Treasuries as your bond allocation?

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Gaston
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Treasuries as your bond allocation?

Post by Gaston »

Some notable names in investing (e.g, Larry Swedroe, Warren Buffett) recommend using mid to long-term treasuries as the primary component of your bond allocation. They expressly advise against using corporate bonds. Their logic, as I understand it, is that the risks associated with corporate bonds closely match that of equities. So instead of diversifying risk, the use of corporate bonds actually concentrates risk without commensurate financial return.

This would seem to imply that for a 60/40 portfolio, you'd have 60% in equities and 40% in treasuries.

What is your take or the Boglehead take on this?
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anon_investor
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Re: Treasuries as your bond allocation?

Post by anon_investor »

Gaston wrote: Sat Jun 12, 2021 9:03 am Some notable names in investing (e.g, Larry Swedroe, Warren Buffett) recommend using mid to long-term treasuries as the primary component of your bond allocation. They expressly advise against using corporate bonds. Their logic, as I understand it, is that the risks associated with corporate bonds closely match that of equities. So instead of diversifying risk, the use of corporate bonds actually concentrates risk without commensurate financial return.

This would seem to imply that for a 60/40 portfolio, you'd have 60% in equities and 40% in treasuries.

What is your take or the Boglehead take on this?
Plenty of BHs use intermediate treasury funds instead of a total bond fund. I think it is perfectly fine.
dbr
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Re: Treasuries as your bond allocation?

Post by dbr »

Yes, plenty of Bogleheads do have some or all bonds in Treasuries. That is not the same thing as a consensus recommendation that Treasuries are the preferred bond holding. Mr. Bogle actually criticized the holding of Vanguards total bond index fund as having too much in Treasuries and not enough in corporates.

You will find bond choice discussions to be a can of worms because there are far more choices in bonds than there are reasons to choose among them. In short, it mostly does not matter. Probably the larger issue in bonds is not the default risk but rather what duration to hold. There can be a lot of discussion suggesting that for long term investors longer term bonds are probably more suitable. As a conservative point that probably indicates mainly intermediate durations. Also consider that the strongest lever on portfolio results is the stock/bond allocation, and that can be adjusted as well given any choice of what bonds to hold. Also it has been pointed out that fixed income holdings such as CDs and stable value funds are options. CDs have no more default risk than Treasuries, for all practical purposes. Also, again, I bonds are an option for some folks sometime, but that sort of bond is not usually what is meant by "Treasury" even though it is a Treasury offering.

Disclaimer: My bonds are an intermediate TIPS fund and an intermediate Treasuries fund.
gips
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Re: Treasuries as your bond allocation?

Post by gips »

have you seen vineviz’s thread? a different allocation (first 20%) but a lot of excellent info:

viewtopic.php?t=287627

best,
delamer
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Re: Treasuries as your bond allocation?

Post by delamer »

This makes a lot if sense to me.

William Bernstein also subscribes to this point-of-view.
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climber2020
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Re: Treasuries as your bond allocation?

Post by climber2020 »

Looking at a comparison, a corporate bond fund appears to resemble the treasury fund more than it does the stock fund:

Image
KlangFool
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Re: Treasuries as your bond allocation?

Post by KlangFool »

OP,

I have both: Total Bond Index and Intermediate-Term Treasury.

Total Bond Index as part of my 3 funds portfolio.

10% Intermediate-Term Treasury is paired with 10% of SmallCapValue as my mini Larry portfolio.

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Re: Treasuries as your bond allocation?

Post by KlangFool »

climber2020 wrote: Sat Jun 12, 2021 9:28 am Looking at a comparison, a corporate bond fund appears to resemble the treasury fund more than it does the stock fund:

Image
I disagreed. You should extend your graph to include the 2008/2009 GFC. Then, you should see the difference.

In fact, it was shown in your graph. You just need to look at March 2020. And, compare the drop between stock fund, corporate bond fund, and treasury fund. The corporate bond fund drop like the stock bond. There was no drop for the treasury.

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dbr
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Re: Treasuries as your bond allocation?

Post by dbr »

climber2020 wrote: Sat Jun 12, 2021 9:28 am Looking at a comparison, a corporate bond fund appears to resemble the treasury fund more than it does the stock fund:
Correct. The risk in bonds whether corporate or Treasuries is small compared to stocks, but corporates are certainly more risky than Treasuries.* If one considers "match" to mean the correlation of returns then Treasuries are less correlated on average, as one would suspect. As written that statement by Buffett does not mean what it appears to say.

It takes a lot of work to elucidate just what difference choices like this actually make and to then also support a decision that one "should" hold Treasuries and not corporates. I don't think you ever really get there. If one wants to consider the issue from the opposite end, one can look up the discussions on whether or not one should hold high yield bonds. That is also not clearly resolved. Another not clearly resolved discussion is whether or not one should hold international bonds, or even, at the extreme, bonds from emerging market countries.

* If one wants a factor model for returns, then the parameters for stocks are market, size, and value and for bonds are duration and default.
Marseille07
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Re: Treasuries as your bond allocation?

Post by Marseille07 »

anon_investor wrote: Sat Jun 12, 2021 9:08 am
Gaston wrote: Sat Jun 12, 2021 9:03 am Some notable names in investing (e.g, Larry Swedroe, Warren Buffett) recommend using mid to long-term treasuries as the primary component of your bond allocation. They expressly advise against using corporate bonds. Their logic, as I understand it, is that the risks associated with corporate bonds closely match that of equities. So instead of diversifying risk, the use of corporate bonds actually concentrates risk without commensurate financial return.

This would seem to imply that for a 60/40 portfolio, you'd have 60% in equities and 40% in treasuries.

What is your take or the Boglehead take on this?
Plenty of BHs use intermediate treasury funds instead of a total bond fund. I think it is perfectly fine.
Aren't they kind of the same thing? When I check the asset category of BND, I see:
Asset class
Intermediate-Term Bond
Category
Intermediate-Term Bond
seajay
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Re: Treasuries as your bond allocation?

Post by seajay »

Gaston wrote: Sat Jun 12, 2021 9:03 am Some notable names in investing (e.g, Larry Swedroe, Warren Buffett) recommend using mid to long-term treasuries as the primary component of your bond allocation. They expressly advise against using corporate bonds. Their logic, as I understand it, is that the risks associated with corporate bonds closely match that of equities. So instead of diversifying risk, the use of corporate bonds actually concentrates risk without commensurate financial return.

This would seem to imply that for a 60/40 portfolio, you'd have 60% in equities and 40% in treasuries.

What is your take or the Boglehead take on this?
I thought both Larry Swedroe and Warren Buffett preferred shifting risk away from bonds over to stocks. Warren Buffett like 90/10 stocks/T-Bills. Larry Swedroe has I believe suggested that corporate default rates compare to the risk-premium, so broadly washes, but has indicated that long dated inflation bonds/TIPS might be OK.

Larry suggesting something like shift 50/50 stock/bond to 33 in more volatile/risker stocks (such as small cap value), more in 'safe' treasury bonds/notes/bills/tips. Buffett prefers T-Bills for their liquidity during times of extremes when he might want to deploy 'reserves'.

Zvi Bodie suggested similar, mostly TIPS, but a little highly volatile long stock exposure via the likes of 10x leveraged stock Options. Along the lines of this
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Re: Treasuries as your bond allocation?

Post by KlangFool »

Marseille07 wrote: Sat Jun 12, 2021 9:43 am
anon_investor wrote: Sat Jun 12, 2021 9:08 am
Gaston wrote: Sat Jun 12, 2021 9:03 am Some notable names in investing (e.g, Larry Swedroe, Warren Buffett) recommend using mid to long-term treasuries as the primary component of your bond allocation. They expressly advise against using corporate bonds. Their logic, as I understand it, is that the risks associated with corporate bonds closely match that of equities. So instead of diversifying risk, the use of corporate bonds actually concentrates risk without commensurate financial return.

This would seem to imply that for a 60/40 portfolio, you'd have 60% in equities and 40% in treasuries.

What is your take or the Boglehead take on this?
Plenty of BHs use intermediate treasury funds instead of a total bond fund. I think it is perfectly fine.
Aren't they kind of the same thing? When I check the asset category of BND, I see:
Asset class
Intermediate-Term Bond
Category
Intermediate-Term Bond
Marseille07,

Not exactly. Intermediate-term treasury is safer. Especially, in a time of crisis. And, you seen this in March 2020. BND drop 7%. VTSAX drop about 30+%. I believe Intermediate-term treasury went up.

There is an additional "flight to safety" factor in the time of crisis with treasury.

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dbr
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Re: Treasuries as your bond allocation?

Post by dbr »

Marseille07 wrote: Sat Jun 12, 2021 9:43 am
anon_investor wrote: Sat Jun 12, 2021 9:08 am
Gaston wrote: Sat Jun 12, 2021 9:03 am Some notable names in investing (e.g, Larry Swedroe, Warren Buffett) recommend using mid to long-term treasuries as the primary component of your bond allocation. They expressly advise against using corporate bonds. Their logic, as I understand it, is that the risks associated with corporate bonds closely match that of equities. So instead of diversifying risk, the use of corporate bonds actually concentrates risk without commensurate financial return.

This would seem to imply that for a 60/40 portfolio, you'd have 60% in equities and 40% in treasuries.

What is your take or the Boglehead take on this?
Plenty of BHs use intermediate treasury funds instead of a total bond fund. I think it is perfectly fine.
Aren't they kind of the same thing? When I check the asset category of BND, I see:
Asset class
Intermediate-Term Bond
Category
Intermediate-Term Bond
No, they are not the same thing. The two factors to start with to describe a bond holding are duration risk and default risk. Intermediate refers to the duration but does not describe the default risk. Default risk ranges from zero for Treasuries to large for high yield or junk bonds. You could do a factor analysis in Portfolio Visualizer selecting fixed income factors using term and credit to compare funds.
Marseille07
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Re: Treasuries as your bond allocation?

Post by Marseille07 »

KlangFool wrote: Sat Jun 12, 2021 9:51 am
Marseille07 wrote: Sat Jun 12, 2021 9:43 am
anon_investor wrote: Sat Jun 12, 2021 9:08 am
Gaston wrote: Sat Jun 12, 2021 9:03 am Some notable names in investing (e.g, Larry Swedroe, Warren Buffett) recommend using mid to long-term treasuries as the primary component of your bond allocation. They expressly advise against using corporate bonds. Their logic, as I understand it, is that the risks associated with corporate bonds closely match that of equities. So instead of diversifying risk, the use of corporate bonds actually concentrates risk without commensurate financial return.

This would seem to imply that for a 60/40 portfolio, you'd have 60% in equities and 40% in treasuries.

What is your take or the Boglehead take on this?
Plenty of BHs use intermediate treasury funds instead of a total bond fund. I think it is perfectly fine.
Aren't they kind of the same thing? When I check the asset category of BND, I see:
Asset class
Intermediate-Term Bond
Category
Intermediate-Term Bond
Marseille07,

Not exactly. Intermediate-term treasury is safer. Especially, in a time of crisis. And, you seen this in March 2020. BND drop 7%. VTSAX drop about 30+%. I believe Intermediate-term treasury went up.

There is an additional "flight to safety" factor in the time of crisis with treasury.

KlangFool
Thank you, always good to learn new things.
Marseille07
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Re: Treasuries as your bond allocation?

Post by Marseille07 »

dbr wrote: Sat Jun 12, 2021 9:51 am
Marseille07 wrote: Sat Jun 12, 2021 9:43 am
anon_investor wrote: Sat Jun 12, 2021 9:08 am
Gaston wrote: Sat Jun 12, 2021 9:03 am Some notable names in investing (e.g, Larry Swedroe, Warren Buffett) recommend using mid to long-term treasuries as the primary component of your bond allocation. They expressly advise against using corporate bonds. Their logic, as I understand it, is that the risks associated with corporate bonds closely match that of equities. So instead of diversifying risk, the use of corporate bonds actually concentrates risk without commensurate financial return.

This would seem to imply that for a 60/40 portfolio, you'd have 60% in equities and 40% in treasuries.

What is your take or the Boglehead take on this?
Plenty of BHs use intermediate treasury funds instead of a total bond fund. I think it is perfectly fine.
Aren't they kind of the same thing? When I check the asset category of BND, I see:
Asset class
Intermediate-Term Bond
Category
Intermediate-Term Bond
No, they are not the same thing. The two factors to start with to describe a bond holding are duration risk and default risk. Intermediate refers to the duration but does not describe the default risk. Default risk ranges from zero for Treasuries to large for high yield or junk bonds. You could do a factor analysis in Portfolio Visualizer selecting fixed income factors using term and credit to compare funds.
Thank you, I'll try to run some PV analysis on them.
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anon_investor
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Re: Treasuries as your bond allocation?

Post by anon_investor »

Marseille07 wrote: Sat Jun 12, 2021 9:53 am
dbr wrote: Sat Jun 12, 2021 9:51 am
Marseille07 wrote: Sat Jun 12, 2021 9:43 am
anon_investor wrote: Sat Jun 12, 2021 9:08 am
Gaston wrote: Sat Jun 12, 2021 9:03 am Some notable names in investing (e.g, Larry Swedroe, Warren Buffett) recommend using mid to long-term treasuries as the primary component of your bond allocation. They expressly advise against using corporate bonds. Their logic, as I understand it, is that the risks associated with corporate bonds closely match that of equities. So instead of diversifying risk, the use of corporate bonds actually concentrates risk without commensurate financial return.

This would seem to imply that for a 60/40 portfolio, you'd have 60% in equities and 40% in treasuries.

What is your take or the Boglehead take on this?
Plenty of BHs use intermediate treasury funds instead of a total bond fund. I think it is perfectly fine.
Aren't they kind of the same thing? When I check the asset category of BND, I see:
Asset class
Intermediate-Term Bond
Category
Intermediate-Term Bond
No, they are not the same thing. The two factors to start with to describe a bond holding are duration risk and default risk. Intermediate refers to the duration but does not describe the default risk. Default risk ranges from zero for Treasuries to large for high yield or junk bonds. You could do a factor analysis in Portfolio Visualizer selecting fixed income factors using term and credit to compare funds.
Thank you, I'll try to run some PV analysis on them.
The trade off is credit risk for yield. Total Bond yields around 1.3% and Intermediate Treasuries around 0.8%.
ImUrHuckleberry
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Re: Treasuries as your bond allocation?

Post by ImUrHuckleberry »

Gaston wrote: Sat Jun 12, 2021 9:03 am Some notable names in investing (e.g, Larry Swedroe, Warren Buffett) recommend using mid to long-term treasuries as the primary component of your bond allocation. They expressly advise against using corporate bonds. Their logic, as I understand it, is that the risks associated with corporate bonds closely match that of equities. So instead of diversifying risk, the use of corporate bonds actually concentrates risk without commensurate financial return.

This would seem to imply that for a 60/40 portfolio, you'd have 60% in equities and 40% in treasuries.

What is your take or the Boglehead take on this?
Most people early and medium term in their investing careers are stuck investing in whatever bonds are available in their 401k plan. And these choices (at least in my experience) are normally total market bond funds, at least the ones with a reasonable ER in any case.
cyclist
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Re: Treasuries as your bond allocation?

Post by cyclist »

dbr wrote: Sat Jun 12, 2021 9:17 am You will find bond choice discussions to be a can of worms because there are far more choices in bonds than there are reasons to choose among them. In short, it mostly does not matter.
I love this. Thanks.

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vineviz
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Re: Treasuries as your bond allocation?

Post by vineviz »

Gaston wrote: Sat Jun 12, 2021 9:03 am This would seem to imply that for a 60/40 portfolio, you'd have 60% in equities and 40% in treasuries.

What is your take or the Boglehead take on this?

My take is that this is probably optimal from a diversification standpoint.

If bonds are less than 50% of your total portfolio, then all of them should probably be intermediate-term or long-term Treasuries (nominal or TIPS).

If bonds are more than 50% of your portfolio, anything in excess of that 50% can be allocated to intermediate-term or short-term corporate bonds. Just a hypothetical example:

30% stock;
20% long-term nominal Treasuries;
30% intermediate-term TIPS;
20% short-term investment grade corporate bonds;

Etc.
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Munir
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Re: Treasuries as your bond allocation?

Post by Munir »

dbr wrote: Sat Jun 12, 2021 9:17 am
..........Probably the larger issue in bonds is not the default risk but rather what duration to hold.
Do short term bond funds have a place in a bond portfolio? Why not have a mix of short and intermediate bond funds that have a mix of government and some corporate bonds in proportions that one feels comfortable with? By keeping them separate from each other instead of being in one fund (such as TBM) you can use one fund or the other for re-balancing purposes when indicated (or RMD). I use the Short Term Federal Fund (VSGDX), the Core Bond Fund (VCOBX), and the Intermediate Bond Index fund (VBILX) in varying proportions-64:18:18.
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galeno
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Re: Treasuries as your bond allocation?

Post by galeno »

We are USD based non-US investors.

Last year we simplified our 100% USD FI allocation from

30% TIPS + 30% US Corps + 30% US Treasuries + 10% CASH

to

90% TWBM (40% USD) + 10% CASH.
Last edited by galeno on Sat Jun 12, 2021 8:53 pm, edited 1 time in total.
KISS & STC.
Big Dog
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Re: Treasuries as your bond allocation?

Post by Big Dog »

vineviz wrote: Sat Jun 12, 2021 11:43 am
Gaston wrote: Sat Jun 12, 2021 9:03 am This would seem to imply that for a 60/40 portfolio, you'd have 60% in equities and 40% in treasuries.

What is your take or the Boglehead take on this?

My take is that this is probably optimal from a diversification standpoint.
......
That's my 2-fund portfolio. I used to hold BND but did not like the 7% drop in Mar-20, so switched to a Treasury fund when BND bounced back.
rockstar
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Re: Treasuries as your bond allocation?

Post by rockstar »

Gaston wrote: Sat Jun 12, 2021 9:03 am Some notable names in investing (e.g, Larry Swedroe, Warren Buffett) recommend using mid to long-term treasuries as the primary component of your bond allocation. They expressly advise against using corporate bonds. Their logic, as I understand it, is that the risks associated with corporate bonds closely match that of equities. So instead of diversifying risk, the use of corporate bonds actually concentrates risk without commensurate financial return.

This would seem to imply that for a 60/40 portfolio, you'd have 60% in equities and 40% in treasuries.

What is your take or the Boglehead take on this?
I thought Buffett hated the long bond. And it looks like a good chunk of his bonds are now foreign, not domestic.

https://berkshirehathaway.com/qtrly/1stqtr21.pdf (page 8)
SteadyOne
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Re: Treasuries as your bond allocation?

Post by SteadyOne »

Vanguard Total Bond fund VBTIX is 65% US government with average duration 7 years. So, it good enough for me, and provides better yield. 2% now.
“Every de­duc­tion is al­lowed as a mat­ter of leg­isla­tive grace.” US Federal Court
SteadyOne
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Re: Treasuries as your bond allocation?

Post by SteadyOne »

rockstar wrote: Sat Jun 12, 2021 1:08 pm
Gaston wrote: Sat Jun 12, 2021 9:03 am Some notable names in investing (e.g, Larry Swedroe, Warren Buffett) recommend using mid to long-term treasuries as the primary component of your bond allocation. They expressly advise against using corporate bonds. Their logic, as I understand it, is that the risks associated with corporate bonds closely match that of equities. So instead of diversifying risk, the use of corporate bonds actually concentrates risk without commensurate financial return.

This would seem to imply that for a 60/40 portfolio, you'd have 60% in equities and 40% in treasuries.

What is your take or the Boglehead take on this?
I thought Buffett hated the long bond. And it looks like a good chunk of his bonds are now foreign, not domestic.

https://berkshirehathaway.com/qtrly/1stqtr21.pdf (page 8)
Berkshire’s focus is different from an individual investor planning for retirement. Otherwise, a simple investment strategy for a such investor would have been to invest all retirement money into BRK stock.
“Every de­duc­tion is al­lowed as a mat­ter of leg­isla­tive grace.” US Federal Court
rockstar
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Re: Treasuries as your bond allocation?

Post by rockstar »

SteadyOne wrote: Sat Jun 12, 2021 1:23 pm
rockstar wrote: Sat Jun 12, 2021 1:08 pm
Gaston wrote: Sat Jun 12, 2021 9:03 am Some notable names in investing (e.g, Larry Swedroe, Warren Buffett) recommend using mid to long-term treasuries as the primary component of your bond allocation. They expressly advise against using corporate bonds. Their logic, as I understand it, is that the risks associated with corporate bonds closely match that of equities. So instead of diversifying risk, the use of corporate bonds actually concentrates risk without commensurate financial return.

This would seem to imply that for a 60/40 portfolio, you'd have 60% in equities and 40% in treasuries.

What is your take or the Boglehead take on this?
I thought Buffett hated the long bond. And it looks like a good chunk of his bonds are now foreign, not domestic.

https://berkshirehathaway.com/qtrly/1stqtr21.pdf (page 8)
Berkshire’s focus is different from an individual investor planning for retirement. Otherwise, a simple investment strategy for a such investor would have been to invest all retirement money into BRK stock.
True. I can only see what they do.

I'm good with index funds. No idea what to do with bonds. I sold them all off last year. I'm buying I Bonds today to get some yield on part of my emergency funds. But I can't wrap my head around buying an asset that won't keep up with inflation for the rest of my portfolio. I'd rather buy VNQ than BND right now.
SteadyOne
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Re: Treasuries as your bond allocation?

Post by SteadyOne »

rockstar wrote: Sat Jun 12, 2021 1:56 pm
SteadyOne wrote: Sat Jun 12, 2021 1:23 pm
rockstar wrote: Sat Jun 12, 2021 1:08 pm
Gaston wrote: Sat Jun 12, 2021 9:03 am Some notable names in investing (e.g, Larry Swedroe, Warren Buffett) recommend using mid to long-term treasuries as the primary component of your bond allocation. They expressly advise against using corporate bonds. Their logic, as I understand it, is that the risks associated with corporate bonds closely match that of equities. So instead of diversifying risk, the use of corporate bonds actually concentrates risk without commensurate financial return.

This would seem to imply that for a 60/40 portfolio, you'd have 60% in equities and 40% in treasuries.

What is your take or the Boglehead take on this?
I thought Buffett hated the long bond. And it looks like a good chunk of his bonds are now foreign, not domestic.

https://berkshirehathaway.com/qtrly/1stqtr21.pdf (page 8)
Berkshire’s focus is different from an individual investor planning for retirement. Otherwise, a simple investment strategy for a such investor would have been to invest all retirement money into BRK stock.
True. I can only see what they do.

I'm good with index funds. No idea what to do with bonds. I sold them all off last year. I'm buying I Bonds today to get some yield on part of my emergency funds. But I can't wrap my head around buying an asset that won't keep up with inflation for the rest of my portfolio. I'd rather buy VNQ than BND right now.
True, but I remember in 2008 when stocks collapsed how happy I was to have bonds. I did not care about inflation at that moment. And I did not sell any equities.
“Every de­duc­tion is al­lowed as a mat­ter of leg­isla­tive grace.” US Federal Court
UpperNwGuy
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Re: Treasuries as your bond allocation?

Post by UpperNwGuy »

rockstar wrote: Sat Jun 12, 2021 1:56 pm I can't wrap my head around buying an asset that won't keep up with inflation for the rest of my portfolio.
Why?
rockstar
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Re: Treasuries as your bond allocation?

Post by rockstar »

SteadyOne wrote: Sat Jun 12, 2021 3:10 pm
rockstar wrote: Sat Jun 12, 2021 1:56 pm
SteadyOne wrote: Sat Jun 12, 2021 1:23 pm
rockstar wrote: Sat Jun 12, 2021 1:08 pm
Gaston wrote: Sat Jun 12, 2021 9:03 am Some notable names in investing (e.g, Larry Swedroe, Warren Buffett) recommend using mid to long-term treasuries as the primary component of your bond allocation. They expressly advise against using corporate bonds. Their logic, as I understand it, is that the risks associated with corporate bonds closely match that of equities. So instead of diversifying risk, the use of corporate bonds actually concentrates risk without commensurate financial return.

This would seem to imply that for a 60/40 portfolio, you'd have 60% in equities and 40% in treasuries.

What is your take or the Boglehead take on this?
I thought Buffett hated the long bond. And it looks like a good chunk of his bonds are now foreign, not domestic.

https://berkshirehathaway.com/qtrly/1stqtr21.pdf (page 8)
Berkshire’s focus is different from an individual investor planning for retirement. Otherwise, a simple investment strategy for a such investor would have been to invest all retirement money into BRK stock.
True. I can only see what they do.

I'm good with index funds. No idea what to do with bonds. I sold them all off last year. I'm buying I Bonds today to get some yield on part of my emergency funds. But I can't wrap my head around buying an asset that won't keep up with inflation for the rest of my portfolio. I'd rather buy VNQ than BND right now.
True, but I remember in 2008 when stocks collapsed how happy I was to have bonds. I did not care about inflation at that moment. And I did not sell any equities.
Back then I was still timing the market. I used the first Fed rate drop as a signal that things were about to get bad, so I bailed. I didn't experience the drop. Now, I use moving averages as guardrails.
rockstar
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Re: Treasuries as your bond allocation?

Post by rockstar »

UpperNwGuy wrote: Sat Jun 12, 2021 4:09 pm
rockstar wrote: Sat Jun 12, 2021 1:56 pm I can't wrap my head around buying an asset that won't keep up with inflation for the rest of my portfolio.
Why?
I don't like to intentionally lose money.
Northern Flicker
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Re: Treasuries as your bond allocation?

Post by Northern Flicker »

Gaston wrote: Sat Jun 12, 2021 9:03 am Some notable names in investing (e.g, Larry Swedroe, Warren Buffett) recommend using mid to long-term treasuries as the primary component of your bond allocation. They expressly advise against using corporate bonds. Their logic, as I understand it, is that the risks associated with corporate bonds closely match that of equities. So instead of diversifying risk, the use of corporate bonds actually concentrates risk without commensurate financial return.

This would seem to imply that for a 60/40 portfolio, you'd have 60% in equities and 40% in treasuries.

What is your take or the Boglehead take on this?
I've never seen Mr. Buffett recommend long-term treasuries. He is not a fan of bonds. He likes t-bills and short-term treasuries to manage liquidity and large-cap stocks for the remainder of a portfolio.

I believe Mr. Swedroe recommends either intermediate treasuries, insured CDs, or muni bonds depending on yields, the asset location of bonds, and the tax status of the investor.

By holding treasuries instead of a total bond index, you can, if desired, increase the stock allocation slightly because treasuries traditionally have provided more protection from a stock crash.

https://www.portfoliovisualizer.com/bac ... tion3_1=40
Last edited by Northern Flicker on Sat Jun 12, 2021 4:26 pm, edited 2 times in total.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
Marseille07
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Re: Treasuries as your bond allocation?

Post by Marseille07 »

rockstar wrote: Sat Jun 12, 2021 4:14 pm
UpperNwGuy wrote: Sat Jun 12, 2021 4:09 pm
rockstar wrote: Sat Jun 12, 2021 1:56 pm I can't wrap my head around buying an asset that won't keep up with inflation for the rest of my portfolio.
Why?
I don't like to intentionally lose money.
I don't think there's anything that's guaranteed to beat inflation risk-free. I-bonds are the only thing, but they cap the amount per year.
dbr
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Re: Treasuries as your bond allocation?

Post by dbr »

Marseille07 wrote: Sat Jun 12, 2021 4:20 pm
rockstar wrote: Sat Jun 12, 2021 4:14 pm
UpperNwGuy wrote: Sat Jun 12, 2021 4:09 pm
rockstar wrote: Sat Jun 12, 2021 1:56 pm I can't wrap my head around buying an asset that won't keep up with inflation for the rest of my portfolio.
Why?
I don't like to intentionally lose money.
I don't think there's anything that's guaranteed to beat inflation risk-free. I-bonds are the only thing, but they cap the amount per year.
Right. I'm not sure there is a helpful difference between not intentionally losing money and choosing to unintentionally lose money. That is the whole dilemma about what assets to choose to hold.
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Re: Treasuries as your bond allocation?

Post by rockstar »

Marseille07 wrote: Sat Jun 12, 2021 4:20 pm
rockstar wrote: Sat Jun 12, 2021 4:14 pm
UpperNwGuy wrote: Sat Jun 12, 2021 4:09 pm
rockstar wrote: Sat Jun 12, 2021 1:56 pm I can't wrap my head around buying an asset that won't keep up with inflation for the rest of my portfolio.
Why?
I don't like to intentionally lose money.
I don't think there's anything that's guaranteed to beat inflation risk-free. I-bonds are the only thing, but they cap the amount per year.
True. But buying an asset class that you know right now won't beat it seems self defeating to me. I'd rather gamble with REITs, where I have a good chance of beating inflation.
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Re: Treasuries as your bond allocation?

Post by Marseille07 »

rockstar wrote: Sat Jun 12, 2021 4:28 pm True. But buying an asset class that you know right now won't beat it seems self defeating to me. I'd rather gamble with REITs, where I have a good chance of beating inflation.
I think we both have an aggressive AA, but I'm OK to have 5% in fixed income, namely cash. I'm aware that's not beating inflation, but my billpay is fully secured.
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Re: Treasuries as your bond allocation?

Post by rockstar »

Marseille07 wrote: Sat Jun 12, 2021 4:32 pm
rockstar wrote: Sat Jun 12, 2021 4:28 pm True. But buying an asset class that you know right now won't beat it seems self defeating to me. I'd rather gamble with REITs, where I have a good chance of beating inflation.
I think we both have an aggressive AA, but I'm OK to have 5% in fixed income, namely cash. I'm aware that's not beating inflation, but my billpay is fully secured.
My emergency fund is mostly in checking. Up until today, it was entirely in checking. I'm willing to take an inflation hit for the liquidity and piece of mind. I'm dabbling in I Bonds for part of it now as the rates exceed my mortgage, so I feel good with the investment being locked up for a year.

What I don't feel good about is knowing going in that I will loss against inflation. When it's a sure thing that I'll lose, I struggle to pull the trigger.

Once the Fed starts raising rates again, I'll buy short term bills again as long as they're higher than my mortgage.
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Re: Treasuries as your bond allocation?

Post by Broken Man 1999 »

My preference is treasuries in our TIRAs.

We do still have some Total Bond Market Index in our VA, but far less than we used to have. No treasuries available for our VA sub-accounts..

For lack of anything better, I started buying I-bonds after a long pause. Easy to leave to grandkids if DW and I don't need them.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go." - Mark Twain
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Re: Treasuries as your bond allocation?

Post by garlandwhizzer »

Gaston wrote:

Some notable names in investing (e.g, Larry Swedroe, Warren Buffett) recommend using mid to long-term treasuries as the primary component of your bond allocation.
I believe this statement is inaccurate. Buffett's attitude toward bonds at this time is undisguised contempt. He believes all Treasuries at this time are money losers going forward in real inflation adjusted terms. He's not in the business of losing future purchasing power and his pockets are deep enough to outlast any bear market in US history. He's worried about long term returns not short term risk.

https://www.forbes.com/sites/simonmoore ... 9df8c63e91

Quote from article based on his last annual letter:
As much as equity markets may be expensive, Buffett is no fan of government bonds. He says, “Can you believe that the income recently available from a 10-year U.S. Treasury bond – the yield was 0.93% at year-end – had fallen 94% from the 15.8% yield available in September 1981?” He believes fixed income investors “face a bleak future.”

Unlike equities, returns to bond investors are generally easier to forecast. Prices don’t move all that much so the yield is a good indicator of future return. Also, negative yields in Europe are not a good sign. You are destined to lose money in many government bonds today in Buffett’s opinion.
As for Larry I can't speak for him but my belief is that he prefers to average bond duration at intermediate rather than long duration. Larry is a great believer in reducing portfolio risk with higher bond allocations, lowering stock allocations and concentrating stocks in assets that are expected from long term backtesting to produce outsized long term returns such as SCV. Backtesting done 10 years ago in 2011 demonstrated much improved risk adjusted returns with Larry's strategy from 1929 to 2011 which is why, I believe, that Larry, an accomplished and astute student of market history, chose this approach more than a decade ago.

Over the last 10 years Larry's Treasury heavy/light equity mostly in SCV reliably reduced portfolio volatility as expected. However in terms of returns it paid a massive opportunity cost as TSM had a CAGR of 14.2% over the past decade, while the ITT fund had a CAGR of 2.75%. More than 11% difference in annualized returns. Safety and risk aversion turned out to be quite expensive over this time frame in spite of the positive backtesting results it produced from 1929 to 2011. This was further compounded by the fact that TSM outperformed SCV over the last decade. Long term backtesting is not infallible to put it mildly.

When you pay such a massive opportunity cost for a decade and you are now facing a future of reduced expected returns in both equity and bonds going forward, have you really reduced your long term risk? The risk long term is running out of purchasing power decades into the future. The answer to that question depends on the size of your asset base. If you're loaded, no problem, enjoy the smooth ride. You don't need consistently big returns. If you're not loaded you may have missed out on a great bull market the likes of which won't come again for decades.

Personally, I believe in learning about the market, financial planning, and tax planning for yourself and making your own investment and portfolio decisions rather than deciding which guru to blindly follow in terms of portfolio construction. There is no one who knows your inner self better or is more highly motivated for your own welfare than you. This subject matter is not that complicated. Much of the academic literature and professionally done stock research is IMO not worth the paper it is written on. The basics and a steady hand are all you need to be successful as an investor. The best place to start getting it is probably reading a book by Bogle whose simple common sense and objective analysis is very hard to beat after costs by anyone. The longer you do your own investing, the better you'll get at it. You learn from your mistakes as well as your successes. Experience turns out to be an effective, if sometimes painful, teacher. The individual investor is not bullet proof but neither are the gurus.

Garland Whizzer
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Re: Treasuries as your bond allocation?

Post by UpperNwGuy »

rockstar wrote: Sat Jun 12, 2021 4:14 pm
UpperNwGuy wrote: Sat Jun 12, 2021 4:09 pm
rockstar wrote: Sat Jun 12, 2021 1:56 pm I can't wrap my head around buying an asset that won't keep up with inflation for the rest of my portfolio.
Why?
I don't like to intentionally lose money.
It sounds like you're not looking at your portfolio as whole but evaluating each portion of the portfolio in isolation from the other portions.
seajay
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Re: Treasuries as your bond allocation?

Post by seajay »

garlandwhizzer wrote: Sat Jun 12, 2021 4:55 pm Over the last 10 years Larry's Treasury heavy/light equity mostly in SCV reliably reduced portfolio volatility as expected. However in terms of returns it paid a massive opportunity cost as TSM had a CAGR of 14.2% over the past decade, while the ITT fund had a CAGR of 2.75%. More than 11% difference in annualized returns. Safety and risk aversion turned out to be quite expensive over this time frame in spite of the positive backtesting results it produced from 1929 to 2011. This was further compounded by the fact that TSM outperformed SCV over the last decade. Long term backtesting is not infallible to put it mildly.

When you pay such a massive opportunity cost for a decade and you are now facing a future of reduced expected returns in both equity and bonds going forward, have you really reduced your long term risk? The risk long term is running out of purchasing power decades into the future. The answer to that question depends on the size of your asset base. If you're loaded, no problem, enjoy the smooth ride. You don't need consistently big returns. If you're not loaded you may have missed out on a great bull market the likes of which won't come again for decades.
Wouldn't you consider a 50/50 TSM/10 year T versus somewhat Larry's 30/70 SCV/10 year T style to be a fairer comparison. Whilst that relatively lagged over the 2011-recent period rewards were still reasonable, and for 2001 to 2010 it relatively outperformed ... was the more-consistent overall, at least in real terms.
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Re: Treasuries as your bond allocation?

Post by seajay »

rockstar wrote: Sat Jun 12, 2021 4:14 pm
UpperNwGuy wrote: Sat Jun 12, 2021 4:09 pm
rockstar wrote: Sat Jun 12, 2021 1:56 pm I can't wrap my head around buying an asset that won't keep up with inflation for the rest of my portfolio.
Why?
I don't like to intentionally lose money.
Many firms issue corporate bonds so on that measure are short bonds and deploy the capital that provides within the business to potentially yield rewards for their shareholders. Those bonds are a risk factor however, that could be mitigated by you also buying the bonds to leave just the business productivity gain factor alone.
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Re: Treasuries as your bond allocation?

Post by Broken Man 1999 »

garlandwhizzer wrote: Sat Jun 12, 2021 4:55 pm
Gaston wrote:

Some notable names in investing (e.g, Larry Swedroe, Warren Buffett) recommend using mid to long-term treasuries as the primary component of your bond allocation.
I believe this statement is inaccurate. Buffett's attitude toward bonds at this time is undisguised contempt. He believes all Treasuries at this time are money losers going forward in real inflation adjusted terms. He's not in the business of losing future purchasing power and his pockets are deep enough to outlast any bear market in US history. He's worried about long term returns not short term risk.

https://www.forbes.com/sites/simonmoore ... 9df8c63e91

Quote from article based on his last annual letter:
As much as equity markets may be expensive, Buffett is no fan of government bonds. He says, “Can you believe that the income recently available from a 10-year U.S. Treasury bond – the yield was 0.93% at year-end – had fallen 94% from the 15.8% yield available in September 1981?” He believes fixed income investors “face a bleak future.”

Unlike equities, returns to bond investors are generally easier to forecast. Prices don’t move all that much so the yield is a good indicator of future return. Also, negative yields in Europe are not a good sign. You are destined to lose money in many government bonds today in Buffett’s opinion.
As for Larry I can't speak for him but my belief is that he prefers to average bond duration at intermediate rather than long duration. Larry is a great believer in reducing portfolio risk with higher bond allocations, lowering stock allocations and concentrating stocks in assets that are expected from long term backtesting to produce outsized long term returns such as SCV. Backtesting done 10 years ago in 2011 demonstrated much improved risk adjusted returns with Larry's strategy from 1929 to 2011 which is why, I believe, that Larry, an accomplished and astute student of market history, chose this approach more than a decade ago.

Over the last 10 years Larry's Treasury heavy/light equity mostly in SCV reliably reduced portfolio volatility as expected. However in terms of returns it paid a massive opportunity cost as TSM had a CAGR of 14.2% over the past decade, while the ITT fund had a CAGR of 2.75%. More than 11% difference in annualized returns. Safety and risk aversion turned out to be quite expensive over this time frame in spite of the positive backtesting results it produced from 1929 to 2011. This was further compounded by the fact that TSM outperformed SCV over the last decade. Long term backtesting is not infallible to put it mildly.

When you pay such a massive opportunity cost for a decade and you are now facing a future of reduced expected returns in both equity and bonds going forward, have you really reduced your long term risk? The risk long term is running out of purchasing power decades into the future. The answer to that question depends on the size of your asset base. If you're loaded, no problem, enjoy the smooth ride. You don't need consistently big returns. If you're not loaded you may have missed out on a great bull market the likes of which won't come again for decades.

Personally, I believe in learning about the market, financial planning, and tax planning for yourself and making your own investment and portfolio decisions rather than deciding which guru to blindly follow in terms of portfolio construction. There is no one who knows your inner self better or is more highly motivated for your own welfare than you. This subject matter is not that complicated. Much of the academic literature and professionally done stock research is IMO not worth the paper it is written on. The basics and a steady hand are all you need to be successful as an investor. The best place to start getting it is probably reading a book by Bogle whose simple common sense and objective analysis is very hard to beat after costs by anyone. The longer you do your own investing, the better you'll get at it. You learn from your mistakes as well as your successes. Experience turns out to be an effective, if sometimes painful, teacher. The individual investor is not bullet proof but neither are the gurus.

Garland Whizzer
I agree with much of what you have written. However, it is easy to see what HAS happened and lament holding a treasury heavy portfolio. Unfortunately who had knowledge of the future? Not me.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go." - Mark Twain
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Re: Treasuries as your bond allocation?

Post by Robot Monster »

Broken Man 1999 wrote: Sat Jun 12, 2021 7:39 pm ...However, it is easy to see what HAS happened and lament holding a treasury heavy portfolio. Unfortunately who had knowledge of the future? Not me.
Indeed. To quote a poster from another thread, there are "those of us who are less sanguine about the future resembling the past".
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Re: Treasuries as your bond allocation?

Post by Mel Lindauer »

garlandwhizzer wrote: Sat Jun 12, 2021 4:55 pm

Personally, I believe in learning about the market, financial planning, and tax planning for yourself and making your own investment and portfolio decisions rather than deciding which guru to blindly follow in terms of portfolio construction. There is no one who knows your inner self better or is more highly motivated for your own welfare than you. This subject matter is not that complicated. Much of the academic literature and professionally done stock research is IMO not worth the paper it is written on. The basics and a steady hand are all you need to be successful as an investor. The best place to start getting it is probably reading a book by Bogle whose simple common sense and objective analysis is very hard to beat after costs by anyone. The longer you do your own investing, the better you'll get at it. You learn from your mistakes as well as your successes. Experience turns out to be an effective, if sometimes painful, teacher. The individual investor is not bullet proof but neither are the gurus.

Garland Whizzer
Well said, Garland. IMO, those are excellent guidelines to financial success.

Larry's extensive long-term back-testing proved that even the best research is no guarantee of future results. Educate yourself, and then invest according to the comfort level you can stick with.
Best Regards - Mel | | Semper Fi
afan
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Re: Treasuries as your bond allocation?

Post by afan »

How is this for an anticlimax "It probably does not make much difference"

Over the longest period I could find in portfolio visualizer (1991-2021), comparing Vanguard total bond investor vs Intermediate Treasury investor, they had remarkably similar characteristics. The treasury fund had a lower duration, slightly higher returns and slightly HIGHER volatility. It was definitely not lower risk. Because of this, it had a lower Sharpe ratio.

There have been times when the flight to quality causes treasuries to go up when the stock market goes down. But this does not result in an overall lower risk for treasuries.

Over that nearly 30 year period, treasuries had only a weakly negative correlation with stocks while the correlation for total bond was essentially zero. Thus, treasuries might serve as a slightly better diversifier in a portfolio with stocks. But again a minor difference
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Re: Treasuries as your bond allocation?

Post by afan »

Over a shorter period, starting Dec 2000, the combination of intermediate term treasuries plus total stock had a slightly higher return, slightly LOWER volatility, and slightly higher Sharpe ratio as compared to total bond plus total stock. There is that weak negative correlation with stocks showing up

But minor effects.

It is possible that the next 20-30 years will differ from the last in ways that make one of either total bond or treasuries substantially better than the other. I do not believe that anyone, including Warren Buffett, knows which will come out ahead. The cool thing is that, 30 years from now, everyone will know.

Total bond vs Intermediate term treasuries is not something that I expect will have any impact on my long term portfolio performance.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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Re: Treasuries as your bond allocation?

Post by NiceUnparticularMan »

So I tend to agree with the idea that bonds are special-purpose risk-management tools and that there is no particular need to "diversify" your bond holding. Nor, for that matter, to hold more bonds than necessary for the purpose of managing your risks at acceptable costs.

Given this, I tend to agree with the sentiment if you want to pursue higher returns through higher exposure to corporate risks, you should probably prefer to do that through stocks. Conversely if you are holding nominal bonds for some risk-management purpose, adding corporate risk to that mix is likely just muddying the waters.

But if you follow that logic, there is no particular reason to be wedded to some specific ratio of stocks to bond irrespective of what bonds you use.

Specifically, if the idea is you would have held X% in U.S. corporate bonds for risk-management purposes, you can likely get the same risk-management benefits from holding less than X% in Treasuries. And if the idea is you would have held Y% in U.S. stocks, with this shifting of risk from bonds to stocks you can hold more than Y% in U.S. stocks.

I realize this flies in the face of one typical framework here which says first you determine your stock/bond ratio, then you figure out which stocks and bonds to hold. That order of operations never made sense to me as it seems obvious to me that how much you hold of what should depend on what you are holding.

All that said, I agree in practice it often doesn't matter much. In the long run. Assuming no really dramatic and persistent bad events for U.S. corporations.
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Re: Treasuries as your bond allocation?

Post by dcabler »

KlangFool wrote: Sat Jun 12, 2021 9:51 am
Marseille07 wrote: Sat Jun 12, 2021 9:43 am
anon_investor wrote: Sat Jun 12, 2021 9:08 am
Gaston wrote: Sat Jun 12, 2021 9:03 am Some notable names in investing (e.g, Larry Swedroe, Warren Buffett) recommend using mid to long-term treasuries as the primary component of your bond allocation. They expressly advise against using corporate bonds. Their logic, as I understand it, is that the risks associated with corporate bonds closely match that of equities. So instead of diversifying risk, the use of corporate bonds actually concentrates risk without commensurate financial return.

This would seem to imply that for a 60/40 portfolio, you'd have 60% in equities and 40% in treasuries.

What is your take or the Boglehead take on this?
Plenty of BHs use intermediate treasury funds instead of a total bond fund. I think it is perfectly fine.
Aren't they kind of the same thing? When I check the asset category of BND, I see:
Asset class
Intermediate-Term Bond
Category
Intermediate-Term Bond
Marseille07,

Not exactly. Intermediate-term treasury is safer. Especially, in a time of crisis. And, you seen this in March 2020. BND drop 7%. VTSAX drop about 30+%. I believe Intermediate-term treasury went up.

There is an additional "flight to safety" factor in the time of crisis with treasury.

KlangFool
I would be a little more precise in this answer. Since the Volker era, you can clearly see that during times of stock shocks, treasuries have acted as a nice ballast - usually the longer the duration the better. Before Volker, however, that was not always the case.
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Re: Treasuries as your bond allocation?

Post by Call_Me_Op »

Gaston wrote: Sat Jun 12, 2021 9:03 am Some notable names in investing (e.g, Larry Swedroe, Warren Buffett) recommend using mid to long-term treasuries as the primary component of your bond allocation. They expressly advise against using corporate bonds. Their logic, as I understand it, is that the risks associated with corporate bonds closely match that of equities. So instead of diversifying risk, the use of corporate bonds actually concentrates risk without commensurate financial return.

This would seem to imply that for a 60/40 portfolio, you'd have 60% in equities and 40% in treasuries.

What is your take or the Boglehead take on this?
I don't recall Larry Swedroe recommending long (nominal) treasuries. Do you have a reference?
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Treasuries as your bond allocation?

Post by Call_Me_Op »

Marseille07 wrote: Sat Jun 12, 2021 4:20 pm
rockstar wrote: Sat Jun 12, 2021 4:14 pm
UpperNwGuy wrote: Sat Jun 12, 2021 4:09 pm
rockstar wrote: Sat Jun 12, 2021 1:56 pm I can't wrap my head around buying an asset that won't keep up with inflation for the rest of my portfolio.
Why?
I don't like to intentionally lose money.
I don't think there's anything that's guaranteed to beat inflation risk-free. I-bonds are the only thing, but they cap the amount per year.
Even IBonds might not do it after you pay taxes, particularly the ones purchased at 0% real.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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