique corporate risk. Once again, I'd appreciate any advice you have in this area too!

Eric
dbr
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Post by dbr »

In a retirement portfolio supporting minor withdrawals continuously over 20-40 years, the duration risk of TBM is worth the expected return. Many people object to the convexity of MBS's in TBM. Exactly what kind of risk that really is to the long term balanced portfolio might be a little subtle as the real question is whether the risk is justified by the extra return, but the argument is granted for those who feel concern there.

Larry Swedroe argues that a better way to manage that situation is to avoid risk in bonds by going short without MBS instruments and seek increased return/risk with more equities. He may be right and if that is the preference then one might follow that advice.

It is not possible to assess the correct properties of bond investments independently of the overall investment plan.

TIPS appear to be a remarkably useful tool for those whose main concern in retirement is hedging inflation. There has been much comment just in this forum regarding the advantages to high, even all, TIPS approaches to funding retirements. Also, Larry Swedroe is an advocate of systems where at high real yields bonds could be 100% TIPS or where bonds are always 100% TIPS with shifting maturity schemes. This approach somewhat contradicts the advice to stay short in bonds. For Larry, TIPS are typically more advantageous at long maturities because inflation is hedged. Note that to hedge inflation, TIPS become a lower risk and lower return option compared to nominal bonds, have a little liquidity risk, and have no agency risk (except for those who anticipate the failure of civil government in the US or who believe the CPI calculation is a conspiracy to defraud the citizenry of its property).

Lastly, I think it is questionable whether market capitalization weighting of debt obligations has meaning with respect to the concept of diversification in bonds. If it did, 50% TIPS would be massively overweighted and more than 30% equities, or something like that would be overweighted. The alternative of setting neutral weighting at 1/n where n is the number of credible alternatives is also arbitrary. While it follows the law of ignorant choice, the selection of the number n is still undetermined by any rationale.
neverknow
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Post by neverknow »

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Last edited by neverknow on Mon Jan 17, 2011 10:08 am, edited 1 time in total.
williamg
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Post by williamg »

neverknow wrote:There was no option for cash and/or bank CD's. So I couldn't vote.
neverknow
Excellent point. Another "bucketing" of fixed income assets:
1) within balanced funds; allows some overall portfolio balancing to be done by professionals
2) bond mutual funds or etfs of various flavors; professional management and probably better returns over time, but loss of principal stability
3) directly owned securities including CDs, treasuries, etc; stable principal but illiquid
4) true cash; e.g., money market funds; stable principal and liquid

I am currently wrestling with how much to allocate between buckets 2 and 3.
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