Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by 209south » Wed Jun 08, 2016 3:30 pm

Probably worth a separate thread but I have 20% of my overall portfolio in TIPs, with most of that in a ladder beginning in 2032. I made that decision based on advice in this forum and more directly from folks like Pfau and Milevsky who endorse liability-management techniques for retiree portfolios. Long TIPs have performed very nicely since I made that decision; conversely the yield on the ladder is now very low, but I plan to keep it in place. For someone without a pension, the TIPs ladder seems offers a lot of peace of mind.

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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by BlueEars » Wed Jun 08, 2016 4:02 pm

jalbert wrote:
I owned a fair amount of TIPS going into the 2008 debacle. Found out they were not as liquid as I would have thought even though they were US Treasury bonds. They did recover but I did not like the ride.


Intermediate investment grade corporate bonds fell harder than TIPs, but the emotional response to TIPs was greater because you see the valuation separately as a separate fund. If the TBM fund instead consisted of treasuries, TIPs, and GNMAs, and you held such a fund, plus a separate intermediate corporate bond fund, corporate bonds would be in a bigger doghouse than TIPs. Short-term TIPs as recommended by Vanguard should be much less volatile as well.

Because int'l bonds are a separate fund, they may get their day in the doghouse at some point . One benefit of LifeStrategy and Target Retirement funds is being able to just see a single number for portfolio return and not second-guess the allocation whenever diversification is busy doing its job.

Perhaps I did not fully explain this. In 2008 I was retired. The plan was to use FI and keep equities untouched. But if FI has liquidity issues (short term price weakness due to factors such as hedge funds dumping "liquid" assets like TIPS), this can be a source of concern. Sure it might be short term but you do not know this in the months of uncertainty. And yes, looking at a bundled group of assets can help to mask this.

My hope is that the FI in our accounts is liquid and rides out a bad recession -- maybe even goes up a bit to balance the equity declines. Others may have different risk tolerances and/or different situations such as secure employment.

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Rick Ferri
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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by Rick Ferri » Wed Jun 08, 2016 6:33 pm

Here are a few tips for investors who are still trying to find the optimal asset allocation:

1) the optimal asset allocation is only known in retrospect.

2) you don't need to find the optimal asset allocation to meet you financial needs.

3) you don't need to invest in every asset class Vanguard has just because someone said it offers diversification benefits.

4) if you own more than 10 mutual funds, you probably own too many.

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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by abuss368 » Wed Jun 08, 2016 11:00 pm

Rick Ferri wrote:Here are a few tips for investors who are still trying to find the optimal asset allocation:

1) the optimal asset allocation is only known in retrospect.
rt
2) you don't need to find the optimal asset allocation to meet you financial needs.

3) you don't need to invest in every asset class Vanguard has just because someone said it offers diversification benefits.

4) if you own more than 10 mutual funds, you probably own too many.

Rick Ferri


Hi Rick,

Thank you for the excellent advice. I remember many years ago you recommend a lot of funds (10 or so in that excellent WSJ article). Over the last couple of years I think you have recommended less. Are you more in favor of the Three Fund Portfolio or the Core Four?

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

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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by Rick Ferri » Thu Jun 09, 2016 10:16 am

The older I get, the more I believe less is more. :D

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Good paraphrase

Post by Taylor Larimore » Thu Jun 09, 2016 10:58 am

anil686 wrote:I use it because it is in my VG TR fund. There seems to be many opinions on holding it or not holding it - I just am trying to limit behavioral mistakes by staying with the TR fund and hope Taylor's advice about if many experts disagree - it probably is not that important (I think I am paraphrasing this...)

anil686:

You paraphrased it well. :wink:

Best wishes.
Taylor
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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by azanon » Thu Jun 09, 2016 11:08 am

While I agree that the optimal asset allocation going foward is only known in retrospect, please don't use this as an excuse to not at least spend some time learning how different asset classes seem to work together, in terms of both typical correlation, as well as how asset classes tend to behave in different investing climates. If, for instance, 70-80% or more of your portfolio only typically does well during economic prosperity, you might be setting yourself up for some real, gut wrenching volatility and/or draw downs that you need to be prepared to emotionally handle. Me? I've been there and done that, ..... twice now. I don't like it. Fortunately, I'm a relatively frugal guy, so I can easily make up for a bit of muted returns with just more savings. So my portfolio is adjusted accordingly.

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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by letsgobobby » Thu Jun 09, 2016 12:15 pm

The reason I don't hold international bonds is very simple. They do not match the critical role in my portfolio that high quality domestic bonds do, namely, safety. International bonds were stress tested in 2008-09 and the results were frightening. I will continue to hold stable value fund, US short and intermediate term government bonds, very high quality US corporate bonds, and highly rated US municipal bonds.

re: TIPS, I view myself as being moderately exposed to inflation risk, assessed as follows:

- I have 60% in equities, which are minimally inflation exposed;
- I have 40% in bonds, which tend toward short and intermediate, and high quality - moderate exposure;
- I have a very secure job which tends to have salary increases at or below the rate of inflation - high exposure;
- I have a fixed , low rate mortgage - low exposure.

So I am in theory interested in TIPS at some level. My problem is that net of inflation and taxes, they are currently a negative yielding asset class. So how does this protect me from inflation? In my view, it doesn't. When real yields go back to 2-3% or more, I will buy them again. I also stopped buying I bonds for the same reason.

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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by Rick Ferri » Thu Jun 09, 2016 7:31 pm

azanon wrote:While I agree that the optimal asset allocation going foward is only known in retrospect, please don't use this as an excuse to not at least spend some time learning how different asset classes seem to work together, in terms of both typical correlation, as well as how asset classes tend to behave in different investing climates.


You mean read good books like All About Asset Allocation? :wink:

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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by steve roy » Thu Jun 09, 2016 7:45 pm

No international bonds here boss!

And there ain't gonna be.

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"All About Asset Allocation" -- A Gem

Post by Taylor Larimore » Thu Jun 09, 2016 9:54 pm

Rick Ferri wrote: "You mean read good books like All About Asset Allocation?" :wink:

azanon:

Rick's right. It is a great book and I've included it in my collection of "Investment Gems." You can read valuable excerpts here:

http://socialize.morningstar.com/NewSoc ... spx#156345

Best wishes.
Taylor
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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by nedsaid » Fri Jun 10, 2016 9:08 am

Rick Ferri wrote:
azanon wrote:While I agree that the optimal asset allocation going foward is only known in retrospect, please don't use this as an excuse to not at least spend some time learning how different asset classes seem to work together, in terms of both typical correlation, as well as how asset classes tend to behave in different investing climates.


You mean read good books like All About Asset Allocation? :wink:

Rick Ferri


Who wrote that? :wink:
A fool and his money are good for business.

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Re: "All About Asset Allocation" -- A Gem

Post by azanon » Fri Jun 10, 2016 9:43 am

Taylor Larimore wrote:
Rick Ferri wrote: "You mean read good books like All About Asset Allocation?" :wink:

azanon:

Rick's right. It is a great book and I've included it in my collection of "Investment Gems." You can read valuable excerpts here:

http://socialize.morningstar.com/NewSoc ... spx#156345

Best wishes.
Taylor


I haven't had the pleasure of reading this particular one, but if its resembles the quality of virtually every other work I've seen of Rick's, I'm sure I'd highly recommend it as well. But for me personally though? As we say in back-woods Arkansas, I've already read more books like this one than I can shake a stick at (including one huge one written by Mr. Bogle himself). I know we all come at it from slightly different angles, but most of us don't stray too far from basic principals shared by all Bogleheads.

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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by SeeMoe » Fri Jun 10, 2016 8:10 pm

Time was I wouldn't invest in international stock funds. Now my folio is near 40% in the vanguard total international stock fund. The total international bond fund is nearing the recommended 30% mark too. Bias and fear of foreign intrigue were my big hang ups until Vanguard analysts slowly convinced they are in my best long term interest, actually making my AA less risky,..
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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by abuss368 » Sat Jun 11, 2016 8:17 am

SeeMoe wrote:Time was I wouldn't invest in international stock funds. Now my folio is near 40% in the vanguard total international stock fund. The total international bond fund is nearing the recommended 30% mark too. Bias and fear of foreign intrigue were my big hang ups until Vanguard analysts slowly convinced they are in my best long term interest, actually making my AA less risky,..
SeeMoe.. :dollar


Hi SeeMoe,

I too have been learning about this asset class over time from Vanguard investment experts.

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

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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by SpringMan » Sat Jun 11, 2016 9:25 am

Rick Ferri wrote:Here are a few tips for investors who are still trying to find the optimal asset allocation:

1) the optimal asset allocation is only known in retrospect.

2) you don't need to find the optimal asset allocation to meet you financial needs.

3) you don't need to invest in every asset class Vanguard has just because someone said it offers diversification benefits.

4) if you own more than 10 mutual funds, you probably own too many.

Rick Ferri

Rick,
I totally agree on bullets #1 through #3 but having 6 different accounts has resulted in our owning 13 mutual funds, slightly more than 2 funds per account. We have his and her Roths, his and her tIRAs and two taxable accounts. The three funds in the taxable accounts all have high unrealized capital gains so no consolidation there. I guess the keyword in bullet#4 is probably. I have tried not to duplicate funds across each account, for example, one has Total Bond Index, another has Intermediate Term Investment Grade, and another has Short Term Investment grade. Do you see any advantage to reducing number of funds which would result in duplicating some funds in each account.
Best Wishes, SpringMan

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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by nedsaid » Sat Jun 11, 2016 10:09 am

abuss368 wrote:If an investor in Total Bond Index was to add an additional bond fund in terms of increased diversification, the toss up with to common choices is International Bonds and TIPS. Many years ago the TIPS was very popular as a second choice both from Bogleheads and Vanguard. That has since changed.


Yep, that was due to recency bias. TIPS the last few years lagged the Total Bond Market and investors just lost interest. I remember when a lot of folks recommended 50% Total Bond and 50% TIPS for a bond portfolio. They went from a must have investment to a not needed investment. TIPS also disappointed during the 2008-2009 financial crisis. I suspect the same will happen with International Bonds.

The thing is that asset classes don't have to behave the way we expect. We have to face up to the fact that diversification doesn't always work the way we think it will. I remember the discussions about buying stuff that zigs while other stuff zags. Well, in 2008-2009 almost everything went in one direction and that was down. The exception were US Nominal Treasuries and certain US Agency Bonds like GNMAs. Asset classes that worked as diversifiers in 2000-2002 didn't work in 2008-2009. Let me name names here: Precious metal funds, REITs, Small-Cap, Value, Higher Dividend stocks. They not only didn't provide the diversification benefits but in most cases fell harder than the broad U.S. Stock Market. Here is another one: commodities. They fell hard in 2008-2009 too.

Sometimes you get the diversification benefits you want from the different asset classes and sometimes you do not. Markets have a way of doing the very thing you didn't expect or plan for.

I think there is a mild case for owning unhedged International Bond Funds and a milder case for owning currency hedged International Bond Funds. I own a couple of unhedged funds and they are about 8% of my bonds. One fund that did horrible the last few years is doing great this year. So I seem to be getting the benefit I wanted but we will see if that continues.
A fool and his money are good for business.

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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by siamond » Sat Jun 11, 2016 10:20 am

I am in the process of plowing through my newly acquired copy of the 'Triumph of the Optimists' (the ultimate study of Global Investment Returns), and here are a few tidbits from the section about international bonds and blended domestic/international investments.

First, the bonds track record is VERY diverse between the 16 countries being studied. From 1900 to 2000, the real (inflation-adjusted) bonds return goes from -2.2 (Germany, Italy) to 2.8 (Switzerland), with the US at 1.6. Standard deviation goes from 8% (Switzerland again) to 20% (Japan), with the US at 10%.

Next, one really has to separate the 1sh half of the century (cf. WW-I and WW-II, devastating for bonds holders, notably in countries directly impacted in-territory) and the 2nd half of the century (more stable, although inflation and interest rates went all over the place). Personally, I fear that severe troubles are not over, and between terrorism and cyber-attacks, no country is shielded anymore by its relative geographic isolation. So the very troubled history of Europe in the 1st half of the century does seem relevant to US investors as a potential (severe) risk.

Now what about a blended investment (weighed by market cap) between domestic bonds and international bonds? That part was completely new to me, and is making me rethink my position. Using the perspective of a US investor (incl. currency adjustments):
- The 'world' performance between 1900 and 2000 wasn't that great (returns/stdev: 1.2/10.3) vs US-only (returns/stdev: 1.6/10.0)
- Of course, those numbers are very skewed by the 1st half of the century, so let's take 1950-2000 to compare on an 'equal footing'
- The 'world' performance between 1950 and 2000 was better (returns/stdev: 2.8/9.2) vs US-only (returns/stdev: 1.8/11.4)

As the authors concluded, "International diversification also lowers bond investor's risk. [...] From 1950 on, the world bond index outperformed US bonds and had lower risk". Hm, now that is thought-provoking. Note that ERs were not taken in account though.

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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by Rick Ferri » Sat Jun 11, 2016 11:48 am

SpringMan wrote:
Rick Ferri wrote:Here are a few tips for investors who are still trying to find the optimal asset allocation:

1) the optimal asset allocation is only known in retrospect.

2) you don't need to find the optimal asset allocation to meet you financial needs.

3) you don't need to invest in every asset class Vanguard has just because someone said it offers diversification benefits.

4) if you own more than 10 mutual funds, you probably own too many.

Rick Ferri

Rick,
I totally agree on bullets #1 through #3 but having 6 different accounts has resulted in our owning 13 mutual funds, slightly more than 2 funds per account. We have his and her Roths, his and her tIRAs and two taxable accounts. The three funds in the taxable accounts all have high unrealized capital gains so no consolidation there. I guess the keyword in bullet#4 is probably. I have tried not to duplicate funds across each account, for example, one has Total Bond Index, another has Intermediate Term Investment Grade, and another has Short Term Investment grade. Do you see any advantage to reducing number of funds which would result in duplicating some funds in each account.


Those are operational issues and totally understandable. I was referring to attempting to "diversify" over more than ten asset classes in one portfolio. It's like trying to cut a blueberry pie into 20 slices...there's not much left to the pie.

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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by jalbert » Sat Jun 11, 2016 12:02 pm

Does the book 'Triumph of the Optimists' discuss the relationship of risk and yield across different countries? When you compare bonds of different countries, there are distortions from, for instance, different central bank policies, making it less than obvious if there is a direct relationship between yield and risk.

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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by siamond » Sat Jun 11, 2016 12:48 pm

jalbert wrote:Does the book 'Triumph of the Optimists' discuss the relationship of risk and yield across different countries? When you compare bonds of different countries, there are distortions from, for instance, different central bank policies, making it less than obvious if there is a direct relationship between yield and risk.

Well, the authors do insist on the fact that bond holders at large do NOT seem rewarded in proportion to the corresponding amount of volatility (aka risk in this context), since the premium compared to bills is usually quite small, and rather erratic. Also, if you think about the Switzerland numbers I just quoted, clearly the relation between returns and volatility is strangely reversed (highest historical returns, lowest volatility!). Then countries with abysmal results (e.g. Japan, Germany, Italy) had negative returns and much higher volatility (15% to 20%).

Now the entire point here would be to diversify across all countries (US and others), so that it all averages out... hopefully! Careful: all numbers are in REAL $, not nominal. A nominal analysis would undoubtedly be quite different.

(note: there is a very interesting chapter about TIPS, which I'll summarize in a separate thread - here I am only referring to regular government bonds issued by the 16 countries being studied).

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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by jalbert » Sat Jun 11, 2016 3:09 pm

I find Vanguard's interpretation of their own study a bit disturbing.

https://advisors.vanguard.com/iwe/pdf/I ... omain=true

Figure 7 shows a tiny improvement in volatility as the percentage of bonds allocated internationally is increased despite the nominal return of currency-hedged int'l bonds being 190 basis points lower than US bonds over the period.

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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by abuss368 » Mon Jun 13, 2016 9:45 pm

This has been an excellent article.

Thanks Bogleheads!
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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by TOJ » Mon Jun 13, 2016 9:48 pm

"Key" asset class, right. US equities are "key". International bonds are at most, "marginal".

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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by Whakamole » Mon Jun 13, 2016 10:52 pm

Perhaps it is simply yield chasing.

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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by BigJohn » Mon Jun 13, 2016 11:42 pm

jalbert wrote:I find Vanguard's interpretation of their own study a bit disturbing.

https://advisors.vanguard.com/iwe/pdf/I ... omain=true

Figure 7 shows a tiny improvement in volatility as the percentage of bonds allocated internationally is increased despite the nominal return of currency-hedged int'l bonds being 190 basis points lower than US bonds over the period.

I couldn't agree more. Lots of movement in volatililty with change in international stock allocation but almost trivial changes when moving from 0% to 100% international bonds. I read this paper when it first came out and viewed it as a very poor case for action. It actually solidified my belief that I did not need to add international bonds.

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Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by White Coat Investor » Tue Jun 14, 2016 2:05 am

mickeyd wrote:
Many years ago the TIPS was very popular as a second choice both from Bogleheads and Vanguard. That has since changed.
I'm one of those who jumped on the TIPS fund bandwagon years ago. I have since exchanged all of it and consider it part of the cost of my financial education.


When did that change and how much did that education cost you?

Year Capital Income Total Index
2015 –2.57% 0.74% –1.83% –1.44%
2014 1.66% 2.16% 3.83% 3.64%
2013 –10.39% 1.47% –8.92% –8.61%
2012 4.16% 2.61% 6.78% 6.98%
2011 8.68% 4.56% 13.24% 13.56%
2010 3.59% 2.58% 6.17% 6.31%
2009 8.94% 1.86% 10.80% 11.41%
2008 –7.47% 4.62% –2.85% –2.35%
2007 5.69% 5.90% 11.59% 11.63%
2006 –2.97% 3.39% 0.43% 0.41%
2005 –2.85% 5.44% 2.59% 2.84%
2004 3.48% 4.79% 8.27% 8.46%
2003 4.14% 3.86% 8.00% 8.40%
2002 12.06% 4.55% 16.61% 16.57%
2001 3.29% 4.32% 7.61% 7.89%

I'm not exactly seeing some terribly painful financial lesson there. Are you talking about 2013? It looks like they worked great in 2008-2009.

For what it's worth I still think TIPS are a useful asset class and haven't changed my allocation to them in years, essentially since my beginning in 2004.
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