Vgd Retirement Savings Trust vs Total Bond Mkt

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Kelly
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Vgd Retirement Savings Trust vs Total Bond Mkt

Post by Kelly » Wed Aug 31, 2016 3:16 pm

The retirement savings trust is offered in my plan along with the total bond market index.

According to the Retirement Savings Trust fact sheet: "The fund invests primarily in synthetic investment contracts backed by high-credit-quality fixed income investments issued by insurance companies and banks". This is a stable value fund with a 2% SEC yield.

What is the advantage of the total bond market with it's 6 year duration and 1.9% yield when you can get 2% without any duration? If rates drop, the total bond market will do better. But, after 6 years the annualized return should be about 1.9% plus or minus a little.

Link https://institutional.vanguard.com/VGAp ... undId=0034

Many thanks for any insight

Kelly

pingo
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Re: Vgd Retirement Savings Trust vs Total Bond Mkt

Post by pingo » Wed Aug 31, 2016 5:02 pm

I use our plan's stable value offering to diversify my "bond" holdings/fixed income.

You've hit on something that others have as well. If a bond fund's current yield is the best indicator of future returns for that fund, why accept the risk of a change in principal for the worse in a low interest rate environment when your stable value fund offers the same yield without the risk of losing principal?

Stable value funds are very low risk investments which I expect to perform somewhere between small and intermediate bond funds. They are affected by interest rates in that when bond interest rates change, the assets of a stable value fund do not rise or fall (no change in principal), but it's yield will slowly move up or down in the same direction as bond yields. I guess technically there is a "duration" or something like since your fact sheet states "Income consistent with a 2- to 4-year average duration," but there's probably no need to factor that in assessing risk.

In case you're interested, I learned a lot from Vanguard's white paper: Stable Value: Navigating past the 2008 credit crisis.

I just discovered that since then, they followed up with Stable value funds: Considerations for plan sponsors, which may also give you some things to consider.
Last edited by pingo on Fri Sep 02, 2016 1:35 pm, edited 1 time in total.

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Phineas J. Whoopee
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Re: Vgd Retirement Savings Trust vs Total Bond Mkt

Post by Phineas J. Whoopee » Thu Sep 01, 2016 9:46 pm

If you have access to the Vanguard stable value fund in your employer-based plan you might choose to use it. Not everybody has a Vanguard-based 40x(y).

Stable value funds are not without their own unique risks. There are circumstances under which they might limit redemptions, perhaps to a period of several years, or charge redemption fees. The risks are low, as is default risk among investment-grade bonds, but they do exist. It isn't free money, nor risk-free return.

An investor might well decide to use one anyway.

PJW

Kelly
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Re: Vgd Retirement Savings Trust vs Total Bond Mkt

Post by Kelly » Fri Sep 02, 2016 4:48 am

Many thanks to you both. The Vanguard paper did an excellent job explaining the details of the fund. Now I'm wondering how much to put into the stable value fund and total bond market. As a start, I see that within the Gov't TSP Lifecycle fund,the bond component is about 20% total bond market and 80% G Fund. The G Fund is non marketable treasuries that currently yields 1.65%. Would be interesting to know how this split was arrived at.

Is there anything wrong with going 100% stable value until the total bond market yields more? Sounds very simple so there must be something wrong with this idea!

Best

Kelly

Engineer250
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Re: Vgd Retirement Savings Trust vs Total Bond Mkt

Post by Engineer250 » Fri Sep 02, 2016 9:49 am

Kelly wrote:Many thanks to you both. The Vanguard paper did an excellent job explaining the details of the fund. Now I'm wondering how much to put into the stable value fund and total bond market. As a start, I see that within the Gov't TSP Lifecycle fund,the bond component is about 20% total bond market and 80% G Fund. The G Fund is non marketable treasuries that currently yields 1.65%. Would be interesting to know how this split was arrived at.

Is there anything wrong with going 100% stable value until the total bond market yields more? Sounds very simple so there must be something wrong with this idea!

Best

Kelly
I think your comparison is valid. I don't know much about stable value funds, but I do know a lot of people use the G Fund for 100% of their "bond/fixed income" allocation, rather than split between G and F. So I think what you are talking about is perfectly acceptable.
Where the tides of fortune take us, no man can know.

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Phineas J. Whoopee
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Re: Vgd Retirement Savings Trust vs Total Bond Mkt

Post by Phineas J. Whoopee » Fri Sep 02, 2016 3:28 pm

Kelly wrote:...
Is there anything wrong with going 100% stable value until the total bond market yields more? Sounds very simple so there must be something wrong with this idea!
...
In general it isn't a very good idea to try to time financial markets. Bonds and interest rates are followed even more closely than socks.

For your case in particular as it exists right now with the SVF yielding slightly more than the bond fund's SEC yield, one could make a strong case, not to wait for bonds to change, but to go for the higher yield with different, but not necessarily greater, risks.

PJW

pingo
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Re: Vgd Retirement Savings Trust vs Total Bond Mkt

Post by pingo » Fri Sep 02, 2016 4:23 pm

PJW makes a good point, especially about the socks. :D

I suppose I might go along with preferring one over the other if there was a clear spread between them, but I'm probably foolish enough to choose the wrong side of the spread! Perhaps you can take comfort in the fact that there is no important difference in return to look forward to, so you can opt to merely spread your bets between the two and rest your decision on the argument of diversification. Hard to argue with that, though I imagine it may not be helpful.

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