Swedroe: A Winning Bond Strategy..

[CountryBoy]

I am a 65 year old retired Diehard who is in a lower income bracket and who tries to keep things simple.

While, on the one hand I hear people suggest putting my bond portion of my AA in the Total Bond Market Index, on the other hand Larry Swedroe has pointed out in a posting on 3.4.06 on the other Diehard forum that

"I don't like the TBM mainly because it includes MBS, and it increases its allocation to MBS at absolutely the worst time ( the lower rates go the more MBS are issued and thus the more TBM holds.)......Also TBM is longer maturity than I would prefer. IMO don't need to hold TBM, TIPS and short to intermediate funds are fine--either one. Owning both diversifies real rate risk."

I have great respect for Larry so I guess I will choose to put my bond money in either a short or intermediate fund. I choose not to go with TIPS since I already have a good amount put into I-bonds do not like the taxable aspect of TIPS.

Am I acting appropriately for the long term?

Also should I think of just putting this in a Vanguard Bond ETF fund?

Are you out there Larry? I have your book in front of me here but I don't believe I am able to work out an answer based on my reading of it.

With thanks for guidance.

Country Boy

[mikenz]

You might get some ideas here:

http://diehards.org/forum/viewtopic.php ... =post+bond

My take on TBM is that it isn't as efficient (correlation-wise to stocks) as having pure govt bills/bonds, but TBM is still a hugely popular fund and there's nothing wrong with owning it.

[tc33]

Country Boy

I'm not Larry, nor do I play him on the internet. However, if you look on page 72 of his book, he states, "...the prudent strategy is to own only very short-term fixed-income assets of the highest investment quality."

To answer your questions based on this fact:
Am I acting appropriately for the long term?
It would probably be difficult to find a reasonable person to say you are acting inappropriately if you invested in either ST or IT bonds. As mikenz said, there's really nothing wrong with owning TBM. Is it optimal? No, but it will do just fine.

Also should I think of just putting this in a Vanguard Bond ETF fund?
It depends...which bond ETF? Is it a short-term bond ETF, or an intermediate-term bond ETF? You must first decide the duration and quality of the fixed income allocation you want, then choose the implementation method (mutual fund vs ETF vs ladder vs etc...)

Hope that helps

Tom

[CountryBoy]

I guess I could go with either short or intermediate Vanguard ETF bond funds but was wondering if doing so is preferable over a comparable Vanguard mutual short or intermediate fund.

If I went with the ETFs I would do so as an investment in the long haul and with no intention of trading in and out. My understanding is that ETFs are cheaper when making a one time long term investment.

Thanks.

Country Boy

[tc33]

If I went with the ETFs I would do so as an investment in the long haul and with no intention of trading in and out. My understanding is that ETFs are cheaper when making a one time long term investment.

CountryBoy, that's the way I understand it as well. If you're reinvesting your bond income, the only concern I'd have is how your brokerage handles the distributions...will you get charged a transaction fee to reinvest? If not, I'd probably go with the ETF if I already had a brokerage account somewhere.

Best wishes

Tom

[CountryBoy]

Your reply is just exactly the type of insightful, detail oriented, and thoughtful observation that I would not have thought of.

Thank you.



Country Boy

[tc33]

Country Boy, thanks so much for the response, I'm happy to have provided some useful information to help you achieve your goals. Good luck!

Tom

[Blackhawkzone]

If I went with the ETFs I would do so as an investment in the long haul and with no intention of trading in and out. My understanding is that ETFs are cheaper when making a one time long term investment.

CountryBoy, that's the way I understand it as well. If you're reinvesting your bond income, the only concern I'd have is how your brokerage handles the distributions...will you get charged a transaction fee to reinvest? If not, I'd probably go with the ETF if I already had a brokerage account somewhere.

Best wishes

Tom

Most online brokerages will reinvest your dividends for free.

[CountryBoy]

for convenience so I will have to contact them and find out.

Thanks Tom.

Country Boy

[CountryBoy]

Well, I just found this quote on another thread running on ETFs on the forum right now...

VBS will automatically reinvest your distributions (unless you specify otherwise) for no commissions on any Vanguard ETF and most other ETF's. I don't know of any ETF thus far where this isn't true.

I can't vouch for it, but that is what it says.

Country Boy

[Doc]

... good amount put into I-bonds do not like the taxable aspect of TIPS.

The adverse tax consequences of TIPS havebeen grossly overstated. Even Mel now admits that with a nearly 100 basis points advantage of TIPS over I-bonds that the TIPS are more favorable. Further with a TIPS fund there are no adverse tax aspects. And further further more if you are in a low tax bracket why worry anyway. Remember the whole tax aspect is only about deferring taxes or not and if the taxes aren't very much anyway the deferral is not worth much. Certainly not worth giving up 100 basis points in real yield.

[CountryBoy]

the points that you make are interesting Doc. And you know far more about this than I do. However there is another aspect to TIPS that concerns me and others and that is their rates.

I mean take the way the govt chooses to fix the rates on the I-bonds. Roughly stated, they set the fixed rate where ever they want to. And with TIPS I am worried about the fact that they will not have honest rates reflect honest inflatiion.

As I said, you know more than I do, but those are 2 of the concerns that myself and others have on TIPS.

Country Boy

[Doc]

CountryBoy

I choose not to go with TIPS since I already have a good amount put into I-bonds do not like the taxable aspect of TIPS.

And with TIPS I am worried about the fact that they will not have honest rates reflect honest inflatiion.

I don’t understand your position. First you say you have I-bonds instead of TIPS because of the tax consequences but that doesn’t justify the 100 basis point yield difference and later you say you worry about the TIPS inflation parameter but it is the same as that used for I-bonds.

[Random Musings]

Country Boy,

With respect to your concern about TIPS, it has been mentioned a few times before that the TIPS fixed rate component determined by the market takes into consideration the current methodology of inflation rate calculations used for the variable component (the assumption here is that markets are efficient).

The one risk that is probably not priced in would be if the government decides to change the methodology in the future. That change would affect TIP owners at that point in time.

RM

[CountryBoy]

were purchased 5 and more years ago when rates were higher. Since that time I have come to see the way the govt is handling the fixed rates for I-bonds, CPI, etc. and I don't find them to be reality based.

Country Boy