Bonds - Throw it all on the table!!!

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Re: Bonds - Throw it all on the table!!!

Post by Doc » Mon May 26, 2014 9:35 am

letsgobobby wrote:Traditional advice is stocks in taxable, bonds in tax preferred.
Traditionally five year Treasury rates were upwards of 5%. Times change. Rules of thumb, not so much.
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Re: Bonds - Throw it all on the table!!!

Post by letsgobobby » Mon May 26, 2014 12:57 pm

I've read the wiki and the threads about this issue but at the end of the day everyone's situation is different and without a pretty detailed calculator that also predicts the future (tax rates, interest rates, incomes, etc) I'm just more comfortable sticking with something that's worked for a long, long time. I am pretty sure we will leave an estate so the step up in basis for highly appreciated assets in taxable is worth a lot to my family.

I'm open to being persuaded otherwise but would need to see a calculator of some kind.

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Re: Bonds - Throw it all on the table!!!

Post by Doc » Mon May 26, 2014 4:41 pm

letsgobobby wrote:I'm open to being persuaded otherwise but would need to see a calculator of some kind.
This has been done numerous times. Simply stated you put the asset with the highest tax cost in the tax advantaged account. In the 25% tax bracket a ten year Treasury with a 2% coupon has a tax cost of 50 bps annually. An S&P 500 fund with a 2% dividend and a 6% price growth has a tax cost on the dividend of 40 bps per yield (say 5% state tax) plus the future capital gains tax on the 6% growth which maybe has an effective tax rate of only 10% combined or another 6 basis points or 46 bps total. (The annualized effective LTCG rate is 9.6% for a 15% statutory rate and a 20 year investment.) So if these numbers hold for your case a ten year Treasury and an S&P 500 fund are essentially a wash as far as tax efficiency is concerned. Short term Treasuries would be more tax efficient and SCV stocks would be less tax efficient.

In your case if you all your equity is going to be grossed up with inheritance so that your LTCG tax rate is zero your S&P 500 fund is still going to be less tax efficient than a short Treasury fund.
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Re: Bonds - Throw it all on the table!!!

Post by TO39 » Mon May 26, 2014 4:59 pm

Doc wrote:
letsgobobby wrote:I'm open to being persuaded otherwise but would need to see a calculator of some kind.
This has been done numerous times. Simply stated you put the asset with the highest tax cost in the tax advantaged account. In the 25% tax bracket a ten year Treasury with a 2% coupon has a tax cost of 50 bps annually. An S&P 500 fund with a 2% dividend and a 6% price growth has a tax cost on the dividend of 40 bps per yield (say 5% state tax) plus the future capital gains tax on the 6% growth which maybe has an effective tax rate of only 10% combined or another 6 basis points or 46 bps total. (The annualized effective LTCG rate is 9.6% for a 15% statutory rate and a 20 year investment.) So if these numbers hold for your case a ten year Treasury and an S&P 500 fund are essentially a wash as far as tax efficiency is concerned. Short term Treasuries would be more tax efficient and SCV stocks would be less tax efficient.

In your case if you all your equity is going to be grossed up with inheritance so that your LTCG tax rate is zero your S&P 500 fund is still going to be less tax efficient than a short Treasury fund.

Do you mean S%P 500 is less tax efficient than a shot term treasury because the short term treasury earns less?

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Re: Bonds - Throw it all on the table!!!

Post by letsgobobby » Mon May 26, 2014 5:31 pm

I use tbm and my rate is 40% so that's a cost of 100 bp. I use tsm and my qualified rate is 25% so that's 46 bps. Seems like traditional advice still holds, yes?

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Re: Bonds - Throw it all on the table!!!

Post by cowboysFan » Mon May 26, 2014 8:06 pm

Doc wrote:
letsgobobby wrote:I'm open to being persuaded otherwise but would need to see a calculator of some kind.
This has been done numerous times. Simply stated you put the asset with the highest tax cost in the tax advantaged account. In the 25% tax bracket a ten year Treasury with a 2% coupon has a tax cost of 50 bps annually. An S&P 500 fund with a 2% dividend and a 6% price growth has a tax cost on the dividend of 40 bps per yield (say 5% state tax) plus the future capital gains tax on the 6% growth which maybe has an effective tax rate of only 10% combined or another 6 basis points or 46 bps total. (The annualized effective LTCG rate is 9.6% for a 15% statutory rate and a 20 year investment.) So if these numbers hold for your case a ten year Treasury and an S&P 500 fund are essentially a wash as far as tax efficiency is concerned. Short term Treasuries would be more tax efficient and SCV stocks would be less tax efficient.

In your case if you all your equity is going to be grossed up with inheritance so that your LTCG tax rate is zero your S&P 500 fund is still going to be less tax efficient than a short Treasury fund.
What's left out of this analysis is that over time stocks should grow the size of the tax advantaged account faster, such that over time a greater percentage of your portfolio is tax advantaged. In year 2, if you buck conventional wisdom, all your stocks and some of your bonds can fit into the tax advantaged account, assuming yearly rebalancing to fixed percentages.

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Re: Bonds - Throw it all on the table!!!

Post by White Coat Investor » Tue May 27, 2014 2:06 am

letsgobobby wrote:I use tbm and my rate is 40% so that's a cost of 100 bp. I use tsm and my qualified rate is 25% so that's 46 bps. Seems like traditional advice still holds, yes?
The truth is it doesn't matter much right now. Bonds in taxable might be a little better, but not nearly as much better as bonds in tax-protected when you could get 5% from bonds. Given the value you place on the step-up in basis, stocks in taxable may very well work for you.
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Re: Bonds - Throw it all on the table!!!

Post by Doc » Tue May 27, 2014 9:02 am

TO39 wrote:
Doc wrote:
letsgobobby wrote:I'm open to being persuaded otherwise but would need to see a calculator of some kind.
This has been done numerous times. Simply stated you put the asset with the highest tax cost in the tax advantaged account. In the 25% tax bracket a ten year Treasury with a 2% coupon has a tax cost of 50 bps annually. An S&P 500 fund with a 2% dividend and a 6% price growth has a tax cost on the dividend of 40 bps per yield (say 5% state tax) plus the future capital gains tax on the 6% growth which maybe has an effective tax rate of only 10% combined or another 6 basis points or 46 bps total. (The annualized effective LTCG rate is 9.6% for a 15% statutory rate and a 20 year investment.) So if these numbers hold for your case a ten year Treasury and an S&P 500 fund are essentially a wash as far as tax efficiency is concerned. Short term Treasuries would be more tax efficient and SCV stocks would be less tax efficient.

In your case if you all your equity is going to be grossed up with inheritance so that your LTCG tax rate is zero your S&P 500 fund is still going to be less tax efficient than a short Treasury fund.
Do you mean S%P 500 is less tax efficient than a short term treasury because the short term treasury earns less?
Yes. At least in the 25% bracket under current market conditions.

Tax (in)efficiency = effective tax rate times income

Any asset can have good tax efficiency because of either low effective tax rate (typically stocks) or low income (currently short term Treasuries).
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Re: Bonds - Throw it all on the table!!!

Post by Doc » Tue May 27, 2014 9:10 am

cowboysFan wrote:What's left out of this analysis is that over time stocks should grow the size of the tax advantaged account faster, such that over time a greater percentage of your portfolio is tax advantaged. In year 2, if you buck conventional wisdom, all your stocks and some of your bonds can fit into the tax advantaged account, assuming yearly rebalancing to fixed percentages.
One account or the other is always limiting the available space for tax efficient asset placement. If you have $1000k total and $100k in tax advantaged you have $100k available for tax efficient asset placement. If you have $1000k total and $900k in tax advantaged you still have only $100k available space for efficient asset placement. When you are doing the asset placement calculation you are always comparing equal amounts of each asset.
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Re: Bonds - Throw it all on the table!!!

Post by Doc » Tue May 27, 2014 9:22 am

letsgobobby wrote:I use tbm and my rate is 40% so that's a cost of 100 bp. I use tsm and my qualified rate is 25% so that's 46 bps. Seems like traditional advice still holds, yes?
Why are you holding TBM? Why not use a short term (1-5) bond index and an intermediate (5-10) bond index. Put the short term in taxable and the longer term in tax advantaged.

Hey if the ease of using a TBM fund is costing you 25 bps and you are satisfied that the ease is worth the extra cost go ahead and do it.

The whole problem with the traditional "bonds in tax advantaged" mantra is that it is highly dependent on each individual's own situation. You will leave a lot to your heirs thus reducing your effective LTCG rate to zero. As EmergDoc suggests that's fine for you. But for the retiree with limited assets and facing very high LTCG rates because of SS phase out it may be a much different storey. "Everbobby" does not walk in your shoes.
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Re: Bonds - Throw it all on the table!!!

Post by letsgobobby » Tue May 27, 2014 11:41 am

TBM is part of the classic 3 fund portfolio and has stood the test of time. Some may find it cost-, return-, or tax-effective to slice/dice their bond holidngs as some do their stock holdings but it has not been my choice. Add corporates! Buy TIPS! Shorten duration! Own international! Darn it man, I'm barely smart enough to figure out how to slice and dice my stock portfolio: I have no business trying to outsmart the bond market.

re: asset location, I agree that everything depends on one's personal situation. That's why I resist blanket statements such as "traditional advice is best for everyone" or "the current interest rate environment turns everything on its head." In my situation, it appears that traditional advice remains the best advice and at any rate, if I'm wrong, the difference is very small. For others the conclusion will be different.

Meanwhile I buy I bonds in taxable to expand my tax-preferred space and if I need more fixed income in taxable I'll buy some muni bonds with short to intermediate durations.

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Re: Bonds - Throw it all on the table!!!

Post by abuss368 » Tue May 27, 2014 11:43 am

letsgobobby wrote:TBM is part of the classic 3 fund portfolio and has stood the test of time. Some may find it cost-, return-, or tax-effective to slice/dice their bond holidngs as some do their stock holdings but it has not been my choice. Add corporates! Buy TIPS! Shorten duration! Own international! Darn it man, I'm barely smart enough to figure out how to slice and dice my stock portfolio: I have no business trying to outsmart the bond market.

re: asset location, I agree that everything depends on one's personal situation. That's why I resist blanket statements such as "traditional advice is best for everyone" or "the current interest rate environment turns everything on its head." In my situation, it appears that traditional advice remains the best advice and at any rate, if I'm wrong, the difference is very small. For others the conclusion will be different.

Meanwhile I buy I bonds in taxable to expand my tax-preferred space and if I need more fixed income in taxable I'll buy some muni bonds with short to intermediate durations.
Excellent post.

Thank you.
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Re: Bonds - Throw it all on the table!!!

Post by Doc » Tue May 27, 2014 12:06 pm

letsgobobby wrote:Meanwhile I buy I bonds in taxable to expand my tax-preferred space and if I need more fixed income in taxable I'll buy some muni bonds with short to intermediate durations
OMG (not addressed at you bobby)

We had "tax deferred" (traditional IRA) and "tax free" (ROTH) and now we have "tax-preferred". No wonder everyone is confused. We don't even have a consensus on the words. :(

(I left out the "after tax" IRA.) :D
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Re: Bonds - Throw it all on the table!!!

Post by abuss368 » Tue May 27, 2014 12:26 pm

Doc wrote:
letsgobobby wrote:Meanwhile I buy I bonds in taxable to expand my tax-preferred space and if I need more fixed income in taxable I'll buy some muni bonds with short to intermediate durations
OMG (not addressed at you bobby)

We had "tax deferred" (traditional IRA) and "tax free" (ROTH) and now we have "tax-preferred". No wonder everyone is confused. We don't even have a consensus on the words. :(

(I left out the "after tax" IRA.) :D
Tax preferred! That is a new one. Should we add to the wiki?
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Re: Bonds - Throw it all on the table!!!

Post by Doc » Tue May 27, 2014 1:57 pm

abuss368 wrote:Tax preferred! That is a new one. Should we add to the wiki?
Aarrgghh!! :D
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Re: Bonds - Throw it all on the table!!!

Post by hoops777 » Tue May 27, 2014 3:09 pm

Today's Ibonds certainly are not very exciting.I am really uncertain about how wise it us to buy them at these rates.I had my wife buy $30,000 in 2002 when the base rate was 3 pct.Very happy with that but .10 or 0 is not a great investment.They are safe though.
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Re: Bonds - Throw it all on the table!!!

Post by letsgobobby » Tue May 27, 2014 3:15 pm

hoops777 wrote:Today's Ibonds certainly are not very exciting.I am really uncertain about how wise it us to buy them at these rates.I had my wife buy $30,000 in 2002 when the base rate was 3 pct.Very happy with that but .10 or 0 is not a great investment.They are safe though.
yes but what is the alternative? risk free in inflation or deflation - not much can touch that and hence the expected return is pretty low as well. I think the 3% fixed was a misprice and not likely to be repeated.

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Re: Bonds - Throw it all on the table!!!

Post by cowboysFan » Tue May 27, 2014 8:05 pm

Doc wrote:
cowboysFan wrote:What's left out of this analysis is that over time stocks should grow the size of the tax advantaged account faster, such that over time a greater percentage of your portfolio is tax advantaged. In year 2, if you buck conventional wisdom, all your stocks and some of your bonds can fit into the tax advantaged account, assuming yearly rebalancing to fixed percentages.
One account or the other is always limiting the available space for tax efficient asset placement. If you have $1000k total and $100k in tax advantaged you have $100k available for tax efficient asset placement. If you have $1000k total and $900k in tax advantaged you still have only $100k available space for efficient asset placement. When you are doing the asset placement calculation you are always comparing equal amounts of each asset.
I'm not sure what point you're trying to convey, but I'ld rather have $900k in a roth and a $100k in taxable than the other way around. To use a really simple example, suppose someone has $100k in a roth and a $100k in taxable, stocks return 4%, bonds return 0% and the AA is 50/50. If you put bonds in the roth after 1 year, the roth is still only $100k but taxable is $104k. If you put stocks in the roth, then you have $104k in the roth and $100k in taxable. Bonds don't actually return 0%, but stocks could easily have a 4% equity premium, so the principle still holds.

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Re: Bonds - Throw it all on the table!!!

Post by Doc » Wed May 28, 2014 8:47 am

cowboysFan wrote:I'm not sure what point you're trying to convey, but I'ld rather have $900k in a roth and a $100k in taxable than the other way around. To use a really simple example, suppose someone has $100k in a roth and a $100k in taxable, stocks return 4%, bonds return 0% and the AA is 50/50. If you put bonds in the roth after 1 year, the roth is still only $100k but taxable is $104k. If you put stocks in the roth, then you have $104k in the roth and $100k in taxable. Bonds don't actually return 0%, but stocks could easily have a 4% equity premium, so the principle still holds.
In your example you need to rebalance the extra $4k. You wind up with $100k of "A" in taxable and in tax advantage you have $102k of "B" and $2k of "A". You might like to have all your "A" in taxable but you have no more room. Even though your ROTH is bigger the $100k in taxable puts a limit on what you can efficiently tax place. The fact that your ROTH is bigger now doesn't affect that amount and doesn't change your tax load at all. You still pay tax on the $100k of "A" in the second year.
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Re: Bonds - Throw it all on the table!!!

Post by cowboysFan » Wed May 28, 2014 6:29 pm

Doc wrote:
cowboysFan wrote:I'm not sure what point you're trying to convey, but I'ld rather have $900k in a roth and a $100k in taxable than the other way around. To use a really simple example, suppose someone has $100k in a roth and a $100k in taxable, stocks return 4%, bonds return 0% and the AA is 50/50. If you put bonds in the roth after 1 year, the roth is still only $100k but taxable is $104k. If you put stocks in the roth, then you have $104k in the roth and $100k in taxable. Bonds don't actually return 0%, but stocks could easily have a 4% equity premium, so the principle still holds.
In your example you need to rebalance the extra $4k. You wind up with $100k of "A" in taxable and in tax advantage you have $102k of "B" and $2k of "A". You might like to have all your "A" in taxable but you have no more room. Even though your ROTH is bigger the $100k in taxable puts a limit on what you can efficiently tax place. The fact that your ROTH is bigger now doesn't affect that amount and doesn't change your tax load at all. You still pay tax on the $100k of "A" in the second year.
I'm not sure what "A" and "B" are or why I might like to have all of anything in taxable, but perhaps it's easier to understand with some more realistic numbers: interest taxed at 30%, capital gains and dividends taxed at 20%, bonds return 4%, and stocks appreciate 6% with a 2% dividend yield.

Scenario A:
year 0
roth - 100k stocks
taxable - 100k bonds

end of year 1 before rebalancing
roth - 108k stocks
taxable - 102.8k bonds

end of year 1 after rebalancing
roth - 105.4k bonds, 2.6k stocks
taxable - 102.8k stocks

taxes due for year 2 - 102.8k*0.02*0.2 = 411.2


Scenario B
year 0
roth - 100k bonds
taxable - 100k stocks

year 1 before rebalancing
roth - 100k bonds
taxable - 106k stocks, 1600 cash from dividends

year 1 after rebalancing
roth - 104k bonds
taxable - bonds - $1799
stocks - 105799

end of year 2 taxes = 105799*0.02*0.2 + 1799*0.04*0.7 = $444.8

At this point, it's easy to see that's it's a mathematical fallacy to look at a tax decision as only effecting a single year. Scenario A could increase your tax bill in year 1 relative to scenario B, but could reduce your tax bill in years 2-30 relative to scenario B. To properly calculate the scenarios, you need to project over your investing lifetime and not just look at a single year.

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Re: Bonds - Throw it all on the table!!!

Post by Doc » Wed May 28, 2014 8:04 pm

cowboysFan wrote:At this point, it's easy to see that's it's a mathematical fallacy to look at a tax decision as only effecting a single year.
You don't look at as only affecting a single year. The tax cost is the ROI times the effective tax rate. For dividends or interest the effective tax rate is the statutory rate. For LTCG is is the average annualized tax rate over the period of investment. That rate depends on the statutory tax rate, the ROI and the length of time for the investment. I indicated this in my original example where I used 10% as an estimate of the effective annualized tax rate. I'm not going to bother to look it up again but I think for a 6% ROI and 20 years the effective tax rate is actually 9.6% with a 15% statutory rate.

This procedure does not tell you how much you are going to have in the end. What it does is tell you how much is lost in taxes on average for each year of the investment for $1 invested. You calculate the average cost for your two investments "A" and "B" and you try to shelter the one with the highest cost. Trying to do the calculation your way is a difficult problem because you have to rebalance and account for the size of the accounts and it requires a spreadsheet. That is difficult and has to be repeated for each case. Whereas if you just calculate the effective tax rate for a few typical ROI's and time frames you can use simple arithmetic with an interpolated value. You can calculate that effective tax rate with a bond calculator or even the simple calculator that comes with Windows in a few minutes if you understand the discounted cash flow (or zero coupon bond) equations.

If you can't do that you are left with using the "rule of thumb" like letsgobobby uses. Luckily for him he still gets the right placement but many people in this low interest rate environment do not.

There are a lot of threads and a fairly good Wiki article on the concepts.
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Re: Bonds - Throw it all on the table!!!

Post by Iorek » Wed May 28, 2014 8:29 pm

These arguments all make me feel better about roughly replicating our asset allocation across our different accounts (although I recognize that is probably the opposite of the intended effect).

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Re: Bonds - Throw it all on the table!!!

Post by abuss368 » Wed May 28, 2014 9:41 pm

Iorek wrote:These arguments all make me feel better about roughly replicating our asset allocation across our different accounts (although I recognize that is probably the opposite of the intended effect).
Equal Location! This is what Rick Ferri recommends. This is our strategy and our experience is it works well and is very simple with many benefits.
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Re: Bonds - Throw it all on the table!!!

Post by cowboysFan » Thu May 29, 2014 6:36 pm

Iorek wrote:These arguments all make me feel better about roughly replicating our asset allocation across our different accounts (although I recognize that is probably the opposite of the intended effect).
That's the opposite of the intended effect. I'm not arguing that people should put stocks in tax advantaged or vice versa. My main point is that Doc uses a model that is too simple and ignores too many real world effects.

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Re: Bonds - Throw it all on the table!!!

Post by Doc » Fri May 30, 2014 3:09 pm

cowboysFan wrote: My main point is that Doc uses a model that is too simple and ignores too many real world effects.
Gee whiz, I think I belive in almost all of the real world effects as presented in the WIKI article "Principles of tax-efficient fund placement" http://www.bogleheads.org/wiki/Principl ... _placement

As an example the most tax efficient asset class listed in that article is "Low-yield money market, cash, short-term bond funds"

The only difference in my model and the very detailed model presented in Tables 1 and 2 of that article is that I ignore the second order "cross term" in the yield equations since that small amount is within the margin of error of the original yield assumptions. It's just the engineer/scientists outlook on the world. (See signature comment below.) :D
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Re: Bonds - Throw it all on the table!!!

Post by epilnk » Fri May 30, 2014 4:10 pm

Bond strategy: throw up hands, keep buying.

Bonds belong in tax deferred. We don't have much (late bloomers with no 401k access most of our lives). And what we do have keeps changing, as jobs change and employers change plans and then are acquired so everything changes again. I had half of our bonds in TIPS, then the TIPS fund went away. I followed a Swenson style all-treasury allocation for many years, but due to available options and space constraints I now have the 401k funnelled toward institutional shares of TBM. We rebalance with new money, but the stock bull is running faster than we are earning. Plus we're aging. Our tax deferred space can't keep up with our increasing need for bonds so munis are an increasing share of the bond portfolio.

So I have long treasuries, int treasuries, long munis, int munis, TIPS, and TBM in ratios that continue to vary but I no longer care. They're all going down together anyway once bondmageddon hits. I hold a small portion in short national munis in case I need cash at an unfavorable moment, but otherwise I do not use bonds for safety, I use them to balance my portfolio and I keep the overall duration only shorter than my expected horizon. I may not have the control I'd like but at least I have the discipline to keep buying.

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Re: Bonds - Throw it all on the table!!!

Post by cowboysFan » Fri May 30, 2014 9:06 pm

Doc wrote:
cowboysFan wrote: My main point is that Doc uses a model that is too simple and ignores too many real world effects.
Gee whiz, I think I belive in almost all of the real world effects as presented in the WIKI article "Principles of tax-efficient fund placement" http://www.bogleheads.org/wiki/Principl ... _placement

As an example the most tax efficient asset class listed in that article is "Low-yield money market, cash, short-term bond funds"

The only difference in my model and the very detailed model presented in Tables 1 and 2 of that article is that I ignore the second order "cross term" in the yield equations since that small amount is within the margin of error of the original yield assumptions. It's just the engineer/scientists outlook on the world. (See signature comment below.) :D
It's not noise. Let's assume a 20% capital gains and dividends tax rate, 25% interest rate, 2% bond yield, 2% dividend yield, and 6% capital appreciation, as you did earlier. You claimed this was a wash. If you assume they start with a $500k roth and a $500k taxable with a 50/50 AA rebalanced annually, then your method will provide them with a total of 3.99 million after 30 years before paying capital gains. However, your stocks have about 1.5 million of capital gains, which after paying taxes reduces your portfolio to about 3.775 million. If you put stocks in your roth and bonds in taxable, then your ending portfolio value is $4.12 million. The effect of growing the roth, which is ignored in the wiki tables, has an impact of about 0.3% year in my example. 0.3% may seem small compared to your overall returns, but if the expected return from tax efficient AL is on the order of 0.5% or less, then it's an effect you can't ignore.

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Re: Bonds - Throw it all on the table!!!

Post by Doc » Sat May 31, 2014 8:40 am

cowboysFan wrote: If you assume they start with a $500k roth and a $500k taxable with a 50/50 AA rebalanced annually, then your method ...
You are conflating the benefits of a tax advantaged account with asset placement within those accounts. If your taxable account contains $1 and your tax advantaged account contains $100k you get to choose whether that $1 in taxable is going to be in bonds or stocks. If by some means you increase your tax advantaged account to $200k you still only have that $1 in taxable that you can choose to be in stocks or bonds.

Having a larger tax advantaged account may save you in taxes but it doesn't affect the asset placement decision.

You pay taxes on your taxable account. Fill that space with the least tax efficient asset you have. And rebalance as necessary in your tax advantaged account. If you choose not to rebalance because you have more space go ahead but that is not the question at hand. And if you make the mistake of not doing a tax adjusted asset allocation (not placement) I suggest you should read up on the subject.

And where do you get this "noise" idea. Not from me. I was addressing the algebra of the yield equations.

Year end balance = (1+gain) * (1+dividend) = 1 + gain + dividend + gain*dividend

The last term is small compared to either the gain or the dividend and can easily be ignored to make the calculation simpler. If you are going to carry out the calculation for 20 years keeping that extra term complicates the calculation but the tables in the WIKI do just that. If you want to keep the extra term go ahead and download Grabiner's spreadsheet and have at it. It won't make much of a difference in the placement rankings which is what asset placement is all about.
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Re: Bonds - Throw it all on the table!!!

Post by cowboysFan » Sat May 31, 2014 3:12 pm

Doc,

This discussion is approaching OT for everyone else, but if you still want help understanding something, feel free to pm me.

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Re: Bonds - Throw it all on the table!!!

Post by Day9 » Sat May 31, 2014 5:03 pm

I own

VUSUX Vanguard Long Term Government Admiral
TLT iShares 20+ year Treasury Bond ETF

I draw inspiration from the PP crowd and ideally I would own newly issued Long Treasury Bonds directly, perhaps even on treasurydirect.gov with no counterparty risk. I would then sell them every 10 years (or whatever) and buy newly issued long Treasuries. But for now I am using this fund and this ETF. Does anyone have any experience buying bonds using Vanguard's Bond counter? Is it pretty painless? Do you buy in $1,000 increments or what? How can I find out more about buying individual bounds at Vanguard's bond desk?

My portfolio is 85% stock, 10% bonds entirely VUSUX and TLT, 5% PIMCO Commodity fund institutional shares which uses TIPS as collateral for a futures contract strategy to match an index PCRIX. I am a young accumulator.
I'm just a fan of the person I got my user name from

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Re: Bonds - Throw it all on the table!!!

Post by Doc » Sat May 31, 2014 7:24 pm

cowboysFan wrote: then your method will provide them with a total of 3.99 million after 30 years before paying capital gains. However, your stocks have about 1.5 million of capital gains, which after paying taxes reduces your portfolio to about 3.775 million. If you put stocks in your roth and bonds in taxable, ...
I do not know where you are coming from. My method would put the short bonds in taxable and therefore there are no capital gains to pay at all. I think perhaps you don't understand that there is no tax at all on your share of a tax advantaged account.

Short term Treasuries are currently more tax efficient than an S&P 500 fund and therefore the bonds should be in taxable. That's what the WIKI says and that's what I said and although I didn't follow through with your math you seem to get to the same place. Put stocks in tax advantaged under current conditions short term bonds in taxable.

The problem with implementing this strategy is that most of us have accumulated a lot of unrealized capital gains in our taxable accounts and moving those assets would cause a large capital gains tax bill now.

(Note the current yield on the five is 1.528 much less than the 2% we have been using and a five year note is usually considered intermediate term.)
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: Bonds - Throw it all on the table!!!

Post by cowboysFan » Sat May 31, 2014 9:47 pm

Doc wrote:
cowboysFan wrote: then your method will provide them with a total of 3.99 million after 30 years before paying capital gains. However, your stocks have about 1.5 million of capital gains, which after paying taxes reduces your portfolio to about 3.775 million. If you put stocks in your roth and bonds in taxable, ...
I do not know where you are coming from.
Doc,

I'm writing with respecting to this post of yours, where you claim bonds yielding 2% are a wash with stocks as far as tax efficiency is concerned. I've demonstrated that bonds and stocks are not a tax efficiency wash using the rates of return and tax rates you gave, ignoring the possible TLH benefits of having stocks in taxable. I ignored the cross yield of 0.06*0.02 in the numbers I gave earlier, but as you've said several times that doesn't change what's optimal for tax placement purposes. Including the cross-term yield does change the ending balances, but does not change the result that the optimal decision for tax purposes would be to have stocks in a roth and bonds yielding 2% in taxable. If you reached that conclusion based on the wiki, then that could indicate a serious flaw in the wiki.
Doc wrote: This has been done numerous times. Simply stated you put the asset with the highest tax cost in the tax advantaged account. In the 25% tax bracket a ten year Treasury with a 2% coupon has a tax cost of 50 bps annually. An S&P 500 fund with a 2% dividend and a 6% price growth has a tax cost on the dividend of 40 bps per yield (say 5% state tax) plus the future capital gains tax on the 6% growth which maybe has an effective tax rate of only 10% combined or another 6 basis points or 46 bps total. (The annualized effective LTCG rate is 9.6% for a 15% statutory rate and a 20 year investment.) So if these numbers hold for your case a ten year Treasury and an S&P 500 fund are essentially a wash as far as tax efficiency is concerned.

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Re: Bonds - Throw it all on the table!!!

Post by weltschmerz » Sat May 31, 2014 10:13 pm

Day9 wrote:I draw inspiration from the PP crowd and ideally I would own newly issued Long Treasury Bonds directly, perhaps even on treasurydirect.gov with no counterparty risk. I would then sell them every 10 years (or whatever) and buy newly issued long Treasuries. But for now I am using this fund and this ETF. Does anyone have any experience buying bonds using Vanguard's Bond counter? Is it pretty painless? Do you buy in $1,000 increments or what? How can I find out more about buying individual bonds at Vanguard's bond desk?
You are on the right track here. Long-term treasuries are a great holding for portfolio diversification, since they tend to zig when then stock market zags. Plus, you can also load up on ultra-safe savings bonds or short-term treasuries, so that the combined duration of all your fixed income is intermediate (a barbell strategy).

Buying treasuries from Vanguard is painless. If you buy at auction and then hold to maturity, then it is free (no spreads or commissions). If you buy a bond that is already issued, or sell before maturity, there will still be no commission, but there will be a (small) spread between buy/sell prices. You do have to buy in $1000 increments.

Check out the current auction schedule here:
http://www.treasury.gov/resource-center ... ctions.pdf

Buying at auction is a great way to get the current market rate with no spreads. You have to wait until the auction is announced, then you can place your order. For instance, the only bonds available to place an order for right now are the 13-week and the 26-week bills. If you want to place an order for the next 30-year bond, you have to wait until the announcement date of June 5, then be sure to get your order in before the auction date of June 12. You can place your order anytime, even after hours.

If you want to see how easy it all is, I'd recommend practicing by buying the smallest amount ($1000) of the next 4-week bill. They announce the auctions for the 4-week bills every Monday, then hold the auction on Tuesday. You'll be able to watch the $ leave your sweep account on the settlement date, then flow back to your account on the maturity date. This might help you get comfortable with the whole process. Good luck to you.

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Re: Bonds - Throw it all on the table!!!

Post by Doc » Sun Jun 01, 2014 10:42 am

cowboysFan

I think I figured out the problem:
letsgobobby wrote: Plus I think I recall reading that if one planned not to consume all taxable assets in one's lifetime, the traditional allocation made more sense because of the immense value in the step up in basis for heirs.
In response
Doc wrote:So if these numbers hold for your case a ten year Treasury and an S&P 500 fund are essentially a wash as far as tax efficiency is concerned.
The "essentially the wash" was referring to letsgobobby's case where the LTCG rate was zero because of the basis step up.

Without the LTCG the amount lost to taxes was 50 bps for Treasuries in taxable and 46 bps for the S&P 500 fund which I consider a wash because the 4 bps difference is well with the margin of error of both the coupon and dividend rate estimates.

I am done with this.
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Re: Bonds - Throw it all on the table!!!

Post by cowboysFan » Sun Jun 01, 2014 2:12 pm

Doc wrote: Without the LTCG the amount lost to taxes was 50 bps for Treasuries in taxable and 46 bps for the S&P 500 fund which I consider a wash because the 4 bps difference is well with the margin of error of both the coupon and dividend rate estimates.

I am done with this.
Doc,

Now, you're misquoting your own posts. It's clear that the 46 bps in your statement below includes paying some LTCG.
Doc wrote: An S&P 500 fund with a 2% dividend and a 6% price growth has a tax cost on the dividend of 40 bps per yield (say 5% state tax) plus the future capital gains tax on the 6% growth which maybe has an effective tax rate of only 10% combined or another 6 basis points or 46 bps total.

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Re: Bonds - Throw it all on the table!!!

Post by Doc » Sun Jun 01, 2014 4:18 pm

cowboysFan wrote:Now, you're misquoting your own posts. It's clear that the 46 bps in your statement below includes paying some LTCG.

Doc wrote:
An S&P 500 fund with a 2% dividend and a 6% price growth has a tax cost on the dividend of 40 bps per yield (say 5% state tax) plus the future capital gains tax on the 6% growth which maybe has an effective tax rate of only 10% combined or another 6 basis points or 46 bps total.
Oh SITH typo. " another 6 60 basis points" :oops:

To restate what I was trying to say: With no capital gains because of a step up in basis on death its a wash. With no step up many investors in the 25% bracket will be better off with short Treasuries in taxable and S&P 500 funds in tax advantaged.

The latter is what the Wiki says, what cowboysFan has been saying and what I was trying to say before my 4th grade arithmetic failed me.

I often say "forget the words, do the math". Maybe I need to remember to do that myself. :(
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: Bonds - Throw it all on the table!!!

Post by abuss368 » Mon Apr 25, 2016 8:41 pm

Bogleheads,

I started this post a while ago and it was a very good thread. In the interest of all the recent bond fund threads, this may be a good opportunity to continue this constructive dialogue.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Bonds - Throw it all on the table!!!

Post by hudson » Mon Apr 25, 2016 8:45 pm

hudson wrote:I try to keep Larry Swedroe's advice in mind with bonds where he says something like: "Go with AAA/AA rated bonds."
Therefore, I like treasuries and AAA/AA municipal bonds...as follows:

Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (not all AAA/AA)
Vanguard Intermediate-Term Treasury Fund Admiral Shares
Baird Intermediate Municipal Bond Fund Class Institutional (Closer to AAA/AA than Van. Intermed. Term Tax-Ex.)
Vanguard Inflation-Protected Securities Fund Admiral Shares
Penfed CDs
IBonds
two years later...same plan...no change

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Re: Bonds - Throw it all on the table!!!

Post by BigJohn » Mon Apr 25, 2016 10:49 pm

Asset allocation target is 60/40 with about that in both taxable and tax deferred accounts. I used VG Intermediate Term Tax Exempt (VWIUX) in taxable and VG Intermediate Term Bond Index (VBILX) in tax deferred. I also hold part of my emergency fund in VG Limited Term Tax Exempt (VMLUX).

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Re: Bonds - Throw it all on the table!!!

Post by siamond » Tue Apr 26, 2016 8:41 pm

siamond wrote:1) List the bond funds, individual bonds, CD's, etc. that you invest in
=> FXSTX, PTRAX, VMATX, VWEHX, plus another HY fund in a Vanguard annuity
=> no individual bonds, no CD, no TIPS, nothing else

2) In which account what fixed income securities are held
=> VMATX in taxable securities, the rest in various tax-deferred vehicles

3) Allocation as a percentage of Fixed Income
=> I aim at 100%. Ok, there is always a tiny bit of cash lingering here and there. No emergency account (can't see the point).

4) Allocation to bonds overall (i.e. age in bonds, etc.)
=> AA is 75/25 (equities/bonds). Then bonds are roughly 55% total-bonds, 20% high-yield, 25% Munis, although I don't fret if such split varies a tad.
=> no age-in-bonds or equivalent progressive strategy. I'm just waiting for big milestones to reassess (e.g. large 'magic' number reached; I turn 65). Does this mean 'lost in space'? :happy

5) Any other plans such as adding more bonds funds, consolidating and merging, etc.
=> Will simplify a bit once my Deferred Comp Plan is over (exit PTRAX). Will probably reduce HY to 10% if & when regular bonds come back to better yields.
=> I might reassess the use of munis once I am fully retired (with a much lower tax rate) and regular bonds come back to better yields.
=> I decided against TIPS and Int'l Bonds. I never tried to use CDs or Individual Bonds though, maybe one day, I'll play around and see what goes. I have little urge to do so though.
Interesting to see how things can evolve in 2 years... I convinced myself that HY bonds weren't useful; I early-retired, I got rid of munis and my DCP is nearly over; I simplified down to one single bond fund (VBILX) in tax-sheltered, following Jack Bogle's logic of beefing up a bit on high-grade corporate bonds. Definitely not interested in Int'l bonds or TIPS. As to my AA, it drifted to 80/20, and given the current yields, I just can't convince myself to buy more bonds.

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Re: Bonds - Throw it all on the table!!!

Post by FreeAtLast » Tue Apr 26, 2016 9:19 pm

abuss368 wrote:Bogleheads there have been many excellent threads over the last couple of weeks related to bonds. I started a couple with polls and the results were excellent. Often a poll is limited, needs more options, etc.

I would like to try an open ended thread on your personal bond strategy.

Please simply note:

1) List the bond funds, individual bonds, CD's, etc. that you invest in
2) In which account what fixed income securities are held
3) Allocation as a percentage of Fixed Income
4) Allocation to bonds overall (i.e. age in bonds, etc.)
5) Any other plans such as adding more bonds funds, consolidating and merging, etc.

Hopefully this thread provides an inside peak into how Bogleheads manage their fixed income allocation and will help other investors.

Best.
1,2) All Vanguard, all Admiral:
Total Bond Market (taxable)
Intermediate-Term Investment Grade (taxable)
Intermediate-Term Bond Index (tIRA)
3) no CD's or individual bonds.
4) overall allocation = 50/50 stocks/bonds.
5) Going to leave these funds as they are for a good long time (except for minor re-balancing adjustments).
Illegitimi non carborundum.

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Re: Bonds - Throw it all on the table!!!

Post by abuss368 » Wed Apr 27, 2016 12:01 am

FreeAtLast wrote:
abuss368 wrote:Bogleheads there have been many excellent threads over the last couple of weeks related to bonds. I started a couple with polls and the results were excellent. Often a poll is limited, needs more options, etc.

I would like to try an open ended thread on your personal bond strategy.

Please simply note:

1) List the bond funds, individual bonds, CD's, etc. that you invest in
2) In which account what fixed income securities are held
3) Allocation as a percentage of Fixed Income
4) Allocation to bonds overall (i.e. age in bonds, etc.)
5) Any other plans such as adding more bonds funds, consolidating and merging, etc.

Hopefully this thread provides an inside peak into how Bogleheads manage their fixed income allocation and will help other investors.

Best.
1,2) All Vanguard, all Admiral:
Total Bond Market (taxable)
Intermediate-Term Investment Grade (taxable)
Intermediate-Term Bond Index (tIRA)
3) no CD's or individual bonds.
4) overall allocation = 50/50 stocks/bonds.
5) Going to leave these funds as they are for a good long time (except for minor re-balancing adjustments).
Are you in a higher or lower tax bracket that you invest in taxable bond funds in your taxable account?
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Bonds - Throw it all on the table!!!

Post by FreeAtLast » Wed Apr 27, 2016 1:12 am

abuss368 wrote:
FreeAtLast wrote:
abuss368 wrote:Bogleheads there have been many excellent threads over the last couple of weeks related to bonds. I started a couple with polls and the results were excellent. Often a poll is limited, needs more options, etc.

I would like to try an open ended thread on your personal bond strategy.

Please simply note:

1) List the bond funds, individual bonds, CD's, etc. that you invest in
2) In which account what fixed income securities are held
3) Allocation as a percentage of Fixed Income
4) Allocation to bonds overall (i.e. age in bonds, etc.)
5) Any other plans such as adding more bonds funds, consolidating and merging, etc.

Hopefully this thread provides an inside peak into how Bogleheads manage their fixed income allocation and will help other investors.

Best.
1,2) All Vanguard, all Admiral:
Total Bond Market (taxable)
Intermediate-Term Investment Grade (taxable)
Intermediate-Term Bond Index (tIRA)
3) no CD's or individual bonds.
4) overall allocation = 50/50 stocks/bonds.
5) Going to leave these funds as they are for a good long time (except for minor re-balancing adjustments).
Are you in a higher or lower tax bracket that you invest in taxable bond funds in your taxable account?
abuss: Been retired for almost 2.33 years. This year I just made it under the 15% federal bracket amount. The year before I was in the 25% bracket. My investing problem has always been that I only had access to one type of tax advantaged account, the tIRA. No 401k or 403b was ever available. So when I had excess monies over the $5500 or $6500 limit, they had to go into taxable. I sure would like to have a magic wand that I could wave and transfer at least the Inter-Term Investment Grade into my IRA. :(
Illegitimi non carborundum.

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Re: Bonds - Throw it all on the table!!!

Post by mongstradamus » Wed Apr 27, 2016 10:49 am

stable value in 401k 2.95% , BIV(vanguard intermediate term bond etf) in IRA, and 5 year cd ladder in taxable. I have fairly small portions of bonds though around 9% are in bonds as opposed to equities.

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Re: Bonds - Throw it all on the table!!!

Post by abuss368 » Tue May 10, 2016 11:42 pm

Keep it going Bogleheads!
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Re: Bonds - Throw it all on the table!!!

Post by stemikger » Wed May 11, 2016 12:19 am

1) List the bond funds, individual bonds, CD's, etc. that you invest in
The Blackrock U.S. Debt Index Fund - CHKTR
The Vanguard Balanced Index Fund

2) In which account what fixed income securities are held
401K - Blackrock
IRA - Balanced Index (No Taxable accounts)

3) Allocation as a percentage of Fixed Income
401K - 35% in Fixed Income
IRA - 40% in Fixed Income

4) Allocation to bonds overall (i.e. age in bonds, etc.)
Age minus 17

5) Any other plans such as adding more bonds funds, consolidating and merging, etc.
In 5 years I will probably take the 35% bonds in my 401K up to 40% (same Blackrock Fund) and when I leave my place of employment move most of it to the Balanced Index Fund.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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Re: Bonds - Throw it all on the table!!!

Post by abuss368 » Wed May 11, 2016 1:02 am

stemikger wrote:1) List the bond funds, individual bonds, CD's, etc. that you invest in
The Blackrock U.S. Debt Index Fund - CHKTR
The Vanguard Balanced Index Fund

2) In which account what fixed income securities are held
401K - Blackrock
IRA - Balanced Index (No Taxable accounts)

3) Allocation as a percentage of Fixed Income
401K - 35% in Fixed Income
IRA - 40% in Fixed Income

4) Allocation to bonds overall (i.e. age in bonds, etc.)
Age minus 17

5) Any other plans such as adding more bonds funds, consolidating and merging, etc.
In 5 years I will probably take the 35% bonds in my 401K up to 40% (same Blackrock Fund) and when I leave my place of employment move most of it to the Balanced Index Fund.
The one fund approach!
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Bonds - Throw it all on the table!!!

Post by stemikger » Wed May 11, 2016 2:16 am

abuss368 wrote:
stemikger wrote:1) List the bond funds, individual bonds, CD's, etc. that you invest in
The Blackrock U.S. Debt Index Fund - CHKTR
The Vanguard Balanced Index Fund

2) In which account what fixed income securities are held
401K - Blackrock
IRA - Balanced Index (No Taxable accounts)

3) Allocation as a percentage of Fixed Income
401K - 35% in Fixed Income
IRA - 40% in Fixed Income

4) Allocation to bonds overall (i.e. age in bonds, etc.)
Age minus 17

5) Any other plans such as adding more bonds funds, consolidating and merging, etc.
In 5 years I will probably take the 35% bonds in my 401K up to 40% (same Blackrock Fund) and when I leave my place of employment move most of it to the Balanced Index Fund.
The one fund approach!
+1

As Mr. Bogle says in Common Sense on Mutual Funds the ultimate in simplicity is to pick a single balanced index fund with about 65% in stocks and 35% in bonds or in Vanguard's case 60/40, investing doesn't get better than that.

Having said that, my situation is very simple, no taxable account to worry about, so this is ideal for my IRA. I wish my 401K held it.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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Re: Bonds - Throw it all on the table!!!

Post by abuss368 » Mon Jun 27, 2016 10:58 pm

The 10 year yield is very low. I read that Bill Gross has said it is almost to low and that investors should take a "break" from bonds!

Huh? :confused
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Bonds - Throw it all on the table!!!

Post by abuss368 » Thu Dec 08, 2016 11:35 pm

This was an excellent thread. I am curious if this thread was started today with the current environment if the responses would be different?
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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