Deciding on types of bonds is harder than stocks!

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simplesauce
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Deciding on types of bonds is harder than stocks!

Post by simplesauce » Tue Jan 17, 2017 12:42 pm

I decided my international stock allocation a long time ago. And have not wrestled with it much at all. And I use Total Market funds. Easy.

But bonds....wow that is a complicated world.

I used to hold Total Bond Market and called it a day. But after learning about the complexities and prepayment risk of Mortgage Backed Securities, the challenges of Corporate bonds and the call risks, decline at the exact wrong times, etc...I did some reevaluating.

The purpose of bonds for me is to keep my money safe. I don't need an extra 1-2% yield right now. I am not withdrawing for some time.

Recently, I've been reading Larry Swedroe and David Swensen. Both recommend a split between treasuries and TIPS.

So far, the most sensible portfolio seems to be 50% TIPS and 50% Treasuries, as David Swensen recommends. This provides what the long-term investor needs in bonds. I know some investors are spooked because of the erratic behavior of TIPS in the crisis. And I know others do not like treasuries because of the very low yield. But as far as long-term investing, this seems like a solid allocation.

Thoughts?

dbr
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Re: Deciding on types of bonds is harder than stocks!

Post by dbr » Tue Jan 17, 2017 7:09 pm

One thought is that the more debate there is the less the answer matters.

Another thought is that bonds supply an excellent pinhead on which to dance.

There is a reason the three fund portfolio often recommended here simply selects a total bond market index even though the nature of that index can be debated forever.

I doubt anyone can argue that half TIPS and half Treasuries in a portfolio of stocks and bonds is a serious error.

Trying to find better portfolios to replace good enough portfolios is an engrossing pastime but does not always benefit the investor.

Rodc
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Re: Deciding on types of bonds is harder than stocks!

Post by Rodc » Tue Jan 17, 2017 7:20 pm

dbr wrote:One thought is that the more debate there is the less the answer matters.

Another thought is that bonds supply an excellent pinhead on which to dance.

There is a reason the three fund portfolio often recommended here simply selects a total bond market index even though the nature of that index can be debated forever.

I doubt anyone can argue that half TIPS and half Treasuries in a portfolio of stocks and bonds is a serious error.

Trying to find better portfolios to replace good enough portfolios is an engrossing pastime but does not always benefit the investor.
+ 1

This is an area where losing sleep over the decision makes no sense. If you want to feel better plot the growth of $10K for TBM, intermediate treasuries, intermediate TIPS, and some other intermediate high quality bond fund. Maybe toss in a short term bond fund.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

Day9
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Re: Deciding on types of bonds is harder than stocks!

Post by Day9 » Tue Jan 17, 2017 7:44 pm

Add CDs to the list as well. They have significantly higher yield than equal duration treasuries but are still FDIC insured up to $250k per institution which makes them good for the little guy.

If going all-in Total Bond Market for your fixed income allocation is a crime, it's a misdemeanor not a felony.
I'm just a fan of the person I got my user name from

Random Walker
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Re: Deciding on types of bonds is harder than stocks!

Post by Random Walker » Tue Jan 17, 2017 8:49 pm

I really like the concept of taking the risk on the equity side and limiting the bonds to highest quality and short to intermediate term. Very hard to argue with 50% Treasuries 50% TIPS in a tax deferred account. In taxable, highest quality Munis with likely some CDs at the short end of the spectrum.

Dave

itstoomuch
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Re: Deciding on types of bonds is harder than stocks!

Post by itstoomuch » Tue Jan 17, 2017 9:21 pm

I've come the conclusion I only want to watch equities and not IOUs in funds and individual issues.
ymmv
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swguy
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Re: Deciding on types of bonds is harder than stocks!

Post by swguy » Tue Jan 17, 2017 9:37 pm

dbr wrote: Trying to find better portfolios to replace good enough portfolios is an engrossing pastime but does not always benefit the investor.
+1000

This sort of optimization, while an interesting mental exercise isn't usually rewarded with immensely higher returns.

brad.clarkston
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Re: Deciding on types of bonds is harder than stocks!

Post by brad.clarkston » Tue Jan 17, 2017 9:41 pm

simplesauce wrote:I decided my international stock allocation a long time ago. And have not wrestled with it much at all. And I use Total Market funds. Easy.

But bonds....wow that is a complicated world.

I used to hold Total Bond Market and called it a day. But after learning about the complexities and prepayment risk of Mortgage Backed Securities, the challenges of Corporate bonds and the call risks, decline at the exact wrong times, etc...I did some reevaluating.

The purpose of bonds for me is to keep my money safe. I don't need an extra 1-2% yield right now. I am not withdrawing for some time.

Recently, I've been reading Larry Swedroe and David Swensen. Both recommend a split between treasuries and TIPS.

So far, the most sensible portfolio seems to be 50% TIPS and 50% Treasuries, as David Swensen recommends. This provides what the long-term investor needs in bonds. I know some investors are spooked because of the erratic behavior of TIPS in the crisis. And I know others do not like treasuries because of the very low yield. But as far as long-term investing, this seems like a solid allocation.

Thoughts?
You and me both ... I went to:

50% - Fidelity US Bond Index Investor CLASS -- (FBIDX)
50% - Vanguard Short-Term Infl-Prot Secs ETF -- (VTIP)

but staid with 100% - Vanguard Total Bond Admiral - (VBTLX) in my VG account about a year ago and now I'm just about read to throw in the towel and go back to a Pimco managed fund ... well not quickly my IPS says no changes until I've held a fund for a year.

brad.clarkston
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Re: Deciding on types of bonds is harder than stocks!

Post by brad.clarkston » Tue Jan 17, 2017 9:42 pm

dbr wrote: Trying to find better portfolios to replace good enough portfolios is an engrossing pastime but does not always benefit the investor.
That's true, but it doesn't make me OSD any less over it.

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galeno
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Re: Deciding on types of bonds is harder than stocks!

Post by galeno » Tue Jan 17, 2017 10:05 pm

I'm also obsessed with our bond allocation. I torture myself with it.

1. 100% TBM. Great workhorse. Simple. Good correlation effect. Some don't like the MBS.

2. 50% USA treasuries + 50% TIPS. Inflation protection. Great correlation effect.

3. 50% USA treasuries + 50% corporates. Good correlation effect. Good yield. This is what we use.

4. 60% TBM + 20% TIPS + 20% HY = Rick Ferri bond allocation.

5. 30% treasuries + 30% corporates + 20% TIPS + 20% HY. We're thinking using doing this. But probably won't.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

ExpatChris
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Re: Deciding on types of bonds is harder than stocks!

Post by ExpatChris » Tue Jan 17, 2017 10:59 pm

As a non-US domiciled I am currently all Ireland based Vanguard Global Short term Bond fund. It is well diversified internationally, app. 25% Corporate vs. 75% Government based and the average duration of 2.6 years.

I am also thinking hard about including a larger percentage of Corporates and or High Yield at the moment. I am not a great fan of TIPs and prefer to hold an allocation to the Bloomberg broad commodity index instead.

Morik
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Re: Deciding on types of bonds is harder than stocks!

Post by Morik » Wed Jan 18, 2017 1:23 am

Total bond market index invests in a lot of treasuries (~42% according to my 401k's fund page), so I don't feel the need to add those. It already falls roughly in-line with what others in the thread have said is recommended by several experts (50% treasuries).

Purchasing I-Bonds seems like a good way to acquire additional tax-deferred space while at the same time adding some inflation-protected bonds.

I have access to TIAA traditional and roughly half our fixed income is in it now. Over time I plan to add I-Bonds, starting next year. We'll end up with a mix of TIAA traditional, Total Bond Market, and I-Bonds.

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tarheel
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Re: Deciding on types of bonds is harder than stocks!

Post by tarheel » Wed Jan 18, 2017 6:02 am

Larry says TBM has too much corporates.
Bogle says TBM has too much treasuries.
I say it's close enough.

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galeno
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Re: Deciding on types of bonds is harder than stocks!

Post by galeno » Wed Jan 18, 2017 6:46 am

This is why we use 50% treasuries + 50% corporates.
tarheel wrote:
Larry says TBM has too much corporates.
Bogle says TBM has too much treasuries.
I say it's close enough.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

Dandy
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Re: Deciding on types of bonds is harder than stocks!

Post by Dandy » Thu Jan 19, 2017 11:38 am

I agree that the fixed income side isn't as simple as I once thought and is a bit more important that "just put it all in the Total Bond fund" (which is a pretty good fund).

People think bonds/bond funds instead of fixed income. If your allocation to fixed income is mostly for safety not income then CDs, online Savings, Stable Value Funds, Money Market Deposit Accounts can play an important role.

I use VG brokerage CDs, Savings and Money Market Deposit accounts, in addition to VG TIPS fund, and several short term and intermediate term bond funds. Allocate fixed income about 1/3 no loss of principal, 1/3 short term bond funds and 1/3 intermediate bond funds including the TIPS fund. Overall allocation is 42/58.

If fixed income is for safety - TIPS/TIPS funds for inflation protection, FDIC products for "no" default risk, and Treasury bonds/funds for when there is a flight to quality during scary economic times. I would add consider annuities for income that lasts for life. I don't expect to have annuities but will be shifting some fixed income assets to Treasury funds this year. If you have a variety of "safe" fixed income products you don't have to over worry about rebalancing them e.g. short term treasury fund vs 1 year CD vs online Savings? etc. who cares?

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billyv
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Re: Deciding on types of bonds is harder than stocks!

Post by billyv » Fri Jan 20, 2017 5:13 pm

Looking at the bond mix in VTINX, which is Vanguard's post-retirement target-date fund, one finds the following recipe for bond nirvana: 50% Total Bond, 25% Total Int'l Bond and 25% short-term TIPS. Not saying it's for everybody, but it does seem to represent Vanguard's current thinking on optimal bond allocation. (Also, please note that since I'm just taking a break from dinner-making duties, I simplified the actual percentages; the Total Bond allocation in VTINX is slightly higher -- and the int'l and TIP's portions slightly lower -- than 50-25-25.)

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galeno
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Re: Deciding on types of bonds is harder than stocks!

Post by galeno » Sat Jan 21, 2017 9:31 am

Our "FI nirvana" looks like this: 40% TIPS + 25% interm treas + 25% corps + 10% cash.

The whole port: 40% equity + 25% TIPS + 15% interm treas + 15% corps + 5% cash.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

Quark
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Re: Deciding on types of bonds is harder than stocks!

Post by Quark » Sat Jan 21, 2017 9:49 am

Rodc wrote:
dbr wrote:One thought is that the more debate there is the less the answer matters.

Another thought is that bonds supply an excellent pinhead on which to dance.

There is a reason the three fund portfolio often recommended here simply selects a total bond market index even though the nature of that index can be debated forever.

I doubt anyone can argue that half TIPS and half Treasuries in a portfolio of stocks and bonds is a serious error.

Trying to find better portfolios to replace good enough portfolios is an engrossing pastime but does not always benefit the investor.
+ 1

This is an area where losing sleep over the decision makes no sense. If you want to feel better plot the growth of $10K for TBM, intermediate treasuries, intermediate TIPS, and some other intermediate high quality bond fund. Maybe toss in a short term bond fund.
+1 (or is it +2?).

Good enough is good enough in the face of uncertainty over the future and the limited difference the decision is likely to make. Google "maximizer vs satisficer", for example, http://gretchenrubin.com/happiness_proj ... u_a_satis/

RobLIC
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Re: Deciding on types of bonds is harder than stocks!

Post by RobLIC » Sat Jan 21, 2017 9:55 am

Hi, a naive question: Regarding your comments about Swedroe and Swensen, what are the corresponding Vanguard tickers for treasuries and TIPS? I realize I may not fully understand if there is a way to purchase only treasuries in a Vanguard fund. Thanks.
simplesauce wrote:I decided my international stock allocation a long time ago. And have not wrestled with it much at all. And I use Total Market funds. Easy.

But bonds....wow that is a complicated world.

I used to hold Total Bond Market and called it a day. But after learning about the complexities and prepayment risk of Mortgage Backed Securities, the challenges of Corporate bonds and the call risks, decline at the exact wrong times, etc...I did some reevaluating.

The purpose of bonds for me is to keep my money safe. I don't need an extra 1-2% yield right now. I am not withdrawing for some time.

Recently, I've been reading Larry Swedroe and David Swensen. Both recommend a split between treasuries and TIPS.

So far, the most sensible portfolio seems to be 50% TIPS and 50% Treasuries, as David Swensen recommends. This provides what the long-term investor needs in bonds. I know some investors are spooked because of the erratic behavior of TIPS in the crisis. And I know others do not like treasuries because of the very low yield. But as far as long-term investing, this seems like a solid allocation.

Thoughts?

dbr
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Joined: Sun Mar 04, 2007 9:50 am

Re: Deciding on types of bonds is harder than stocks!

Post by dbr » Sat Jan 21, 2017 10:15 am

RobLIC wrote:Hi, a naive question: Regarding your comments about Swedroe and Swensen, what are the corresponding Vanguard tickers for treasuries and TIPS? I realize I may not fully understand if there is a way to purchase only treasuries in a Vanguard fund. Thanks.
Go here: https://investor.vanguard.com/mutual-fu ... nd-returns and scroll down to the section "Bond funds
Treasury/Agency" and look at the list. It is pretty easy to find TIPS, etc., etc. It may take a little more reading of the fund description to distinguish agency bonds from Treasuries per se.

RobLIC
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Re: Deciding on types of bonds is harder than stocks!

Post by RobLIC » Sat Jan 21, 2017 10:17 am

Thank you, DBR.

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