Swedroe's guidelines to Bonds

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Kevin M
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Re: Swedroe's guidelines to Bonds

Post by Kevin M » Wed Jan 25, 2017 4:25 pm

aj76er wrote: Hi Kevin,

Do you feel this recommendation applies to Brokered CDs as well? Relative to 5yr Treasuries, I don't think the spreads are that different (although haven't checked recently). I believe this is the only type of CD available to me in my 401k. Even if there were some premium to CDs, it seems it would be difficult to rebalance with equities if/when tolerance bands are hit.

Thanks!
Larry's recommendation applies to brokered CDs, since that's what his firm uses for its clients. Currently 5-year Treasury yield is 1.99% and I see a 5-year CD at Vanguard at 2.25%. So the spread of about 25 bps is larger than the 10 bps at which Larry said one should prefer Treasuries, but much less than the 100 bps spread that he said he's seen on "longer-term" CDs.

I'd say consider taking the CD 25 bps premium for the portion of your fixed income you can hold to maturity, but stick with Treasuries for the portion you might want for rebalancing. Or maybe hold off on CDs until the yield spread is more favorable.

I've been using direct CDs exclusively for the last 6+ years (now about 75% of fixed income and 52% of portfolio), and my average yield premium over Treasuries of same maturity for CDs purchased since late 2010 is 117 bps, and on a dollar-weighted basis, 124 bps. There have been some really good CD deals the last couple of years, so my yield premium for CDs purchased in 2015 and 2016 is 150 bps.

CD yield premiums are significantly smaller now with the recent increases in Treasury yields, with most good 5-year CDs at 2.3%. There's still a 7-year CD available at 3%, so a premium of 67 bps over the 7-year Treasury yield of 2.33%.

Of course the direct CD yields aren't relevant to the brokered CDs that you might be able to buy in your 401k, but I share them for some perspective.

Kevin
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Re: Swedroe's guidelines to Bonds

Post by Desert » Wed Jan 25, 2017 4:35 pm

I like the mix of 5-year CD's in combination with a slice of Long Term Treasuries to capture any flight to quality behavior during equity bear markets.

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Re: Swedroe's guidelines to Bonds

Post by larryswedroe » Wed Jan 25, 2017 4:42 pm

Kevin
couple of other points

First, the spreads on CDs widen and narrow depending on liquidity conditions for banks and flights to quality. And you only need one bank with a special need and yields can jump. Say a bank has big client who wants a 7 year loan---well that bank might bid up the yield on 7 year CDs.

Second, the wider spreads tend to happen not just with bear markets when foreign demand for Treasuries drives yields way down, but also on LONGER CDs, which can go out to 10 years. And that's helpful in building ladders. The spreads at the shorter end tend to be narrower.

And of course anyone can buy CDs direct on their own.
Larry

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Re: Swedroe's guidelines to Bonds

Post by robertmcd » Wed Jan 25, 2017 4:43 pm

Thank you larry.

I plan on using 2.1% 5 yr CDs with a 3 month EWP as my 60% fixed income allocation in taxable. With my limited roth space (only tax advantaged space now) of 12k for my international value, emerging markets value, and int/em small cap.

One more question though, if I am planning on buying a house in the next 3-7 years, am I wrong to assume that I can use a large portion of my 60% fixed income in taxable to buy it. After a house purchase, I will not worry as much about the drawdown in my portfolio and may go to 60/40 or 80/20 for example. In other words, will I get burned by small/value underperformance if I don't have the large fixed income allocation ready to rebalance, or do I just need to be okay with seeing a much larger drop in portfolio when the fixed income is not there anymore?

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Re: Swedroe's guidelines to Bonds

Post by aj76er » Wed Jan 25, 2017 4:51 pm

Thank you all. This is some good insight!

Kevin, I just checked Fidelity's website, and my numbers agree with yours:
5 yr Treasuries: 2%
5 yr Brokered CDs: 2.30%

And yes, a longer maturity direct CD with a favorable EWP and available for an IRA would certainly be a great option :). Unfortunately, nearly all my tax-advantaged is in 401k, so I'd have to consider tax consequences on any direct CDs subject to my tax rate (25% federal + 9% state).

As I'm still actively working and contributing to 401k, I think the best course of action is to diversify some of my TBM holdings into Brokered CD's to capture a higher yield. However, keeping some of my TBM for future automated purchases + rebalancing makes sense.

Also, I suppose the brokered CD's have the issues of interest-on-interest; not sure if the interest payments can be automatically invested in other funds (outside of brokerage link). Will have to check on that.
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Re: Swedroe's guidelines to Bonds

Post by lack_ey » Wed Jan 25, 2017 4:52 pm

Cardio wrote:Not Larry, but I recall he did a blog post in which he analyzed ST corporate bonds vs Treasuries as the FI portion of a balanced portfolio of equities and FI. Over the period analyzed (which was a non-cherry picked, reasonably long interval), the corporate FI fund gave no net return benefit and was associated with higher volatility. If memory serves, corporate bonds had a slightly higher return than Treasuries, but when placed in the portfolio, no net benefit due to the risks showing up at the wrong time, flight to quality,etc. as Larry has explained.
Taking a quick look into that now (ST corp vs. ST Treasury)...

I don't know if this is properly duration matched, but here looking at iShares 1-3 Year Credit Bond ETF (CSJ) vs. pure iShares 1-3 Year Treasury Bond ETF (SHY), for the last almost 10 years:
https://www.portfoliovisualizer.com/bac ... tion4_2=22

Over that period, ignoring tax and the fact that you could have gotten better yields on CDs vs. Treasuries, using some corporate bonds was actually slightly better even adjusting for vol or drawdown (if you took away from equities slightly).

Going back to 1988, using Vanguard Short-Term Investment Grade Fund (VFSTX) vs. Vanguard Short-Term Federal Fund (VSGBX):
https://www.portfoliovisualizer.com/bac ... tion3_2=20

Over the last ~30 years, doesn't look much different either way, short-term corporates or no. I don't know if the duration was well matched or not so maybe there are nuisance variables distorting this comparison. I think maybe checking some indexes might be better but this is easier.

ST corporates don't look conclusively worse for portfolio construction (if in tax-advantaged accounts), at least if not tilting equities. Though I think another argument is that credit risk mixes worse with value, small value, which is not addressed here.

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Re: Swedroe's guidelines to Bonds

Post by aj76er » Wed Jan 25, 2017 4:56 pm

And just for reference, BND has a SEC yield of 2.40%
But of course, there is more risk there. I'm curious, at what yield premium would BND be considered a decent bet? 10bps over FDIC insured CDs seems small.
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Re: Swedroe's guidelines to Bonds

Post by aj76er » Wed Jan 25, 2017 5:08 pm

larryswedroe wrote: Second, the wider spreads tend to happen not just with bear markets when foreign demand for Treasuries drives yields way down, but also on LONGER CDs, which can go out to 10 years. And that's helpful in building ladders. The spreads at the shorter end tend to be narrower.
Hi Larry,

It seems the spread on 10yr CD's is currently the sweet spot over treasuries, and are yielding ~3% (~50bps premium). Is your strategy generally to ladder the CD's? Perhaps initially setup a 10yr ladder, with each CD maturing in 1yr? Then, based on spreads roll the ladder into either a 10yr treasury or 10yr CD? Or, due to liquidity concerns, would you not go above 5yr maturity?

Thanks!
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Re: Swedroe's guidelines to Bonds

Post by Kevin M » Wed Jan 25, 2017 5:22 pm

Also want to mention that the CD/Treasury tradeoff is somewhat different for direct CDs, due to the early withdrawal option. So although I'd agree with Larry that there's no point in using brokered CDs unless you get a decent yield premium to compensate for reduced liquidity, for direct CDs your term risk is significantly reduced by the early withdrawal option, so a direct CD has a superior risk-adjusted expected return even with no yield premium, or even perhaps with a negative yield premium.

Or to look at it another way, the expected return of a direct CD over the original term to maturity is somewhat higher than the APY. This is because if a CD becomes available with an APY that is enough higher than the CD you're holding, you can do an early withdrawal and reinvest at the higher rate, giving you a higher return over the original term (of course you have to factor in the early withdrawal penalty).

Real life example: A few years ago I bought several 5-year CDs at about 2% from Ally Bank and Barclays Bank, then when the PenFed 3% CD deal came along in late 2013, I did early withdrawals from the 2% CDs to buy the 3% CDs. At that time the early withdrawal penalty on the Ally CDs was only two months of interest and on the Barclays CD it was three months of interest, so this was an even easier decision. More recently, some people have been doing early withdrawals from ballpark 2% CDs to buy the 7-year 3% CD from Andrews FCU.

Of course you could make an argument that the expected 5-year return for a 5-year Treasury sold after three years and reinvested in another 5-year Treasury is higher than the original yield on the Treasury due to a positively sloped yield curve ("riding the yield curve"). Interestingly, you can benefit from this with steady or falling Treasury yields, while with the direct CD you benefit with rising CD rates (or simply from a better CD deal coming along).

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Re: Swedroe's guidelines to Bonds

Post by larryswedroe » Wed Jan 25, 2017 5:28 pm

Kevin, that's certainly true if the early redemption premium is small which it typically is as most of these are created by bank marketing departments, not their finance/treasury people. I know having worked at a big bank. So yes they have advantage

ajer
We typically build portfolios out to about 10 years with average maturity of 4-5, depending on yield curve. When it's steep, like now we tend to go bit longer, and when really flat like was when 10 year Treasury was about 1.5 or so, then we tend to shorten up a bit. So average maturity wanders a bit from 4-maybe 6 years at outside. Note that is what the academic research shows, when curves are steepest they have rewarded the most and vice versa. Hope that helps
Larry

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Re: Swedroe's guidelines to Bonds

Post by bertilak » Wed Jan 25, 2017 7:27 pm

This is a complex thread with lots of theory. I would like to ask a practical question with a couple of follow-ups:

First, background: I have a 60/40 AA with Vanguard's TBM for the 40%. The 60% is 48% Vanguard TSM and 12% Vanguard TISM. I am retired. I need no income from my portfolio as I have a great pension along with SS. As a matter of fact, I have about $15K left over to keep investing. I expect that someday either inflation or desire to up my standard of living might require me to dip into my portfolio.

So, the questions:
  • Should I replace the TBM with something else?
  • If so, what?
  • Can I keep it in the Vanguard family?
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Re: Swedroe's guidelines to Bonds

Post by Doc » Wed Jan 25, 2017 7:34 pm

Kevin M wrote:
Doc wrote:I follow all of Larry's recommendations as well as I can.
Really? What about this one:
larryswedroe wrote:Just to add that should use CDs instead of Treasuries when you have access to them, unless spread in yields very thin
:twisted: :beer
Doc wrote:(I keep Larry's bond book on the end table next to my computer. Thanks neighbor. :wink: )
Does the book include Larry's recommendations about CDs?

Kevin
YES.
larryswedroe wrote:robert, that is fine, unless have access to CDs.

ajer
I have owned brokered CDs and if need be can sell them prior to maturity, though not as liquid as Treasuries, so you may want to keep some liquidity in safer assets to rebalance in bear markets

Kevin, see comment to ajer above. It's one reason one should consider holding some Treasuries or government/agencies vs. all CDs. Trade off is the higher yield in CDs with the lower benefit they offer in bear markets with liquidity flights. One is certain, the other tends to show up rarely, though does happen. And of course in most 401k plans don't have access to CDs.

Larry
Kevin, we've been over this again and again. Access, bear market benefits, roll yield and tax considerations mean that your approach is not a one size fits all solution. Your ideas are not wrong it is just they are not universally applicable. Your solution does not apply to my situation.

Don't look at investment decisions with one eye closed. :P :beer yourself. :wink:
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Re: Swedroe's guidelines to Bonds

Post by Doc » Wed Jan 25, 2017 7:43 pm

bertilak wrote: So, the questions:
  • Should I replace the TBM with something else?
  • If so, what?
  • Can I keep it in the Vanguard family?
1) Whether you replace TBM or not is a highly personal question.

2) If you want to go 100% towards Larry's position use a short and intermediate term Treasury fund and a short term corporate fund.

3) Yes you can get them all with Vanguard.

(If CD's make sense for you tax situation it may be more difficult to do with Vanguard since the "best" CD's are usually direct CD's)
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Re: Swedroe's guidelines to Bonds

Post by bertilak » Wed Jan 25, 2017 7:47 pm

Doc wrote:
bertilak wrote: So, the questions:
  • Should I replace the TBM with something else?
  • If so, what?
  • Can I keep it in the Vanguard family?
1) Whether you replace TBM or not is a highly personal question.

2) If you want to go 100% towards Larry's position use a short and intermediate term Treasury fund and a short term corporate fund.

3) Yes you can get them all with Vanguard.

(If CD's make sense for you tax situation it may be more difficult to do with Vanguard since the "best" CD's are usually direct CD's)
Thnks, Doc, for the quick and to-the-point response.
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Re: Swedroe's guidelines to Bonds

Post by markfaix » Wed Jan 25, 2017 8:26 pm

Another implementation question:

For my 401(k) non-TIPS bond allocation, I'm trying to decide between a CD ladder or the Vanguard short term corporate bond fund (which I know Larry S doesn't fully endorse, but a short end of the spectrum, there does seem to be some benefit).

In my 401(k) provider, a 1-5 yr CD ladder would have a ladder APY of 1.77%. The Vanguard short term corporate SEC yield is 1.94%, avg maturity 3.1 yr.

The Vanguard fund is slightly riskier with slightly higher return, but less hassle and easier to rebalance. Any criteria re how to choose between the two options?

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Re: Swedroe's guidelines to Bonds

Post by larryswedroe » Wed Jan 25, 2017 8:40 pm

markfaix
If going to take corporate risk one place to do it is short end (the other is with fallen angels) where don't have anywhere near the default risk nor the call risk which is asymmetric. The effective yields look effectively the same, so why take the credit risk for very little premium?
Larry

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Re: Swedroe's guidelines to Bonds

Post by aj76er » Wed Jan 25, 2017 8:41 pm

markfaix wrote:Another implementation question:

For my 401(k) non-TIPS bond allocation, I'm trying to decide between a CD ladder or the Vanguard short term corporate bond fund (which I know Larry S doesn't fully endorse, but a short end of the spectrum, there does seem to be some benefit).

In my 401(k) provider, a 1-5 yr CD ladder would have a ladder APY of 1.77%. The Vanguard short term corporate SEC yield is 1.94%, avg maturity 3.1 yr.

The Vanguard fund is slightly riskier with slightly higher return, but less hassle and easier to rebalance. Any criteria re how to choose between the two options?
As stated earlier in this thread... the problem with corp bond fund is that during market corrections the corp bonds start "behaving" like equities on the way down. Thus, the risks inherent in corp bonds tend to show up at the wrong time. I'd be hesitant to use this as your only nominal bond holding.
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Re: Swedroe's guidelines to Bonds

Post by markfaix » Wed Jan 25, 2017 8:47 pm

larryswedroe wrote:markfaix
If going to take corporate risk one place to do it is short end (the other is with fallen angels) where don't have anywhere near the default risk nor the call risk which is asymmetric. The effective yields look effectively the same, so why take the credit risk for very little premium?
Larry
Larry
Makes sense. What premium would you want for short-term corporate fund over CDs?

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Re: Swedroe's guidelines to Bonds

Post by lack_ey » Wed Jan 25, 2017 8:49 pm

markfaix wrote:Another implementation question:

For my 401(k) non-TIPS bond allocation, I'm trying to decide between a CD ladder or the Vanguard short term corporate bond fund (which I know Larry S doesn't fully endorse, but a short end of the spectrum, there does seem to be some benefit).

In my 401(k) provider, a 1-5 yr CD ladder would have a ladder APY of 1.77%. The Vanguard short term corporate SEC yield is 1.94%, avg maturity 3.1 yr.

The Vanguard fund is slightly riskier with slightly higher return, but less hassle and easier to rebalance. Any criteria re how to choose between the two options?
Slightly higher return? SEC yield is not quite a best estimate of forward return. You have some slippage from credit downgrades (which can result in selling at a loss if falling below investment grade) as well as the occasional actual default. Though of course the amount and impact depends on the environment, and some bonds might even get upgrades. On the other hand you may ride the yield curve slightly and get some rolldown return if it's upwards sloping (when a bond reaches 1 year old and gets sold by the fund or there's some other selling as part of portfolio maintenance, it may be at a premium). And there definitely are effects from the yield curve and credit spreads changing, though you could argue for zero expected (on average) contribution there.

For reference, ETF shares on 8/31/2013 had an SEC yield of 1.63%, which moved to 1.73% by 8/31/2016. Annualized return over those three years was 2.70%.

The CD ladder would range from 3 yr average maturity down to 2 year right when you need to buy a new rung (when 5->4, 4->3, 3->2, 2->1, 1->0). So more like 2.5 yr on average. I guess the bigger deal is not having the credit risk.

Keep in mind Vanguard's fund is investment grade, but that's at 42.5% Baa and 40.7% A. Not much of the very high quality stuff.

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"The Three-Fund Portfolio"

Post by Taylor Larimore » Wed Jan 25, 2017 10:21 pm

bertilak wrote: So, the questions:
  • Should I replace the TBM with something else?
  • If so, what?
  • Can I keep it in the Vanguard family?
bertilak:

Diversified TBM (Vanguard Total Bond Market Index Fund) is now the largest bond fund in the world for good reasons. Stay-the-course with your Three-Fund Portfolio and its many advantages.
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Best wishes.
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Re: "The Three-Fund Portfolio"

Post by simplesauce » Thu Jan 26, 2017 7:30 am

Taylor Larimore wrote:
bertilak wrote: So, the questions:
  • Should I replace the TBM with something else?
  • If so, what?
  • Can I keep it in the Vanguard family?
bertilak:

Diversified TBM (Vanguard Total Bond Market Index Fund) is now the largest bond fund in the world for good reasons. Stay-the-course with your Three-Fund Portfolio and its many advantages.
The enemy of a good plan is the dream of a perfect plan. -- Jack Bogle
Best wishes.
Taylor
Taylor, even though there are "risks" or "bad qualities" with MBS and corporate bonds, you believe that the advantages of Total Bond Market (one fund, low cost, simplicity, diversification) outweigh some of the potential concerns of these riskier bonds?

In other words, using corporates on their own, or MBS on their own, you would expose yourself to those risks. But in TBM, there is enough quality to offset the concerns?

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Re: Swedroe's guidelines to Bonds

Post by larryswedroe » Thu Jan 26, 2017 8:59 am

markfaix
Depends on the credit quality of the fund, the higher the lower the premium. And that figure will shift as credit risks show up (that's the equity like risk). And would avoid anything with more than 3 year maturity basically (though that's not a "hard stop"). But with that said can consider perhaps say something like 30-40bp at a minimum requirement of extra expected return, taking into account the fund's ER which avoid with CDs or Treasuries (at least can avoid).
Larry

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Re: Swedroe's guidelines to Bonds

Post by Kevin M » Thu Jan 26, 2017 11:37 am

Doc wrote: Kevin, we've been over this again and again. Access, bear market benefits, roll yield and tax considerations mean that your approach is not a one size fits all solution. Your ideas are not wrong it is just they are not universally applicable. Your solution does not apply to my situation.
Yes, we've been over this at length, but the twist of this thread is how closely we are following Larry's advice about bonds. So this is not about "my approach", but about how closely we are following Larry's approach. Let's stay focused on that in this thread.

You say that you are following it as well as you can, yet you hold little-to-no CDs despite Larry's clear recommendation that CDs should be preferred over Treasuries if the yield premium is decent. As I've pointed out, my average yield premium for CDs purchased over the last six+ years is greater than 100 bps, which is WAY larger than the 10 bps example threshold that Larry mentioned.

You emphasize the flight-to-quality benefit of Treasuries, which of course Larry acknowledges (as I have acknowledged in our previous discussions), but seem to ignore Larry's qualifier about perhaps holding some Treasuries for this reason, as well as Larry's point about the certain "free lunch" from the CD premium vs. the uncertain and much less frequent flight to quality benefit (a point I also have made numerous times). I have suggested many times in our previous discussions that one may want to supplement one's CD holdings with some Treasuries, specifically for rebalancing in flight-to-quality scenarios, so Larry and I seem to be perfectly aligned on this point.

I'll also point out that where you and I both diverge from Larry's advice is that we hold some corporate bonds in the form of our investment-grade bond funds. I also diverge from his advice in holding the Vanguard CA tax-exempt bond funds, so not all AA or above, and certainly not holding just the specific types of munis that Larry recommends. In my case, the sin is minor, since less than 20% of my fixed income is in bond funds, so very little exposure to either the corporates or munis that Larry does not recommend--in the case of corporates and MBS, less of a sin than TBM, for example.

Kevin
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Re: Swedroe's guidelines to Bonds

Post by larryswedroe » Thu Jan 26, 2017 11:56 am

Kevin
If going to "sin" sin a little (:-))
Larry

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Re: Swedroe's guidelines to Bonds

Post by lack_ey » Thu Jan 26, 2017 11:57 am

Kevin, have you looked at SEC yield vs. return for corporate bonds, say short-term corporates or others? I recall something before using total bond, maybe muni bonds. I imagine especially for high yield it would look different because of defaults but don't have a feel for the magnitude of the effect.

What was the data source you had for determining historical fund SEC yield? Was it just old fund filings on the SEC site or something else?


Actually, while on the subject, Larry, you've mentioned fallen angels a number of times before as an area of high yield that is relatively rewarded (with the position that the rest is not). Have you or your team ever evaluated VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL)? Do you know what their exposure looks like, if they're buying fallen angels soon enough after they're downgraded to get any benefit, etc.? All I know there is that return for the fund since inception looks good, even adjusting for the extra duration (though still less than 5 yrs). I know you don't like bond ETFs, especially the lower the credit quality and more potential issues with price dislocations from sell herding etc...

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Re: Swedroe's guidelines to Bonds

Post by ruralavalon » Thu Jan 26, 2017 12:17 pm

simplesauce wrote:I was just reading Larry Swedroe's bonds book. He summarizes some general guidelines to follow. I'm wondering how many Bogleheads follow some of these. Here are a few:

-Avoid any bonds longer than 10-years
-Avoid bonds with ratings under AA
-Favor Treasuries and TIPS
-Municpals are OK if using the higher qualities (AAA, AA). Must diversify.
-Corporates have issues, not recommended unless highest quality. Must diversify
-Say no to Mortgage Backed Securities
-If using high-yield, add to your equities allocation, not bonds. In general, the risk has not been rewarded.
I read his book years ago, it is very good.

We follow his recommendations almost exactly. The only real differences are an average credit quality of A rather than AA, and use of an intermediate-term corporate bond fund for one of our bond funds.

We use Vanguard Intermediate-term Bond Index Fund (VBILX), average effective duration = 6.52 years, average credit quality A, no mortgage backed securities.

We use Vanguard Intermediate-term Investment Grade Bond Fund (VFIDX), average effective duration = 5.48 years, average credit quality = A, mostly corporate bonds.

The only individual bonds we have are short-term Treasuries.

We have no municipal bonds or municipal bond funds.

We do not use any high yield bonds or bond funds.
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Re: Swedroe's guidelines to Bonds

Post by Kevin M » Thu Jan 26, 2017 12:25 pm

lack_ey wrote:Kevin, have you looked at SEC yield vs. return for corporate bonds, say short-term corporates or others? I recall something before using total bond, maybe muni bonds. I imagine especially for high yield it would look different because of defaults but don't have a feel for the magnitude of the effect.
I'd have to go back and look at the threads or my spreadsheets to see exactly which funds, but for sure total bond and a muni fund or two. Not that hard to do for Vanguard funds, so I could do the analysis for say short-term investment grade and/or high-yield corporate, as long as there's enough history.

EDIT: You have to pick a time period over which to evaluate the return. For TBM I looked at 5 and 10 years, the former because it's in the ballpark of duration (and because I invest mostly in 5-year CDs), and the latter because of the oft-quoted statistic about 90-92% correlation between initial YTM and subsequent 10-year return for US aggregate bond market (I learned that the statistic is misleading, because correlation does not equal prediction accuracy). For a short-term bond fund, I'd think we'd want to look at a shorter time period--duration for short-term investment-grade is 2.5 years, so maybe look at 3-year and 5-year periods.
What was the data source you had for determining historical fund SEC yield? Was it just old fund filings on the SEC site or something else?
Vanguard provides history for SEC yield and price. On the Vanguard page for the fund, click Price & Performance tab, then "Search for more historical price information". For short-term investment-grade, can go back to 10/29/1982: Vanguard - Price History Search

I wrote a Google Sheets script to automate pulling the SEC yield data from the Vanguard site, so faster than copying/pasting data a year at a time.

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Total Bond Market's free lunch"

Post by Taylor Larimore » Thu Jan 26, 2017 1:02 pm

Taylor, even though there are "risks" or "bad qualities" with MBS and corporate bonds, you believe that the advantages of Total Bond Market (one fund, low cost, simplicity, diversification) outweigh some of the potential concerns of these riskier bonds?

In other words, using corporates on their own, or MBS on their own, you would expose yourself to those risks. But in TBM, there is enough quality to offset the concerns?
simplesauce:

You put it into words better than I can.

Diversification is "The only free-lunch in investing."

Best wishes.
Taylor
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Re: Swedroe's guidelines to Bonds

Post by Doc » Thu Jan 26, 2017 1:26 pm

Kevin M wrote:Doc wrote:
Kevin, we've been over this again and again. Access, bear market benefits, roll yield and tax considerations mean that your approach is not a one size fits all solution. Your ideas are not wrong it is just they are not universally applicable. Your solution does not apply to my situation.

Yes, we've been over this at length, but the twist of this thread is how closely we are following Larry's advice about bonds. So this is not about "my approach", but about how closely we are following Larry's approach. Let's stay focused on that in this thread.

You say that you are following it as well as you can, yet you hold little-to-no CDs despite Larry's clear recommendation that CDs should be preferred over Treasuries if the yield premium is decent. As I've pointed out, my average yield premium for CDs purchased over the last six+ years is greater than 100 bps, which is WAY larger than the 10 bps example threshold that Larry mentioned.
And as I have pointed out, given our portfolio needs we can not attain the 100 bps premium that you can and we have no ready access to CD's paying the high yields that you often site. It makes more sense for us to use Treasuries and 3 year average duration high quality corporates then to use all CD's instead, which is in keeping with Larry's recommendation of only short Corps and CD's if you have ready access. All CD's of course would negate any liquid or flight to quality advantages that the Treasury have over CD's.

As I said we follow Larry's recommendations where we can. No long bonds except high real yield TIPS if there ever is such a thing again. Avoid MBS. And no low quality corporates. If we were to use CD's the tradeoff would be to corporates not Treasuries.
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Re: Swedroe's guidelines to Bonds

Post by Kevin M » Thu Jan 26, 2017 2:15 pm

Doc wrote: And as I have pointed out, given our portfolio needs we can not attain the 100 bps premium that you can and we have no ready access to CD's paying the high yields that you often site.
Perhaps it would be useful to discuss what we mean by "access".

Clearly someone with most of their portfolio in a typical 401k/403b cannot hold CDs, and may not even be able to hold Treasuries. The only choice may be a crappy, high-cost, actively-managed bond fund. Someone in this situation simply isn't going to be able to use Treasuries or CDs, and may have to hold a lot of the types of bonds that Larry recommends against. This is a clear case of "no access".

Others have mentioned a brokerage option of some sort in their 401k/403b, which may give them access to Treasuries and even brokered CDs. Although my preference is direct CDs, Larry probably thinks more in terms of brokered CDs, since that's what his firm probably uses for its clients. As Larry has mentioned, the yield premium for brokered CDs can be quite rich at times. Sometimes it's even as rich as competitive direct CDs, and by extending maturity beyond five years and going to the secondary market, you can sometimes get even richer premiums with brokered CDs than with direct CDs.

Moving to someone who has significant assets in IRAs (traditional or Roth), which is the case for me and I think for you, and can be the case for anyone who is retired (so they can roll their 401k/403b to an IRA), access is not really the issue, but simplicity is a factor. I have no problem doing direct IRA transfers out of Vanguard or Fidelity to banks and credit unions that offer good IRA CD deals, but some people either aren't aware how easy this is or just don't want to mess around with it. So I guess we can define "access" differently, but I think it's more an issue of willingness to accept a little additional complexity for much higher risk-adjusted yields (as opposed to higher yields due to higher risk).

And of course anyone with an IRA at Vanguard, Fidelity, Schwab, or any other broker, also has the option of buying brokered CDs, which is mostly what Larry is talking about. Again, there is a complexity factor that may be an impediment for some, but it's not really an access issue.

Finally, in a taxable account, access as a non-issue, but again, simplicity vs. complexity can continue to be a dominant factor for some. Aside from that, it comes down to a comparison of taxable-equivalent, risk-adjusted yields, which anyone can calculate for themselves (remembering that if bond markets are efficient, one should probably be comparing to Treasuries in the 25% federal tax bracket, since munis probably are priced to be competitive here, then make additional adjustments for higher federal tax bracket, state taxes, and the state tax exemption for Treasuries).
Doc wrote: It makes more sense for us to use Treasuries and 3 year average duration high quality corporates then to use all CD's instead, which is in keeping with Larry's recommendation of only short Corps and CD's if you have ready access. All CD's of course would negate any liquid or flight to quality advantages that the Treasury have over CD's.
Why keep raising the strawman argument of "all CDs"? I don't hold all CDs, nor do I recommend it, nor do I hear Larry recommending it.

I've already confessed my sin of holding a bit less than 20% of my fixed income in investment-grade and muni bond funds, so not all CDs. If I were more of a Larry-purist, I probably would hold Treasuries instead of investment-grade, and only AA or higher munis instead of my Vanguard CA tax-exempt bond funds.

This brings to mind a question for Larry: what does your firm recommend in taxable accounts for its high net-worth clients in California? I seem to recall you advising against CA munis at some point in the past, but the state tax exemption seems pretty significant. I would guess you would be OK with some CA munis as long as AA or above and only certain types, but probably should diversify with some in other states and even some in CDs. I do the latter, and therefore not the former, since my CA munis are a very small portion of my portfolio.

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Re: Swedroe's guidelines to Bonds

Post by Doc » Thu Jan 26, 2017 3:42 pm

Kevin M wrote:... and by extending maturity beyond five years and going to the secondary market, you can sometimes get even richer premiums with brokered CDs than with direct CDs.
Point me in a direction to find these things.

I just rolled a Treasury. It took me less than five minutes for the sell/buy pair. I can't find any CD that has a better rate even before taxes and hassle. I can't even find one with the term I need let alone a better rate.

Has Janet changed the world?
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Re: Swedroe's guidelines to Bonds

Post by Kevin M » Thu Jan 26, 2017 4:07 pm

Doc wrote:
Kevin M wrote:... and by extending maturity beyond five years and going to the secondary market, you can sometimes get even richer premiums with brokered CDs than with direct CDs.
Point me in a direction to find these things.

I just rolled a Treasury. It took me less than five minutes for the sell/buy pair. I can't find any CD that has a better rate even before taxes and hassle. I can't even find one with the term I need let alone a better rate.
Well without specifying term, we can't really say, but since I mentioned extending maturity beyond five years ...

Without even looking at secondary market, I see these yields on the Vanguard bond/CD page for Treasuries and new-issue CDs:

2.02% 5-year Treasury
2.25% 5-year CD
------
0.23% CD premium

2.32% 7-year Treasury
2.50% 7-year CD
------
0.18% CD premium

2.54% 10-year Treasury
2.80% 10-year CD
------
0.26% CD premium

So not particularly rich, but certainly exceeding the 10bps threshold mentioned by Larry.

With a quick search for secondary CDs at Vanguard in the 10-year ballpark, I find one maturing on 1/5/2027 with a yield to worst/maturity bid of 2.988%, and a couple others in this ballpark. So that's a yield premium of about 45bps, so an increase of about 20bps over 5-year new-issue CD yield premium, and about 20bps over the 10-year new-issue premium, which demonstrates the point about extending maturity and going to secondary market. And these are priced at a discount, so no exposure to non-FDIC deposit insurance coverage (as you have with CDs priced at a premium).

And this is at a time when CD premiums are not particularly rich--we have seen much better premiums for 10-year CDs on secondary market, but of course you take what you can get when you need it. I admit though that these premiums don't interest me nearly as much as what I've typically been able to get with direct CDs (obviously). At a 20bp premium, I might very well stick with a Treasury vs. a brokered CD for the reasons that we agree on (liquidity, potential flight-to-safety benefit, potential roll return). As Larry said, we each have to determine our yield premium threshold, and as I've pointed out, that threshold is higher for brokered CDs than for direct CDs, since they don't have the early withdrawal option.

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Re: Swedroe's guidelines to Bonds

Post by larryswedroe » Thu Jan 26, 2017 4:35 pm

Kevin

We recommend not exceeding 35% in any state to get diversification.

Cal is NOT one of the states that we won't buy any bonds from. So yes we would buy AAA/AA GOs and essential service revenue bonds.

And finally, while I don't recommend buying corporates in general, if stick with high grade and shorter term and importantly avoid the call risks there are far worse things one can do. Similarly with MBS if gov't guaranteed. I would not buy them, but far worse things one can do. In other words, these IMO are not investment felonies (:-))

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Re: Swedroe's guidelines to Bonds

Post by Fundhunter » Thu Jan 26, 2017 4:47 pm

Since this thread started I have reread most of Larry's book. At page 145, it is recommended that currency-hedged foreign bonds be held as part of fixed income, but that they be short to intermediate term and highly rated, like his recommendation for US bonds.

I do not see either a Vanguard or a Fidelity short or intermediate international fund. The Vanguard Total International Bond Index Fund has close to 30% of its bonds with maturities of over 10 years, which is too much for me, as I avoid all long bonds.

Is there a low cost short or intermediate international fund out there somewhere?
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Re: Swedroe's guidelines to Bonds

Post by Kevin M » Thu Jan 26, 2017 4:50 pm

Thanks for the inputs on the CA munis, Larry.

Doc (and whoever else is interested), while on the topic of secondary CDs, I'll also mention that one of the secondary-market CDs had both a bid and ask yield, which is unusual--usually only see ask, and the spread was 18bps. A quick check of Treasury bid/ask yields showed spreads of about 1bp, so this is an example of the much higher liquidity for Treasuries.

Of course if you can earn a premium of 20bps or more on the CD, you make up for the higher spread in one year, so if you hold for more than one year, you are ahead even if selling on the secondary market.

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Re: Swedroe's guidelines to Bonds

Post by simplesauce » Thu Jan 26, 2017 4:55 pm

Fundhunter wrote:Since this thread started I have reread most of Larry's book. At page 145, it is recommended that currency-hedged foreign bonds be held as part of fixed income, but that they be short to intermediate term and highly rated, like his recommendation for US Bonds.

I do not see either a Vanguard or a Fidelity short or intermediate international fund. The Vanguard Total International Bond Index Fund has close to 30% of its bonds with maturities of over 10 years, which is too much for me, as I avoid all long bonds.

Is there a low cost short or intermediate international fund out there somewhere?
I would like to know the answer to this as well.

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Re: Swedroe's guidelines to Bonds

Post by Doc » Thu Jan 26, 2017 5:02 pm

larryswedroe wrote:I've seen times when it's been close to 1% on longer term CDs. So as example if I had just a say 10bp premium for a CD I would go with Treasury (also should consider the cost of a fund if not buying Treasury direct).
Kevin M wrote:So not particularly rich, but certainly exceeding the 10bps threshold mentioned by Larry.
OMG. Larry didn't mention a threshold. He was just giving an example using 10 bps. The 10 bps disappears just with state income taxes. That doesn't even consider flight to quality situations, roll yield, liquidity and hassle factors.

If you are just going to buy a CD and park it for 7 years and not look at anything else that might happen with other parts of your portfolio, ok maybe the CD wins over Treasuries. But if I'm going to park assets for that length of time I'm not going to compare the CD to a seven year Treasury I'm going to compare it to maybe a three year AA grade corporate. I'll trade a little default risk against some term risk especially with today's yield curve.

And no, you can't use the early withdrawal thingy unless I can use the roll yield thingy.

(I use "thingy" because thingy's can't be quantified. :D )

Now if you are setting up a liability matching portfolio the calculus changes. Maybe that's the source of our crossed hairs.
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Re: Swedroe's guidelines to Bonds

Post by lack_ey » Thu Jan 26, 2017 5:07 pm

simplesauce wrote:
Fundhunter wrote:Since this thread started I have reread most of Larry's book. At page 145, it is recommended that currency-hedged foreign bonds be held as part of fixed income, but that they be short to intermediate term and highly rated, like his recommendation for US Bonds.

I do not see either a Vanguard or a Fidelity short or intermediate international fund. The Vanguard Total International Bond Index Fund has close to 30% of its bonds with maturities of over 10 years, which is too much for me, as I avoid all long bonds.

Is there a low cost short or intermediate international fund out there somewhere?
I would like to know the answer to this as well.
Low(ish) cost? Erm...

DFA Five-Year Global Fixed-Income (DFGBX)
DFA Two-Year Global Fixed-Income (DFGFX)
DFA One-Year Global Fixed Income (DFIHX)

These are global, not international strictly. Primarily AA, some AAA, not much under AA. I don't think this will help a lot of people as most don't have access.

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Re: Swedroe's guidelines to Bonds

Post by Fundhunter » Thu Jan 26, 2017 5:28 pm

lack_ey wrote:
simplesauce wrote:
Fundhunter wrote:Since this thread started I have reread most of Larry's book. At page 145, it is recommended that currency-hedged foreign bonds be held as part of fixed income, but that they be short to intermediate term and highly rated, like his recommendation for US Bonds.

I do not see either a Vanguard or a Fidelity short or intermediate international fund. The Vanguard Total International Bond Index Fund has close to 30% of its bonds with maturities of over 10 years, which is too much for me, as I avoid all long bonds.

Is there a low cost short or intermediate international fund out there somewhere?
I would like to know the answer to this as well.
Low(ish) cost? Erm...

DFA Five-Year Global Fixed-Income (DFGBX)
DFA Two-Year Global Fixed-Income (DFGFX)
DFA One-Year Global Fixed Income (DFIHX)

These are global, not international strictly. Primarily AA, some AAA, not much under AA. I don't think this will help a lot of people as most don't have access.
Those would be great. ER of the 2 year one is .17, not too bad. Isn't DFA only available if you hire an advisor that is on their list?

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Re: Swedroe's guidelines to Bonds

Post by lack_ey » Thu Jan 26, 2017 5:34 pm

Fundhunter wrote:Those would be great. ER of the 2 year one is .17, not too bad. Isn't DFA only available if you hire an advisor that is on their list?
Yes. Sometimes also available in 401k, 457, etc. kinds of plans [edit: and 529, the education savings plans. thanks for the reminder below]. But not generally elsewhere.
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Re: Swedroe's guidelines to Bonds

Post by larryswedroe » Thu Jan 26, 2017 5:37 pm

Doc
For CDs remember for most investors they will be holding their FI in tax advantaged accounts where the state tax benefit of Treasuries is irrelevant.

One other thing, re today's yield curve. The current one year is about 80 bp and 5 year about 2%. So that is 120bp for four years which is steep. Our rule of thumb is if you get 20bp year in that part of the curve take it as you have historically been well rewarded. If less, can go shorter. For munis obviously would use a lower hurdle. As you go beyond that the hurdle should obviously get smaller as you earn that premium over a longer period. Hope that helps
Larry

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Re: Swedroe's guidelines to Bonds

Post by larryswedroe » Thu Jan 26, 2017 5:38 pm

Lackey
Can add 529 plans to that list of places DFA available
larry

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Re: Swedroe's guidelines to Bonds

Post by matto » Thu Jan 26, 2017 6:04 pm

lack_ey wrote: I guess the question I would have is this:

If you take corporate bonds or high yield over a full business cycle, determine beta to equities for the full period, and subtract that out, does the residual [corp bond - average equity beta component] underperform during equity bear markets? Does the correlation or drawdowns during bear markets beyond the level expected based on the effective equity component they contain? Or alternatively, is the beta significantly higher or lower during certain periods? Or is the higher correlation with equities during bear markets already explained by underlying, roughly constant effective equity exposure?

The way I hear people talk about them, the implication I think is that there is residual underperformance and the risks are thus not worth it, but I haven't checked it for myself.
That's a very interesting question, but one that I believe is more suited to institutional traders than retail investors. Based on past backtesting results, there has been essentially no difference.

See for example, I volatility balanced TSM/TBM and TSM/Treasuries https://www.portfoliovisualizer.com/bac ... on3_2=46.5

A 0.02 sharpe difference over 8 years and the 2008 drawdown difference was 16.3 vs 17.2%, or 0.9% worse than expected based on keeping volatility equal on the whole time scale. You can decide if you want to use those differences to make a statement about the forward returns.

Even if there has been a difference, why would we expect it to persist? If one wants to avoid corp bonds in order to better simplify the 'buckets' of their portfolio, that's fine. If one want to avoid corp bonds because CDs are attractive, that's also fine.

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Re: Swedroe's guidelines to Bonds

Post by Kevin M » Thu Jan 26, 2017 7:10 pm

Doc wrote:
Kevin M wrote:So not particularly rich, but certainly exceeding the 10bps threshold mentioned by Larry.
OMG. Larry didn't mention a threshold. He was just giving an example using 10 bps. The 10 bps disappears just with state income taxes. That doesn't even consider flight to quality situations, roll yield, liquidity and hassle factors.
I don't know why you're just taking a selected statement out of context and setting it up as a strawman argument. First, I already agreed with what you're saying:
Kevin M wrote:At a 20bp premium, I might very well stick with a Treasury vs. a brokered CD for the reasons that we agree on (liquidity, potential flight-to-safety benefit, potential roll return). As Larry said, we each have to determine our yield premium threshold, and as I've pointed out, that threshold is higher for brokered CDs than for direct CDs, since they don't have the early withdrawal option.
So there's really no argument here. Shouldn't we celebrate having found some common ground? :?

Now let's add back the context:
Doc wrote:
Kevin M wrote:... and by extending maturity beyond five years and going to the secondary market, you can sometimes get even richer premiums with brokered CDs than with direct CDs.
Point me in a direction to find these things.

I just rolled a Treasury. It took me less than five minutes for the sell/buy pair. I can't find any CD that has a better rate even before taxes and hassle. I can't even find one with the term I need let alone a better rate.
I was simply responding to your request to "point you in the direction to find these things", given that you said you couldn't even find a CD with a better rate than the Treasury you bought. Easily found CDs with better rates, and found even better rates by going to the secondary market. Great rates? No. Better rates? Yes. Even better by extending maturity and going to secondary market? Yes.

What's the beef?

Now, I realize that I didn't actually illustrate the point that the premium is sometimes better for secondary-market brokered CDs than for direct CDs with maturities of longer than five years, so let me touch on that briefly.

I pointed out secondary market 10-year CDs with yields of about 3%. Other than the 7-year Andrews FCU CD at 3%, which is an outlier, the next-best APY I see for a 10-year CD on DepositAccounts.com is 2.50%, which is no premium at all over a 10-year Treasury. So aside from the Andrews FCU deal, the best secondary 10-year brokered CDs beat the best 10-year direct CDs (and the 10-year Treasury) by about 45-50bps.

Of course personally I'd go for the 7-year direct CD at 3%, which even in this low-premium environment is a healthy 70bps premium over the 7-year Treasury at 2.3%. As long as these anomalous deals keep showing up when I'm in the market, I'll happily take the equivalent of 3-4 years of term-extension-yield-bump (using Larry's 20bps per year of maturity guideline), or more, while actually lowering my term risk.

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Re: Swedroe's guidelines to Bonds

Post by lack_ey » Thu Jan 26, 2017 7:45 pm

matto wrote:
lack_ey wrote: I guess the question I would have is this:

If you take corporate bonds or high yield over a full business cycle, determine beta to equities for the full period, and subtract that out, does the residual [corp bond - average equity beta component] underperform during equity bear markets? Does the correlation or drawdowns during bear markets beyond the level expected based on the effective equity component they contain? Or alternatively, is the beta significantly higher or lower during certain periods? Or is the higher correlation with equities during bear markets already explained by underlying, roughly constant effective equity exposure?

The way I hear people talk about them, the implication I think is that there is residual underperformance and the risks are thus not worth it, but I haven't checked it for myself.
That's a very interesting question, but one that I believe is more suited to institutional traders than retail investors. Based on past backtesting results, there has been essentially no difference.

See for example, I volatility balanced TSM/TBM and TSM/Treasuries https://www.portfoliovisualizer.com/bac ... on3_2=46.5

A 0.02 sharpe difference over 8 years and the 2008 drawdown difference was 16.3 vs 17.2%, or 0.9% worse than expected based on keeping volatility equal on the whole time scale. You can decide if you want to use those differences to make a statement about the forward returns.

Even if there has been a difference, why would we expect it to persist? If one wants to avoid corp bonds in order to better simplify the 'buckets' of their portfolio, that's fine. If one want to avoid corp bonds because CDs are attractive, that's also fine.
Yeah, personally nothing I've really found backtesting with portfoliovisualizer indicates you need to strongly stay away from corporates, but that's a somewhat limited data set.

Like you said, if the case against is based on backtests there's not necessarily a strong reason to suspect the same relationship will hold in the future. Especially considering that the credit market is very large it's at least a bit uncomfortable to me to write it all off as mispriced in a meaningful sense for stock/bond investors. (except possibly the long end, where I can believe that pricing is somewhat pushed by insurance companies and some other entities with different stipulations, restrictions, and needs compared to individual investors)

Also the historical record analyzed different ways, like in IMHO the compelling paper "The Credit Risk Premium" by Asvanunt and Richardson, is more encouraging:
http://www.iinews.com/site/pdfs/JFI_Winter_2017_AQR.pdf

I do have some corporate bonds myself but largely suspect it's not a big deal either way.

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Re: Swedroe's guidelines to Bonds

Post by Beltane » Fri Jan 27, 2017 1:17 am

Sorry to hijack the thread a bit, but back in 2014 I posted a thread viewtopic.php?f=10&t=142479 about the angst this forum gave me. Since then, I’ve been mostly at peace with my decisions and have gone back to lurking. However, this thread and another recent one on bonds has brought some of the angst back. Mostly I blame Larry, since he’s gained some authority in my mind. Thanks, Larry. :D

Discounting 401k/403b where my rule is to pick the lowest ER fund available, I hold AGG in tax deferred and MUB in taxable and TIPS in both. And now I feel like I’ve done it all wrong. Term of 6-8 years. Too long. ETFs. Risks at the wrong time. Mortgages. Negative convexity. Ugh.

Is it just laziness that is holding me back from moving to Larry’s recommendations? Opening a treasury direct account and transferring money. Buying treasuries on the secondary market. Finding brokered CDs for the IRAs. Opening CDs at random credit unions for taxable. What is it? It must not be financial reasons keeping me here, since I can get similar yields on similar duration CDs without the risks. What is holding me back? An unwillingness to let go of my old decisions? In 2014 I wrote, “Why am I adding risk to the “safe” part of my investments? At this point, with such low yields, shouldn’t it all be in PenFed CDs?” Why didn’t I listen to myself then? Why won’t I listen to Larry now?

How does everyone else manage this? How does everyone else either stay confident in their decisions or admit they were wrong and change their investments?

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Re: Swedroe's guidelines to Bonds

Post by aj76er » Fri Jan 27, 2017 2:50 am

Beltane wrote: How does everyone else manage this? How does everyone else either stay confident in their decisions or admit they were wrong and change their investments?
You should take Taylor's post above to heart; and specifically the following quote:
The enemy of a good plan is the dream of a perfect plan. -- Jack Bogle
Usually "better" options also require more "cost", which comes in different forms: higher ER's, more time on your part, more complexity, etc. The three fund portfolio with TBM is called a "lazy" portfolio for a reason :). Are there more "optimal" solutions? sure. But when considering the intersection of time-cost, complexity-cost, risk, and return ... no, I believe that there is nothing currently better than the three fund portfolio of TSM, TISM, and TBM.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Swedroe's guidelines to Bonds

Post by Robert T » Fri Jan 27, 2017 4:54 am

.
IMO - three useful views from Larry on fixed income.
  • 1. Don’t view bonds in isolation (should be viewed as how they fit/contribute to overall portfolio). This makes imminent sense to me. In contrast, as I understood from earlier discussions/posts, Rick Ferri views stock and bond portfolios separately/in isolation.

    2. "If you are going to hold a high allocation to value stocks, you should also consider holding longer-term fixed-income instruments. The recession/ deflation/ flight to quality risks of value stocks have negative correlation with the risks of longer-term fixed income instruments (which generally perform well in these types of environments). ...Thus holding a value tilt not only provides greater expected returns on your equity holdings, but it also allows you to take more interest-rate risk and thus potentially earn greater returns on your fixed income investments." – The Successful Investor Today.

    3. With high equity allocations, adding longer-term treasuries has, at least historically, provided superior mean-variance efficiency (with portfolio volatility driven by stocks). – The Maturity of Fixed-Income Assets and Portfolio Risk http://www.iijournals.com/doi/abs/10.39 ... 9.18.4.107
Swenson’s view on fixed income also very useful IMO viewtopic.php?p=550096#p550096

Robert
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trasmuss
Posts: 231
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Re: Swedroe's guidelines to Bonds

Post by trasmuss » Fri Jan 27, 2017 5:07 am

A nice advantage of Vanguard Total Bond is that the expense ratio is the lowest at only 6 basis point. This ads up for larger portfolios.

I personally am not concerned about the corporates and MBS mixed into Total Bond. Since I will be taking RMD's in three years the intermediate duration (especially if we are entering a rising rate environment) may be a concern. So far I am 100% Total Bond but may consider a shorter duration fund in addition to Total Bond for future RMD's.

Total Bond performed well in 2008 when you wanted bonds to offset losses in stocks. My old Inflation Protected fund was a disappointment (sold for Total Bond after it recovered). If I would have had a pure corporate fund in 2008 I likely would have been disappointed also.

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dandypandys
Posts: 65
Joined: Sun Mar 27, 2016 8:32 am

Re: Swedroe's guidelines to Bonds

Post by dandypandys » Fri Jan 27, 2017 9:04 am

Does Larry's book talk about Stable Asset Value funds at all?
There is a copy at my library :)
I am asking because my 403b choice of bonds was not good, so we chose a stable value fund https://www.standard.com/eforms/16940.pdf
14% allocation (18k) at a rate of 2.30%
Interested in learning more about this in comparison to TB which i can now access through our tIRA's

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