Total Bond is safe. Is it prudent?

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Admiral
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Total Bond is safe. Is it prudent?

Post by Admiral »

I just came across this article in Kiplinger's:

http://www.kiplinger.com/article/invest ... funds.html

It's rather old (2014) but makes the following point about TBM:
So when you buy the Vanguard index fund or a similar fund sponsored by another firm, you’re investing 70% of your money in government debt. That’s a giant allocation -- way too much, in my view.

Even Vanguard founder Jack Bogle, who practically invented index funds, says 70% in U.S. government bonds is too much. He’s proposed that the index be reworked to increase its exposure to corporate bonds.
This isn't quite accurate anymore (it's now under 70%) but the general point still holds. Basically, he makes the point that TBM is the "safe" choice (which of course it is) to counter portfolio volatility, but that the very low returns are a problem due to inflation.

Now, his recommendation is naturally a bunch of other bond funds with higher ERs (some of them Vanguard funds) but how do people feel about this?

I have virtually all my bond holdings in TBM. Do people look at this fund as solely a volatility hedge at this point--almost like cash--or feel that it will actually make real money someday (again)?
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Re: Total Bond is safe. Is it prudent?

Post by Grt2bOutdoors »

Use equities to take risk, use bonds to protect principal. I don't hold bonds with the expectation of "making" money, I hold with expectations of "keeping it".
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Re: Total Bond is safe. Is it prudent?

Post by tibbitts »

This is one of those pick-your-guru and pick-your-point-in-time-for-your-chosen-guru's-advice posts. I honestly don't think anybody saw the current economic circumstances coming and they're all (including Bogle) flailing away trying to deal with it somehow.

I have no idea what will happen but in general I think the choice of bond funds probably won't matter much in your life, and I definitely don't think that worrying about a .05% difference in expense ratios is worth your time.

The main issue is that you need a more productive hobby than reading three-year-old finance magazines.
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Re: Total Bond is safe. Is it prudent?

Post by Admiral »

tibbitts wrote:This is one of those pick-your-guru and pick-your-point-in-time-for-your-chosen-guru's-advice posts. I honestly don't think anybody saw the current economic circumstances coming and they're all (including Bogle) flailing away trying to deal with it somehow.

I have no idea what will happen but in general I think the choice of bond funds probably won't matter much in your life, and I definitely don't think that worrying about a .05% difference in expense ratios is worth your time.

The main issue is that you need a more productive hobby than reading three-year-old finance magazines.
I was building a dollhouse while reading it.

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Re: Total Bond is safe. Is it prudent?

Post by Call_Me_Op »

Admiral wrote:I just came across this article in Kiplinger's:

http://www.kiplinger.com/article/invest ... funds.html

It's rather old (2014) but makes the following point about TBM:
So when you buy the Vanguard index fund or a similar fund sponsored by another firm, you’re investing 70% of your money in government debt. That’s a giant allocation -- way too much, in my view.

Even Vanguard founder Jack Bogle, who practically invented index funds, says 70% in U.S. government bonds is too much. He’s proposed that the index be reworked to increase its exposure to corporate bonds.
This isn't quite accurate anymore (it's now under 70%) but the general point still holds. Basically, he makes the point that TBM is the "safe" choice (which of course it is) to counter portfolio volatility, but that the very low returns are a problem due to inflation.
We need to accept that in the current interest-rate environment, the risk-free rate is very low. If you want higher expected return, you will need to bear greater risk. There is no way out of this.

Now one can replace treasuries with corporates to get slightly greater expected (not guaranteed) return, but then he or she is taking-on greater risk.

Some (including I) believe that the best way to increase expected return is to raise your allocation to equities, not increase the risk in your bond allocation. But make no mistake - you are increasing risk in either case. You first need to decide how much risk you are willing to bear.
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Re: Total Bond is safe. Is it prudent?

Post by rob65 »

Curious if anyone uses Intermediate Term Bond (VBILX admiral, BIV etf, ER .09) instead? Looks like it uses a 50/50 split on government/corporate.
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Re: Total Bond is safe. Is it prudent?

Post by jhfenton »

rob65 wrote:Curious if anyone uses Intermediate Term Bond (VBILX admiral, BIV etf, ER .09) instead? Looks like it uses a 50/50 split on government/corporate.
i slice and dice my bond funds a bit, holding intermediate treasuries and short corporates (and a little in Vanguard's Ohio muni fund). But if I had to hold just one bond fund, it would be VBILX rather than Total Bond.
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Re: Total Bond is safe. Is it prudent?

Post by Doc »

rob65 wrote:Curious if anyone uses Intermediate Term Bond (VBILX admiral, BIV etf, ER .09) instead? Looks like it uses a 50/50 split on government/corporate.
Yep, except I would pair it with the short term version to reduce the duration some. (But I don't like long bonds either.)
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Re: Total Bond is safe. Is it prudent?

Post by jhfenton »

Doc wrote:
rob65 wrote:Curious if anyone uses Intermediate Term Bond (VBILX admiral, BIV etf, ER .09) instead? Looks like it uses a 50/50 split on government/corporate.
Yep, except I would pair it with the short term version to reduce the duration some. (But I don't like long bonds either.)
That's one of the reason I do the Intermediate Government Iindex and Short Corporate Index. The Govt Index is a 3-10 index. The Intermediate Corporate and mixed Intermediate Funds follow 5-10 indices, making the duration a bit longer.

So I combine the 3-10 Government with the 1-5 Short Corporate.
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Re: Total Bond is safe. Is it prudent?

Post by nisiprius »

Don't tell me, let me guess... this is this guy in Kiplinger's, Stephen Goldberg, who tends to like active funds and once harshly criticized the president and VP for not setting a good example by having enough stocks in their personal investments, cautious to a fault, am I right? Yes, I really did guess and I was right.

By the way he makes an error of fact at the end. Vanguard's Intermediate-Term Investment-Grade bond fund, VFICX, contrary to what he says, is not an index fund. Vanguard's own fund screener classifies it as "active."

I would say that if you take all of the stuff people write about Total Bond you will see a range of opinions--most, of course, expressed with total certainty and confidence--that go in diametrically opposite directions.

It is a fact that the Bloomberg Barclay's US Aggregate index has this composition, or to put it another way, this is what the "investment-grade, US dollar-denominated, fixed-rate taxable bond market" invests in. Most of the dollars in that market are in government issues and very-high-credit-quality Aaa-rated bonds. That's what "the bond market" is.

Image

Most of the dollars in "the" bond market (I'm putting it in quotes because there isn't any unified bond market comparable to the stock market) are in government bonds. Perhaps that surprises people, just as some people seem surprised most of the dollars in the US stock market are invested in large-caps. So anyone who wants to attack indexing can introduce fear by saying "most of your money is in X" and then raising doubts about X.

Another objective fact is that corporate bonds have become considerably less liquid since 2008-2009.

Here's the dichotomy. Government bonds have less credit risk, lower return, and higher liquidity; corporates have more credit risk, higher return, and lower liquidity. Thus, John C. Bogle has suggested, essentially, that the Bloomberg Barclay's index, and thus index funds that track it, have a government allocation that he thinks is higher than most investors should want, and that the normal retirement saver should take more risk in corporates in order to get a higher return. That's a reasonable viewpoint that should be measured against one's personal risk tolerance.

But at the same time, we have just seen the collapse of a (very unusual, lowest-of-the-low credit quality) junk bond fund, Third Avenue Focused Credit, due to liquidity problems in the bonds it invested in. Part of the appeal of mutual funds is that they are required to provide daily liquidity--you can redeem your fund shares for end-of-day NAV regardless of whether there is anybody out there at that exact instant in time who is interested in buying the assets in the fund. Since they provide daily liquidity, they are prohibited from investing more than 15% of their funds in "illiquid" assets. However, I guess liquidity is somewhat in the eye of the beholder, and as bond categories that were traditionally liquid became less so, both the IMF and the SEC began to be concerned about it... and in October the SEC passed new "liquidity and swing pricing" rules that allow bond funds to take actions to slow redemptions when there is a liquidity problem.

In other words, Goldberg doesn't like and raises alarms about "US government debt," which he even calls "The government-debt bugaboo." But it would be just as easy to raise alarms about liquidity problems in corporate bonds.

In reality, I don't think either of them amounts to a hill of beans in a fund like Total Bond. The world being what it is, serious problems in Treasuries certainly could happen, but would precipitate a global crisis which would unfold in unpredictable ways, and holding a corporate bond index fund wouldn't be much of a shield. And the liquidity question mostly involves junk ("high-yield") bonds, and even if it happened, in a "normal" junk bond fund would probably just be a nuisance--a short delay or an imposition of a small fee for redemption.

If you have a fear of Treasuries for whatever reason, there's not a thing wrong with Goldberg's alternative suggestions of Fidelity Total Bond (FTBFX) and Vanguard Intermediate-Term Investment Grade (VFICX) but be aware that yes, of course there darn well is some additional risk, as shown in their behavior in 2008-2009. Vanguard Total Bond Index, blue; Fidelity Total Bond, orange; Vanguard Intermediate-Term Investment Grade, green. It was only about a 10% hit when stocks were taking a 50% hit, but still. And as you see, in the time period shown, the obvious extra risk was compensated by obvious higher return. Exactly what you'd expect.

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Re: Total Bond is safe. Is it prudent?

Post by David Jay »

I pair total bond with intermediate term corporate in about a 5:2 ratio to compensate for the high level of government bonds in TBM
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Re: Total Bond is safe. Is it prudent?

Post by fantasytensai »

David Jay wrote:I pair total bond with intermediate term corporate in about a 5:2 ratio to compensate for the high level of government bonds in TBM
This is a total nub question, but why not use Vanguard Long-Term Investment Grade Fund Admiral Shares instead (VWETX)? It has a 4.23% yield vs. 2.63 of Intermediate. Is it because long term is much more volatile? But the NAV never dropped too significantly.
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Re: Total Bond is safe. Is it prudent?

Post by oldcomputerguy »

Thanks, nisiprius, I always enjoy reading your posts.
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Re: Total Bond is safe. Is it prudent?

Post by nisiprius »

smartinwate wrote:Thanks, nisiprius, I always enjoy reading your posts.
You're welcome!
fantasytensai wrote:...This is a total nub question, but why not use Vanguard Long-Term Investment Grade Fund Admiral Shares instead (VWETX)? It has a 4.23% yield vs. 2.63 of Intermediate. Is it because long term is much more volatile?
Yes.

Also, because if you think of the case of an individual bond, you're locked in for the term of the bond, which might be 20 or 30 years, and to anyone my age (i.e. whose lived through the late seventies inflation), that's pretty worrisome in terms of inflation risk.
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Re: Total Bond is safe. Is it prudent?

Post by fantasytensai »

nisiprius wrote:
smartinwate wrote:Thanks, nisiprius, I always enjoy reading your posts.
You're welcome!
fantasytensai wrote:...This is a total nub question, but why not use Vanguard Long-Term Investment Grade Fund Admiral Shares instead (VWETX)? It has a 4.23% yield vs. 2.63 of Intermediate. Is it because long term is much more volatile?
Yes.

Also, because if you think of the case of an individual bond, you're locked in for the term of the bond, which might be 20 or 30 years, and to anyone my age (i.e. whose lived through the late seventies inflation), that's pretty worrisome in terms of inflation risk.
Right, which is why I have always been skeptical of holding long term bonds. But don't bond funds alleviate that risk somewhat? Sure the underlying bonds are mostly long-term, but the bond fund itself can be sold and bought at any time. Like I said, I have observed the NAV of VWETX and it fluctuates between 9 to 11 - volatile for bond funds, but very calm compared to stocks. Wouldn't it be worth the risk of buying the bond fund at 10, even if it drops to a NAV of 9, if it means getting superior yield?
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Re: Total Bond is safe. Is it prudent?

Post by dbr »

fantasytensai wrote: Wouldn't it be worth the risk of buying the bond fund at 10, even if it drops to a NAV of 9, if it means getting superior yield?
Larry Swedroe once formulated a recommendation to that question in the form of a rule of thumb that it is worth it if you can add 20bps to the yield for each extra year in duration. Here we have 160 bps extra yield to extend the duration from 5.4 to 13.3 or right on 20 bps/year. You will have to decide for yourself if Larry's reasoning is astute and would apply in this case. Most people don't like being exposed that much to the interest rate risk in long bonds.
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Re: Total Bond is safe. Is it prudent?

Post by oldcomputerguy »

fantasytensai wrote: Right, which is why I have always been skeptical of holding long term bonds. But don't bond funds alleviate that risk somewhat? Sure the underlying bonds are mostly long-term, but the bond fund itself can be sold and bought at any time. Like I said, I have observed the NAV of VWETX and it fluctuates between 9 to 11 - volatile for bond funds, but very calm compared to stocks. Wouldn't it be worth the risk of buying the bond fund at 10, even if it drops to a NAV of 9, if it means getting superior yield?
A drop from 10 to 9 would be a 10% drop in NAV. In actual fact, from 2007 to 2009 the NAV of VWETX dropped from 9.41 to a low of 7.2, a decrease of 23.4%. For my taste, that's a bit too much risk to carry on the bond side.
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Re: Total Bond is safe. Is it prudent?

Post by David Jay »

fantasytensai wrote:
David Jay wrote:I pair total bond with intermediate term corporate in about a 5:2 ratio to compensate for the high level of government bonds in TBM
This is a total nub question, but why not use Vanguard Long-Term Investment Grade Fund Admiral Shares instead (VWETX)? It has a 4.23% yield vs. 2.63 of Intermediate. Is it because long term is much more volatile? But the NAV never dropped too significantly.
Bond funds are interest sensitive and recover at a rate related to the maturity of the bonds in the fund. This is because the bonds mature and the fund buys new bonds at the new rate. A short-term fund may completely turn over the bond holdings within a year or so, a long term bond fund will take decades.

For example, lets say that interest rates suddenly go up 2% and then do not change for a while. With a short term fund, within a year you will be holding bonds that pay the "new" rate. With a long term fund, the fund will be holding some the lower rate bonds for 15 or 20 years!

There is risk and reward with long term bonds. Why do you own bonds? I own them for safety, I take my risk on the stock side of my portfolio.
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Re: Total Bond is safe. Is it prudent?

Post by Admiral »

fantasytensai wrote:
nisiprius wrote:
smartinwate wrote:Thanks, nisiprius, I always enjoy reading your posts.
You're welcome!
fantasytensai wrote:...This is a total nub question, but why not use Vanguard Long-Term Investment Grade Fund Admiral Shares instead (VWETX)? It has a 4.23% yield vs. 2.63 of Intermediate. Is it because long term is much more volatile?
Yes.

Also, because if you think of the case of an individual bond, you're locked in for the term of the bond, which might be 20 or 30 years, and to anyone my age (i.e. whose lived through the late seventies inflation), that's pretty worrisome in terms of inflation risk.
Right, which is why I have always been skeptical of holding long term bonds. But don't bond funds alleviate that risk somewhat? Sure the underlying bonds are mostly long-term, but the bond fund itself can be sold and bought at any time. Like I said, I have observed the NAV of VWETX and it fluctuates between 9 to 11 - volatile for bond funds, but very calm compared to stocks. Wouldn't it be worth the risk of buying the bond fund at 10, even if it drops to a NAV of 9, if it means getting superior yield?
Actually the average duration of TBM is more like an intermediate bond: currently its 6 years, with 8.3 years average effective maturity.
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Post by Taylor Larimore »

Bogleheads:

In his Little Book of Common Sense Investing Mr. Bogle recommends a 2-fund portfolio: Total Stock Market and Total Bond Market. Investors seem to agree. Each is now the largest stock and bond mutual fund in the world.

There is more than one road to Dublin.

Best wishes.
Taylor
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Re: Total Bond Market Index Fund?

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Taylor Larimore wrote:Bogleheads:

In his Little Book of Common Sense Investing Mr. Bogle recommends a 2-fund portfolio: Total Stock Market and Total Bond Market. Investors seem to agree. Each is now the largest stock and bond mutual fund in the world.

There is more than one road to Dublin.

Best wishes.
Taylor
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Re: Total Bond is safe. Is it prudent?

Post by SeeMoe »

rob65 wrote:Curious if anyone uses Intermediate Term Bond (VBILX admiral, BIV etf, ER .09) instead? Looks like it uses a 50/50 split on government/corporate.

Yes, I have 25% of my bond funds in our T-IRA folios(they are 100% bond now in the payout RMD phase)intermediate investment grade fund, 35% in the total bond index fund, 20% short term investment grade, 10% high yield and 10% total international bond index. Then we have 3 "laddered" tax exempt funds in the taxable folio. Plus a Prime MM holding fund. Works out well in my opinion, and the total portfolio in now 40/60 with a bank account not included @$25k or so.

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Re: Total Bond is safe. Is it prudent?

Post by Kingtriton10 »

Ive heard people say that if interest rates increase by 1% in a year, then the bond returns a negative 3-4%. Does this number include inflation? If not, then you'd really be looking at a -6.5% return.

It seems to me that interest rates have nowhere else to go but up at the moment, especially with growth in GDP numbers. Its could be slow, but it sure seems like a lot of risk for such a low reward. I wouldn't want to make an investment just so it declines less than the stock market. I want it to actually work for me in terms of earnings. It seems like I could very well come out ahead with just cash on hand at the moment.

The market has been ''very generous'' this past 30+ years for bonds. I would suspect that the future earnings are nowhere near recent returns.

I just don't see how bonds are attractive during periods of low interest rates. Im a complete novice on the subject of bonds, so what am I missing here?
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Re: Total Bond is safe. Is it prudent?

Post by Munir »

A mix of Total Bond Market, Intermediate Investment Grade, Core Bond Fund, and Short Term Investment Grade (& cash) meets my needs as a retiree with 70% fixed income in my portfolio.
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Re: Total Bond Market Index Fund?

Post by dkturner »

Taylor Larimore wrote:Bogleheads:

In his Little Book of Common Sense Investing Mr. Bogle recommends a 2-fund portfolio: Total Stock Market and Total Bond Market. Investors seem to agree. Each is now the largest stock and bond mutual fund in the world.

There is more than one road to Dublin.

Best wishes.
Taylor
That's the beauty of Mr. Bogle's philosophy. He believes in having a big tent to accommodate varying views. He also changes course from time to time, exhibiting the flexibility that one should expect from an individual of his caliber. In the early years of this century he was critical of the Total Bond Market fund because of its large holdings of mortgage backed securities - he didn't like their negative convexity. A couple of years ago he didn't like the Total Bond Market fund because it had too much U.S. government debt - he thought it should hold more corporate bonds.
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Re: Total Bond is safe. Is it prudent?

Post by Nate79 »

Kingtriton10 wrote:Ive heard people say that if interest rates increase by 1% in a year, then the bond returns a negative 3-4%. Does this number include inflation? If not, then you'd really be looking at a -6.5% return.
Which bond are you referring to? Any random bond, or Total Bond Market?

But, no it not not just some general statement like that.
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Re: Total Bond is safe. Is it prudent?

Post by Kingtriton10 »

I'm referring to the total bond market
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Re: Total Bond is safe. Is it prudent?

Post by Doc »

dbr wrote:
fantasytensai wrote: Wouldn't it be worth the risk of buying the bond fund at 10, even if it drops to a NAV of 9, if it means getting superior yield?
Larry Swedroe once formulated a recommendation to that question in the form of a rule of thumb that it is worth it if you can add 20bps to the yield for each extra year in duration. Here we have 160 bps extra yield to extend the duration from 5.4 to 13.3 or right on 20 bps/year. You will have to decide for yourself if Larry's reasoning is astute and would apply in this case. Most people don't like being exposed that much to the interest rate risk in long bonds.
I don't think you're doing it right. It's not 20 bps/year on average over eight years it's 20 bps in any one year. You increase the duration by one year as long as you will get an additional 20 bps for that year.

For Treasury's on 2/10/17 the rate difference from 5 to 7 years was 33 bps. Somewhere near 5 years the slope of the yield curve goes to 20 bps/yr. That's where you quit going longer.

Applying that logic to funds is a little more nuanced. In today's market I would prefer a fund that had a 7 year max. For Treasurys maybe something like iShares 3-7 Year Treasury Bond IEI. Or for more of a total bond maybe iShares Intermediate Credit Bond ETF CIU (1-10). It's hard to get the duration down with one fund if you insist on having MBS in the same fund.
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Re: Total Bond is safe. Is it prudent?

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Kingtriton10 wrote: I wouldn't want to make an investment just so it declines less than the stock market. I want it to actually work for me in terms of earnings. It seems like I could very well come out ahead with just cash on hand at the moment.

I just don't see how bonds are attractive during periods of low interest rates. Im a complete novice on the subject of bonds, so what am I missing here?
You may be missing TIPS, bought at auction and/or the secondary market at maturities that match your future needs for the funds. Not much in the way of "earnings" right now, but much better than cash as inflation becomes a non-factor.
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Re: Total Bond is safe. Is it prudent?

Post by grok87 »

Well instead of total bond market, the US bond index, why not a total world bond index? You could make one out of vanguard funds...

Isn't it always right, according to economic theory, to hold some sort of unhedged global cap weighted portfolio?

Well no. No it isn't!

it turns out that that's only the right thing to own if you are some sort of global institutional investor with weighted-average nominal spending needs in all the (investable) countries in the world- say a global charitable foundation or something like that.

Well what about US individual investors? Well here are the ways we are different than that hypothetical global charitable foundation:

1) we live in the US- so US bonds.
2) we typically have inflation sensitive spending needs- so tips and ibonds
3) we have a finite time horizon- so duration match

Duration-matched tips! Duration-matched tips! Duration-matched tips!

Cheers,
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Re: Total Bond is safe. Is it prudent?

Post by kolea »

I used TLH as an opportunity recently to largely get out of TBM. My main complaint with TBM is not the relative proportion of government/corporate, it is the barbell nature of the maturities. I just do not want any long bonds at all and TBM is about 20% long. I also wanted to have more liquidity options. So rather than TBM I now hold short-term US Treasuries, intermediate term US Treasuries, and intermediate term investment grade corporate in the proportion 1:2:2.
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Re: Total Bond is safe. Is it prudent?

Post by stlutz »

Here's the dichotomy. Government bonds have less credit risk, lower return, and higher liquidity; corporates have more credit risk, higher return, and lower liquidity.
I suggest one revision to nisi's post. Corporate offer higher "yields". Whether they actually offer higher returns depends upon the degree to which the risks show up. There is a lot of debate amongst historical backtesters as to whether corporate bonds have actually offered higher returns that Treasuries over long-term history.
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Re: Total Bond is safe. Is it prudent?

Post by Sandtrap »

smartinwate wrote:Thanks, nisiprius, I always enjoy reading your posts.
+1
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RustyShackleford
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Re: Total Bond is safe. Is it prudent?

Post by RustyShackleford »

rob65 wrote:Curious if anyone uses Intermediate Term Bond (VBILX admiral, BIV etf, ER .09) instead? Looks like it uses a 50/50 split on government/corporate.
I do, because someone who sounded smart recommended it here - the idea basically being that intermediate is the right duration.

I held some VCSH (short-term corporate) for awhile, but in a push to simplify my portfolio, I sold it and rolled the money into BIV. I decided now was a good time to do it, based on the oscillation of BIV's price relative to VCSH's price (the latter being more stable, due to its shorter duration):

https://finance.yahoo.com/chart/VCSH?lt ... ciOnRydWV9

Yes, I timed the market. And I'm tempted to keep doing it, since this variation of BIV (with respect to VCSH) seems fairly consistent.
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Sandtrap
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Re: Total Bond Market Index Fund?

Post by Sandtrap »

Taylor Larimore wrote:Bogleheads:

In his Little Book of Common Sense Investing Mr. Bogle recommends a 2-fund portfolio: Total Stock Market and Total Bond Market. Investors seem to agree. Each is now the largest stock and bond mutual fund in the world.

There is more than one road to Dublin.

Best wishes.
Taylor
Yes. I was glued to that "Little Book. . . "
If so, why add Total International Stock & Total International Bond?
Or, is the fundamental 2 fund by Mr. Bogle still enough?
thanks,
j
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grok87
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Re: Total Bond is safe. Is it prudent?

Post by grok87 »

FIREchief wrote:
Kingtriton10 wrote: I wouldn't want to make an investment just so it declines less than the stock market. I want it to actually work for me in terms of earnings. It seems like I could very well come out ahead with just cash on hand at the moment.

I just don't see how bonds are attractive during periods of low interest rates. Im a complete novice on the subject of bonds, so what am I missing here?
You may be missing TIPS, bought at auction and/or the secondary market at maturities that match your future needs for the funds.
+1
RIP Mr. Bogle.
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Fudgie
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Re: Total Bond is safe. Is it prudent?

Post by Fudgie »

:oops:
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siamond
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Re: Total Bond is safe. Is it prudent?

Post by siamond »

rob65 wrote:Curious if anyone uses Intermediate Term Bond (VBILX admiral, BIV etf, ER .09) instead? Looks like it uses a 50/50 split on government/corporate.
Yup, that is exactly what I do for my entire bonds allocation. In general, I don't follow Jack's advice religiously, far from it (ah come on, no International?), but moving to 50/50 between government debt and corporate debt made a lot of sense to me. Very easy to do, very cheap to do, I like to hedge bets, and I don't see the downside.
Fundhunter
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Re: Total Bond is safe. Is it prudent?

Post by Fundhunter »

rob65 wrote:Curious if anyone uses Intermediate Term Bond (VBILX admiral, BIV etf, ER .09) instead? Looks like it uses a 50/50 split on government/corporate.
Yes I have VBILX.

I do not like Total Bond Market (I agree with Larry Swedroe on this) because it contains a chunk of long bonds, which I avoid like cancer.

I also hold a larger stake in Short Term Investment Grade Admiral (VFSUX; ER= .10), which has a lot of corporate.

I don't agree with the posters who say that your fixed portfolio is just to KEEP that portion of your money. If that is true than why not invest all your fixed income in a government money market fund that is almost essentially risk free? I want some yield as well, although to me the extra yield of long bonds does not compensate for the high amount of interest rate risk they carry.
Valuethinker
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Re: Total Bond is safe. Is it prudent?

Post by Valuethinker »

fantasytensai wrote:
nisiprius wrote:
smartinwate wrote:Thanks, nisiprius, I always enjoy reading your posts.
You're welcome!
fantasytensai wrote:...This is a total nub question, but why not use Vanguard Long-Term Investment Grade Fund Admiral Shares instead (VWETX)? It has a 4.23% yield vs. 2.63 of Intermediate. Is it because long term is much more volatile?
Yes.

Also, because if you think of the case of an individual bond, you're locked in for the term of the bond, which might be 20 or 30 years, and to anyone my age (i.e. whose lived through the late seventies inflation), that's pretty worrisome in terms of inflation risk.
Right, which is why I have always been skeptical of holding long term bonds. But don't bond funds alleviate that risk somewhat? Sure the underlying bonds are mostly long-term, but the bond fund itself can be sold and bought at any time. Like I said, I have observed the NAV of VWETX and it fluctuates between 9 to 11 - volatile for bond funds, but very calm compared to stocks. Wouldn't it be worth the risk of buying the bond fund at 10, even if it drops to a NAV of 9, if it means getting superior yield?
You won't get time to make that shift.

Interest rate moves that move bond prices are by definition ones that surprise the market. The market will react almost instantaneously to a change in its expectations of interest rates.

And then, if long US Treasury moves to 3.5%, you won't know whether it's going to 5.0% (sell!) or back down to 2.5% (buy!).

The longer the maturity, for the same coupon, the greater the sensitivity to interest rates.

David Swensen's book on personal investing takes you through the logic (I believe Larry Swedroe's bond book does something similar) but, basically:

- longer duration = more sensitivity to interest rate changes and greater inflation risk

For most investors, if they want to hold 30 year bonds, I would recommend TIPS. The big long term risk to bond holders is inflation.
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