Add TIPS and High Yield Corporate Bonds To Your Portfolio?

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rattlenap
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Add TIPS and High Yield Corporate Bonds To Your Portfolio?

Post by rattlenap » Sun Jun 11, 2017 7:57 pm

I often see posts about tilting as well as slicing and dicing albeit on the stock side of your portfolio. Yet what about adding extension funds to the bond portion?

TIPS and High Yield Corporate Bonds are not in the Total Bond Fund. Rick Ferri's portfolio does a 60/20/20 split between Vanguard Total Bond Fund, TIPS and High Yield Corporate respectively and seems to work very well.

What are your thoughts on the matter?

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Taylor Larimore
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Re: Add TIPS and High Yield Corporate Bonds To Your Portfolio?

Post by Taylor Larimore » Sun Jun 11, 2017 8:11 pm

rattlenap wrote:I often see posts about tilting as well as slicing and dicing albeit on the stock side of your portfolio. Yet what about adding extension funds to the bond portion?

TIPS and High Yield Corporate Bonds are not in the Total Bond Fund. Rick Ferri's portfolio does a 60/20/20 split between Vanguard Total Bond Fund, TIPS and High Yield Corporate respectively and seems to work very well.

What are your thoughts on the matter?
rattlenap:

Bonds are primarily for safety in a portfolio. Cash, CDs, or almost any high-quality, low-cost, bond fund will do the job. I slightly favor diversified Total Bond Market Index Fund. It has never lost more than 2.66% in any year since inception. In the severe 2008 bear market it gained 5%. Vanguard High Yield Corporate lost 21.3%.

If higher return is your goal, it is more efficient to increase one's stock allocation.

Higher yield in bond funds nearly always means higher-risk.

Strive for simplicity--not complexity.

Best wishes.
Taylor
Last edited by Taylor Larimore on Sun Jun 11, 2017 8:36 pm, edited 1 time in total.
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jebmke
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Re: Add TIPS and High Yield Corporate Bonds To Your Portfolio?

Post by jebmke » Sun Jun 11, 2017 8:17 pm

High yield bonds basically add more equity-like risk.

I like Tips and have held them since 2008. I sold about half of our holdings along the way for a sizeable gain. I use individual Tips on the long end and nominal bond funds on the short-intermediate range of fixed income.
Last edited by jebmke on Sun Jun 11, 2017 8:17 pm, edited 1 time in total.
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alex_686
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Re: Add TIPS and High Yield Corporate Bonds To Your Portfolio?

Post by alex_686 » Sun Jun 11, 2017 8:17 pm

I am all for this and encourage others to follow.

The factors that drive bonds tend to more pure than that of stocks. The difference between value and growth can be fuzzy, the difference between TIPS, government bonds, and corporate bonds are clear. How much tilt should one give TIPS is fuzzy even in the best of times. The risk factors associated with duration and credit quality are sharper.

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Re: Add TIPS and High Yield Corporate Bonds To Your Portfolio?

Post by rgs92 » Sun Jun 11, 2017 8:18 pm

If anything, use some high yield bonds in the STOCK allocation of your portfolio. Not a major part, of course.
TIPS are a completely different subject discussed at length over the years here in other threads, so just do some searching.

Like Taylor said, bonds are for safety. Or as Jack Bogle puts it all the time, bonds provide ballast to a portfolio.
Hi yield bonds are volatile, so they belong with stocks.

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Re: Add TIPS and High Yield Corporate Bonds To Your Portfolio?

Post by Dominic » Sun Jun 11, 2017 8:25 pm

TIPS are a great investment if you want to protect yourself specifically from inflation. No other safe instrument is linked to inflation, so it's a good diversifier.

I am very against high yield bonds. They represent a sliver of the bond market, and they aren't really an asset class worth owning. Risk-adjusted, high yield bonds do not do better than safe bonds. And their risk generally shows up at the wrong time -- when the stock market is tanking, and safe bonds are rising. If you want more return, just buy stocks. If you want safety, buy safe bonds.

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TheTimeLord
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Re: Add TIPS and High Yield Corporate Bonds To Your Portfolio?

Post by TheTimeLord » Sun Jun 11, 2017 8:25 pm

Use TIPS for liability matching, won't touch high yield since they have equity type risk so I would rather have equities or at least convertible notes.
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Re: Add TIPS and High Yield Corporate Bonds To Your Portfolio?

Post by Index Fan » Sun Jun 11, 2017 10:00 pm

I have a modest portion of my fixed income (mostly consisting of TBM) in TIPS. I think Taylor is correct on taking your risks on the equity side, not fixed income which is more for stability. I have no desire to own high yield for that reason.
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Re: Add TIPS and High Yield Corporate Bonds To Your Portfolio?

Post by LadyGeek » Mon Jun 12, 2017 3:34 pm

TxInjun is requesting portfolio help which I've moved into a new topic: [Help with asset allocation - TIPS and Corporate bonds]

This thread is now in the Investing - Theory, News & General forum (general question).
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Re: Add TIPS and High Yield Corporate Bonds To Your Portfolio?

Post by not4me » Mon Jun 12, 2017 3:59 pm

Years ago, I realized that the Total Bond fund wasn't total & it was too narrowly focused for me. This was before the days of BH & I didn't know as much as I do today. I added some other investments & tracked for quite a while. I looked at this part of my portfolio as a whole & compared it to what it would have been if only in total bond. The return of the group was always higher than total bond & the standard deviation was always lower.

So, to me, it was safer. I guess it was more complex. Simplicity has a cost. In this case, the cost was more than I wanted to pay. Clearly, that is not everyone's cup of tea.

bigred77
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Re: Add TIPS and High Yield Corporate Bonds To Your Portfolio?

Post by bigred77 » Mon Jun 12, 2017 4:35 pm

In the accumulation phase, I split my fixed income 40/40/20 between Total Bond, TIPS, and Intermediate term corporate bonds. In retirement I plan to just hold 50/50 Total Bond and TIPS. I chose this allocation because I like round numbers, it's easy to rebalance around, and at this level of granularity it probably makes a negligible difference. In accumulation I hold 25% fixed income so it's an easy 10%, 10% and 5% slice of my total portfolio. In retirement I expect to be around 60/40, so my total portfolio percentages would be 20% each. I only use funds, not individual securities.

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nedsaid
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Re: Add TIPS and High Yield Corporate Bonds To Your Portfolio?

Post by nedsaid » Mon Jun 12, 2017 5:20 pm

bigred77 wrote:In the accumulation phase, I split my fixed income 40/40/20 between Total Bond, TIPS, and Intermediate term corporate bonds. In retirement I plan to just hold 50/50 Total Bond and TIPS. I chose this allocation because I like round numbers, it's easy to rebalance around, and at this level of granularity it probably makes a negligible difference. In accumulation I hold 25% fixed income so it's an easy 10%, 10% and 5% slice of my total portfolio. In retirement I expect to be around 60/40, so my total portfolio percentages would be 20% each. I only use funds, not individual securities.
This is a good allocation for a bond portfolio. One of the criticisms of Total Bond Index is that it is too light on corporates. The TIPS also gives you additional inflation protection on the bond side. I like this.
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Re: Add TIPS and High Yield Corporate Bonds To Your Portfolio?

Post by Theoretical » Mon Jun 12, 2017 6:23 pm

If I wasn't also heavily into Small Value, I'd strongly consider the Fallen Angels junk fund ANGL, perhaps as a barbell with treasuries.

The comparison of default rates between BB, B, and the Ca are completely stunning. 1%, 7%, and 14% as averages.

ANGl is 75% BB

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Re: Add TIPS and High Yield Corporate Bonds To Your Portfolio?

Post by LadyGeek » Mon Jun 12, 2017 6:35 pm

^^^ The wiki has some background info: Barbell strategy
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Explorer
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Re: Add TIPS and High Yield Corporate Bonds To Your Portfolio?

Post by Explorer » Mon Jun 12, 2017 7:32 pm

TIPS have a place in the portfolio if you believe inflation will pick back up again.
HY is a whole different matter of personal preference.

Do you like seasoning salt or plain salt on your french fries? Use moderation if you want to mix some TIPS and HY bonds into the portfolio.

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Re: Add TIPS and High Yield Corporate Bonds To Your Portfolio?

Post by LadyGeek » Mon Jun 12, 2017 7:45 pm

Some caution is indicated. See the wiki: High yield bonds
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TD2626
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Re: Add TIPS and High Yield Corporate Bonds To Your Portfolio?

Post by TD2626 » Mon Jun 12, 2017 8:39 pm

Investors who wish to have exposure to all investable assets would need obtain exposure to several things outside the three-fund portfolio to complete that goal.

These include high-yeild corporate bonds and TIPS, as well as things like international bonds, muni bonds, and so forth. Note that REITs, mining/precious metal stocks, and emerging markets are represented in the three-fund portfolio already so these types of assets would only be held by investors intending to intentionally overweight (or underweight) them relative to the market portfolio.

I feel like diversification into as many major investible segments of the global market can aid returns and make a portfolio more efficent. Besides, being "long everything" may help an investor sleep well at night.

Small (~5% of portfolio) allocations to HY corporate may be acceptable. Higher allocations (~10% or so) may also be acceptable but are harder to defend. The OP's 20% seems very, very high and is difficult to defend.

Basically, the HY investor should be able to clearly enunciate their reasons for investment. For example, a hypothetical investor may say:

"I feel that HY provides exposure to a market segment not represented by my total bond index fund. I believe that this segment has unique risks and presents a diversification opportunity. I desire the added income thrown off by the fund, and am comfortable with the drastically increased credit risk compared to treasuries. Indeed, I fully recognize that the risks of this fund are high enough that many investors choose to place it in their equity allocation. The investment is not to exceed 5% of my portfolio size and will be through low-cost, relatively conservative funds such as Vanguards".

If a hypothetical investor, after many months of research and careful thought, and after considering the subject at great length, can state clearly a paragraph similar to the above, they may be able to defend a small allocation to high yield.

You need to have reasons for everything you do - and those reasons absolutely can not involve simply chasing yeild.

Most investors do not care to get into bond markets deeply enough to understand the tradeoffs of high yield and are likely best served with a Total Bond fund only (or munis). However, for

One must always keep in mind - simplicity is important - will small allocations to these segments really make a difference? What difference will they make? How?

Even if you reduce your financial risk by slicing and dicing bonds, you increase your risk of being buried in paperwork. Having dozens and dozens of holdings can be highly stressful and can require many hours of effort.

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