Vanguard - Four Fund Portfolio
- abuss368
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Vanguard - Four Fund Portfolio
Bogleheads,
Vanguard now recommends a Four Fund Portfolio that is a total market approach:
* Total Stock Market (U.S.) Index
* Total International Stock Market Index
* Total Bond (U.S.) Market Index
* Total International Bond Market Index
This portfolio appears to be low cost, very diversified, no active funds, to manager risks, no style drift, easy to understand, and very simple.
Thoughts?
Vanguard now recommends a Four Fund Portfolio that is a total market approach:
* Total Stock Market (U.S.) Index
* Total International Stock Market Index
* Total Bond (U.S.) Market Index
* Total International Bond Market Index
This portfolio appears to be low cost, very diversified, no active funds, to manager risks, no style drift, easy to understand, and very simple.
Thoughts?
Last edited by abuss368 on Tue Jun 09, 2015 9:52 am, edited 1 time in total.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Vanguard - Total Markets Four Fund Portfolio
This is how they've done things for about two years now, right? Since they opened the international bond fund?
I think you can understand this from the perspective of the three-fund portfolio (US stock, ex-US stock, US bonds). There is that big thread on that. Then search for all the opinions about Vanguard's international bond fund, which is USD-hedged. Then together from those two pieces you can get an opinion of their four-fund allocation.
Three fund:
viewtopic.php?f=10&t=88005&newpost=2516631
International bonds:
viewtopic.php?t=166712
viewtopic.php?t=142019
viewtopic.php?t=139939
I think you can understand this from the perspective of the three-fund portfolio (US stock, ex-US stock, US bonds). There is that big thread on that. Then search for all the opinions about Vanguard's international bond fund, which is USD-hedged. Then together from those two pieces you can get an opinion of their four-fund allocation.
Three fund:
viewtopic.php?f=10&t=88005&newpost=2516631
International bonds:
viewtopic.php?t=166712
viewtopic.php?t=142019
viewtopic.php?t=139939
Re: Vanguard - Total Markets Four Fund Portfolio
You could do much worse.
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Re: Vanguard - Total Markets Four Fund Portfolio
I personally don't like the significant use of derivatives, in the international bond market fund, to hedge currency. Of course, I wouldn't use currency-exposed international bonds, either.
So, I'm left with Taylor's awesome Three-Fund Portfolio (adapted for a Canadian investor).
So, I'm left with Taylor's awesome Three-Fund Portfolio (adapted for a Canadian investor).
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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Re: Vanguard - Total Markets Four Fund Portfolio
I sure hope the combination works.
The whole family is betting that way in one way or another - target date funds or basically a four fund approach. If it goes belly up, my name will be mud (or Mudd - don't know which reference is correct) for several generations because I put them into those investments.
The whole family is betting that way in one way or another - target date funds or basically a four fund approach. If it goes belly up, my name will be mud (or Mudd - don't know which reference is correct) for several generations because I put them into those investments.
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
Re: Vanguard - Total Markets Four Fund Portfolio
Throw some REITs in the IRA and add munis in taxable and you have a nice 6 fund portfolio.
Re: Vanguard - Total Markets Four Fund Portfolio
It's fine, assuming your AA is appropriate.
Re: Vanguard - Total Markets Four Fund Portfolio
Can't argue with the theory too much. Like the theory that young accumulators should have ultra high equity allocations-that is reflected in late dated Target Date Funds. Both theories add a bit more risk than I would be comfortable with or recommend. I would be a bit wary of VG suggested allocations - can the people you talk to that suggest allocations vary much from the firm's stated position on international investing?
Not against international investing - just don't think global allocation is necessary especially for US retirees. It would be an interesting poll to see how many 3 fund portfolio investors have or are considering moving to 4 funds and global allocations as suggested by the VG experts- and if not why not.
Not against international investing - just don't think global allocation is necessary especially for US retirees. It would be an interesting poll to see how many 3 fund portfolio investors have or are considering moving to 4 funds and global allocations as suggested by the VG experts- and if not why not.
Re: Vanguard - Total Markets Four Fund Portfolio
I would say overall it is pretty good. A minor quibble I would say is that the international bond fund is not easy to understand. I could not easily explain how the currency hedging process works to the average person.
Re: Vanguard - Total Markets Four Fund Portfolio
I think the Four Fund Portfolio should be the core of any investor's holdings, subject to the following:
- rather than an individual investor holding/rebalancing four independent funds, the four LifeStrategy funds provide an elegant, balanced, low-cost, 'set it and forget it' way to achieve the same objective, once one has decided on their comfort along the conservative-aggressive spectrum
- as I've stated in other threads, I'm a believer in international bonds and think having exposure to the world's single largest asset class is sensible; again, the LifeStrategy funds take a measured approach here (for those that think explaining currency hedging to their friends is difficult, it is equally challenging to explain the simple concepts of 'index funds', 'bond duration', etc...I'd just get over it and move on)
- there is deep empirical evidence supporting the value of factors such as 'value' and 'size', and increasingly 'momentum' and others, all of which are (for the most part) ignored by a 3 or 4 fund portfolio - each investor needs to come to his/her own determination whether too much money is being left on the table in search of simplification (my portfolio may be unnecessarily complex, but I probably have half of my funds in the '4 funds' and the rest diversified through small, value, emerging and REIT exposures (oh, yes, and bullion...but that's for another thread!)
- rather than an individual investor holding/rebalancing four independent funds, the four LifeStrategy funds provide an elegant, balanced, low-cost, 'set it and forget it' way to achieve the same objective, once one has decided on their comfort along the conservative-aggressive spectrum
- as I've stated in other threads, I'm a believer in international bonds and think having exposure to the world's single largest asset class is sensible; again, the LifeStrategy funds take a measured approach here (for those that think explaining currency hedging to their friends is difficult, it is equally challenging to explain the simple concepts of 'index funds', 'bond duration', etc...I'd just get over it and move on)
- there is deep empirical evidence supporting the value of factors such as 'value' and 'size', and increasingly 'momentum' and others, all of which are (for the most part) ignored by a 3 or 4 fund portfolio - each investor needs to come to his/her own determination whether too much money is being left on the table in search of simplification (my portfolio may be unnecessarily complex, but I probably have half of my funds in the '4 funds' and the rest diversified through small, value, emerging and REIT exposures (oh, yes, and bullion...but that's for another thread!)
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Re: Vanguard - Total Markets Four Fund Portfolio
Hi Dandy,Dandy wrote:It would be an interesting poll to see how many 3 fund portfolio investors have or are considering moving to 4 funds and global allocations as suggested by the VG experts- and if not why not.
That is a good idea. You should consider starting a new thread and a poll to gauge interest on the forum. Vanguard is putting out a lot of articles and information on their website regarding the Four Fund Portfolio.
Best.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Vanguard - Total Markets Four Fund Portfolio
I like somewhat less in International, adding REITs in tax deferred and Muni's in taxable. Like one said a good 6 fund approach. Some say the REIT is
unnecessary and that Muni's only make sense after a certain income level but I don't care, see you in 40-50 years!
unnecessary and that Muni's only make sense after a certain income level but I don't care, see you in 40-50 years!
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Re: Vanguard - Total Markets Four Fund Portfolio
I have been thinking about the 6 funds as well: Total US Stock, Total International Stock, REITs, Total US Bond, Total International Bond, and Tax Exempt Bonds.
Does anyone place Total International Bond in Taxable, Tax Advantage, or both accounts?
What about TIPS?
Does anyone place Total International Bond in Taxable, Tax Advantage, or both accounts?
What about TIPS?
John C. Bogle: “Simplicity is the master key to financial success."
Re: Vanguard - Total Markets Four Fund Portfolio
I have International in both. Heard some grumblings about one or the other didn't seem it would make all that much of a difference long term.abuss368 wrote:I have been thinking about the 6 funds as well: Total US Stock, Total International Stock, REITs, Total US Bond, Total International Bond, and Tax Exempt Bonds.
Does anyone place Total International Bond in Taxable, Tax Advantage, or both accounts?
What about TIPS?
I have some TIPS type funds as a percentage of my "Emergency Fund", around 16%, which has been criticized by many as being too large (around
18 months, I have seen others with 2-3 years in EF, others 3-6 months). TIPS don't look very good short term, do your research to see if you would
be able to tolerate that long term.
Re: Vanguard - Total Markets Four Fund Portfolio
At this moment, I think hedged international bonds add no value to a portfolio mix compared to other options, whether TBM, shorter duration bonds, or even CDs.abuss368 wrote:Bogleheads,
* Total International Bond Market Index
Total International Bond Market Index has low yields, a higher ER than TBM, and no evidence that it is a better safe haven than US bonds for US-based investors.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Re: Vanguard - Total Markets Four Fund Portfolio
If they weren't part of the international bond fund, would you consider buying Japanese government debt or German bunds?209south wrote: - as I've stated in other threads, I'm a believer in international bonds and think having exposure to the world's single largest asset class is sensible;
As of this writing:
10 Year German bund yield: 0.943%
10 Year Japanese government bond yield: 0.43%
Because you're going to own a lot of that in the international bond fund. And pay an ER=.23 for the privilege.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Re: Vanguard - Total Markets Four Fund Portfolio
watchnerd, I believe I'm paying 19 bps not 23 but either way, I'm happy paying that price for that exposure, for four reasons:
- I believe in being maximally diversified and the non-US fixed income market is the world's largest capital market...seems silly to ignore now that low-cost diversified options are offered via Vanguard and DFA
- I believe many US investors overstate the credit strength of the USA...there are at least a dozen AAA sovereigns (Germany, Canada, UK, Hong Kong, etc...alas not Japan), vs. USA's AA+...not making a political statement, but with a 30/70 portfolio, I'm not sure I want all of my 'safe' money managed by the folks in Washington or Trenton!
- Regarding pricing / valuation, while I am sympathetic to the argument that 'current yields are the best indicator of future returns', I am also a staunch EMH follower and, in this instance, have decided I'm not smart enough to time the markets and over-weight the USA because of current yields
- The fact that BNDX has outperformed BND by ~550bps since launch almost two years ago does prove to me that there is a diversification free lunch in the fixed income arena (note I established my BNDX position at inception and have not changed allocation other than to rebalance, from profitable BNDX into unprofitable BND)
To each his own, but I happily have 30% of my bond exposure in international bonds.
- I believe in being maximally diversified and the non-US fixed income market is the world's largest capital market...seems silly to ignore now that low-cost diversified options are offered via Vanguard and DFA
- I believe many US investors overstate the credit strength of the USA...there are at least a dozen AAA sovereigns (Germany, Canada, UK, Hong Kong, etc...alas not Japan), vs. USA's AA+...not making a political statement, but with a 30/70 portfolio, I'm not sure I want all of my 'safe' money managed by the folks in Washington or Trenton!
- Regarding pricing / valuation, while I am sympathetic to the argument that 'current yields are the best indicator of future returns', I am also a staunch EMH follower and, in this instance, have decided I'm not smart enough to time the markets and over-weight the USA because of current yields
- The fact that BNDX has outperformed BND by ~550bps since launch almost two years ago does prove to me that there is a diversification free lunch in the fixed income arena (note I established my BNDX position at inception and have not changed allocation other than to rebalance, from profitable BNDX into unprofitable BND)
To each his own, but I happily have 30% of my bond exposure in international bonds.
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Re: Vanguard - Total Markets Four Fund Portfolio
Vanguard's all in one funds: Target and Life Strategy are now including the Four Fund Portfolio. This single fund is very diversified and very low cost. Your post makes a lot of sense.209south wrote:watchnerd, I believe I'm paying 19 bps not 23 but either way, I'm happy paying that price for that exposure, for four reasons:
- I believe in being maximally diversified and the non-US fixed income market is the world's largest capital market...seems silly to ignore now that low-cost diversified options are offered via Vanguard and DFA
- I believe many US investors overstate the credit strength of the USA...there are at least a dozen AAA sovereigns (Germany, Canada, UK, Hong Kong, etc...alas not Japan), vs. USA's AA+...not making a political statement, but with a 30/70 portfolio, I'm not sure I want all of my 'safe' money managed by the folks in Washington or Trenton!
- Regarding pricing / valuation, while I am sympathetic to the argument that 'current yields are the best indicator of future returns', I am also a staunch EMH follower and, in this instance, have decided I'm not smart enough to time the markets and over-weight the USA because of current yields
- The fact that BNDX has outperformed BND by ~550bps since launch almost two years ago does prove to me that there is a diversification free lunch in the fixed income arena (note I established my BNDX position at inception and have not changed allocation other than to rebalance, from profitable BNDX into unprofitable BND)
To each his own, but I happily have 30% of my bond exposure in international bonds.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Vanguard - Total Markets Four Fund Portfolio
Has the expense ratio of the Total International Bond Index fund declined since inception. I wonder if Vanguard will continue to lower the fee as the fund size increases.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Vanguard - Total Markets Four Fund Portfolio
Do you think EMH applies when the ECB and BOJ are buying trillions of dollars worth of euro and yen Japanese debt via their massive QE programs?209south wrote: - Regarding pricing / valuation, while I am sympathetic to the argument that 'current yields are the best indicator of future returns', I am also a staunch EMH follower and, in this instance, have decided I'm not smart enough to time the markets and over-weight the USA because of current yields
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Re: Vanguard - Total Markets Four Fund Portfolio
If you're worried about credit or default risk of US or municipals, why not CDs? They yield more and are insured.abuss368 wrote:[
- I believe many US investors overstate the credit strength of the USA...there are at least a dozen AAA sovereigns (Germany, Canada, UK, Hong Kong, etc...alas not Japan), vs. USA's AA+...not making a political statement, but with a 30/70 portfolio, I'm not sure I want all of my 'safe' money managed by the folks in Washington or Trenton!
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Re: Vanguard - Four Fund Portfolio
Since abuss368 is now trolling the QSPIX thread I thought I would troll here...with actual performance and facts not speculation and FUD. If you are thinking LifeStrategy or adding a few more funds to it why not just go with the esteemed Robert T.'s portfolio? 7 funds I think. Is it that you like worse performance overall and worse performance in down markets? Thanks Vanguard!
http://www.bogleheads.org/forum/viewtop ... 1#p2502131
Out of interest I just checked my portfolio performance since inception (at start of 2003) against the Vanguard lifestrategy growth funds. I have a 75:25 stock:bond portfolio with global small cap and value tilt. A combined 75:25 Vanguard Lifestrategy Growth:Moderate Growth mix provides a 75% stock:25% bond comparison.
Over last 12 years: Annualized return (%)
Lifestrategy fund combination = 8.3% (2008 return = -32.4%)
Own portfolio = 10.3% (2008 return = -28.7)
The 2008 downside would have been matched with a 35% bond allocation among the Lifestrategy fund combination for an annualized return over the last 12 years of 7.8%. In addition, using the lifestrategy funds would likely have been less tax efficient, as would need to hold some bonds in taxable account.
http://www.bogleheads.org/forum/viewtop ... 1#p2502131
Out of interest I just checked my portfolio performance since inception (at start of 2003) against the Vanguard lifestrategy growth funds. I have a 75:25 stock:bond portfolio with global small cap and value tilt. A combined 75:25 Vanguard Lifestrategy Growth:Moderate Growth mix provides a 75% stock:25% bond comparison.
Over last 12 years: Annualized return (%)
Lifestrategy fund combination = 8.3% (2008 return = -32.4%)
Own portfolio = 10.3% (2008 return = -28.7)
The 2008 downside would have been matched with a 35% bond allocation among the Lifestrategy fund combination for an annualized return over the last 12 years of 7.8%. In addition, using the lifestrategy funds would likely have been less tax efficient, as would need to hold some bonds in taxable account.
A man is rich in proportion to the number of things he can afford to let alone.
Re: Vanguard - Total Markets Four Fund Portfolio
Do you really think 2 years of data is sufficient to "prove" this?209south wrote: - The fact that BNDX has outperformed BND by ~550bps since launch almost two years ago does prove to me that there is a diversification free lunch in the fixed income arena (note I established my BNDX position at inception and have not changed allocation other than to rebalance, from profitable BNDX into unprofitable BND)
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Vanguard - Total Markets Four Fund Portfolio
Hi watchnerd,watchnerd wrote:If you're worried about credit or default risk of US or municipals, why not CDs? They yield more and are insured.abuss368 wrote:[
- I believe many US investors overstate the credit strength of the USA...there are at least a dozen AAA sovereigns (Germany, Canada, UK, Hong Kong, etc...alas not Japan), vs. USA's AA+...not making a political statement, but with a 30/70 portfolio, I'm not sure I want all of my 'safe' money managed by the folks in Washington or Trenton!
I believe you may have quoted the wrong Boglehead from the message above.
Best.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Vanguard - Four Fund Portfolio
watchnerd (first of all how do you 'copy/paste' someone's prior comment into a post so you can comment on it? I need to learn that!)
That's a great question re. central bank buying of securities, and frankly way over my head - another reason I like being as diversified as possible. I just have to assume that third party institutional buyers are willingly participating in these markets and the pricing ultimately reflects the broader market view - if I'm wrong I acknowledge I would have no basis on which to effect a trading rule, so I just have to assume I'm right! A bigger concern in my view would be to follow the typical boglehead advice and have 100% of one's fixed income invested in essentially one credit...the US government...I feel better having my 'central bank exposure' diversified
I do hold a decent CD portfolio but over half of my fixed income is in taxable and thus in several of Vanguard's muni funds...they have performed well but I do worry about having such large exposure...let's face it many of these state/local credits are stretched...again, I can only operate under the assumption that the broader capital markets are pricing that risk as well as can be hoped.
That's a great question re. central bank buying of securities, and frankly way over my head - another reason I like being as diversified as possible. I just have to assume that third party institutional buyers are willingly participating in these markets and the pricing ultimately reflects the broader market view - if I'm wrong I acknowledge I would have no basis on which to effect a trading rule, so I just have to assume I'm right! A bigger concern in my view would be to follow the typical boglehead advice and have 100% of one's fixed income invested in essentially one credit...the US government...I feel better having my 'central bank exposure' diversified
I do hold a decent CD portfolio but over half of my fixed income is in taxable and thus in several of Vanguard's muni funds...they have performed well but I do worry about having such large exposure...let's face it many of these state/local credits are stretched...again, I can only operate under the assumption that the broader capital markets are pricing that risk as well as can be hoped.
Re: Vanguard - Four Fund Portfolio
watchnerd, agreed 2 years is a very short time, but I wish I knew how to post a graph here...pull up BND vs BNDX since inception and what you see is they've performed 'differently' - I'm NOT saying BNDX is better, just that the two have not moved in lockstep and rebalancing opportunities exist if you hold both - to me that's a free lunch, albeit a modest one
Re: Vanguard - Total Markets Four Fund Portfolio
You're right, darn nested quotes. My apologies.abuss368 wrote:Hi watchnerd,watchnerd wrote:If you're worried about credit or default risk of US or municipals, why not CDs? They yield more and are insured.abuss368 wrote:[
- I believe many US investors overstate the credit strength of the USA...there are at least a dozen AAA sovereigns (Germany, Canada, UK, Hong Kong, etc...alas not Japan), vs. USA's AA+...not making a political statement, but with a 30/70 portfolio, I'm not sure I want all of my 'safe' money managed by the folks in Washington or Trenton!
I believe you may have quoted the wrong Boglehead from the message above.
Best.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Re: Vanguard - Four Fund Portfolio
Third party institutional buyers and other private parties are absolutely dwarfed by the volume of money the ECB and BOJ are putting out (just as they were when the Fed did its QE move). The central banks are massively steering the price....as it is their policy to do so under a QE program. And they have infinite resources (i.e. they can print money) to do so.209south wrote: That's a great question re. central bank buying of securities, and frankly way over my head - another reason I like being as diversified as possible. I just have to assume that third party institutional buyers are willingly participating in these markets and the pricing ultimately reflects the broader market view - if I'm wrong I acknowledge I would have no basis on which to effect a trading rule, so I just have to assume I'm right!
The BOJ, especially, is trying to create inflation. The BOJ has no interest in doing what is good for bond holders (it's trying to do what it thinks is good for the Japanese economy). Is that a scenario you want to buy into?
Are you aware that the yield on the German bund turned negative a few weeks ago (i.e. the bonds were guaranteed to be worth less in the future than the present)? That wouldn't happen under market conditions.
In other words, you're not seeing a market price. You're seeing policy-driven prices for >50% of the holdings of International Bond.
Well, if you want to diversify your central bank exposure (is this diversification useful? or just diversification for diversification's sake?), why not buy EM bonds, too?209south wrote: A bigger concern in my view would be to follow the typical boglehead advice and have 100% of one's fixed income invested in essentially one credit...the US government...I feel better having my 'central bank exposure' diversified
Also, you do realize that the Japanese debt is 28% of International Bond, right (also Japanese debt to GDP ratio is amongst the highest in the world amongst developed countries)? Add in the euro-denominated debt and you're >50% in just 2 central banks (ECB and BOJ) -- that's not super-diversified.
Lastly, total bond market index isn't 100% US government (it's 63%). But if you want to diversify more, why not just slice and dice by adding corporates?
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Re: Vanguard - Four Fund Portfolio
I could pick all sorts of bond assets that didn't move in a lockstep pattern over the last 2 years: BSV (short term debt) vs BND. VWOB (emerging market debt) vs BNDX. VTIP (Short term TIPS) vs BNDX or BND. The list goes on and on....209south wrote:watchnerd, agreed 2 years is a very short time, but I wish I knew how to post a graph here...pull up BND vs BNDX since inception and what you see is they've performed 'differently' - I'm NOT saying BNDX is better, just that the two have not moved in lockstep and rebalancing opportunities exist if you hold both - to me that's a free lunch, albeit a modest one
Purposeful diversification isn't just about having a random basket of things that don't move in lockstep. It's about holding a basket of things that provide better risk-adjusted returns.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Morningstar Questions Total International Bond
Some commentary from one of the Morningstar analysts on Total International Bond:
"Diversification for the Sake of Diversification
Vanguard's Total International Bond exchange-traded fund is a poor investment today.
I don’t know why Vanguard bothered to launch Vanguard Total International Bond ETF (BNDX), a currency-hedged developed-markets bond fund. When you hedge foreign sovereign bonds, you end up with something that looks a lot like U.S. Treasuries. Vanguard points to some modest historical diversification benefits, but this backward-looking analysis fails to consider how present valuations and economic conditions affect prospective returns and correlations... The fund seems to be a case of diversification for the sake of diversification.
If you're a diehard efficient-market person, the foreign bond index’s lower yield and higher duration must be compensation for some kind of risk-hedging benefit. Of course, this is crazy when you consider the bonds’ modest diversification benefits, low expected returns, and the fact that their sovereign issuers are more indebted and slower-growing than the United States.
The main reason these bonds trade at such valuations is that financial institutions under the purview of European and Japanese regulators are "encouraged" to own them. If you’re not under the regulators’ thumbs, why act as if you were? In this case, the logic of market-cap weighting breaks down: The individual investor is very different from the typical owner of sovereign bonds.
I can see a role for this fund when interest rates are a lot higher and developed-markets yield curves aren’t so homogeneous. Not today, though."
Source: http://news.morningstar.com/articlenet/ ... ?id=659003
"Diversification for the Sake of Diversification
Vanguard's Total International Bond exchange-traded fund is a poor investment today.
I don’t know why Vanguard bothered to launch Vanguard Total International Bond ETF (BNDX), a currency-hedged developed-markets bond fund. When you hedge foreign sovereign bonds, you end up with something that looks a lot like U.S. Treasuries. Vanguard points to some modest historical diversification benefits, but this backward-looking analysis fails to consider how present valuations and economic conditions affect prospective returns and correlations... The fund seems to be a case of diversification for the sake of diversification.
If you're a diehard efficient-market person, the foreign bond index’s lower yield and higher duration must be compensation for some kind of risk-hedging benefit. Of course, this is crazy when you consider the bonds’ modest diversification benefits, low expected returns, and the fact that their sovereign issuers are more indebted and slower-growing than the United States.
The main reason these bonds trade at such valuations is that financial institutions under the purview of European and Japanese regulators are "encouraged" to own them. If you’re not under the regulators’ thumbs, why act as if you were? In this case, the logic of market-cap weighting breaks down: The individual investor is very different from the typical owner of sovereign bonds.
I can see a role for this fund when interest rates are a lot higher and developed-markets yield curves aren’t so homogeneous. Not today, though."
Source: http://news.morningstar.com/articlenet/ ... ?id=659003
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Vanguard - Four Fund Portfolio
I personally don't see the need for allocating to International bonds. I prefer US bonds which in my view currently offer a better safety/yield profile than say Germany or any other safe low risk DM. In addition you don't have to pay currency hedging costs in a US bond portfolio and, after all, US investors spending dollars not Euros. I am on board for EM equity, but not EM bonds which do not perform well in financial crisis situations, largely the reason to hold bonds in the first place. In this one area I believe Vanguard carries diversification too far simply because they are in love with the theory and concept of it. I do not believe that it will provide any practical advantage for US investors to hold INTL bonds which is likely to increase risk and reduce return in my opinion. I view Vanguard's obsession with INTL bonds as a solution in search of a problem.
Garland Whizzer
Garland Whizzer
Re: Vanguard - Four Fund Portfolio
abuss368, apologies for this becoming a thread about the merits of international bonds, but I guess that is the fourth (and most controversial) leg of the four fund portfolio. A lot of good points have been made - watchnerd, I am exposed to all of the markets you list...in mutual funds at Vanguard I have Total Bond, ST Inv Grade, Total Intl Bond, EM Bond, TIPs, ST TIPs, LT Tax Exempt, HY Tax Exempt, NJ LT Tax Exempt, HY Corporate...plus I own DFA Global Bond and have another HY fund inside an old variable life plan - and I like 'em all! Within my overall asset allocation, US investment grade = 25%, TIPs are 17.5%, international bonds are 12.5% and high yield is 2.5%...for a total of 57.5% fixed income (25% equities, 10% REITs, 5% gold bullion and 2.5% commodities FWIW). Have been there since the international bond funds were offered by Vanguard and I have no plans to change. BTW to say that you 'could pick all sorts of bond assets that didn't move in a lockstep pattern' just proves the point that there is diversification / rebalancing opportunities within the asset class...that is one reason I own them all.
With respect to the current valuations of foreign bonds I again plead ignorance...I concluded long ago that I wasn't smart enough to decide when 'international bonds' or 'REIT's or for that matter equities were too expensive, and I have chosen a type of all-weather that I am comfortable with. (BTW for those saying 'it's obvious' that international bonds are a bad buy today, those are probably the same people warning others off such bonds a year or so ago, or REITs at the same time...I'm not a performance chaser (I set my targets early) but am glad I didn't listen then and have no plans to listen now).
And final point / end of rant. I do think US is the world's strongest economy and do have substantial US govt/muni/corp bond exposure...but you only need to read Arnott and others to understand that our federal/state balance sheets, when fully-loaded, are hardly bullet proof. Remember, these are supposed to be your safe assets!
With respect to the current valuations of foreign bonds I again plead ignorance...I concluded long ago that I wasn't smart enough to decide when 'international bonds' or 'REIT's or for that matter equities were too expensive, and I have chosen a type of all-weather that I am comfortable with. (BTW for those saying 'it's obvious' that international bonds are a bad buy today, those are probably the same people warning others off such bonds a year or so ago, or REITs at the same time...I'm not a performance chaser (I set my targets early) but am glad I didn't listen then and have no plans to listen now).
And final point / end of rant. I do think US is the world's strongest economy and do have substantial US govt/muni/corp bond exposure...but you only need to read Arnott and others to understand that our federal/state balance sheets, when fully-loaded, are hardly bullet proof. Remember, these are supposed to be your safe assets!
Re: Vanguard - Four Fund Portfolio
If I added to the 3 fund portfolio it would be TIPS, Muni (if warranted), short term bond fund, and some $$ in the no loss of principal product category: e.g. CDs, I or EE bonds, Stable Value fund, Money Market deposit account, saving account etc. Welcome to the 7 product allocation idea - maybe it needs a name to catch on- Lucky 7? or did Scott Burns use that one?
Maybe after that and after seeing a track record I'd consider Int'l bonds. Never say never - and at 67 just not likely.
Maybe after that and after seeing a track record I'd consider Int'l bonds. Never say never - and at 67 just not likely.
- Taylor Larimore
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Three funds or four?
Bogleheads:
This is a post I made in the Three Fund Portfolio thread (page 11):
Taylor
This is a post I made in the Three Fund Portfolio thread (page 11):
Best wishes.Norske77 wrote:
"What is Taylor's thinking on adding this fund (Total International Bond Fund) and making four?"
Norske77:
You ask a very good question and one that I carefully considered when Vanguard first offered their Total International Bond Fund (VTIBX and Admiral VTABX) on May 31, 2013, and later increased its allocation on May 26, 2015 to 30% of nominal fixed income exposure.
It is always tempting to add additional funds to the Three Fund Portfolio and overlook their additional costs, risk and complexity. International bonds represent a large asset class which Vanguard added to their Target and Life-Strategy funds so their new Total International Bond Fund deserves a look.
It is notable that a Target portfolio with a 20% bond allocation will have only 6% international bonds. This is almost meaningless. Adding a Total International Bond fund inside a single Target or Life-Strategy fund adds no complexity to the investor.
Adding Total International Bond fund to the Three Fund Portfolio has several disadvantages: Political risk, higher expense ratios, longer duration, relatively week credit quality and more complexity.
Mr. Bogle said this in a Morningstar interview:Boglehead author and adviser, Bill Bernstein wrote this article: Don't Bother With International BondsThe other thing that's typical of an industry that's going kind of marketing-wild is think about [how much] are people saying you should put in these exotic, if you will, (international) bond funds. And they say, well, maybe 5% of your bond position or 10% of your bond position. Well, that's not going to change your returns. They're expensive. They have hedging costs--I guess about half are hedged and half are not. I don't even an opinion about which is which because I wouldn't buy either.
For the above reasons, I will not add Total International Bond Index to the very successful Three Fund Portfolio.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Re: Vanguard - Four Fund Portfolio
I am curious how TIPS play into this scenario.
(original body text deleted to avoid hijacking the thread...)
RTR
(original body text deleted to avoid hijacking the thread...)
RTR
Last edited by RTR2006 on Tue Jun 09, 2015 6:46 pm, edited 2 times in total.
- abuss368
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Re: Morningstar Questions Total International Bond
Hi watchnerd,watchnerd wrote:Some commentary from one of the Morningstar analysts on Total International Bond:
"Diversification for the Sake of Diversification
Vanguard's Total International Bond exchange-traded fund is a poor investment today.
I don’t know why Vanguard bothered to launch Vanguard Total International Bond ETF (BNDX), a currency-hedged developed-markets bond fund. When you hedge foreign sovereign bonds, you end up with something that looks a lot like U.S. Treasuries. Vanguard points to some modest historical diversification benefits, but this backward-looking analysis fails to consider how present valuations and economic conditions affect prospective returns and correlations... The fund seems to be a case of diversification for the sake of diversification.
If you're a diehard efficient-market person, the foreign bond index’s lower yield and higher duration must be compensation for some kind of risk-hedging benefit. Of course, this is crazy when you consider the bonds’ modest diversification benefits, low expected returns, and the fact that their sovereign issuers are more indebted and slower-growing than the United States.
The main reason these bonds trade at such valuations is that financial institutions under the purview of European and Japanese regulators are "encouraged" to own them. If you’re not under the regulators’ thumbs, why act as if you were? In this case, the logic of market-cap weighting breaks down: The individual investor is very different from the typical owner of sovereign bonds.
I can see a role for this fund when interest rates are a lot higher and developed-markets yield curves aren’t so homogeneous. Not today, though."
Source: http://news.morningstar.com/articlenet/ ... ?id=659003
Thank you for sharing that excellent article from Morningstar.
Best.
John C. Bogle: “Simplicity is the master key to financial success."
- abuss368
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Re: Vanguard - Four Fund Portfolio
11 funds must be a challenge to own and manage.209south wrote:abuss368, apologies for this becoming a thread about the merits of international bonds, but I guess that is the fourth (and most controversial) leg of the four fund portfolio. A lot of good points have been made - watchnerd, I am exposed to all of the markets you list...in mutual funds at Vanguard I have Total Bond, ST Inv Grade, Total Intl Bond, EM Bond, TIPs, ST TIPs, LT Tax Exempt, HY Tax Exempt, NJ LT Tax Exempt, HY Corporate...plus I own DFA Global Bond and have another HY fund inside an old variable life plan - and I like 'em all! Within my overall asset allocation, US investment grade = 25%, TIPs are 17.5%, international bonds are 12.5% and high yield is 2.5%...for a total of 57.5% fixed income (25% equities, 10% REITs, 5% gold bullion and 2.5% commodities FWIW). Have been there since the international bond funds were offered by Vanguard and I have no plans to change. BTW to say that you 'could pick all sorts of bond assets that didn't move in a lockstep pattern' just proves the point that there is diversification / rebalancing opportunities within the asset class...that is one reason I own them all.
With respect to the current valuations of foreign bonds I again plead ignorance...I concluded long ago that I wasn't smart enough to decide when 'international bonds' or 'REIT's or for that matter equities were too expensive, and I have chosen a type of all-weather that I am comfortable with. (BTW for those saying 'it's obvious' that international bonds are a bad buy today, those are probably the same people warning others off such bonds a year or so ago, or REITs at the same time...I'm not a performance chaser (I set my targets early) but am glad I didn't listen then and have no plans to listen now).
And final point / end of rant. I do think US is the world's strongest economy and do have substantial US govt/muni/corp bond exposure...but you only need to read Arnott and others to understand that our federal/state balance sheets, when fully-loaded, are hardly bullet proof. Remember, these are supposed to be your safe assets!
Jack Bogle: "Simplicity is the master key to financial success!"
John C. Bogle: “Simplicity is the master key to financial success."
Re: Vanguard - Four Fund Portfolio
Are you indicating that you're trying to shield from the US government defaulting on Treasuries?209south wrote: And final point / end of rant. I do think US is the world's strongest economy and do have substantial US govt/muni/corp bond exposure...but you only need to read Arnott and others to understand that our federal/state balance sheets, when fully-loaded, are hardly bullet proof. Remember, these are supposed to be your safe assets!
If so, the resulting financial chaos of such an event would be so immense, global, and pervasive that there really wouldn't be any such thing as a safe haven.
(Munis are a different story...)
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
- abuss368
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Re: Vanguard - Four Fund Portfolio
I would agree.watchnerd wrote:Are you indicating that you're trying to shield from the US government defaulting on Treasuries?209south wrote: And final point / end of rant. I do think US is the world's strongest economy and do have substantial US govt/muni/corp bond exposure...but you only need to read Arnott and others to understand that our federal/state balance sheets, when fully-loaded, are hardly bullet proof. Remember, these are supposed to be your safe assets!
If so, the resulting financial chaos of such an event would be so immense, global, and pervasive that there really wouldn't be any such thing as a safe haven.
(Munis are a different story...)
John C. Bogle: “Simplicity is the master key to financial success."
- abuss368
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Re: Vanguard - Four Fund Portfolio
I would like to prevent this thread from being locked down and on topic as a continuous revolving thread about the "Four Fund Portfolio" from Vanguard much like Taylor's "Three Fund Portfolio" and Rick Ferri's "Core Four".
Thank you Bogleheads.
Thank you Bogleheads.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Vanguard - Four Fund Portfolio
I think you're confusing mere variety with useful diversification. The optimal asset mix is one where each asset moves the portfolio closer to the Efficient Frontier. But there are diminishing returns to this, and there comes a point where more variety actually moves one away from the Efficient Frontier. There is opportunity cost in asset allocation.209south wrote:BTW to say that you 'could pick all sorts of bond assets that didn't move in a lockstep pattern' just proves the point that there is diversification / rebalancing opportunities within the asset class...that is one reason I own them all.
Last edited by watchnerd on Tue Jun 09, 2015 4:58 pm, edited 2 times in total.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
- abuss368
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Re: Vanguard - Four Fund Portfolio
Hi watchnerd,
Would you prefer a TIPS fund rather than international bonds for Vanguard's Fourth Fund?
Would you prefer a TIPS fund rather than international bonds for Vanguard's Fourth Fund?
John C. Bogle: “Simplicity is the master key to financial success."
Re: Vanguard - Four Fund Portfolio
I view TIPS as so fundamentally different, in behavior, liquidity, market cap, and return, such that I don't even mentally model them alongside other bonds. Pretty much all other bonds can be understood by understanding the factors of return, interest rate risk (duration), liquidity, call-ability and credit risk (and currency risk, if unhedged foreign).abuss368 wrote:Hi watchnerd,
Would you prefer a TIPS fund rather than international bonds for Vanguard's Fourth Fund?
As such, it's not too hard to evaluate any 'normal' bond's risk-return profile (note: not a prediction) as a "safe haven" vs equities as the data and research goes back decades if one can mentally digest the factors.
Given that, I view TBM much like TSM: if you want something different from the default mix, just break it down to its subcomponents and tilt (e.g. shorter duration, or more yield, or whatever).
I view TIPS more as inflation protected cash. I think they're right for some people in some situations, but I wouldn't make a blanket recommendation as a 4th bond holding.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Re: Vanguard - Four Fund Portfolio
RTR2006 wrote:I am curious how TIPS play into this scenario.
RTR
abuss368 wrote:Hi watchnerd,
Would you prefer a TIPS fund rather than international bonds for Vanguard's Fourth Fund?
Boy... what am I? Chopped Liver?
Re: Vanguard - Four Fund Portfolio
Before the most recent post, I started writing a response (about the TIPS, the allocation) and then decided to delete it because this is the OP's thread and the OP indicated it should be about the four fund portfolio. A question that seemed more geared at a personal allocation should be in another thread and not lost buried in here as it has.
Re: Vanguard - Four Fund Portfolio
Thanks for your reply. I am not asking for re-allocation advice. I can work on that on my own (plus, I am retiring shortly, and will need to re-balance a bit for this and a few other reasons).lack_ey wrote:A question that seemed more geared at a personal allocation should be in another thread and not lost buried in here as it has.
In keeping with the OP's primary objective, and leaving my editorial ramblings aside, I think many here would be interested in knowing how to understand what TIPS do to a 4 fund portfolio. 1TIP = .75 equity fund +.25 bond fund? 1 TIP = .5 equity plus .5 bond? ... or .25 equity + .75 bond?
You get the drift, I'm sure...
Thanks,
RTR
- abuss368
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Re: Vanguard - Four Fund Portfolio
The Four Fund Portfolio provides maximum diversification at very low costs.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Vanguard - Four Fund Portfolio
Amen, abuss368. The four fund portfolio is an outstanding core holding...I think there is benefit to adding slices/factors on top of that but the four fund will beat 96% of portfolios.
watchnerd, I don't need the patronizing tone 'you're confusing...etc.' - if you have evidence proving one of my holdings is moving me away from the efficient frontier (keep taxes / rebalancing in mind), fire away...especially while arguing that the world's biggest asset class doesn't belong in one's portfolio
watchnerd, I don't need the patronizing tone 'you're confusing...etc.' - if you have evidence proving one of my holdings is moving me away from the efficient frontier (keep taxes / rebalancing in mind), fire away...especially while arguing that the world's biggest asset class doesn't belong in one's portfolio
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Re: Vanguard - Four Fund Portfolio
I would only say that if you are thinking seriously about making a change in portfolio, take some time away from the forum - once you have enough to consider - and ponder it. Sometimes I just get plain restless, because lets' face it, they don't refer to these index funds as "lazy" or "boring" for nothing; they kind of are. Doing nothing over time is a hard won experience.
"Nothing is simpler than owning the stock market and holding it forever, and that’s essentially the idea behind the index fund.” - Bogle.
Re: Vanguard - Four Fund Portfolio
I'm sorry if you perceived a certain tone (I can be rather blunt), but the evidence is the number of bond funds you listed -- I don't know of any asset allocation expert that advocates that many different bond funds (11 if I counted correctly?) as being a mix for staying on the efficient frontier. Neither Gibson, nor Bernstein, nor Swensen promote such a mix.209south wrote: watchnerd, I don't need the patronizing tone 'you're confusing...etc.' - if you have evidence proving one of my holdings is moving me away from the efficient frontier (keep taxes / rebalancing in mind), fire away...
If that's not enough evidence, I would suggest trying one of the many Monte Carlo simulators out there that plot an Efficient Frontier to test it yourself.
As far as owning the biggest asset class / hedged international bonds is concerned, the goal of asset allocation in modern portfolio theory is not to own one of each and every asset class. It's to own the right mix of asset classes that provide the best risk-adjusted returns, and ideally with the best costs and tax efficiencies, too. Just because an asset exists doesn't mean one needs to own it. Every asset in a port has a role to play and it needs to justify its space due to the opportunity cost of owning something more suitable. And, as many have pointed out above, many noted experts feel that hedged international bonds are not worth owning (at the present) compared to suitable alternatives.209south wrote: ...especially while arguing that the world's biggest asset class doesn't belong in one's portfolio
To quote William Bernstein from http://www.etf.com/sections/features/22 ... nopaging=1
"Now, when you have hedged currency risk as opposed to unhedged currency risk in a bond fund, you’ve got a smaller problem, but it’s still a problem. And that’s when you take foreign sovereign bonds and hedge them back to the dollar—you’ve basically got U.S. bonds.
Maybe you get a tiny bit of extra diversification, but it’s a trivial amount—plus you’re paying higher expenses and higher transactional costs to deal with foreign bonds."
These are pretty much the same points that the Morningstar analyst made. And that's not even factoring in the current uber-low yields.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder