"Is Bogle Befuddling?"

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Taylor Larimore
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"Is Bogle Befuddling?"

Post by Taylor Larimore »

Bogleheads:

John Rekenthaler, Vice-President of Research at Morningstar, answers a question:

Is Bogle Befuddling?

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Rodc
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Re: "Is Bogle Befuddling?"

Post by Rodc »

As for Bogle's most-radical idea, that investors might wish to rotate out of stocks and into bonds, it's not radical when one considers what Nelson freely acknowledges: that Bogle isn't much for rebalancing. A portfolio that consisted of 50% stocks, 50% bonds in spring 2009 that has been permitted to run with the market will now be 65% stocks, 35% bonds. Thus, shifting 15% of assets from stocks to bonds would put that portfolio right back where it started. That's not market-timing; it's a giant rebalancing. Irony, thy name is not Bogle.
Seems a bit of a stretch to assume Bogle is talking to folks who happened to have just their right allocation in the bottom of 2009 and then never rebalanced for five years. That would be a very small set of people.
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Re: "Is Bogle Befuddling?"

Post by Billyboy »

Boy, Taylor, you are very quick, as usual. Your post beat mine by 4 minutes. I figured someone had to have seen the article before I did. Guess I should have done a search B/4 posting! If I knew exactly how to do it. :oops:
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Re: "Is Bogle Befuddling?"

Post by Rodc »

Interestingly, right this moment we have this thread with a suggesting to move from stocks to bonds due to stocks being highly valued while the thread just above this one is on moving out of bonds and into stocks because bonds are so highly valued. :)

Everything but stay the course! :)
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Re: "Is Bogle Befuddling?"

Post by jebmke »

Rodc wrote:Interestingly, right this moment we have this thread with a suggesting to move from stocks to bonds due to stocks being highly valued while the thread just above this one is on moving out of bonds and into stocks because bonds are so highly valued. :)

Everything but stay the course! :)
That leaves open the option of re-balancing to consumption.
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Re: "Is Bogle Befuddling?"

Post by pkcrafter »

Rodc wrote:Interestingly, right this moment we have this thread with a suggesting to move from stocks to bonds due to stocks being highly valued while the thread just above this one is on moving out of bonds and into stocks because bonds are so highly valued. :)

Everything but stay the course! :)
Rodc, as ususal you are the voice of reason. The examples you cite are proof that investor do things they claim they don't do. :confused

The DOW dropped 137 today on news that bond rates may be raised before planned. And investors think they can figure out what's going to happen? :oops:

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Re: "Is Bogle Befuddling?"

Post by peppers »

Down 137 today? I didn't know. I'll just stay the course like Mr. Bogle wrote in the book he sent me. :)
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Re: "Is Bogle Befuddling?"

Post by ASUGrad »

I read the interview, and I read these 'reviews' of the interview. You could say the reviews take things out of context. You could also say Bogle is quite experienced at finding the true question.

Bogle didn't just come out and say move 15% from stocks to bonds. He was asked a direct question about the market being so high after a 5 year bull market and how to protect those returns. I'll summarize Bogle's long answer. Don't market time, don't market time, don't get out of stocks, BUT if you want to trim your stocks take 15% off the table.

Then he is asked about where to put the 15%. I'll summarize his long answer, corporate bonds.

From the point of view of someone who has had this conversation with investors he is a genius. If an investor asks you about the market being too high and protecting their returns the real question is either....
1. "Should I get out now to get back in later"... market timing. His answer, NO.
2. "I'm scared of the market going down." This investor is either in too aggressive a portfolio for their goals, or lets emotions dictate investment decisions and they are scared, or both. Moving 15% from stocks into corporate bonds makes them feel better, and it will make a down market hurt less so they are likely closer to their actual risk tolerance. Its also only moving 15% from stocks to corporate bonds instead of moving 15% or even the entire portfolio from stocks to very safe assets. Their returns won't be greatly impacted if the market keeps going up, but they will feel better if the market goes down. No matter how much you drill in discipline investments are still very emotional for some people. They are better off in a portfolio they are comfortable with and can stick with during any market than a riskier portfolio that might scare them and cause them to sell at a bad time.


He also makes a very good argument that the index the Total Bond market index(VBTLX) tracks is too heavy in government bonds. I also noticed in terms of credit rating VBTLX doesn't show anything under a Baa credit rating. I know government bonds make up a big piece of the bond market, but having so much(65%) invested in one borrower doesn't seem that diversified. Yes US government bonds are safe from a credit standpoint, but it increases your risk to interest rates and not meeting your goals(low returns).
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Re: "Is Bogle Befuddling?"

Post by JoMoney »

I don't think his answer is inconsistent or "Befuddling", I think people try to read too much strategy into the whole ordeal.
John Bogle in Common Sense On Mutual Funds wrote:...Assett allocation is not a panacea. It is a reasoned -if imperfect- approach to the inevitable uncertainty of the financial markets...
To me, his answer doesn't seem that out of line given the question:
http://www.etf.com/sections/features/21 ... ml?start=1
How do you protect returns that are in the bag and enhance future returns at this juncture?
Bogle: [...] Well, I think that is a weapon that should be used sparingly. You're taking a gamble when you get out. [...]
Here's an interview quote of Mr.Bogle saying something that I think if you read into it too much, it may seem a bit more "befuddling" given his typical stance on the 60/40 policy portfolio, and the typical approach people use for rebalancing @2:30 :
http://live.wsj.com/video/jack-bogle-wh ... 329DDF5CA0 ...buy and hold stocks, but buy and hold some bonds as well. Call it an anchor to windward, call it anything you want... a little dry powder... although I don't like to spend the "dry powder" I like a permanent kind of bond position..."
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: "Is Bogle Befuddling?"

Post by joe8d »

He also makes a very good argument that the index the Total Bond market index(VBTLX) tracks is too heavy in government bonds. I also noticed in terms of credit rating VBTLX doesn't show anything under a Baa credit rating. I know government bonds make up a big piece of the bond market, but having so much(65%) invested in one borrower doesn't seem that diversified. Yes US government bonds are safe from a credit standpoint, but it increases your risk to interest rates and not meeting your goals(low returns).ASUGrad
+1
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Re: "Is Bogle Befuddling?"

Post by schuyler74 »

John Rekenthaler wrote:In Praise of the Ordinary
The investment performance of another, less-revered gentleman has also been in the news. The press has breathlessly reported that, if forced to sell the Los Angeles Clippers, Donald Sterling could receive as much as $1 billion, thereby reaping a "massive profit" on an initial investment of $12.5 million made in 1981.

Indeed, Sterling will end up doing very well indeed on the Clippers, earning just more than 14% annualized for the 33 years. However, had he put that money instead into Vanguard 500 Index (VFIAX) shares, he would have still made a healthy 11.1% per year, taking him to about $400 million. That strikes me as impressively close, given that Sterling assumed huge idiosyncratic risk in putting that $12.5 million into a single egg and given that the investment was unusually successful, even by the standards of professional sports franchises.
That was a very interesting paragraph, as many of my friends have discussed the massive growth in value of the Clippers franchise since 1981, when Sterling bought the team. I think all (most?) on these forums would agree that the S&P 500 index is considered safer than buying an NBA franchise, but is it really that close? 11.1% vs 14.0% annualized? Maybe I should be tilting NFL with a slice of MLB? What's the Sharpe Ratio on owning an American professional sports franchise anyway?
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Re: "Is Bogle Befuddling?"

Post by JohnR »

Rodc wrote:Seems a bit of a stretch to assume Bogle is talking to folks who happened to have just their right allocation in the bottom of 2009 and then never rebalanced for five years. That would be a very small set of people.
Ha yes, it is indeed a stretch. That was a shorthand version of the argument. The longer version is -

1) Peeling back the stock allocation of a constantly balanced portfolio is a different thing than peeling back on one where the investor has let the stocks ride through a bull market. The first is a true allocation change, the second is a chunky form of rebalancing.

2) Given that Bogle is not much for rebalancing, I suspect that he had the latter in mind with his answer. Of course I don't know that, but it seems to be a reasonable guess. Also, while there were few people indeed who had the perfect stock allocation in 2009 and have since let it ride (!), as a general principle there are a whole lot of people who now have a higher stock allocation than they had 2 or 3 years ago. So the very general notion of "maybe I am uncomfortable owning so much in stocks," to which Bogle responds, "yes that is possible you are," is I believe related to the idea that many people have not rebalanced.

In short, the DFA advisor who professes befuddlement at Bogle lives in a constantly rebalanced world, and in that world Bogle's comment makes less sense than it does in both Bogle's world and the real world, where many do not rebalance on an ongoing basis.

I'll catch up with Jack at some point and ask him if my mind reading was correct. :wink:
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Re: "Is Bogle Befuddling?"

Post by Roy »

Followup from the advisor, Eric D. Nelson:

http://servowealth.com/resources/articl ... stly-right
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Re: "Is Bogle Befuddling?"

Post by JoMoney »

Roy wrote:Followup from the advisor, Eric D. Nelson:

http://servowealth.com/resources/articl ... stly-right
Hmmm...
...Total Stock Indexes are heavily invested in large cap stocks and often the most growth-oriented companies (remember 2000?)...
Maybe the author doesn't remember 2007-2009 where a Value index lost as much from peak to trough as a Growth index did in 2000-2002, and how someone balanced in a "Total Market" would have performed better than being in the wrong style at either point in time...
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John Rekenthaler

Post by Taylor Larimore »

Bogleheads:

"JohnR" is the first post by John Rekenthaler, Morningstar's Vice President of Research.

John, we are honored to have you contribute to the Bogleheads Forum.

I hope that you will continue to share your thoughts about the wisdom of our mutual friend, Jack Bogle, and his crusade to give ordinary investors "a fair shake."

Thank you and best wishes.
Taylor
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Re: John Rekenthaler

Post by ObliviousInvestor »

Taylor Larimore wrote:I hope that you will continue to share your thoughts
Ditto this. Welcome, John!
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Re: John Rekenthaler

Post by Woodshark »

ObliviousInvestor wrote:
Taylor Larimore wrote:I hope that you will continue to share your thoughts
Ditto this. Welcome, John!
Another welcome John. Thanks for your input. I hope you find many occasions to post your thoughts.
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Re: "Is Bogle Befuddling?"

Post by Rodc »

JohnR wrote:
Rodc wrote:Seems a bit of a stretch to assume Bogle is talking to folks who happened to have just their right allocation in the bottom of 2009 and then never rebalanced for five years. That would be a very small set of people.
Ha yes, it is indeed a stretch. That was a shorthand version of the argument. The longer version is -

1) Peeling back the stock allocation of a constantly balanced portfolio is a different thing than peeling back on one where the investor has let the stocks ride through a bull market. The first is a true allocation change, the second is a chunky form of rebalancing.

2) Given that Bogle is not much for rebalancing, I suspect that he had the latter in mind with his answer. Of course I don't know that, but it seems to be a reasonable guess. Also, while there were few people indeed who had the perfect stock allocation in 2009 and have since let it ride (!), as a general principle there are a whole lot of people who now have a higher stock allocation than they had 2 or 3 years ago. So the very general notion of "maybe I am uncomfortable owning so much in stocks," to which Bogle responds, "yes that is possible you are," is I believe related to the idea that many people have not rebalanced.

In short, the DFA advisor who professes befuddlement at Bogle lives in a constantly rebalanced world, and in that world Bogle's comment makes less sense than it does in both Bogle's world and the real world, where many do not rebalance on an ongoing basis.

I'll catch up with Jack at some point and ask him if my mind reading was correct. :wink:
John,
Thanks for the clarification.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: "Is Bogle Befuddling?"

Post by G-Money »

schuyler74 wrote:
John Rekenthaler wrote:In Praise of the Ordinary
The investment performance of another, less-revered gentleman has also been in the news. The press has breathlessly reported that, if forced to sell the Los Angeles Clippers, Donald Sterling could receive as much as $1 billion, thereby reaping a "massive profit" on an initial investment of $12.5 million made in 1981.

Indeed, Sterling will end up doing very well indeed on the Clippers, earning just more than 14% annualized for the 33 years. However, had he put that money instead into Vanguard 500 Index (VFIAX) shares, he would have still made a healthy 11.1% per year, taking him to about $400 million. That strikes me as impressively close, given that Sterling assumed huge idiosyncratic risk in putting that $12.5 million into a single egg and given that the investment was unusually successful, even by the standards of professional sports franchises.
That was a very interesting paragraph, as many of my friends have discussed the massive growth in value of the Clippers franchise since 1981, when Sterling bought the team. I think all (most?) on these forums would agree that the S&P 500 index is considered safer than buying an NBA franchise, but is it really that close? 11.1% vs 14.0% annualized? Maybe I should be tilting NFL with a slice of MLB? What's the Sharpe Ratio on owning an American professional sports franchise anyway?
The author dramatically understates Sterling's profit, unless we are going to assume that the Clippers merely broke even (earnings = expenses) over the last 33 years. The proceeds of the sale would just be the capital gain. That's like looking at the capital appreciation of the S&P 500, without considering dividends. Given ticket revenues, merchandise, TV contracts, etc., I'm pretty sure the Clippers generated some nice profits (and distributed them to the owner(s)) over the last 33 years. That needs to be included in the ROI calculation for an accurate apples-to-apples comparison.
Don't assume I know what I'm talking about.
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Re: "Is Bogle Befuddling?"

Post by tadamsmar »

Here's was he really said about bonds:
Bogle: Well, I go to basically short-term and intermediate-term municipals in my personal account, and, in my retirement plan account, which is my largest asset here, I use intermediate-term corporate and short-term corporate debt.
He has short-term intermediate muni's in his taxable account. He might have a big taxable account relative to his retirement plan, so he could be holding mostly munis, with a relatively small corporate bond allocation.

In my opinion, it makes more sense when you see it unfiltered. Munis in taxable, corporate in tax-deferred. If you have a taxable account, then it makes sense to not use the Total Bond Fund everywhere for reasons that have nothing to do with tilting away from government bonds and toward corporate bonds.
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Re: "Is Bogle Befuddling?"

Post by abuss368 »

Hi Taylor,

Excellent article.

Thank you for sharing.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: "Is Bogle Befuddling?"

Post by iceport »

Roy wrote:Followup from the advisor, Eric D. Nelson:

http://servowealth.com/resources/articl ... stly-right
Thank you for this.

Eric Nelson beautifully articulates my perspective on some of Jack Bogle's more recent comments in the press:
Eric D. Nelson, CFA, wrote:In truth, none of these inconsistencies are all that troubling, it's when you step back and view all of them in light of Bogle's previously-held positions or in the context of the total-portfolio impact that I get worried. No one said consistency, or “staying the course” was easy - but when the steward of "just standing there" is doing just the opposite, efforts to remain disciplined and steadfast with one's portfolio can seem even more challenging than normal. Given the central role that the "behavioral gap" plays in the poor long-term returns of most investors, I would think critically exposing inconsistencies in portfolio policy from a pillar of the investment industry would be seen as a positive thing. Clearly, it’s at least worth talking about.
The first book I ever read by Jack Bogle was his 2007 Little Book of Common Sense Investing. In it, in page after page, chapter after admonishing chapter, Jack argued strenuously (and convincingly) that a two-fund portfolio was the only asset allocation one need ever bother with. That would be the Total (domestic) Stock Market Index fund combined with the Total Bond Market Index fund. Sure, he made some allowances at the end of the book for the limited inclusion of other assets, but he made it crystal clear that including other assets was not his preference. And all of that, it should go without saying, was in the context of "Just staying the course."

So no, while Jack's recent revisions to his simple and elegant advice from earlier years are neither drastic nor particularly alarming in and of themselves, the fact that they come from Jack Bogle is disconcerting. I have to agree with Eric on this.

Take the bond side recommendations. It's not as if the Total Bond Market Index was appreciably different in 2007 than it is today. And it's not as if corporate bond funds didn't exist in 2007. Nonetheless, Jack argued relentlessly not only that the Total Bond Market Index was a fine bond fund to own, but that it was the only bond fund you would ever need to own! Therefore, it seems to me, Jack is revising his recommendations based on short term market conditions. How is that consistent with "Just stay the course?"

Is Bogle Befuddling? With all due respect, yes, sometimes he is.

--Peter
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
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Re: "Is Bogle Befuddling?"

Post by Boglegrappler »

In one of his collections, Charles Ellis of Greenwich Associates tells the story of the "Yale Plan" which was implemented in response to the equity losses of the depression crash. He notes that it was essentially a rebalancing that sold stocks as they rose above the target allocation and buying bonds with the proceeds. His comment, if I recall correctly, was that it amounted to "Cut your profits and let your losses run".
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Re: "Is Bogle Befuddling?"

Post by Roy »

petrico wrote:
Roy wrote:Followup from the advisor, Eric D. Nelson:

http://servowealth.com/resources/articl ... stly-right
Thank you for this.

Eric Nelson beautifully articulates my perspective on some of Jack Bogle's more recent comments in the press:
Eric D. Nelson, CFA, wrote:In truth, none of these inconsistencies are all that troubling, it's when you step back and view all of them in light of Bogle's previously-held positions or in the context of the total-portfolio impact that I get worried. No one said consistency, or “staying the course” was easy - but when the steward of "just standing there" is doing just the opposite, efforts to remain disciplined and steadfast with one's portfolio can seem even more challenging than normal. Given the central role that the "behavioral gap" plays in the poor long-term returns of most investors, I would think critically exposing inconsistencies in portfolio policy from a pillar of the investment industry would be seen as a positive thing. Clearly, it’s at least worth talking about.
So no, while Jack's recent revisions to his simple and elegant advice from earlier years are neither drastic nor particularly alarming in and of themselves, the fact that they come from Jack Bogle is disconcerting. I have to agree with Eric on this.

Take the bond side recommendations. It's not as if the Total Bond Market Index was appreciably different in 2007 than it is today. And it's not as if corporate bond funds didn't exist in 2007. Nonetheless, Jack argued relentlessly not only that the Total Bond Market Index was a fine bond fund to own, but that it was the only bond fund you would ever need to own! Therefore, it seems to me, Jack is revising his recommendations based on short term market conditions. How is that consistent with "Just stay the course?"

Is Bogle Befuddling? With all due respect, yes, sometimes he is.

--Peter
Peter: I've read Eric's articles and web page and had discussions with him. He is a fine advisor in my view, knowledgable and disciplined, behaviorly in some ways very much like classic Bogle, even if their ideas on portfolio design differ (different roads to Dublin, so to speak). And I agree that Bogle is so dominant a figure that anything he says matters more than if some other guy said it. So his words will be scrutinized. In a sense, that is a credit to what he has accomplished. I agree he was befuddling—perhaps just around the edges.

Note that Bogle also questioned Total Bond Market's composition in 2007, regarding mortgage backed securities (in fact, the same issues Larry has raised):

"The Total Bond Market Index Fund is fine, but I vaguely wonder about a bond fund that has 35% of its portfolio in non-bonds (i.e., GNMA securities, with their risk of being prepaid early, when interest rates tumble)."

I don't think any of these issues matter much from a returns perspective, nor are they likely to matter much over the long haul. That Bogle questions something—anything at anytime—always matters.
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Re: "Is Bogle Befuddling?"

Post by tadamsmar »

Burton Malkeil befuddled me. I adopted the life-cycle asset allocation schedule from a late 1990s edition of his classic "Random Walk Down Wall Street" back in 2000 and later I found that he was changing it in every (or almost every) new edition of the book.

Heck, if you are using a Vanguard Target Retirement fund as your way to "stay the course", guess what? Even those funds recently changed course by changing the asset allocation of the fixed income portion.
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Re: "Is Bogle Befuddling?"

Post by coachz »

I'm 70% total stock and 30% total bond from the run up. Normally I'm 60/40. With the comments about corporate bonds and being heavy gov bonds in the total bond index should I do something differently or just rebalance back to 60/40 total stock and total bond?


ASUGrad wrote:I read the interview, and I read these 'reviews' of the interview. You could say the reviews take things
of context. You could also say Bogle is quite experienced at finding the true question.

Bogle didn't just come out and say move 15% from stocks to bonds. He was asked a direct question about the market being so high after a 5 year bull market and how to protect those returns. I'll summarize Bogle's long answer. Don't market time, don't market time, don't get out of stocks, BUT if you want to trim your stocks take 15% off the table.

Then he is asked about where to put the 15%. I'll summarize his long answer, corporate bonds.

From the point of view of someone who has had this conversation with investors he is a genius. If an investor asks you about the market being too high and protecting their returns the real question is either....
1. "Should I get out now to get back in later"... market timing. His answer, NO.
2. "I'm scared of the market going down." This investor is either in too aggressive a portfolio for their goals, or lets emotions dictate investment decisions and they are scared, or both. Moving 15% from stocks into corporate bonds makes them feel better, and it will make a down market hurt less so they are likely closer to their actual risk tolerance. Its also only moving 15% from stocks to corporate bonds instead of moving 15% or even the entire portfolio from stocks to very safe assets. Their returns won't be greatly impacted if the market keeps going up, but they will feel better if the market goes down. No matter how much you drill in discipline investments are still very emotional for some people. They are better off in a portfolio they are comfortable with and can stick with during any market than a riskier portfolio that might scare them and cause them to sell at a bad time.


He also makes a very good argument that the index the Total Bond market index(VBTLX) tracks is too heavy in government bonds. I also noticed in terms of credit rating VBTLX doesn't show anything under a Baa credit rating. I know government bonds make up a big piece of the bond market, but having so much(65%) invested in one borrower doesn't seem that diversified. Yes US government bonds are safe from a credit standpoint, but it increases your risk to interest rates and not meeting your goals(low returns).
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Taylor Larimore
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Re: "Is Bogle Befuddling?"

Post by Taylor Larimore »

I'm 70% total stock and 30% total bond from the run up. Normally I'm 60/40. With the comments about corporate bonds and being heavy gov bonds in the total bond index should I do something differently or just rebalance back to 60/40 total stock and total bond?
coachz:

Mr. Bogle likes to say: "Don't do something; just stand there."

I think it applies in your situation.

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: "Is Bogle Befuddling?"

Post by coachz »

So just do my normal rebalancing. Shouldn't I be scared? Hehe
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Re: "Is Bogle Befuddling?"

Post by kelage »

I do not think John Bogle is "Befuddling". I find John Bogle's comments in these interviews of late to be the clearest advice I've heard from anyone. I think he is trying to be as clear and as honest as possible, even brutally honest. I think he is talking to people like myself who have no business in the 70 percent, trying to be an active, alpha seeking, slice and dice investor.

I think he is always trying to reach those in need of his message. We all know he's been a tireless advocate for giving the individual a fair shake to participate in the fruits of the economy. He's given this self-employed tradesman an opportunity for a good retirement.

Don't mean to be preaching to the choir. This forum is a wonderful reinforcement of his work. Personally, I like his answers in these interviews better than his books. Short and to the point. Stay the course.
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Re: "Is Bogle Befuddling?"

Post by pingo »

My thanks to John Rekenthaler (JohnR) for joining the discussion, as well. Welcome to the forum, sir!

I'll quote myself from the 1 April 2014 discussion called Bogle: Tilt To Corporates For More Yield which may apply to the current thread:
pingo wrote:I think Doc nailed one of the great keys to understanding statements such as Mr. Bogle's. I've heard Bogle state that he is a buy and hold investor, but that he doesn't consider himself a buy, hold and rebalance investor. On occasion, when markets or spreads hit extremes, he re-allocates to reflect his desire for risk (or lack thereof) and his desire for yield which is an extremely important part of the equation for him. That is, it has been for these few years that I've been paying attention to him.

That's one area (among many, I suppose) where it appears he differs from other fan favorites such as Bernstein and Swedroe, not that they are completely immune to adjusting for spreads. I believe that they want bonds for safety and even negative correlation with equities to benefit from what happens when one buys, holds and rebalances. I have always gotten the sense that Mr. Ferri is a little more flexible on such matters, or perhaps he simply has a different philosophy. It seems he is often somewhere between the two camps.

It is all reasonable in my view. We exercise control wherever we think we've found it.
Like petrico, my first direct exposure to John Bogle was The Little Book of Common Sense Investing. It is still my favorite book on investing. In it he makes no secret about how he estimates future returns and how that affects his expectation of asset returns and even affects his allocation decisions on occasion. It has always appeared to me that for Mr. Bogle staying the course, asset allocation and estimations of future returns interact with each other and each one is still about taking the long view and acting accordingly. Market trends, investment trends, exotic asset classes, the ups and downs of the dow on any given day or even during a given year… such is market noise; such is the short view, to which he frequently retorts: "Don't just do something, stand there!"

On the whole it makes sense to me, so I find myself befuddle-free.
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Re: "Is Bogle Befuddling?"

Post by nedsaid »

John Bogle is an independent thinker. His opinions are based on probably 60 years or so of market experience. He definitely has his bedrock investing principles but I believe he allows himself flexibility to make adjustments for market conditions and asset valuations. Most of us do the same whether we admit it or not. He "stays the course" but with adjustments and tweaks from time to time. Why is this so radical?
A fool and his money are good for business.
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Re: "Is Bogle Befuddling?"

Post by coachz »

That's why I was asking if it makes sense to buy the corporate bond index instead of rebalancing to total bond index since the comments seemed to indicate that. Is that what Bogle was saying ?
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Re: "Is Bogle Befuddling?"

Post by dkturner »

coachz wrote:That's why I was asking if it makes sense to buy the corporate bond index instead of rebalancing to total bond index since the comments seemed to indicate that. Is that what Bogle was saying ?
Mr. Bogle was addressing the unusually low yield of U.S. Government securities. Increasing portfolio yield by increasing corporate bond exposure was his recommendation. Those who hyperventilate about staying the course because markets know all should probably be ignored in this situation. Rebalancing is a completely different subject, although increasing exposure to corporate debt represents a partial rebalancing FROM debt to equity - just the opposite of what you are considering. If you were to sell half of your total bond position and replace it with corporate debt your portfolio would behave more like a 73/27 portfolio.
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Re: "Is Bogle Befuddling?"

Post by coachz »

If I were to retire today, what ratio would Mr. Bogle likely be recommending at age 55 for total stock and total bond index ? Where would corporate funds be in this?
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Re: "Is Bogle Befuddling?"

Post by Alex Frakt »

petrico wrote:
Roy wrote:Followup from the advisor, Eric D. Nelson:

http://servowealth.com/resources/articl ... stly-right
Thank you for this.

Eric Nelson beautifully articulates my perspective on some of Jack Bogle's more recent comments in the press:
Eric D. Nelson, CFA, wrote:In truth, none of these inconsistencies are all that troubling, it's when you step back and view all of them in light of Bogle's previously-held positions or in the context of the total-portfolio impact that I get worried. No one said consistency, or “staying the course” was easy - but when the steward of "just standing there" is doing just the opposite, efforts to remain disciplined and steadfast with one's portfolio can seem even more challenging than normal. Given the central role that the "behavioral gap" plays in the poor long-term returns of most investors, I would think critically exposing inconsistencies in portfolio policy from a pillar of the investment industry would be seen as a positive thing. Clearly, it’s at least worth talking about.
The first book I ever read by Jack Bogle was his 2007 Little Book of Common Sense Investing. In it, in page after page, chapter after admonishing chapter, Jack argued strenuously (and convincingly) that a two-fund portfolio was the only asset allocation one need ever bother with. That would be the Total (domestic) Stock Market Index fund combined with the Total Bond Market Index fund. Sure, he made some allowances at the end of the book for the limited inclusion of other assets, but he made it crystal clear that including other assets was not his preference. And all of that, it should go without saying, was in the context of "Just staying the course."

So no, while Jack's recent revisions to his simple and elegant advice from earlier years are neither drastic nor particularly alarming in and of themselves, the fact that they come from Jack Bogle is disconcerting. I have to agree with Eric on this.

Take the bond side recommendations. It's not as if the Total Bond Market Index was appreciably different in 2007 than it is today. And it's not as if corporate bond funds didn't exist in 2007. Nonetheless, Jack argued relentlessly not only that the Total Bond Market Index was a fine bond fund to own, but that it was the only bond fund you would ever need to own! Therefore, it seems to me, Jack is revising his recommendations based on short term market conditions. How is that consistent with "Just stay the course?"

Is Bogle Befuddling? With all due respect, yes, sometimes he is.

--Peter
People need to understand that the answer to the general question "How should everyone invest?" may differ in details from the answer to the specific question "How should I invest?" If you are tasked with writing a short guide to investing that will work for all, you are going to have to leave out some of the more esoteric possibilities. Especially if you (like Bogle) are well aware that the different varieties of performance chasing that people do to their portfolios trails only the failure to save in causing people to come up short of their retirement goals.

For those who are interested enough to read more deeply into Bogle's thoughts, you will find that he has always held out the possibility of shifts in allocations of up to 15% in response to extraordinary market conditions. For instance, from Common Sense on Mutual Funds:
If rational forecasts indicate that one asset class offers a considerably better investment opportunity than another, you might shift a modest percentage of your assets from the class judges less attractive to the class judged more attractive. This policy is referred to as tactical asset allocation. It is an opportunistic, transitory, aggressive policy that - if skill, insight, and luck are with you - may result in marginally better long-term returns than either a fixed-ratio approach or benign neglect.

It's grand to possess skill and insight, though all of us tend to overrate our abilities in both areas. But luck, too, plays a role. Many investors are right, but at the wrong time. It does no good to be too early or too late. Tactical asset allocation, if the strategy is to be used at all, should therefore be used only at the margin. That is, if your optimal strategic allocation is 65 percent stocks, limit any change to no more than 15 percentage points (50 to 80 percent stocks), and implement the change gradually. The prospect of having the skill, insight, and luck to eliminate your stock position overnight and restore it "when the time is right" is, in my opinion, patently absurd. Cautious tactical asset allocation may have a lure for the bold. Full-blown tactical allocation lures only the fool.

What might dictate moderate shifts in tactical asset allocation? One example: concern that stocks are substantially overvalued relative to bonds. Then, investors with conviction, courage, and discipline might benefit from a bow toward caution. I say "bow", not "capitulation." In an inevitably uncertain world, the reduction should not exceed 15 percentage points in your equity position. If you have 65 percent of your portfolio in equities, retain at least 50 percent; if 50 percent, at least 35 percent, and so on. A little caution may represent simple prudence, and, if you are relatively risk-adverse, may enable you to sleep better, a blessing that is hardly trivial. One doesn't have to have investment experience to to recognize the wisdom in this saying, from a remarkably parallel field: "There are old pilots and there are bold pilots, but there are no old bold pilots.
On to bonds. Total Bond Index is not the same thing it was when it was introduced or even what it was in 2006. Vast foreign government and Federal Reserve holdings of Treasuries mean they are overrepresented in the index compared to what non-indexed individual investors hold. Since Treasuries are also at or near historical low yields, holding more of them is not doing Total Bond Index returns any favors.

Jack discussed this in a New York Times article last year:
Many bond funds mirror the Barclays U.S. Aggregate Bond index.... Around 75 percent of the index tracks government securities or other types of government-backed bonds. Less than 25 percent is in corporate bonds.

“At the end of the day,” Ms. Jones said, “these funds may own a lot of different bonds, but you don’t get much issuer diversification, and you’re getting that at very low yields.”

Because of this, says John C. Bogle, founder of the Vanguard Group, total bond indexes “are deeply flawed — and that’s coming from an indexer.” He adds that individual investors should keep only about one-third of their bond stake in Treasuries and government debt, reflecting the market’s mix based on private investors such as pension and mutual funds.

Investors might consider keeping half their money in a total bond market fund, he said, while shifting the other half to an intermediate corporate bond fund. By doing so, investors would end up with an overall strategy that’s about two-thirds in corporate debt and one-third in government securities.
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Re: "Is Bogle Befuddling?"

Post by Taylor Larimore »

Alex:

None of us can capture the depth of Jack's knowledge and wisdom--but your post is the best I have read explaining his thoughts on "tactical asset-allocation" and "Total Bond Market".

Thank you and best wishes.
Taylor
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Re: "Is Bogle Befuddling?"

Post by schuyler74 »

Right! A beautiful summary all in a single post. Should be #requiredReading. Or maybe in the wiki somewhere... I remember reading all those things separately but it helps seeing it all at once to get Bogle's complete view on the topic.

I think the final answer is: "No, Bogle is not befuddling."
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Re: "Is Bogle Befuddling?"

Post by tibbitts »

Rodc wrote:
As for Bogle's most-radical idea, that investors might wish to rotate out of stocks and into bonds, it's not radical when one considers what Nelson freely acknowledges: that Bogle isn't much for rebalancing. A portfolio that consisted of 50% stocks, 50% bonds in spring 2009 that has been permitted to run with the market will now be 65% stocks, 35% bonds. Thus, shifting 15% of assets from stocks to bonds would put that portfolio right back where it started. That's not market-timing; it's a giant rebalancing. Irony, thy name is not Bogle.
Seems a bit of a stretch to assume Bogle is talking to folks who happened to have just their right allocation in the bottom of 2009 and then never rebalanced for five years. That would be a very small set of people.
I don't think that's much of a stretch. Outside of this forum, rebalancing isn't that common of a notion. And probably lots of investors realized that their risk tolerance was some percentage lower than they'd thought before equities dropped 50%. Combine that with the age-in-bonds thing, and the investors now being older: considering those factors, they might have been at close to their "correct" allocation for today back at the depths of the downturn.
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"Is Bogle Befuddling?"

Post by shawcroft »

This is a great discussion.
I do have a question and that comes from my a bit of my own befuddlement.

I have considered - but not - acted on adding a corporate bond fund, mostly because I have an established asset allocation in the 65% equity-35% fixed income range. Our VG Total Bond Fund holdings are about 50% of our fixed income and are in an IRA. The other half of the fixed income include a few CD's and the VG short-term and limited term muni bond funds. I have thought of corporate bonds as having some "equity-like" qualities to them. Sort of rise and fall perhaps a bit more owing to their tie to corporate fortunes and equity market behavior and a few might be subject to bankruptcy risk. So, I have not acted on the possibility but this discussion does rekindle my thoughts on the topic as it would diversify our fixed income holdings

The question to my esteemed colleagues: How do you view corporate bond funds and where do you place them in your asset allocation? Are they in a sort of middle ground between your "pure" equity assets and your "pure" fixed income assets? And if they are in a middle ground, would you view them as behaving mostly as fixed income with a little bit of equity?

Thanks for any thoughts to clear up my befuddlement!
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Re: "Is Bogle Befuddling?"

Post by Alex Frakt »

shawcroft wrote:The question to my esteemed colleagues: How do you view corporate bond funds and where do you place them in your asset allocation? Are they in a sort of middle ground between your "pure" equity assets and your "pure" fixed income assets? And if they are in a middle ground, would you view them as behaving mostly as fixed income with a little bit of equity?
I've held 100% Vanguard Intermediate-Term Corps (now Vanguard Intermediate-Term Investment-Grade) since I started bond investing. Well, except for my house downpayment fund, which was 100% Limited Term Tax Exempt and a short stint in High Yield in the aftermath of the '08 crash, see http://www.bogleheads.org/forum/viewtop ... 82#p579882 .

The reason is that I'm still in the accumulation stage and so I don't mind a little extra volatility in my bond holdings in exchange for higher yield. In theory, I could just hold a bit less of a more conservative bond fund. But the obvious candidates, Total Bond and any of the taxable government funds have never impressed me. I found Larry Swedroe and Bogle's arguments for avoiding the agency bonds in the former compelling. For short and intermediate treasuries, I've always thought that since there is a great deal of demand for these regardless of yield, prices must be higher than they would be if people bought them just because of their function in portfolio construction theory :-) BTW, I feel the same normally applies to TIPS. If people are willing to pay a premium for inflation protection, that demand is going to be reflected in the price of TIPS.

Note that my bond holdings may change in retirement as bonds take on a different role in my portfolio.

FWIW, at one of the Bogleheads conferences, I asked the panel about using Intermediate Corps as a sole bond holdings and they all agreed it was in the realm of the reasonable.
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Re: "Is Bogle Befuddling?"

Post by Munir »

Alex Frakt wrote: Note that my bond holdings may change in retirement as bonds take on a different role in my portfolio.

FWIW, at one of the Bogleheads conferences, I asked the panel about using Intermediate Corps as a sole bond holdings and they all agreed it was in the realm of the reasonable.
Alex,

How might your bond holdings change in retirement and why?
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Re: "Is Bogle Befuddling?"

Post by iceport »

Alex Frakt wrote:
petrico wrote:Take the bond side recommendations. It's not as if the Total Bond Market Index was appreciably different in 2007 than it is today. And it's not as if corporate bond funds didn't exist in 2007. Nonetheless, Jack argued relentlessly not only that the Total Bond Market Index was a fine bond fund to own, but that it was the only bond fund you would ever need to own! Therefore, it seems to me, Jack is revising his recommendations based on short term market conditions. How is that consistent with "Just stay the course?"
On to bonds. Total Bond Index is not the same thing it was when it was introduced or even what it was in 2006. Vast foreign government and Federal Reserve holdings of Treasuries mean they are overrepresented in the index compared to what non-indexed individual investors hold. Since Treasuries are also at or near historical low yields, holding more of them is not doing Total Bond Index returns any favors.

Jack discussed this in a New York Times article last year:
Alex,

Do you have any documentation of the changes in the Total Bond Market Index fund between 2006 or 2007 when The Little Book of Common Sense Investing was written and now? Just how different is it? I looked for previous annual reports for the fund, but was unsuccessful in finding any. It would surprise me to learn of any significant changes in the composition of the fund since Jack recommended it so unreservedly.

I read Jack's comments in that NYT article when it came out, and I remember questioning then, as I am now, just how the fund has changed. My impression is that the short term market conditions have changed rather than the fund. But it would be very interesting to see documentation of major shifts in the fund's portfolio.

Thanks,
--Peter
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
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Re: "Is Bogle Befuddling?"

Post by Bustoff »

Alex Frakt wrote: I've held 100% Vanguard Intermediate-Term Corps (now Vanguard Intermediate-Term Investment-Grade) since I started bond investing.
The reason is that I'm still in the accumulation stage and so I don't mind a little extra volatility in my bond holdings in exchange for higher yield.
Note that my bond holdings may change in retirement as bonds take on a different role in my portfolio.
Munir wrote: How might your bond holdings change in retirement and why?
I had the same question. I recalled Larry Swedroe remarking about this in his bond book. On p. 206 Mr. Swedroe discusses Fixed Income Investing in Retirement and suggests considering an opposite approach; that accumulators should consider using bonds to reduce the risk of an equity portfolio, whereas withdrawal stage investors with the need for cash flow might seek higher yields within acceptable levels of risk.
Alex Frakt wrote: For short and intermediate treasuries, I've always thought that since there is a great deal of demand for these regardless of yield, prices must be higher than they would be if people bought them just because of their function in portfolio construction theory.
Alex- do you mean they should be avoided due to their demand?

Thanks
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Re: "Is Bogle Befuddling?"

Post by tadamsmar »

petrico wrote:
Alex Frakt wrote:
petrico wrote:Take the bond side recommendations. It's not as if the Total Bond Market Index was appreciably different in 2007 than it is today. And it's not as if corporate bond funds didn't exist in 2007. Nonetheless, Jack argued relentlessly not only that the Total Bond Market Index was a fine bond fund to own, but that it was the only bond fund you would ever need to own! Therefore, it seems to me, Jack is revising his recommendations based on short term market conditions. How is that consistent with "Just stay the course?"
On to bonds. Total Bond Index is not the same thing it was when it was introduced or even what it was in 2006. Vast foreign government and Federal Reserve holdings of Treasuries mean they are overrepresented in the index compared to what non-indexed individual investors hold. Since Treasuries are also at or near historical low yields, holding more of them is not doing Total Bond Index returns any favors.

Jack discussed this in a New York Times article last year:
Alex,

Do you have any documentation of the changes in the Total Bond Market Index fund between 2006 or 2007 when The Little Book of Common Sense Investing was written and now? Just how different is it? I looked for previous annual reports for the fund, but was unsuccessful in finding any. It would surprise me to learn of any significant changes in the composition of the fund since Jack recommended it so unreservedly.

I read Jack's comments in that NYT article when it came out, and I remember questioning then, as I am now, just how the fund has changed. My impression is that the short term market conditions have changed rather than the fund. But it would be very interesting to see documentation of major shifts in the fund's portfolio.

Thanks,
--Peter
A list of changes in the Total Bond Index benchmark are here (in the box on the left):

http://www.bogleheads.org/wiki/Barclays ... Bond_Index

Also, Vanguard changed benchmarks after 2009:
**Barclays U.S. Aggregate Bond Index through December 31, 2009; Barclays U.S. Aggregate Float Adjusted Index thereafter.
https://personal.vanguard.com/us/funds/ ... IntExt=INT

Here's info on the new benchmark:

http://www.reuters.com/article/2009/07/ ... MW20090730
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Re: "Is Bogle Befuddling?"

Post by Munir »

I am bumping this conversation up because three of the last four posts have questions addressed to Alex Frakt which remain unanswered. Maybe he will notice them now. Calling Alex :happy !
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Re: "Is Bogle Befuddling?"

Post by coachz »

Bump Alex!
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Re: "Is Bogle Befuddling?"

Post by Archie Sinclair »

Befuddling: making someone unable to think clearly
Befuddled: the state of being unable to think clearly

Example: I am befuddled by this article's befuddling word choice.
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Re: "Is Bogle Befuddling?"

Post by Alex Frakt »

Munir wrote:
Alex Frakt wrote: Note that my bond holdings may change in retirement as bonds take on a different role in my portfolio.

FWIW, at one of the Bogleheads conferences, I asked the panel about using Intermediate Corps as a sole bond holdings and they all agreed it was in the realm of the reasonable.
Alex,

How might your bond holdings change in retirement and why?
IMO, bond investing in retirement is mainly about meeting your income needs with as much safety as possible. If I can meet my income needs with TIPS (or the guaranteed portion of TIAA Traditional, I've kept my TIAA account open so I'll have this option), then that's mostly what I will hold. If I need a higher yield, then I'll keep more corporates. Perhaps I'll start annuitizing some of my holdings. Or move somewhere cheaper. Because our family income is highly variable, there's no point in pretending that I can plan it all out ahead. I'll have to see what the options are when we get there.
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Re: "Is Bogle Befuddling?"

Post by Alex Frakt »

petrico wrote:Do you have any documentation of the changes in the Total Bond Market Index fund between 2006 or 2007 when The Little Book of Common Sense Investing was written and now? Just how different is it? I looked for previous annual reports for the fund, but was unsuccessful in finding any. It would surprise me to learn of any significant changes in the composition of the fund since Jack recommended it so unreservedly.
You can get the annual reports through the SEC. Looking at the Statement of Net Assets 2005 and 2013 year-end annual reports, we find:

Treasury Bonds and Notes
2005 - 25.2%
2013 - 39.2%

Agency Bonds and Notes (US agencies that provide mortgage financing to banks)
2005 - 10.4%
2013 - 3.9%

Mortgage Backed Securities
2005 - 34.6%
2013 - 23.3%

Corporate
2005 - 25.6%
2013 - 24.0 %

Sovereign Bonds (foreign government bonds denominated in US $)
2005 - 3.2%
2013 - 5.4%

So the shifts are the increase in Treasury holdings and the decrease in mortgage-related holdings. I'll leave it to you to decide if a 14% overall increase in the holding of the lowest-yielding sector of the portfolio is significant :-) Maybe if I said it was a 56% increase in Treasury holdings?
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Re: "Is Bogle Befuddling?"

Post by Alex Frakt »

Bustoff wrote:
Alex Frakt wrote: For short and intermediate treasuries, I've always thought that since there is a great deal of demand for these regardless of yield, prices must be higher than they would be if people bought them just because of their function in portfolio construction theory.
Alex- do you mean they should be avoided due to their demand?
No, I think you should look at the difference in yield between bond classes and decide if the premium you often (not always) have to pay for inflation protection (TIPS), liquidity (Treasuries, especially short term) or lower taxes (munis) is worth it. For example, right now the liquidity premium for ST Treasuries is so high that you can get the same yield (pre-tax !) from ST Munis. This should be an easy call for the individual investor.
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