Comparing Ferri and Malkiel's Bond Portfolios

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neomutiny06
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Comparing Ferri and Malkiel's Bond Portfolios

Post by neomutiny06 » Mon Dec 12, 2016 1:30 pm

Malkiel/Ellis bond portfolio (Rebalance IRA):
25% - US High Yield Dividend Stocks
25% - US Corporate Bonds
25% - US High-Yield Corporate Bonds
25% - Emerging Market Bonds

Rick Ferri's bond portfolio (All About Asset Allocation):
60% - US Total Bond Market
20% - US TIPS
20% - US High-Yield Corporate Bonds

I am curious as to what Bogleheads think of these two options. I currently use Rick Ferri's Allocation. But Malkiel/Ellis have me extremely worried about the future of bonds. And they are not interested in Total Bond Market. Could their bond portfolio be a better option moving forward? It is super risky, but they say "Total Bond Market" is dangerous because of the 0% future rate of return expected after inflation.

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Re: Comparing Ferri and Malkiel's Bond Portfolios

Post by lack_ey » Mon Dec 12, 2016 2:25 pm

I don't particularly agree with either, but generally I am not impressed by arguments for reaching for yield (or return), attempting to keep return constant as risk/reward shifts. Also, I think it's usually more useful to think of the properties of the portfolio as a whole rather than fixate on individual components in isolation and shift allocation heavily based on individual component valuations relative to their past history (which, sorry, may not be coming back, at least perhaps not soon). I disagree with a lot of what Malkiel has written the last 5+ years.

You have to deal with the cards you're dealt, not the ones you wish you had, or worse, trying to compensate for what might have happened on average with a better hand by overplaying what you're actually given.

Ideally on principle you should refuse to discuss these proposals outside of a context of what the stock allocations look like and the overall intent and goals.

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Re: Comparing Ferri and Malkiel's Bond Portfolios

Post by kolea » Mon Dec 12, 2016 2:56 pm

The Malkiel portfolio seems to be yield chasing, but Ferri's has a little of that going on too. Somebody around here opined that stocks are for growth, bonds are for stability and I tend to agree with that more and more. I have a lot of total bond and am now wondering why and am thinking of moving much of it to TIPS (bond ladder, not a fund). It would provide the stability I really want + the hedge against inflation.
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Re: Comparing Ferri and Malkiel's Bond Portfolios

Post by Aptenodytes » Mon Dec 12, 2016 2:57 pm

I suggest unbundling some of the issues here.

1) TIPS or no TIPS? That's something that depends heavily on what inflation would do to your personally, and what your full range of adaptive measures is. That is, you could believe Malkiel/Ellis make more sense than Ferri and still own TIPS, or the obverse.

2) Total Bond or not? This is a bit complicated. I think it boils down to a tradeoff between having the Treasury fraction of your bond holdings go through wide swings that are unrelated to any expected benefits, and having an approach to disciplined diversification that is hard for you to tamper with. The Ferri approach amounts to saying "maybe I lose a little with the wide Treasury swings, but I'd lose more if I tried to set all my bond allocations myself"

3) Are high-dividend stocks the equivalent of bonds? This is probably the easiest thing to sort out.

4) Are emerging market bonds a safe bet? This one boils down largely to whether you limit your investment choices to strategies that have been proven with substantial historical data. If no, the emerging market bond play could make sense. If yes, you consider it speculative.

5) Do investment-grade corporate bonds make sense? The conventional wisdom is no.

If are tracking votes, I don't think there is a valid generalization regarding TIPS -- you have to see if they make sense for you; I side with Malkiel that Total Bond imposes uncompensated gyrations and unless your own decision-making is even more erratic it is better to construct your portfolio; high-dividend stocks are not bond-equivalents; emerging market bonds are speculative; investment-grade corporates don't make sense unless your alternatives are really horrible.

Notice that both model portfolios use high-yield corporates, which is something that makes sense to me too, but I believe is not a popular view on this forum. So even though you are asking about differences between the two this similarity may be considered controversial.

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Re: Comparing Ferri and Malkiel's Bond Portfolios

Post by duckcalldan » Mon Dec 12, 2016 3:16 pm

I am FIREing in February so I am researching all things bonds as of late. I'm currently 58/39/3 cash. My rollover IRA (about 30% of total assets) will be my main bonds space, with the remaining 8% of my bond allocation in short-term bonds (VFSUX) in taxable. With 17 years until I take RMDs, I have ample time to convert much of my tIRA to Roth, and hope to pass on my Roth money to my heirs. That being said, I'm trying to figure out a simple and relatively safe way to invest my 401K proceeds, which will be 100% bonds. I'm leaning toward a mix of BND and VCSH. But I might forego BND because of MBS and LT bond worries, and go with a mix of VGIT and VCSH. I am leaning away from both intermediate and long term corporates. I haven't figured out what role, if any, TIPS should play.

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Re: Comparing Ferri and Malkiel's Bond Portfolios

Post by neomutiny06 » Mon Dec 12, 2016 4:00 pm

Aptenodytes wrote:I suggest unbundling some of the issues here.

1) TIPS or no TIPS? That's something that depends heavily on what inflation would do to your personally, and what your full range of adaptive measures is. That is, you could believe Malkiel/Ellis make more sense than Ferri and still own TIPS, or the obverse.

2) Total Bond or not? This is a bit complicated. I think it boils down to a tradeoff between having the Treasury fraction of your bond holdings go through wide swings that are unrelated to any expected benefits, and having an approach to disciplined diversification that is hard for you to tamper with. The Ferri approach amounts to saying "maybe I lose a little with the wide Treasury swings, but I'd lose more if I tried to set all my bond allocations myself"

3) Are high-dividend stocks the equivalent of bonds? This is probably the easiest thing to sort out.

4) Are emerging market bonds a safe bet? This one boils down largely to whether you limit your investment choices to strategies that have been proven with substantial historical data. If no, the emerging market bond play could make sense. If yes, you consider it speculative.

5) Do investment-grade corporate bonds make sense? The conventional wisdom is no.

If are tracking votes, I don't think there is a valid generalization regarding TIPS -- you have to see if they make sense for you; I side with Malkiel that Total Bond imposes uncompensated gyrations and unless your own decision-making is even more erratic it is better to construct your portfolio; high-dividend stocks are not bond-equivalents; emerging market bonds are speculative; investment-grade corporates don't make sense unless your alternatives are really horrible.

Notice that both model portfolios use high-yield corporates, which is something that makes sense to me too, but I believe is not a popular view on this forum. So even though you are asking about differences between the two this similarity may be considered controversial.


Great post. But you don't think corporate bonds make sense at all?

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Re: Comparing Ferri and Malkiel's Bond Portfolios

Post by billyv » Sat Dec 24, 2016 5:59 pm

Just to be clear, is the Malkiel/Ellis example intended as the "bond portion" of a conventional balanced portfolio (ie. 50/50, 60/40, etc.)? Or is it intended as a modern version of an old-school fixed-income portfolio -- meaning one that's closer to 80% bonds (or higher)?

If the former, then it seems much too risky for all but the boldest investors. If the latter, then it's an interesting idea, although not one I'm likely to try. In either case, it seems quite different from the Ferri example.

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Re: Comparing Ferri and Malkiel's Bond Portfolios

Post by nisiprius » Sat Dec 24, 2016 6:27 pm

I'm not an expert, I just stumble through this stuff... for the record, my "non-stocks, non-cash-like" allocation is about 40% Vanguard Total Bond Index, 40% Vanguard Inflation-Protected Securities, and 20% individual Series I savings bonds. Of course I bought most of those I bonds back when you could buy $30,000/year per person, and when the "fixed" rate over inflation was about 3%. I might not put that high a percentage into I bonds if I were starting now.
neomutiny06 wrote:...they say "Total Bond Market" is dangerous because of the 0% future rate of return expected after inflation...
How does that make it "dangerous?" It doesn't make it dangerous. Low return is just low return, it isn't "dangerous," particularly when you have a reasonably good idea in advance of what to expect. Risk is risk, return is return, and it's very important to keep the two concepts separate.

P.S. All of the Malkiel/Ellis suggestions have one thing in common: they're riskier than mind, straight down the line, in every aspect. They advocate higher percentages in stocks than I use. Within stocks, they advocate a higher allocation to international stocks than I use. And with bonds... well... what they're doing is plumb loco. But definitely riskier. Now, Malkiel has described himself, in every edition of A Random Walk Down Wall Street as far as I know, as "one who has been smitten with the gambling urge since birth." So it's a pretty fair guess that he is more risk-tolerant than I am.

So, how risk-tolerant are you, compared with Malkiel?
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Re: Comparing Ferri and Malkiel's Bond Portfolios

Post by TropikThunder » Sat Dec 24, 2016 7:39 pm

neomutiny06 wrote:Malkiel/Ellis bond portfolio (Rebalance IRA):
25% - US High Yield Dividend Stocks
25% - US Corporate Bonds
25% - US High-Yield Corporate Bonds
25% - Emerging Market Bonds

Rick Ferri's bond portfolio (All About Asset Allocation):
60% - US Total Bond Market
20% - US TIPS
20% - US High-Yield Corporate Bonds

I am curious as to what Bogleheads think of these two options. I currently use Rick Ferri's Allocation. But Malkiel/Ellis have me extremely worried about the future of bonds. And they are not interested in Total Bond Market. Could their bond portfolio be a better option moving forward? It is super risky, but they say "Total Bond Market" is dangerous because of the 0% future rate of return expected after inflation.


Three quarters of the Malkiel bond portfolio are things that make many BH'ers shudder when you ask "Is this a safe place to put my fixed income allocation?"

1. High Yield Dividend Stocks are not bonds, do not behave as bonds, will offer no protection in a crash, and should not be thought of as fixed income in any way shape or form. Getting a 4% dividend won't help when the stock drops 50% (because it will be 4% of a 50%-smaller NAV). See the excellent chart posted by nisiprius in this thread:
viewtopic.php?t=205152
And a really good discussion thread started by Larry Swedroe:
viewtopic.php?t=194104

2. US Corporate Bonds: I think these are acceptable, especially intermediate term to balance yield and interest rate risk,and credit risk to me is acceptable. In the Vanguard Intermed Corp fund (VICSX), none of the bonds are below Baa (meaning medium grade or higher). [average coupon 3.7%, average duration 6.5 yrs]

3. High-Yield Corporate Bonds: just a marketing improvement on the term "Junk Bonds". In the Vanguard HY fund (VWEAX), >90% of the bonds are rated Ba1 or lower, for which Moody's descriptions run from "Speculative" at best, to "Substantial Risks" to "Extremely Speculative". Although, on a good note, <1% are considered "Default imminent with little prospect for recovery", so there's that. But High Yield! [average coupon 5.8%, average duration 4.5 yrs]

4. Emerging Market Bonds: um, I don't know enough about these to comment intelligently (that won't stop me!!) but I just don't think I want 25% of my fixed income to be in the form of government bonds issued by China, Mexico, Brazil, Russia, Turkey, Venezuela, etc. Vanguard EM Bond fund (VGAVX) has almost half of its portfolio in those countries, and 40% of the bonds are rated <Baa (i.e., junk; see #3). Do any of those governments instill confidence in ability/willingness to pay me back? [average coupon 5.5%, average duration 6.2 yrs]

Two quotes from people far better then me:
"More money has been lost reaching for yield than at the point of a gun." Raymond DeVoe Jr

"I've always felt that people should be taking risks on the stock side and not on the bond side." William Bernstein

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Re: Comparing Ferri and Malkiel's Bond Portfolios

Post by Call_Me_Op » Sun Dec 25, 2016 7:38 am

If bonds are supposed to be for safety, they both have it wrong - but Rick is closer
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Re: Comparing Ferri and Malkiel's Bond Portfolios

Post by Van » Sun Dec 25, 2016 8:16 am

FWIW: bonds are 75% of my portfolio (retired and 75 years old), and I have limited non-taxable space. The allocation I have selected for bonds is 1/3 Vanguard Total Bond, 1/3 Vanguard intermediate-term investment grade and 1/3 Vanguard intermediate-term tax-exempt. This seems to me like a pretty good mix of the 3 major bond categories, US government, corporate and municipal. No TIPS (I used to own some but I became dissatisfied with the results, perhaps I was just too impatient).

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Re: Comparing Ferri and Malkiel's Bond Portfolios

Post by garlandwhizzer » Sun Dec 25, 2016 12:35 pm

I believe that the bond market is very efficient at pricing risk, more so than the equity market. Whenever any bond asset or bond substitute yields more than high quality bonds it is overwhelmingly likely that more risk comes with it in exact proportion to its increased yield, risk being defined as the probability of substantial/severe loss in a short-intermediate period of time. Most observers today believe that over the next decade or so high quality US and DM bonds will yield little more than the inflation rate, that is to say a near zero total return, taking into account principal loss during a rising rate and increasing inflationary environment. This is why Malkiel avoids most categories of US high quality bonds--he is unwilling to accept a decade long low yield in today's environment where equity returns going forward are also expected to be significantly lower than historical averages. Malkiel's approach offers the likelihood of increased yield and return but the tradeoff is increased volatility and lack of a portfolio anchor in market downturns. Malkiel may well be able to tolerate the emotional crisis of a severe bear market, to keep the faith and hold onto his bond-like assets through the storm, but many of us with different temperaments and in different financial circumstances cannot do so. An alternate approach from Malkiel's to increase expected returns in a world where all quality assets appear to be richly priced is to keep only high quality bonds, good insurance and safety in a market downturn, and take more risk on the equity side of the portfolio either by increasing equity weighting in a cap weighted portfolio, or by using factor investing to attempt to juice returns, or by increasing allocation to what are perceived as riskier areas of the market like EM where risk is clearly greater but since that risk is baked in to current prices, long term returns are likewise expected to be greater. There are many ways to skin this cat, finding the right balance for your particular circumstances, but it always involves trading risk for reward and, to do it right, it requires an in depth knowledge of yourself and your financial circumstances. What is right for Malkiel or Ferri may not be right for you. I'm not a fan of picking an expert and blindly following whatever he recommends because so many experts differ so greatly on approach. Instead it may be best to look critically at all points of view and then pick which one fits you and your circumstances the best.

Garland Whizzer

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Re: Comparing Ferri and Malkiel's Bond Portfolios

Post by Van » Sun Dec 25, 2016 12:55 pm

garlandwhizzer wrote:I believe that the bond market is very efficient at pricing risk, more so than the equity market. Whenever any bond asset or bond substitute yields more than high quality bonds it is overwhelmingly likely that more risk comes with it in exact proportion to its increased yield, risk being defined as the probability of substantial/severe loss in a short-intermediate period of time. Most observers today believe that over the next decade or so high quality US and DM bonds will yield little more than the inflation rate, that is to say a near zero total return, taking into account principal loss during a rising rate and increasing inflationary environment. This is why Malkiel avoids most categories of US high quality bonds--he is unwilling to accept a decade long low yield in today's environment where equity returns going forward are also expected to be significantly lower than historical averages. Malkiel's approach offers the likelihood of increased yield and return but the tradeoff is increased volatility and lack of a portfolio anchor in market downturns. Malkiel may well be able to tolerate the emotional crisis of a severe bear market, to keep the faith and hold onto his bond-like assets through the storm, but many of us with different temperaments and in different financial circumstances cannot do so. An alternate approach from Malkiel's to increase expected returns in a world where all quality assets appear to be richly priced is to keep only high quality bonds, good insurance and safety in a market downturn, and take more risk on the equity side of the portfolio either by increasing equity weighting in a cap weighted portfolio, or by using factor investing to attempt to juice returns, or by increasing allocation to what are perceived as riskier areas of the market like EM where risk is clearly greater but since that risk is baked in to current prices, long term returns are likewise expected to be greater. There are many ways to skin this cat, finding the right balance for your particular circumstances, but it always involves trading risk for reward and, to do it right, it requires an in depth knowledge of yourself and your financial circumstances. What is right for Malkiel or Ferri may not be right for you. I'm not a fan of picking an expert and blindly following whatever he recommends because so many experts differ so greatly on approach. Instead it may be best to look critically at all points of view and then pick which one fits you and your circumstances the best.

Garland Whizzer


This seems to provide a common sense and well-considered answer to the question posed by the OP, as well as something I think anyone would benefit from reading.

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Re: Comparing Ferri and Malkiel's Bond Portfolios

Post by jalbert » Sun Dec 25, 2016 1:27 pm

You might also consider the Swensen bond portfolio:

50% intermediate treasuries
50% intermediate TIPs

And increase equity allocation a little bit.

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Re: Comparing Ferri and Malkiel's Bond Portfolios

Post by oldcomputerguy » Sun Dec 25, 2016 1:32 pm

neomutiny06 wrote:Malkiel/Ellis bond portfolio (Rebalance IRA):
25% - US High Yield Dividend Stocks
25% - US Corporate Bonds
25% - US High-Yield Corporate Bonds
25% - Emerging Market Bonds

Rick Ferri's bond portfolio (All About Asset Allocation):
60% - US Total Bond Market
20% - US TIPS
20% - US High-Yield Corporate Bonds

I am curious as to what Bogleheads think of these two options. I currently use Rick Ferri's Allocation. But Malkiel/Ellis have me extremely worried about the future of bonds. And they are not interested in Total Bond Market. Could their bond portfolio be a better option moving forward? It is super risky, but they say "Total Bond Market" is dangerous because of the 0% future rate of return expected after inflation.


Who are "they" and how do they know what the future return of bonds will be?
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