Jack Bogle: We need to fix the bond index

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Jack Bogle: We need to fix the bond index

Post by rmelvey » Fri Apr 19, 2013 11:49 am

http://www.morningstar.com/cover/videoc ... ?id=592689

I agree with Bogle that the Barclay's Agg is a very strange product. The major thing that bothers me is that it is only "investment grade." I would like it if they held the entire bond market, including all of the junk! Although his point that it doesn't represent the average investor's portfolio is quite interesting as well.

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Re: Jack Bogle: We need to fix the bond index

Post by NoRoboGuy » Fri Apr 19, 2013 1:34 pm

Yeah, JB started advocating more exposure to corporates awhile back, I think around February. Clearly he sees the current index as less diversified and overweighting treasuries. Junk is such a small portion of the market, and controversial as fixed income goes, I doubt he would agree to throw that segment in the mix for "fixing" the index.

Thanks for posting the interview - I enjoyed it.
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Re: Jack Bogle: We need to fix the bond index

Post by rmelvey » Fri Apr 19, 2013 1:35 pm

louis c wrote:Yeah, JB started advocating more exposure to corporates awhile back, I think around February. Clearly he sees the current index as less diversified and overweighting treasuries. Junk is such a small portion of the market, and controversial as fixed income goes, I doubt he would agree to throw that segment in the mix for "fixing" the index.
Yes I didn't mean to put words into his mouth, but it is interesting how the "Total Bond Market" index does not accurately describe the investment portfolios of the investment community.

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Re: Jack Bogle: We need to fix the bond index

Post by Occupier » Fri Apr 19, 2013 2:17 pm

It kinda shows that even the biggest advocates of indexing market time a little when valuations get to extreme levels. What he is advocating is that treasuries are so overpriced that you should mostly be in corporates. I happen to agree with him, but he is backing off the traditional total market Bogle view. Dave

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Re: Jack Bogle: We need to fix the bond index

Post by EDN » Fri Apr 19, 2013 2:18 pm

There is nothing wrong with TBM, you just have to understand that its pricing formula and credit/maturity restrictions can lead to very concentrated exposure when one major issuer of debt is crowding out all others.

This is no different than issues with TSM, it too is marketed as "total", but is basically a large cap fund. In the late 1990s it looked like a watered down tech fund. Some tried to warn against this in favor of more distinct asset class diversification, but that was largely ignored.

I think Jack is rightly coming around to the idea that "total" might not be "totally appropriate" for everyone. Instead, you start with the question of where returns come from. And conclude that your allocation should simply target the expected returns you want exposure to, while limiting those you do not or can't afford.

In the bond market, returns are a function of credit and interest rate risk. TBM is great at what it is -- a mostly government bond portfolio with a sprinkling of some investment grade corporates and medium maturities. If this is what you want, there isn't a better fund out there. But not everyone wants or needs this. Some want longer term bonds (to hedge future long-dated nominal liabilities), some want shorter term bonds (to reduce risk of rising rates and improve portfolio liquidity). Some want lower credit quality and higher expected returns, others want even higher credit quality and better downside risk protection.

Nothing needs to be fixed, all the options you need to invest the way that works for you are already out there. You just have to admit to yourself it is OK to invest in something other than Total Stock Indexes (just like it is OK to have a stock and bond mix other than "age in bonds"). These are just guidelines, simple "mental" short-cuts to keep from being overwhelmed with analysis paralysis. They aren't cast-in-stone allocations we have to follow.

What we need are some folks to admit that the market is multi-dimensional, and it is perfectly acceptable to deviate from market weights (stocks or bonds) if it is done to build yourself a more appropriate and comfortable allocation for your particular needs.

Eric

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Re: Jack Bogle: We need to fix the bond index

Post by rmelvey » Fri Apr 19, 2013 2:29 pm

EDN wrote:There is nothing wrong with TBM, you just have to understand that its pricing formula and credit/maturity restrictions can lead to very concentrated exposure when one major issuer of debt is crowding out all others.

This is no different than issues with TSM, it too is marketed as "total", but is basically a large cap fund. In the late 1990s it looked like a watered down tech fund. Some tried to warn against this in favor of more distinct asset class diversification, but that was largely ignored.

I think Jack is rightly coming around to the idea that "total" might not be "totally appropriate" for everyone. Instead, you start with the question of where returns come from. And conclude that your allocation should simply target the expected returns you want exposure to, while limiting those you do not or can't afford.

In the bond market, returns are a function of credit and interest rate risk. TBM is great at what it is -- a mostly government bond portfolio with a sprinkling of some investment grade corporates and medium maturities. If this is what you want, there isn't a better fund out there. But not everyone wants or needs this. Some want longer term bonds (to hedge future long-dated nominal liabilities), some want shorter term bonds (to reduce risk of rising rates and improve portfolio liquidity). Some want lower credit quality and higher expected returns, others want even higher credit quality and better downside risk protection.

Nothing needs to be fixed, all the options you need to invest the way that works for you are already out there. You just have to admit to yourself it is OK to invest in something other than Total Stock Indexes (just like it is OK to have a stock and bond mix other than "age in bonds"). These are just guidelines, simple "mental" short-cuts to keep from being overwhelmed with analysis paralysis. They aren't cast-in-stone allocations we have to follow.

What we need are some folks to admit that the market is multi-dimensional, and it is perfectly acceptable to deviate from market weights (stocks or bonds) if it is done to build yourself a more appropriate and comfortable allocation for your particular needs.

Eric
Those are great points. Even in an efficient market people could rationally desire different portfolios because of different risk tolerances, different constraints on leverage (it doesn't make sense for retail investors to lever up due to high borrow rates), different currency considerations, different risks associated with their own human capital... The list could go on much longer i think!

I think the real take aways from the index revolution are that costs matter and diversification is a free lunch. Anything going farther than can get overly dogmatic from my perspective :D

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Re: Jack Bogle: We need to fix the bond index

Post by momar » Fri Apr 19, 2013 2:36 pm

EDN wrote:There is nothing wrong with TBM, you just have to understand that its pricing formula and credit/maturity restrictions can lead to very concentrated exposure when one major issuer of debt is crowding out all others.

This is no different than issues with TSM, it too is marketed as "total", but is basically a large cap fund. In the late 1990s it looked like a watered down tech fund. Some tried to warn against this in favor of more distinct asset class diversification, but that was largely ignored.

I think Jack is rightly coming around to the idea that "total" might not be "totally appropriate" for everyone. Instead, you start with the question of where returns come from. And conclude that your allocation should simply target the expected returns you want exposure to, while limiting those you do not or can't afford.

In the bond market, returns are a function of credit and interest rate risk. TBM is great at what it is -- a mostly government bond portfolio with a sprinkling of some investment grade corporates and medium maturities. If this is what you want, there isn't a better fund out there. But not everyone wants or needs this. Some want longer term bonds (to hedge future long-dated nominal liabilities), some want shorter term bonds (to reduce risk of rising rates and improve portfolio liquidity). Some want lower credit quality and higher expected returns, others want even higher credit quality and better downside risk protection.

Nothing needs to be fixed, all the options you need to invest the way that works for you are already out there. You just have to admit to yourself it is OK to invest in something other than Total Stock Indexes (just like it is OK to have a stock and bond mix other than "age in bonds"). These are just guidelines, simple "mental" short-cuts to keep from being overwhelmed with analysis paralysis. They aren't cast-in-stone allocations we have to follow.

What we need are some folks to admit that the market is multi-dimensional, and it is perfectly acceptable to deviate from market weights (stocks or bonds) if it is done to build yourself a more appropriate and comfortable allocation for your particular needs.

Eric
I'm sorry, but the problem with TBM is clearly different than the problems you have with TSM. Say what you will about proper diversification being across different risk factors, but TSM does in fact give you ownership of the total stock market. TBM does not do the same and the name is BS. They should not call it TBM, it is misleading and false.
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Re: Jack Bogle: We need to fix the bond index

Post by EDN » Fri Apr 19, 2013 2:50 pm

momar wrote:
EDN wrote:There is nothing wrong with TBM, you just have to understand that its pricing formula and credit/maturity restrictions can lead to very concentrated exposure when one major issuer of debt is crowding out all others.

This is no different than issues with TSM, it too is marketed as "total", but is basically a large cap fund. In the late 1990s it looked like a watered down tech fund. Some tried to warn against this in favor of more distinct asset class diversification, but that was largely ignored.

I think Jack is rightly coming around to the idea that "total" might not be "totally appropriate" for everyone. Instead, you start with the question of where returns come from. And conclude that your allocation should simply target the expected returns you want exposure to, while limiting those you do not or can't afford.

In the bond market, returns are a function of credit and interest rate risk. TBM is great at what it is -- a mostly government bond portfolio with a sprinkling of some investment grade corporates and medium maturities. If this is what you want, there isn't a better fund out there. But not everyone wants or needs this. Some want longer term bonds (to hedge future long-dated nominal liabilities), some want shorter term bonds (to reduce risk of rising rates and improve portfolio liquidity). Some want lower credit quality and higher expected returns, others want even higher credit quality and better downside risk protection.

Nothing needs to be fixed, all the options you need to invest the way that works for you are already out there. You just have to admit to yourself it is OK to invest in something other than Total Stock Indexes (just like it is OK to have a stock and bond mix other than "age in bonds"). These are just guidelines, simple "mental" short-cuts to keep from being overwhelmed with analysis paralysis. They aren't cast-in-stone allocations we have to follow.

What we need are some folks to admit that the market is multi-dimensional, and it is perfectly acceptable to deviate from market weights (stocks or bonds) if it is done to build yourself a more appropriate and comfortable allocation for your particular needs.

Eric
I'm sorry, but the problem with TBM is clearly different than the problems you have with TSM. Say what you will about proper diversification being across different risk factors, but TSM does in fact give you ownership of the total stock market. TBM does not do the same and the name is BS. They should not call it TBM, it is misleading and false.
If they called it the Aggregate Investment Grade Index, would that make you happier? I mean, it's in the summary, so, it shouldn't be taking anyone by surprise unless you are throwing darts at mutual fund pages. I don't think the stuff that isn't in there (like High Yield) is really that big a % of the market anyway. Like going from S&P 500 to TSM is supposed to get you 2500 more stocks, but they are only 10% of the fund.

I personally think TBM is a fine fund/index. The "reach for yield crowd" wants some junk in there I guess after a few good years of yield spreads narrowing, but I'm pretty sure over the last 15 years you've been happier without them as a big chunk of HY (as measured by Vanguard fund) has underperformed treasuries of similar maturity. And I am also pretty sure that 5% gain in 2008 was a lot more comforting that the -25% contribution from HY that you would have gotten.

If you need higher expected returns, fair enough. But I wouldn't dance with risky debt. Save more, cut spending, own more equities, or tilt more to small and value. There are plenty of indexes that let you do that with razor-like precision and it will have a better outcome than a more "complete" bond allocation. You start looking at less liquid securities that "complete" an investment grade bond index, and I don't think the rigidity of typical index reconstitution is going to fare too well.

Personally, if I wanted to spice up a bond allocation, I'd still start with TBM and include TIPS, or short-term, or High Yield, or foreign or emerging bonds or whatever. Kind of like starting with TSM and adding SV or REITs or whatever. Its good to have traditional Core holdings as the centerpiece of your portfolio and tilt towards your preferences.

Eric
Last edited by EDN on Fri Apr 19, 2013 2:52 pm, edited 1 time in total.

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Re: Jack Bogle: We need to fix the bond index

Post by momar » Fri Apr 19, 2013 2:51 pm

Yes, it would make me happier.
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Re: Jack Bogle: We need to fix the bond index

Post by Rick Ferri » Fri Apr 19, 2013 3:02 pm

My solution to this this issue has always been to hold a portfolio that's 20-60-20.

20% TIPS
60% Total bond market
20% High yield corporate

Rebalance occasionally. It has worked very well over the years and is doing fine this year.

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Last edited by Rick Ferri on Fri Apr 19, 2013 3:03 pm, edited 1 time in total.
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Re: Jack Bogle: We need to fix the bond index

Post by mptfan » Fri Apr 19, 2013 3:02 pm

EDN wrote: If they called it the Aggregate Investment Grade Index, would that make you happier? I mean, it's in the summary, so, it shouldn't be taking anyone by surprise unless you are throwing darts at mutual fund pages.
Eric
That's a ridiculous argument. So if Vanguard had a fund that was called "Total International Stock Index", but in the summary it stated that the fund only invested in European stocks, would you say ... "It's in the summary, so who cares what they call it?"

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Re: Jack Bogle: We need to fix the bond index

Post by momar » Fri Apr 19, 2013 3:18 pm

Rick Ferri wrote:My solution to this this issue has always been to hold a portfolio that's 20-60-20.

20% TIPS
60% Total bond market
20% High yield corporate

Rebalance occasionally. It has worked very well over the years and is doing fine this year.

Rick Ferri
The only problem is that if one holds bonds in their 401k, they likely have something like PIMCO and something like TBM. Yes, I could some in an IRA, but the difference in available space becomes too much. I already hold more bonds in my 401k than there is space in my IRA, and I have had my IRA for 15 years and the 401k for less than 5. This will only get worse considering the difference yearly is 5:1, for me.
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Re: Jack Bogle: We need to fix the bond index

Post by Rick Ferri » Fri Apr 19, 2013 3:36 pm

There is a difference of opinion on this forum over whether an investor should hold all bonds in an IRA (401k) and all stock in a taxable account or be diversified in both accounts. I fall more on the side of being diversified in both accounts, but also put some thought into it. For example, use municipal bonds in a taxable account and REITs in a tax-sheltered account.

Which will come out ahead - a strict tax-location strategy or a diversified portfolio strategy? Well, that depends on what happens to the tax code in the future. If you know what taxes will be over the remainder of your life, then perhaps you could figure it out. I don't. So I lean toward diversified portfolios in both taxable and tax-sheltered accounts. There's also a physiological advantage to doing this in a bear market because some people fixate on the amount their losing in each account separately.

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Re: Jack Bogle: We need to fix the bond index

Post by momar » Fri Apr 19, 2013 4:57 pm

Rick Ferri wrote:There is a difference of opinion on this forum over whether an investor should hold all bonds in an IRA (401k) and all stock in a taxable account or be diversified in both accounts. I fall more on the side of being diversified in both accounts, but also put some thought into it. For example, use municipal bonds in a taxable account and REITs in a tax-sheltered account.

Which will come out ahead - a strict tax-location strategy or a diversified portfolio strategy? Well, that depends on what happens to the tax code in the future. If you know what taxes will be over the remainder of your life, then perhaps you could figure it out. I don't. So I lean toward diversified portfolios in both taxable and tax-sheltered accounts. There's also a physiological advantage to doing this in a bear market because some people fixate on the amount their losing in each account separately.

Rick Ferri
Thank you Rick. This also has the advantage of diversifying my bond holdings further into municipal bonds. By chance, do you know what the market weight is of municipals?
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Re: Jack Bogle: We need to fix the bond index

Post by Gort » Fri Apr 19, 2013 10:48 pm

From the Morningstar interview, Bogle says the following: "...I wouldn't go all the way to corporates. I'd keep these Treasury positions. So, if we don't have an index fund that accurately reflects the total bond market for U.S. investors, you maybe take half of that and put it in a corporate-bond index fund."
Wouldn't Vanguard's Intermediate-Term Bond Index fund (VBIIX) closely approximate Bogle's suggestion? VBIIX has 50% Treasuries and 50% Corporate bonds. How come there's not much discussion on this forum about VBIIX?

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Re: Jack Bogle: We need to fix the bond index

Post by pascalwager » Fri Apr 19, 2013 10:59 pm

Postby Gort » Fri Apr 19, 2013 11:48 pm

From the Morningstar interview, Bogle says the following: "...I wouldn't go all the way to corporates. I'd keep these Treasury positions. So, if we don't have an index fund that accurately reflects the total bond market for U.S. investors, you maybe take half of that and put it in a corporate-bond index fund."
Wouldn't Vanguard's Intermediate-Term Bond Index fund (VBIIX) closely approximate Bogle's suggestion? VBIIX has 50% Treasuries and 50% Corporate bonds. How come there's not much discussion on this forum about VBIIX?
I guess because it's not a total bond fund. Nearly all of the bonds are in the 5-10 year range.
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Re: Jack Bogle: We need to fix the bond index

Post by Eric » Fri Apr 19, 2013 11:41 pm

EDN wrote:it is perfectly acceptable to deviate from market weights (stocks or bonds) if it is done to build yourself a more appropriate and comfortable allocation for your particular needs.
I agree with this statement. But then, it is perfectly consistent with the "total market" philosophy.

"Total market" investors don't say you shouldn't tilt. We just say that you should tilt only for the right reasons. The right reasons have to do with how your individual circumstances differ from those of investors generally. John Norstad gives a number of helpful examples here.

You can apply this concept to the bond market, too. Huge amounts of the available bonds are owned by large national investors (central banks, etc.) whose characteristics are very different from mine. If I had a trillion dollars to invest, the depth and liquidity of the U.S. Treasury market would be very attractive. But for a small investor, those factors may be less important.

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Re: Jack Bogle: We need to fix the bond index

Post by Munir » Sat Apr 20, 2013 8:30 am

Why does Jack Bogle ignore the Vanguard Intermediate Investment Grade Fund (VFIDX) with a SEC yield of 2.18%, ER of 0.10% (for Admiral shares), and a duration of 5.3 years? It meets all the critreria he mentions, and could act as an appropriate "tilter" to a total-type bond fund.

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Re: Jack Bogle: We need to fix the bond index

Post by Blues » Sat Apr 20, 2013 8:35 am

Munir wrote:Why does Jack Bogle ignore the Vanguard Intermediate Investment Grade Fund (VFIDX) with a SEC yield of 2.18%, ER of 0.10% (for Admiral shares), and a duration of 5.3 years? It meets all the critreria he mentions, and could act as an appropriate "tilter" to a total-type bond fund.
I don't own it but if I recall correctly, when I checked recently it even had a higher credit rating than Short-Term Investor Grade.
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Re: Jack Bogle: We need to fix the bond index

Post by NoRoboGuy » Sat Apr 20, 2013 9:48 am

There is VICSX for the mutual fund, or VCIT for the ETF that gives you just the intermediate corporates, which can be blended with TBM.
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Re: Jack Bogle: We need to fix the bond index

Post by abuss368 » Sat Apr 20, 2013 10:17 am

Rick Ferri wrote:There is a difference of opinion on this forum over whether an investor should hold all bonds in an IRA (401k) and all stock in a taxable account or be diversified in both accounts. I fall more on the side of being diversified in both accounts, but also put some thought into it. For example, use municipal bonds in a taxable account and REITs in a tax-sheltered account.

Which will come out ahead - a strict tax-location strategy or a diversified portfolio strategy? Well, that depends on what happens to the tax code in the future. If you know what taxes will be over the remainder of your life, then perhaps you could figure it out. I don't. So I lean toward diversified portfolios in both taxable and tax-sheltered accounts. There's also a physiological advantage to doing this in a bear market because some people fixate on the amount their losing in each account separately.

Rick Ferri
Excellent point Rick and one that we practice as well.

Pretty much the same funds in each account with the exception being Intermediate Term Tax Exempt in place of Total Bond in taxable. This has worked very well for us and we sleep well at night!

EDN (Eric) has also followed / recommended this practice. Perhaps he will provide additional insight.
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Re: Jack Bogle: We need to fix the bond index

Post by azanon » Sat Apr 20, 2013 10:39 am

Rick Ferri wrote:So I lean toward diversified portfolios in both taxable and tax-sheltered accounts. There's also a physiological advantage to doing this in a bear market because some people fixate on the amount their losing in each account separately.

Rick Ferri
If that's an issue for someone, then I would suggest that they find a more consolidated way of tracking their investments so that they can understand that they function as a unit, and that the subdivision of taxable vs. non-taxable has no relevance if the monies are all targeted for retirement savings (or one specific goal).

Personally, I use Quicken software (currently running 2011 edition), and both taxable and non-taxable fall under the "investment" category, and only a very small line separates the two. Looking at it like this, I would be hard pressed to be able to identify with someone that is psychologically bothered by the taxable account dropping more than the non-taxable. If I had to adjust per rebalancing, I would go so far as to add some stocks to the tax-advantaged side of the equation if need be. In other words, no big deal, and certainly no reason to intentionally put bonds in a taxable fund.

The thing that psychologically bothers me is paying more taxes than necessary.

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Re: Jack Bogle: We need to fix the bond index

Post by Rick Ferri » Sat Apr 20, 2013 10:52 am

Azanon

I question if you will pay more taxes in a well managed diversified approach. I can think of a few cases where you might pay MORE taxes using a strict tax-location strategy. What happens when you run out of bond space in tax sheltered accounts? Now you'll have to sell more stocks in a taxable account to rebalance - a unexpected taxable event.

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Re: Jack Bogle: We need to fix the bond index

Post by Artsdoctor » Sat Apr 20, 2013 11:13 am

I know that Jack Bogle has been talking about using a corporate bond fund to augment the AGG for a while now. Nonetheless, hearing his interview was very rewarding to me, because it allowed a complete conversation without the risk of taking anything out of context.

This whole environment of unnaturally low yields has forced a conversation--definitely here--about what exactly the fixed income portion of a portfolio is meant to do. We can all argue about high yield allocations, international fixed income, etc., but the question that each individual has to ask is what they want out of their fixed income. Bogle feels that it's both safety and income, and I've made my peace with that as well. Short-term treasuries (or the equivalent) might be a real return loser but they do provide liquidity and they allow you to swoop in during those inevitable equity bear markets to buy. But, as I've gotten older, I've lightened up on my equities somewhat (not much), and I can't see putting 50% of my portfolio in treasuries!

Investment grade corporates still provide income that can augment the "safer" side of your FI portion. CDs are safe, but are they really that liquid? An investment grade index fund might be liquid, but it just won't provide you the opportunity to sell when you need it most--during a brutal bear market in equities, because it's also going to tank, albeit temporarily.

Including high yield and international bonds in your portfolio can be easily argued, as it has been here many times by extremely smart people. But do they fulfill the criteria that you're using for investing in fixed income? Or do you want to include them on the equity side of your portfolio?

Isn't one of the most important tenets of investing trying to understand correlations between asset classes?

Artsdoctor

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Re: Jack Bogle: We need to fix the bond index

Post by Artsdoctor » Sat Apr 20, 2013 11:16 am

Munir,

I don't think Bogle is actually ignoring the intermediate investment grade bond fund. I'm interpreting his comments to mean that he is interested in expanding the type of holdings that a total corporate fund might hold. Take a look at the fund, and then take a look at the ETF (VCIT). It's interesting to me to see the difference. And I think he is advocating trying to expand corporates even further--in concept.

Not sure, but that's my interpretation.

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Re: Jack Bogle: We need to fix the bond index

Post by azanon » Sat Apr 20, 2013 11:46 am

Rick Ferri wrote:Azanon

I question if you will pay more taxes in a well managed diversified approach. I can think of a few cases where you might pay MORE taxes using a strict tax-location strategy. What happens when you run out of bond space in tax sheltered accounts? Now you'll have to sell more stocks in a taxable account to rebalance - a unexpected taxable event.

Rick Ferri
If I run out of bond space with a 70/30 portfolio, I have much bigger problems than taxes. I'm 41, with a secure job, so that's my current allocation.

The other thing, Rick, is that my tax-sheltered accounts dominate my retirement portfolio, and I would imagine that this is also true for many others. With 17,500 for my 401(k), plus an extra $11,000 in Roths for my wife and I, I have to really be an extreme saver to go past those limits, and I do (but not by that much).

......

Then there are others (like my dad) who's 90%+ taxable (small businessman who was very successful), so there isn't much point in him balancing between the two either.

......

So my second point is that your suggestion probably won't be applicable to large groups of individuals.

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Re: Jack Bogle: We need to fix the bond index

Post by Munir » Sat Apr 20, 2013 11:58 am

louis c wrote:There is VICSX for the mutual fund, or VCIT for the ETF that gives you just the intermediate corporates, which can be blended with TBM.

VICSX needs $5 million to purchase and has a duration of 6.5 years. I don't know about the ETF.

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Re: Jack Bogle: We need to fix the bond index

Post by Artsdoctor » Sat Apr 20, 2013 12:14 pm

The psychological issue described by Rick should be one of the first things an investor gets over. There is no way anyone can justify looking at a single account in isolation anymore than someone should be looking at an asset class in isolation. If that is happening in a portfolio that is being managed by an advisor, the account holder really needs an "educational experience," or "re-adjustment in thinking."

The flip side is that the variety in account types is almost infinite: 90% taxable, or 90% tax-deferred, and then things definitely change over the lifetime of the investor. The concept of fixed income in tax-deferred and equities in taxable might be a guideline, but there's plenty of room for flexibility.

Besides, the need for munis will probably increase during peak earning years since tax situations can change. The only thing you can be almost certain of is that a middle-aged investor's federal and state situation will NOT be the same in the future as it is now.

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Re: Jack Bogle: We need to fix the bond index

Post by longview » Sat Apr 20, 2013 12:24 pm

rmelvey wrote:http://www.morningstar.com/cover/videoc ... ?id=592689

I agree with Bogle that the Barclay's Agg is a very strange product. The major thing that bothers me is that it is only "investment grade." I would like it if they held the entire bond market, including all of the junk! Although his point that it doesn't represent the average investor's portfolio is quite interesting as well.
I don't think that was the point though. The point is it's good stuff, just in the wrong proportion. The 70% govt. bonds is too high, and largely based on outside investment (which is there for other reasons, like a weak dollar).
(To color my comments: my situation is ER trying to make a large portfolio that is 99% taxable last 45 years)

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Re: Jack Bogle: We need to fix the bond index

Post by longview » Sat Apr 20, 2013 12:27 pm

Rick Ferri wrote:My solution to this this issue has always been to hold a portfolio that's 20-60-20.

20% TIPS
60% Total bond market
20% High yield corporate

Rebalance occasionally. It has worked very well over the years and is doing fine this year.

Rick Ferri
Is there a decent taxable equivalent? Tax-exempt intermediate, tax-exempt HY, and no TIPS?
(To color my comments: my situation is ER trying to make a large portfolio that is 99% taxable last 45 years)

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Re: Jack Bogle: We need to fix the bond index

Post by Austintatious » Sat Apr 20, 2013 12:34 pm

Munir & Arts Doctor,

Some time back, when I was trying to find Bogle commentary regarding his views on having corporate bonds in one's portfolio these days, I came across a Reuters interview of Bogle wherein they asked him about his portfolio. He said he had significant amounts of corporates in his retirement accounts. He specifically mentioned owning VICBX, which is a Vanguard intermediate-term corporate bond index fund, institutional class. I found it on Morningstar and not on Vanguard's site. It enjoys 5 M*stars and they've given it a high risk, high return rating. It has an ave. duration of 6.35 and an ave. maturity of 7.4. It's holdings are about 50% BBB and lower in credit, so a bit more duration and credit risk than with VFICX. I thought that was interesting, in that he's assuming a bit more risk for, presumably, a bit more return.

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Re: Jack Bogle: We need to fix the bond index

Post by longview » Sat Apr 20, 2013 12:36 pm

Artsdoctor wrote:Munir,

I don't think Bogle is actually ignoring the intermediate investment grade bond fund. I'm interpreting his comments to mean that he is interested in expanding the type of holdings that a total corporate fund might hold. Take a look at the fund, and then take a look at the ETF (VCIT). It's interesting to me to see the difference. And I think he is advocating trying to expand corporates even further--in concept.

Not sure, but that's my interpretation.

Artsdoctor
I think his issue was he wants an index and to have it be weighted by actual US investment. That was his point about the outside money, and about active management. Sure, you can find a fund that does what he says -- but what is the index for it?

He's an index man. You can estimate his proposed index by taking 50/50 TBM and HY possibly -- but that isn't an index, that's a slice n dice. He would like to have a real total bond index and having many funds competing for low ER in that space.

At least, that was my read. And I agree. ;)
(To color my comments: my situation is ER trying to make a large portfolio that is 99% taxable last 45 years)

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Re: Jack Bogle: We need to fix the bond index

Post by Artsdoctor » Sat Apr 20, 2013 1:18 pm

Austintatious,

Interesting. Thanks for the thoughts. VICBX, at first glance, looks very much like VCIT (the ETF). Although the ETF costs just a little more with ER and bid/ask spreads, it'll probably be the closest most of us will get to VICBX unless our 401k's offer it through our employers.

In fact, I've been purchasing VCIT in blocks within my tax-deferred accounts for a while knowing that I was going further out on the duration curve and deeper into the credit hole. I've chosen to balance that out with treasuries and CDs in order to help smooth the ride a bit.

Whether or not this will be a good move in retrospect remains to be seen!

Artsdoctor

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Bonds are for safety.

Post by Taylor Larimore » Sat Apr 20, 2013 1:28 pm

The major thing that bothers me is that it is only "investment grade."
Melvey:

Bonds are primarily for safety. That means "investment grade."

For higher returns (and risk), use stock funds.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Jack Bogle: We need to fix the bond index

Post by Austintatious » Sat Apr 20, 2013 2:22 pm

Artsdoctor wrote:Austintatious,

Interesting. Thanks for the thoughts. VICBX, at first glance, looks very much like VCIT (the ETF). Although the ETF costs just a little more with ER and bid/ask spreads, it'll probably be the closest most of us will get to VICBX unless our 401k's offer it through our employers.

In fact, I've been purchasing VCIT in blocks within my tax-deferred accounts for a while knowing that I was going further out on the duration curve and deeper into the credit hole. I've chosen to balance that out with treasuries and CDs in order to help smooth the ride a bit.

Whether or not this will be a good move in retrospect remains to be seen!

Artsdoctor
Well, you're in pretty good company, knowing that Jack Bogle has been buying essentially the same fund as you. We own VFICX, a bit shorter in duration and safer in credit, but less in returns. I like VCIT and if it had been just me making the purchase, I'd probably have gone with it. As you say, we shall see.

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Re: Bonds are for safety.

Post by rmelvey » Sat Apr 20, 2013 3:26 pm

Taylor Larimore wrote:
The major thing that bothers me is that it is only "investment grade."
Melvey:

Bonds are primarily for safety. That means "investment grade."

For higher returns (and risk), use stock funds.

Best wishes.
Taylor
Taylor, that is my personal philosophy as well. I am currently only using Treasury bonds and I don't have any money in the TBM.

However, my concern has to do with active investors exploiting the index. You espouse the total market stock index because it makes it harder for active investors to exploit the index reconstitution process. I just worry with the current "investment grade" bond index that when a bond gets downgraded the index is forced to sell it, creating an opportunity for hedge funds to exploit that process. If I wanted pure safety I would buy a Treasury bond.

If I am going to buy corporate bonds, I want to buy all of them. I don't want to buy an arbitrary section of them that allows hedge funds to front run me when I am forced to sell just because Moody's or S&P doesn't like them :| If I am jumping into corporate's in the first place, I want to fully embrace them for what they, instruments with changing characteristics and risks over time. Put simply, if I am jumping into a market I want to to own that market :happy

Think about if there was an "investment grade" stock index that sold stocks after they had gotten beaten up. Personally I wouldn't like that at all.

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Re: Jack Bogle: We need to fix the bond index

Post by Random Musings » Sat Apr 20, 2013 9:54 pm

Does it need to be fixed? Or just develop a new benchmark and have a new fund track it? Let's call it the:

"Total Bond Market Index And We Really Mean It This Time Until Something Changes Again".

RM
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Re: Jack Bogle: We need to fix the bond index

Post by SkolVikes7 » Sat Apr 20, 2013 11:42 pm

Rick Ferri wrote:My solution to this this issue has always been to hold a portfolio that's 20-60-20.

20% TIPS
60% Total bond market
20% High yield corporate

Rebalance occasionally. It has worked very well over the years and is doing fine this year.

Rick Ferri
Rick,

I'd be interested to know how or if you would change this strategy if you had access to TSP's G and F funds?

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Re: Jack Bogle: We need to fix the bond index

Post by sharke » Wed Apr 24, 2013 1:21 am

Rick Ferri wrote:There is a difference of opinion on this forum over whether an investor should hold all bonds in an IRA (401k) and all stock in a taxable account or be diversified in both accounts. I fall more on the side of being diversified in both accounts, but also put some thought into it. For example, use municipal bonds in a taxable account and REITs in a tax-sheltered account.

Which will come out ahead - a strict tax-location strategy or a diversified portfolio strategy? Well, that depends on what happens to the tax code in the future. If you know what taxes will be over the remainder of your life, then perhaps you could figure it out. I don't. So I lean toward diversified portfolios in both taxable and tax-sheltered accounts. There's also a physiological advantage to doing this in a bear market because some people fixate on the amount their losing in each account separately.
Thanks for this insight Rick. I recently moved to diversifying in both taxable and non-taxable (using municipal bonds in taxable), and as silly as it seems, I've been comforted to watch the two accounts react to the market in similar fashion.
I survived the Great Bond Crash of 2013!

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Re: Jack Bogle: We need to fix the bond index

Post by xram » Thu May 02, 2013 6:15 pm

Rick Ferri wrote:My solution to this this issue has always been to hold a portfolio that's 20-60-20.

20% TIPS
60% Total bond market
20% High yield corporate

Rebalance occasionally. It has worked very well over the years and is doing fine this year.

Rick Ferri
Would 20% IBONDS be an acceptable substitute in your opinion?
Thanks
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Re: Jack Bogle: We need to fix the bond index

Post by DoWahDaddy » Thu May 02, 2013 7:27 pm

The problem with including high yield in a bond index is that HY tends to overwhelm the rest of the components' returns one way or another, and you dont really get the benefit of diversification across the various other bond components anymore, nor does your bond index perform like a bond index.

In light of the above, it may be preferable to keep high yield as a separate asset class in one's overall portfolio.
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Re: Jack Bogle: We need to fix the bond index

Post by DoWahDaddy » Thu May 02, 2013 7:29 pm

Rick Ferri wrote:My solution to this this issue has always been to hold a portfolio that's 20-60-20.

20% TIPS
60% Total bond market
20% High yield corporate

Rebalance occasionally. It has worked very well over the years and is doing fine this year.

Rick Ferri
In other words, what he said, plus stocks.
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Re: Jack Bogle: We need to fix the bond index

Post by abuss368 » Thu May 02, 2013 7:38 pm

sharke wrote:
Rick Ferri wrote:There is a difference of opinion on this forum over whether an investor should hold all bonds in an IRA (401k) and all stock in a taxable account or be diversified in both accounts. I fall more on the side of being diversified in both accounts, but also put some thought into it. For example, use municipal bonds in a taxable account and REITs in a tax-sheltered account.

Which will come out ahead - a strict tax-location strategy or a diversified portfolio strategy? Well, that depends on what happens to the tax code in the future. If you know what taxes will be over the remainder of your life, then perhaps you could figure it out. I don't. So I lean toward diversified portfolios in both taxable and tax-sheltered accounts. There's also a physiological advantage to doing this in a bear market because some people fixate on the amount their losing in each account separately.
Thanks for this insight Rick. I recently moved to diversifying in both taxable and non-taxable (using municipal bonds in taxable), and as silly as it seems, I've been comforted to watch the two accounts react to the market in similar fashion.

I agree. Rick has provided a very good alternative view point on portfolio structure.
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Re: Jack Bogle: We need to fix the bond index

Post by xram » Thu May 02, 2013 8:13 pm

Rick Ferri wrote:There is a difference of opinion on this forum over whether an investor should hold all bonds in an IRA (401k) and all stock in a taxable account or be diversified in both accounts. I fall more on the side of being diversified in both accounts, but also put some thought into it. For example, use municipal bonds in a taxable account and REITs in a tax-sheltered account.

Which will come out ahead - a strict tax-location strategy or a diversified portfolio strategy? Well, that depends on what happens to the tax code in the future. If you know what taxes will be over the remainder of your life, then perhaps you could figure it out. I don't. So I lean toward diversified portfolios in both taxable and tax-sheltered accounts. There's also a physiological advantage to doing this in a bear market because some people fixate on the amount their losing in each account separately.

Rick Ferri
Mr Ferri,

Would you be willing to further describe which MFs/ETFs you spread across taxable and advantaged accounts?

WIth acknowledging that I am probably wrong on many of the following, something like this?

Only in Taxable:
1) Municipal bond funds
2) Total International funds/ETF - due to foreign tax credit?
3) International Small Cap - due to foreign tax credit?
4) International Emerging Markets - due to foreign tax credit?

Only in Tax-Advantaged Accounts
1) US AND INTL REITS
2) Commodity Funds
3) TIPS?

Spread Across Both Taxable and Tax-Advantaged
1) Total US Stock Market
2) US Small Cap Value -- or maybe only in tax-advantaged?
3) Total Bond Market

What about High-Yield Bonds?

What about the new upcoming Vanguard Total International Bond Fund?


Thank you very much,
xram
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Re: Jack Bogle: We need to fix the bond index

Post by abuss368 » Thu May 02, 2013 9:05 pm

xram wrote:
Rick Ferri wrote:There is a difference of opinion on this forum over whether an investor should hold all bonds in an IRA (401k) and all stock in a taxable account or be diversified in both accounts. I fall more on the side of being diversified in both accounts, but also put some thought into it. For example, use municipal bonds in a taxable account and REITs in a tax-sheltered account.

Which will come out ahead - a strict tax-location strategy or a diversified portfolio strategy? Well, that depends on what happens to the tax code in the future. If you know what taxes will be over the remainder of your life, then perhaps you could figure it out. I don't. So I lean toward diversified portfolios in both taxable and tax-sheltered accounts. There's also a physiological advantage to doing this in a bear market because some people fixate on the amount their losing in each account separately.

Rick Ferri
Mr Ferri,

Would you be willing to further describe which MFs/ETFs you spread across taxable and advantaged accounts?

WIth acknowledging that I am probably wrong on many of the following, something like this?

Only in Taxable:
1) Municipal bond funds
2) Total International funds/ETF - due to foreign tax credit?
3) International Small Cap - due to foreign tax credit?
4) International Emerging Markets - due to foreign tax credit?

Only in Tax-Advantaged Accounts
1) US AND INTL REITS
2) Commodity Funds
3) TIPS?

Spread Across Both Taxable and Tax-Advantaged
1) Total US Stock Market
2) US Small Cap Value -- or maybe only in tax-advantaged?
3) Total Bond Market

What about High-Yield Bonds?

What about the new upcoming Vanguard Total International Bond Fund?


Thank you very much,
xram
There was another posted few months ago where the poster provided the portfolio as recommend by Rick's firm - Portfolio Solutions. The portfolio was the same in both taxable and tax advantaged accounts if I recall (i.e. US, International, REIT, TIPS, High Yield Bond, Total Bonds, etc.).

We are very satisfied with an "equal location" rather than "asset location" approach.
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Re: Jack Bogle: We need to fix the bond index

Post by NoRoboGuy » Sat May 04, 2013 9:51 am

SkolVikes7 wrote:
Rick Ferri wrote:My solution to this this issue has always been to hold a portfolio that's 20-60-20.

20% TIPS
60% Total bond market
20% High yield corporate

Rebalance occasionally. It has worked very well over the years and is doing fine this year.

Rick Ferri
Rick,

I'd be interested to know how or if you would change this strategy if you had access to TSP's G and F funds?
xram wrote: Would 20% IBONDS be an acceptable substitute in your opinion?
Thanks
Rick - count me as curious on these two questions.
There is no free lunch.

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Re: Jack Bogle: We need to fix the bond index

Post by Rick Ferri » Sat May 04, 2013 9:55 am

F Fund's investment objective is to match the performance of the Barclays Capital U.S. Aggregate Bond Index, so it's the same as a TBM index fund.

iBonds are fine as a substitute for TIPS, but you can only buy limited quantity each year. TSP's G fund is a substitute for TIPS in that it is all Treasury bonds with the objective to " produce a rate of return that is higher than inflation while avoiding exposure to credit (default) risk and market price fluctuations."

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Re: Jack Bogle: We need to fix the bond index

Post by yogesh » Sat May 04, 2013 1:55 pm

VWINX Wellesley has 70% bonds in corporate and 12% in government; opposite of AGG index
Last edited by yogesh on Sun May 05, 2013 12:01 am, edited 1 time in total.
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Re: Jack Bogle: We need to fix the bond index

Post by clevername » Sat May 04, 2013 4:43 pm

I worry about a lot of things but the absence of junk bonds in my portfolio just isn't one of them. Maybe I'm wrong and I should but it really doesn't bother me.

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