US and International Bond Fund Allocation

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pong3d
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US and International Bond Fund Allocation

Post by pong3d » Wed Jul 19, 2017 9:29 pm

I'd be interested in reading articles and opinions on allocation of US bonds and international bonds when using two funds to diversify, say Vanguard Total Bond Market Index Fund(VBTLX) and Vanguard Total International Bond Index Fund (VTABX). Any links or thoughts are appreciated.

mhalley
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Re: US and International Bond Fund Allocation

Post by mhalley » Wed Jul 19, 2017 9:49 pm

Vanguard has a paper here
https://personal.vanguard.com/pdf/icrif ... 2_high.pdf
While vanguard has embraced them, bogleheads in general have not warmed up to intl bonds.

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whodidntante
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Re: US and International Bond Fund Allocation

Post by whodidntante » Wed Jul 19, 2017 11:31 pm

International bonds are the largest asset class. Someone must be buying them. :)

Dead Man Walking
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Re: US and International Bond Fund Allocation

Post by Dead Man Walking » Thu Jul 20, 2017 12:59 am

The international bond market is much different than the US bond market. I don't understand the esoteric intricacies of the international bond market; consequently, I don't invest in the international bond market. I think that Vanguard has integrated international bonds into many of their balanced funds because they are interested in becoming an international investment company. Time will tell whether this is a profitable strategy. I will be monitoring these funds to determine whether or not this is a profitable strategy.

DMW

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Re: US and International Bond Fund Allocation

Post by jmk » Thu Jul 20, 2017 8:13 am

Doesn't international diversify rate change risk--the main danger with an investment grade bonds?

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Re: US and International Bond Fund Allocation

Post by pascalwager » Thu Jul 20, 2017 3:04 pm

Dead Man Walking wrote:The international bond market is much different than the US bond market. I don't understand the esoteric intricacies of the international bond market; consequently, I don't invest in the international bond market. I think that Vanguard has integrated international bonds into many of their balanced funds because they are interested in becoming an international investment company. Time will tell whether this is a profitable strategy. I will be monitoring these funds to determine whether or not this is a profitable strategy.

DMW
What do you mean by "an international investment company"? Would this be against the interests of a US investor?

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Re: US and International Bond Fund Allocation

Post by ThrustVectoring » Thu Jul 20, 2017 5:01 pm

jmk wrote:Doesn't international diversify rate change risk--the main danger with an investment grade bonds?
If you're hedged against a change in exchange rates, you effectively have a USD interest rate. If you aren't hedged, then you've got the risk of paying for dollar-denominated expenses with non-USD money.

The only case I can see for having foreign currency exposure is to hold it unhedged for paying foreign currency expenses. Eg, if your retirement plan includes "snowbirding" in Spain, you probably want to pay your Euro-denominated expenses in Spain with a diversified Euro portfolio.

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Re: US and International Bond Fund Allocation

Post by Dead Man Walking » Thu Jul 20, 2017 5:37 pm

pascalwager wrote:
Dead Man Walking wrote:The international bond market is much different than the US bond market. I don't understand the esoteric intricacies of the international bond market; consequently, I don't invest in the international bond market. I think that Vanguard has integrated international bonds into many of their balanced funds because they are interested in becoming an international investment company. Time will tell whether this is a profitable strategy. I will be monitoring these funds to determine whether or not this is a profitable strategy.

DMW
What do you mean by "an international investment company"? Would this be against the interests of a US investor?
I mean that Vanguard is developing a global footprint. This would not be against the interests of US investors, but would be great for investors in other countries. Developing a fund for international bonds may help them attract foreign investors who may not want US bonds. Janus just merged with a British company that offers funds with high expense ratios. The world is becoming more integrated.

Vanguard's international bond funds don't have enough history for me to invest in them. They may prove to be excellent performers and diversifiers.

DMW

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SimpleGift
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Re: US and International Bond Fund Allocation

Post by SimpleGift » Thu Jul 20, 2017 5:52 pm

pascalwager wrote:What do you mean by "an international investment company"? Would this be against the interests of a US investor?
As Vanguard expands into other global markets, such as the U.K. and China, broad international bond funds may be attractive to non-U.S. investors. U.S. investors already have the deepest, most diverse bond market on the planet — and in their own currency, so less need for international bonds (in my personal view).

Re: Vanguard's global plans, from a recent Financial Times article:
Financial Times wrote:Vanguard is stepping up its presence in China by opening an office in Shanghai that should pave the way for it to sell its funds to the country’s fast-growing market of retail investors. The world’s second largest fund company by assets has joined a clutch of rivals — including Axa Investment Managers, Invesco and Neuberger Berman — in establishing what is known as a wholly foreign-owned enterprise. Through these, international fund managers can avoid setting up businesses in China controlled by local partners.

Pennsylvania-based Vanguard’s latest move in China highlights its focus on international expansion, and follows plans outlined last week by the company to push into the UK market through an online investment platform. “This new milestone solidifies our commitment to China,” said Bill McNabb, chairman and chief executive of Vanguard. “Bringing our unique and proven investment approach to the millions of investors in China is an important initiative for Vanguard’s international business.”
Cordially, Todd

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Re: US and International Bond Fund Allocation

Post by convert949 » Thu Jul 20, 2017 6:29 pm

I am the first to admit that I am not very familiar with the intricacies of investing in foreign bonds. Having said that, I did agree to purchase an amount equal to 5% (12% of bonds) of our portfolio to assure that if anything happened to me, Vanguard Asset Management Services would be able to step in to help the DW.

What I find difficult (and what keeps me from following their recommendation of 30% of bonds), is that hedging income is difficult to predict and currently, the fund has an extended duration as well as a very low dividend rate. Assuming that, as stated above, they will mimic US dividends including the hedging income, how do we assess the interest rate risk?

Comparing the International fund to TBM, the international fund would be riskier based on duration alone... Did I miss something? Are the statements made by David Swensen assuming similar credit quality and duration?

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Re: US and International Bond Fund Allocation

Post by Thesaints » Thu Jul 20, 2017 6:33 pm

aegis965 wrote:
David Swensen wrote: FOREIGN BONDS

...
In a portfolio context, foreign exchange exposure may produce the benefit of additional diversification. Even with no expected return, the lack of full correlation between currency movements and other asset-class fluctuations reduces portfolio risk.
Mmmh... then why is Vanguard Minimum Volatility Fund currency-hedged ?

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Re: US and International Bond Fund Allocation

Post by aegis965 » Thu Jul 20, 2017 8:32 pm

Thesaints wrote:Mmmh... then why is Vanguard Minimum Volatility Fund currency-hedged ?
Beats me. Because hedging reduces volatility in the short term? There were a debate on this over at Monevator when the UCITS version came out.

BTW the quote from Swensen has been deleted due to violation of fair use policy.
I may be biased.

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TD2626
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Re: US and International Bond Fund Allocation

Post by TD2626 » Thu Jul 20, 2017 8:51 pm

Anyone think it might be nice to have a total world bond fund akin to the total world stock fund? I think in theory a fund like that may be useful to some. If you were comfortable with a very high level of international, then could one just use one fund instead of two?

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Re: US and International Bond Fund Allocation

Post by abuss368 » Thu Jul 20, 2017 9:08 pm

jmk wrote:Doesn't international diversify rate change risk--the main danger with an investment grade bonds?
Hi jmk -

That is my understanding for Vanguard investment experts adding them to a diversified investment portfolio.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: US and International Bond Fund Allocation

Post by abuss368 » Thu Jul 20, 2017 9:12 pm

convert949 wrote:I am the first to admit that I am not very familiar with the intricacies of investing in foreign bonds. Having said that, I did agree to purchase an amount equal to 5% (12% of bonds) of our portfolio to assure that if anything happened to me, Vanguard Asset Management Services would be able to step in to help the DW.

What I find difficult (and what keeps me from following their recommendation of 30% of bonds), is that hedging income is difficult to predict and currently, the fund has an extended duration as well as a very low dividend rate. Assuming that, as stated above, they will mimic US dividends including the hedging income, how do we assess the interest rate risk?

Comparing the International fund to TBM, the international fund would be riskier based on duration alone... Did I miss something? Are the statements made by David Swensen assuming similar credit quality and duration?
David Swensen does not recommend international bonds.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: US and International Bond Fund Allocation

Post by abuss368 » Thu Jul 20, 2017 9:43 pm

Bogleheads -

Vanguard investment experts recommend a two fund bond strategy in most investment portfolios: 1) Total Bond Index Fund, 2) Total International Bond Index Fund.

This two fund strategy provides maximum diversification including interest rate diversification. In my opinion investors could do much worse.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: US and International Bond Fund Allocation

Post by pascalwager » Thu Jul 20, 2017 11:56 pm

Thanks, Dead Man and Simplegift. Interesting.

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Re: US and International Bond Fund Allocation

Post by Thesaints » Fri Jul 21, 2017 1:14 am

Whereas I'm fully convinced that with stocks global market cap weight, possibly tweaked to minimize volatility in case foreign holdings are not currency-hedged, is the way to go, with bonds things are quite different.

First of all, I'm sure that in most cases foreign bonds have to be currency-hedged and therefore they don't offer superior expected returns.
With that in mind it is possible to diversify over four domains:
- Issuer (everything else being equal)
- Credit rating (including asset backed securities)
- Maturity/Duration
- Fixed vs. variable rate (including ZC)

For the same reason as stocks, I think one definitely wants to diversify across issuers, but for the other three domain blindly following market cap weight is not the optimal solution for almost everybody.
First of all, individual investors do have a time horizon in most cases. If mine is, let's say, 20 years, why would I want to keep more than 20% of my bonds in durations shorter than 3 years ? (see VBMFX)
One could argue that this is to lower my bonds portfolio risk, but I'd retort that I don't really care about that risk, I care about my total portfolio risk. If I wanted to lower total risk, instead of getting short-term bonds, I could increase the allocation to bonds. Can't tell which solution is better until I have a look at the yield curve and at my particular situation.

Analogous considerations can be made for diversifying across credit rating. Instead of choosing investment grade bonds, I could be better of with short-term treasuries + junk bonds.

Finally ZC TIPS are the best possible solution if one wants a certain sum at an established future date with the lowest possible risk.

In short, the choice of which bonds to add to one's portfolio is a lot like selecting one's wardrobe. We need suits that fit our individual physique and the sort of social engagements we are exposed to. Letting someone else fill our closets, on the basis of what is good for the average American, may have tragic consequences.

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Re: US and International Bond Fund Allocation

Post by convert949 » Fri Jul 21, 2017 9:18 am

abuss368 wrote:
convert949 wrote:I am the first to admit that I am not very familiar with the intricacies of investing in foreign bonds. Having said that, I did agree to purchase an amount equal to 5% (12% of bonds) of our portfolio to assure that if anything happened to me, Vanguard Asset Management Services would be able to step in to help the DW.

What I find difficult (and what keeps me from following their recommendation of 30% of bonds), is that hedging income is difficult to predict and currently, the fund has an extended duration as well as a very low dividend rate. Assuming that, as stated above, they will mimic US dividends including the hedging income, how do we assess the interest rate risk?

Comparing the International fund to TBM, the international fund would be riskier based on duration alone... Did I miss something? Are the statements made by David Swensen assuming similar credit quality and duration?
David Swensen does not recommend international bonds.
Understood... Not what I asked... What I hope to learn is AFTER hedging the yield to USD equivalents, do the typical rules of assessing the risks of bonds still apply, i.e. is an international bond fund with a longer duration (7.8 yrs) carry more interest rate risk than the equivalent US bond fund (TBM) @ 6.1 yrs?

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Re: US and International Bond Fund Allocation

Post by convert949 » Fri Jul 21, 2017 9:24 am

abuss368 wrote:Bogleheads -

Vanguard investment experts recommend a two fund bond strategy in most investment portfolios: 1) Total Bond Index Fund, 2) Total International Bond Index Fund.

This two fund strategy provides maximum diversification including interest rate diversification. In my opinion investors could do much worse.

Best.
Interesting... Recently, in our latest iteration of the complimentary financial plan, besides the International fund, they recommended that I keep ST investment Grade and use Intermediate Term Bond index (so far, so good). They then suggested that I add Intermediate Term Investment Grade as my "risk profile" indicated that I could have more corporate bonds. TBM was nowhere to be found in their recommendation.

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Re: US and International Bond Fund Allocation

Post by abuss368 » Fri Jul 21, 2017 4:06 pm

convert949 wrote:
abuss368 wrote:
convert949 wrote:I am the first to admit that I am not very familiar with the intricacies of investing in foreign bonds. Having said that, I did agree to purchase an amount equal to 5% (12% of bonds) of our portfolio to assure that if anything happened to me, Vanguard Asset Management Services would be able to step in to help the DW.

What I find difficult (and what keeps me from following their recommendation of 30% of bonds), is that hedging income is difficult to predict and currently, the fund has an extended duration as well as a very low dividend rate. Assuming that, as stated above, they will mimic US dividends including the hedging income, how do we assess the interest rate risk?

Comparing the International fund to TBM, the international fund would be riskier based on duration alone... Did I miss something? Are the statements made by David Swensen assuming similar credit quality and duration?
David Swensen does not recommend international bonds.
Understood... Not what I asked... What I hope to learn is AFTER hedging the yield to USD equivalents, do the typical rules of assessing the risks of bonds still apply, i.e. is an international bond fund with a longer duration (7.8 yrs) carry more interest rate risk than the equivalent US bond fund (TBM) @ 6.1 yrs?
Hi convert949,

I would recommend reading "Unconventional Success". One of the best chapters was the asset classes to avoid. I have referred to this, and specifically International Bonds, many times.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: US and International Bond Fund Allocation

Post by abuss368 » Fri Jul 21, 2017 4:09 pm

convert949 wrote:
abuss368 wrote:Bogleheads -

Vanguard investment experts recommend a two fund bond strategy in most investment portfolios: 1) Total Bond Index Fund, 2) Total International Bond Index Fund.

This two fund strategy provides maximum diversification including interest rate diversification. In my opinion investors could do much worse.

Best.
Interesting... Recently, in our latest iteration of the complimentary financial plan, besides the International fund, they recommended that I keep ST investment Grade and use Intermediate Term Bond index (so far, so good). They then suggested that I add Intermediate Term Investment Grade as my "risk profile" indicated that I could have more corporate bonds. TBM was nowhere to be found in their recommendation.
That is interesting. Perhaps because you have an advisor. The Target and LifeStrategy funds have the four total markets funds. In my opinion, that is a lot a bond funds.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: US and International Bond Fund Allocation

Post by dpm321 » Fri Jul 21, 2017 6:38 pm

Dead Man Walking wrote:The international bond market is much different than the US bond market. I don't understand the esoteric intricacies of the international bond market; consequently, I don't invest in the international bond market.

DMW
Unlike our understanding stocks with no earnings trading at obscene multiples, declining earnings with increasing prices the market relentlessly going up with both good and bad news, etc.?

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Re: US and International Bond Fund Allocation

Post by spdoublebass » Fri Jul 21, 2017 6:48 pm

Question on international bonds. Are most of the objections because the vanguard international bond fund (BNDX) does not yield as much as total bond market?
If the yield was higher on international bonds would less people object? I'm just curious. I went with a small portion to international bonds just following Vanguard's lead.
I'm trying to think, but nothing happens

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Re: US and International Bond Fund Allocation

Post by pascalwager » Fri Jul 21, 2017 7:19 pm

spdoublebass wrote:Question on international bonds. Are most of the objections because the vanguard international bond fund (BNDX) does not yield as much as total bond market?
If the yield was higher on international bonds would less people object? I'm just curious. I went with a small portion to international bonds just following Vanguard's lead.
Swensen's position is: why include an asset class (foreign bonds) that doesn't provide much diversification (because of the hedging), doesn't provide the same safety as US Treasuries, and doesn't provide superior yields?

Sharpe also had some reservations about the hedging, but thought they still provide some diversification. Also, Sharpe's world portfolio is a risk portfolio. TIPS are employed externally, but Swensen includes them inside his risk portfolio.

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Re: US and International Bond Fund Allocation

Post by pascalwager » Fri Jul 21, 2017 7:23 pm

abuss368 wrote:
convert949 wrote:I am the first to admit that I am not very familiar with the intricacies of investing in foreign bonds. Having said that, I did agree to purchase an amount equal to 5% (12% of bonds) of our portfolio to assure that if anything happened to me, Vanguard Asset Management Services would be able to step in to help the DW.

What I find difficult (and what keeps me from following their recommendation of 30% of bonds), is that hedging income is difficult to predict and currently, the fund has an extended duration as well as a very low dividend rate. Assuming that, as stated above, they will mimic US dividends including the hedging income, how do we assess the interest rate risk?

Comparing the International fund to TBM, the international fund would be riskier based on duration alone... Did I miss something? Are the statements made by David Swensen assuming similar credit quality and duration?
David Swensen does not recommend international bonds.
He would also dislike TBM–because of the non-Treasury bonds.

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Re: US and International Bond Fund Allocation

Post by pascalwager » Fri Jul 21, 2017 7:31 pm

Thesaints wrote:Whereas I'm fully convinced that with stocks global market cap weight, possibly tweaked to minimize volatility in case foreign holdings are not currency-hedged, is the way to go, with bonds things are quite different.

First of all, I'm sure that in most cases foreign bonds have to be currency-hedged and therefore they don't offer superior expected returns.
With that in mind it is possible to diversify over four domains:
- Issuer (everything else being equal)
- Credit rating (including asset backed securities)
- Maturity/Duration
- Fixed vs. variable rate (including ZC)

For the same reason as stocks, I think one definitely wants to diversify across issuers, but for the other three domain blindly following market cap weight is not the optimal solution for almost everybody.
First of all, individual investors do have a time horizon in most cases. If mine is, let's say, 20 years, why would I want to keep more than 20% of my bonds in durations shorter than 3 years ? (see VBMFX)
One could argue that this is to lower my bonds portfolio risk, but I'd retort that I don't really care about that risk, I care about my total portfolio risk. If I wanted to lower total risk, instead of getting short-term bonds, I could increase the allocation to bonds. Can't tell which solution is better until I have a look at the yield curve and at my particular situation.

Analogous considerations can be made for diversifying across credit rating. Instead of choosing investment grade bonds, I could be better of with short-term treasuries + junk bonds.

Finally ZC TIPS are the best possible solution if one wants a certain sum at an established future date with the lowest possible risk.

In short, the choice of which bonds to add to one's portfolio is a lot like selecting one's wardrobe. We need suits that fit our individual physique and the sort of social engagements we are exposed to. Letting someone else fill our closets, on the basis of what is good for the average American, may have tragic consequences.
When you depart from the world market AA, you're now making bets. Do you really feel competent to make these bets? I don't. When I buy my own clothes, I still always end up with mere shorts and a tee-shirt.

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Re: US and International Bond Fund Allocation

Post by Thesaints » Fri Jul 21, 2017 7:59 pm

pascalwager wrote: When you depart from the world market AA, you're now making bets. Do you really feel competent to make these bets? I don't. When I buy my own clothes, I still always end up with mere shorts and a tee-shirt.
Of course I am!
Why should I buy 20% of short-term bonds, when I know that I won't need that money for many many years ?
Remember that the total allocation of bonds is nothing else than the average of many diverse needs and targets. I know my own needs (in fact I'm a world expert on them); what do I care of someone else's, which push him to buy other types of bonds ?

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Re: US and International Bond Fund Allocation

Post by abuss368 » Fri Jul 21, 2017 8:37 pm

pascalwager wrote:
abuss368 wrote:
convert949 wrote:I am the first to admit that I am not very familiar with the intricacies of investing in foreign bonds. Having said that, I did agree to purchase an amount equal to 5% (12% of bonds) of our portfolio to assure that if anything happened to me, Vanguard Asset Management Services would be able to step in to help the DW.

What I find difficult (and what keeps me from following their recommendation of 30% of bonds), is that hedging income is difficult to predict and currently, the fund has an extended duration as well as a very low dividend rate. Assuming that, as stated above, they will mimic US dividends including the hedging income, how do we assess the interest rate risk?

Comparing the International fund to TBM, the international fund would be riskier based on duration alone... Did I miss something? Are the statements made by David Swensen assuming similar credit quality and duration?
David Swensen does not recommend international bonds.
He would also dislike TBM–because of the non-Treasury bonds.
Hi pascalwager -

Indeed. David Swensen in his book "Unconventional Success" recommended 30% of an investment portfolio allocated to bonds. This allocation was comprised of 50% Treasury Bonds and 50% TIPS Bonds.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: US and International Bond Fund Allocation

Post by Dead Man Walking » Fri Jul 21, 2017 11:25 pm

spdoublebass wrote:Question on international bonds. Are most of the objections because the vanguard international bond fund (BNDX) does not yield as much as total bond market?
If the yield was higher on international bonds would less people object? I'm just curious. I went with a small portion to international bonds just following Vanguard's lead.
As I recall, Bogle stated that the expected return of a bond fund would be the yield over the average duration of the fund. Total International Bond Index Fund is yielding 0.78% for an average duration of 7.8 years. Would you choose the fund over an FDIC insured savings account yielding 1.10%?

DMW

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Re: US and International Bond Fund Allocation

Post by patrick » Sat Jul 22, 2017 12:06 am

I would generally expect bond returns to not differ by much when currency hedged, and thus not provide much diversification. Looking at the historical difference between US and international returns for Vanguard's total funds (unfortunately international bond only opened in 2013) seems to bear this out:

In 2014, stocks differed by 16.7% but bonds only differed by 2.9%
In 2015, stocks differed by 4.7% but bonds only differed by 0.7%
In 2016, stocks differed by 8.0% but bonds only differed by 2.1%

Interestingly, foreign bonds outperformed US bonds in each year, while the reverse happened with stocks.

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Re: US and International Bond Fund Allocation

Post by saltycaper » Sat Jul 22, 2017 12:14 am

Dead Man Walking wrote:
spdoublebass wrote:Question on international bonds. Are most of the objections because the vanguard international bond fund (BNDX) does not yield as much as total bond market?
If the yield was higher on international bonds would less people object? I'm just curious. I went with a small portion to international bonds just following Vanguard's lead.
As I recall, Bogle stated that the expected return of a bond fund would be the yield over the average duration of the fund. Total International Bond Index Fund is yielding 0.78% for an average duration of 7.8 years. Would you choose the fund over an FDIC insured savings account yielding 1.10%?

DMW
I think it's a little more complex for a bond fund utilizing currency hedging. There's a cost to hedge as well as a return earned (or lost) based on the spread between short-term bonds denominated in the various currencies. I don't fully understand the details, but the topic has been discussed before if you want to do a search.
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Re: US and International Bond Fund Allocation

Post by spdoublebass » Sat Jul 22, 2017 12:17 am

patrick wrote:
In 2014, stocks differed by 16.7% but bonds only differed by 2.9%
In 2015, stocks differed by 4.7% but bonds only differed by 0.7%
In 2016, stocks differed by 8.0% but bonds only differed by 2.1%

Interestingly, foreign bonds outperformed US bonds in each year, while the reverse happened with stocks.
Is this unusual? (I'm not being sarcastic, I'm trying to learn)
Foreign stocks were down a bit so international bond being up would make sense.
That's actually one of the only reasons I think international bonds make sense. The fact that they did well when international stocks weren't performing well. So you can rebalance.

Another thing which I only toss out not for debate, but again just to learn. I know we have been discussing international bonds only, but what about emerging bonds. I know they are included in the international bond index, but if you add a bit more, it "seems" (which doesn't mean it always will) that one could pick up some yield there. I guess what I mean is if you are alootong 20% of your bond fund for international, you could split that with some emerging bonds and possibly have it match total bond market.
I know I'm probably not thinking clearly here, was just trying to attempt something outside of the box.
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Re: US and International Bond Fund Allocation

Post by patrick » Sat Jul 22, 2017 12:32 am

spdoublebass wrote:
patrick wrote:
In 2014, stocks differed by 16.7% but bonds only differed by 2.9%
In 2015, stocks differed by 4.7% but bonds only differed by 0.7%
In 2016, stocks differed by 8.0% but bonds only differed by 2.1%

Interestingly, foreign bonds outperformed US bonds in each year, while the reverse happened with stocks.
Is this unusual? (I'm not being sarcastic, I'm trying to learn)
Foreign stocks were down a bit so international bond being up would make sense.
That's actually one of the only reasons I think international bonds make sense. The fact that they did well when international stocks weren't performing well. So you can rebalance.

Another thing which I only toss out not for debate, but again just to learn. I know we have been discussing international bonds only, but what about emerging bonds. I know they are included in the international bond index, but if you add a bit more, it "seems" (which doesn't mean it always will) that one could pick up some yield there. I guess what I mean is if you are alootong 20% of your bond fund for international, you could split that with some emerging bonds and possibly have it match total bond market.
I know I'm probably not thinking clearly here, was just trying to attempt something outside of the box.
I don't know offhand if it is usual for "winning" side to be opposite on stocks and bonds. Vanguard's fund doesn't go back very far but PIMCO does have a much older hedged foreign bond fund you could compare with (not quite sure how good a substitute it is). A quick look suggests the pattern doesn't hold.

I do however remember that emerging markets bonds have outperformed just about everything else in the recent past. Using the oldest emerging markets bond funds I could find, I see the following annual returns over the last 23 years:

11.4% emerging market bonds (Fidelity FNMIX)
10.4% emerging market bonds (T Rowe Price PREMX)
9.8% US stocks (VTSAX)
7.3% emerging market stocks (VEIEX)
5.5% US bonds (VBMFX)

Which doesn't necessarily mean they will have similar results over the next 23 years, of course.

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Re: US and International Bond Fund Allocation

Post by spdoublebass » Sat Jul 22, 2017 9:42 am

[quote="Thesaints"
Of course I am!
Why should I buy 20% of short-term bonds, when I know that I won't need that money for many many years ?
Remember that the total allocation of bonds is nothing else than the average of many diverse needs and targets. I know my own needs (in fact I'm a world expert on them); what do I care of someone else's, which push him to buy other types of bonds ?[/quote]

All I read on this forum is how people should have short duration bonds. Then I read something like this and it makes me wonder. Am I supposed to have longer term bonds if I have an investing timeframe of 30+ years? I have total Bond market now, but I'm asking if I were to add something would it be longer or shorter term.
I'm trying to think, but nothing happens

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Re: US and International Bond Fund Allocation

Post by abuss368 » Sat Jul 22, 2017 9:58 am

spdoublebass wrote:[quote="Thesaints"
Of course I am!
Why should I buy 20% of short-term bonds, when I know that I won't need that money for many many years ?
Remember that the total allocation of bonds is nothing else than the average of many diverse needs and targets. I know my own needs (in fact I'm a world expert on them); what do I care of someone else's, which push him to buy other types of bonds ?
All I read on this forum is how people should have short duration bonds. Then I read something like this and it makes me wonder. Am I supposed to have longer term bonds if I have an investing timeframe of 30+ years? I have total Bond market now, but I'm asking if I were to add something would it be longer or shorter term.[/quote]

In my experience, the Bogleheads forum will often recommend any short or intermediate term bond fund that is both low cost and diversified. Bonds provide safety and income to an investment portfolio.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: US and International Bond Fund Allocation

Post by Thesaints » Sat Jul 22, 2017 2:39 pm

abuss368 wrote:
spdoublebass wrote:[quote="Thesaints"
Of course I am!
Why should I buy 20% of short-term bonds, when I know that I won't need that money for many many years ?
Remember that the total allocation of bonds is nothing else than the average of many diverse needs and targets. I know my own needs (in fact I'm a world expert on them); what do I care of someone else's, which push him to buy other types of bonds ?
All I read on this forum is how people should have short duration bonds. Then I read something like this and it makes me wonder. Am I supposed to have longer term bonds if I have an investing timeframe of 30+ years? I have total Bond market now, but I'm asking if I were to add something would it be longer or shorter term.
In my experience, the Bogleheads forum will often recommend any short or intermediate term bond fund that is both low cost and diversified. Bonds provide safety and income to an investment portfolio.[/quote]

If your time horizon is decades long, you are leaving money on the table by adding shorter-term bonds to your mix.
Vanguard Total Bond Market has a little over 20% of bonds with duration <3 years. You don't need those.
If someone objects that you are increasing your bonds component volatility by excluding shorter maturities, answer him that it could be an advantage from the overall portfolio volatility point of view (negative correlation bonds/stocks) and, anyway, you could always reduce a little your stocks and correspondingly increase a little your long-term bonds and achieve the same total volatility but with a higher expected return.

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Re: US and International Bond Fund Allocation

Post by munemaker » Sat Jul 22, 2017 2:58 pm

For what it is worth, Personal Capital recommended I have 5% of my investments in foreign bonds, and said I currently have 4%. What? I didn't know I have any. Then I checked Vanguard Total Bond Fund (VBTLX) on Morningstar and found out they have a percentage (8% maybe? I don't remember) in international bonds.

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Re: US and International Bond Fund Allocation

Post by spdoublebass » Sat Jul 22, 2017 3:10 pm

Thesaints wrote:
abuss368 wrote:
spdoublebass wrote:[quote="Thesaints"
Of course I am!
Why should I buy 20% of short-term bonds, when I know that I won't need that money for many many years ?
Remember that the total allocation of bonds is nothing else than the average of many diverse needs and targets. I know my own needs (in fact I'm a world expert on them); what do I care of someone else's, which push him to buy other types of bonds ?
All I read on this forum is how people should have short duration bonds. Then I read something like this and it makes me wonder. Am I supposed to have longer term bonds if I have an investing timeframe of 30+ years? I have total Bond market now, but I'm asking if I were to add something would it be longer or shorter term.
In my experience, the Bogleheads forum will often recommend any short or intermediate term bond fund that is both low cost and diversified. Bonds provide safety and income to an investment portfolio.
If your time horizon is decades long, you are leaving money on the table by adding shorter-term bonds to your mix.
Vanguard Total Bond Market has a little over 20% of bonds with duration <3 years. You don't need those.
If someone objects that you are increasing your bonds component volatility by excluding shorter maturities, answer him that it could be an advantage from the overall portfolio volatility point of view (negative correlation bonds/stocks) and, anyway, you could always reduce a little your stocks and correspondingly increase a little your long-term bonds and achieve the same total volatility but with a higher expected return.[/quote]


I've always thought this to be true. But I for sure am no expert. I assume you are talking about long term treasury bonds though correct and not corporate (VCLT) or long bond fund (BLV)?
Long term treasury always seem to perform well when stocks go down. Which leads to rebalancing opportunities.
I'm trying to think, but nothing happens

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Re: US and International Bond Fund Allocation

Post by Thesaints » Sat Jul 22, 2017 3:27 pm

Long term bond index has 40% of treasuries and yields .7% less than long term corporate. It is an individual choice.

More in general, if given my present capital and my target 20 years down the road, there were an investment grade yield that allows my to get there, I'd be a fool to add stocks or shorter term bonds. If it is a long term treasury that has sufficient yield, then I'm all set. For corporate bonds, I'd want a fund with the necessary yield, not to tie myself to the fortunes of a single company for such a long time.

If there is no sufficient yield from investment grade bonds, I'm forced to allocate so e of my capital to stocks and take on more risk.

In any case, short term bonds have no role in either scenario, unless the yield curve is sufficiently flat, and even then it is something not necessarily true.

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Re: US and International Bond Fund Allocation

Post by BeBH65 » Sat Jul 22, 2017 3:42 pm

Hello Thesaints,

What is the role of bonds/bond funds in your portfolio?
In your replies above, do you speak about individual bonds or bond funds ?
How do you see lmg term bonds evolve in the near to mid term?

Regards,
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

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Re: US and International Bond Fund Allocation

Post by spdoublebass » Sat Jul 22, 2017 3:47 pm

Thesaints wrote:Long term bond index has 40% of treasuries and yields .7% less than long term corporate. It is an individual choice.

More in general, if given my present capital and my target 20 years down the road, there were an investment grade yield that allows my to get there, I'd be a fool to add stocks or shorter term bonds. If it is a long term treasury that has sufficient yield, then I'm all set. For corporate bonds, I'd want a fund with the necessary yield, not to tie myself to the fortunes of a single company for such a long time.

If there is no sufficient yield from investment grade bonds, I'm forced to allocate so e of my capital to stocks and take on more risk.

In any case, short term bonds have no role in either scenario, unless the yield curve is sufficiently flat, and even then it is something not necessarily true.
You'd pick BLV over VGLT?
I'm trying to think, but nothing happens

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Re: US and International Bond Fund Allocation

Post by pascalwager » Sun Jul 23, 2017 2:22 am

Thesaints wrote:
pascalwager wrote: When you depart from the world market AA, you're now making bets. Do you really feel competent to make these bets? I don't. When I buy my own clothes, I still always end up with mere shorts and a tee-shirt.
Of course I am!
Why should I buy 20% of short-term bonds, when I know that I won't need that money for many many years ?
Remember that the total allocation of bonds is nothing else than the average of many diverse needs and targets. I know my own needs (in fact I'm a world expert on them); what do I care of someone else's, which push him to buy other types of bonds ?
The int'l fund average duration is 7.8 years, not short-term.

I personally can accept the market risk/returns in retirement, so I don't care about the bond fund details. These bonds are part of my risk portfolio, not my liability matching portfolio. The market considers them investable assets and so does Vanguard.

If you're young, you may not want any bonds. In that case, just take the market portfolio and discard the two bond funds. I guess you end up with TWS and a risk of 1.5, the maximum prudent risk level at Financial Engines.

I have three portfolios:
  • -World bonds/stocks, total market, risk portfolio.
    -Global bonds/stocks, DFA, 5-year global bonds, risk portfolio.
    -Pension and cash (others might need TIPS, short/intermediate and/or short-term bonds)
Right now, the world market looks like:
  • 30% US stocks
    27% non-US stocks
    22% US bonds
    21% non-US bonds
The bonds in the two risk portfolios aren't there for safety; they're just investable, diversifying assets.

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Re: US and International Bond Fund Allocation

Post by Thesaints » Sun Jul 23, 2017 2:34 pm

spdoublebass wrote: You'd pick BLV over VGLT?
Not necessarily. One has higher risk and higher expected return. If I need the higher expected return I'd pick BLV, provided I'm cool with the higher risk.

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Re: US and International Bond Fund Allocation

Post by indexonlyplease » Sun Jul 23, 2017 2:42 pm

Thesaints wrote:
pascalwager wrote: When you depart from the world market AA, you're now making bets. Do you really feel competent to make these bets? I don't. When I buy my own clothes, I still always end up with mere shorts and a tee-shirt.
Of course I am!
Why should I buy 20% of short-term bonds, when I know that I won't need that money for many many years ?
Remember that the total allocation of bonds is nothing else than the average of many diverse needs and targets. I know my own needs (in fact I'm a world expert on them); what do I care of someone else's, which push him to buy other types of bonds ?
Thesaints

May I ask what you use for fixed income?? If you do. In another post I stated I use my stable fixed fund paying 3.5%. Since I really just starting to understand bonds and the possiblity of interest rates I chose the fixed.

Thanks in advance.

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Re: US and International Bond Fund Allocation

Post by Thesaints » Sun Jul 23, 2017 2:44 pm

pascalwager wrote: The int'l fund average duration is 7.8 years, not short-term.
The discussion has strayed a little from simply "international bonds, yes or no".
Hedged international bonds are no different from domestic bonds, so why not ? (but also, why yes ?).
However it is a flawed rationale to say that since the world bond market capitalization is 60% in non-USD denominated bonds, then I should have the same repartition in my bonds portfolio.
One fifth of the world's circulating currency is JPY-denominated, but I don't put 900 ¥ in my wallet every morning.
I personally can accept the market risk/returns in retirement, so I don't care about the bond fund details. These bonds are part of my risk portfolio, not my liability matching portfolio. The market considers them investable assets and so does Vanguard.
Maybe if you paid more attention to your bond portfolio the overall performance could be even better. Not sure what "risk" and "liability matching" portfolios are.
I only have one portfolio, the vanilla one encompassing all my investable assets.
Last edited by Thesaints on Sun Jul 23, 2017 3:05 pm, edited 2 times in total.

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Re: US and International Bond Fund Allocation

Post by Thesaints » Sun Jul 23, 2017 2:58 pm

indexonlyplease wrote:
Thesaints wrote:
pascalwager wrote: When you depart from the world market AA, you're now making bets. Do you really feel competent to make these bets? I don't. When I buy my own clothes, I still always end up with mere shorts and a tee-shirt.
Of course I am!
Why should I buy 20% of short-term bonds, when I know that I won't need that money for many many years ?
Remember that the total allocation of bonds is nothing else than the average of many diverse needs and targets. I know my own needs (in fact I'm a world expert on them); what do I care of someone else's, which push him to buy other types of bonds ?
Thesaints

May I ask what you use for fixed income?? If you do. In another post I stated I use my stable fixed fund paying 3.5%. Since I really just starting to understand bonds and the possiblity of interest rates I chose the fixed.

Thanks in advance.
I use a combinations of bonds. Cash, for me, is also a bond; of a particular variety: zero maturity and zero risk (and zero expected return). Obviously, CD's, savings accounts, and things like that are also "bonds", each with its own maturity, credit quality, etc.
In my bond portfolio I have:
- Cash
- TIPS (fund)
- Savings Bonds (Series I)
- VUSFX
mainly, with some high-yield bonds, intermediate-term munis, and GNMA throw in (less than 15% total).

I do not have any LT bonds, although Savings Bonds are LT in a way. Don't need them to achieve an expected return for my total portfolio of my satisfaction.
Additionally, my personal view is that:
- Bond/Stock correlation is going to be higher than usual, maximally so on the downside.
- Yield curve is rather flat.
- Rather than taking intermediate risk on a portion of my portfolio, I'd rater take a blend of much higher risk (HY, if not more stocks outright) and much lower risk. Very low risk is easier to identify compared to intermediate risk and high risk cannot get much worse than that.

Stable fixed 3.5% I'd jump on it. Unless there is some small prints attached.
Last edited by Thesaints on Sun Jul 23, 2017 3:06 pm, edited 1 time in total.

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Re: US and International Bond Fund Allocation

Post by EvanRude » Sun Jul 23, 2017 3:04 pm

Domestic bonds are 24% of our total invested portfolio, and international bonds are 10% of the total. A comparison of total return from Vanguard's website today is below. Neither are setting the world on fire. Total International Bond was created in May 2013 so there is no 5 year performance number yet. To me it's just another slice of diversification - I would recommend you get some percentage of international bond and don't worry about it.

Average annual total return—after taxes on distributions

Vanguard Total Bond Mkt Index Adm
1-year -1.51%
3-year +1.30%

Vanguard Tot Intl Bond Ix Admiral
1-year -1.40%
3-year +2.83%

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Re: US and International Bond Fund Allocation

Post by pascalwager » Sun Jul 23, 2017 3:24 pm

Thesaints wrote:
pascalwager wrote: The int'l fund average duration is 7.8 years, not short-term.
The discussion has strayed a little from international bonds yes or no.
Hedged international bonds are no different from domestic bonds, so why not ? (but also, why yes ?).
However it is a flawed rationale to say that since the world bond market capitalization is 60% in non-USD denominated bonds, then I should have the same repartition in my bonds portfolio.
One fifth of the World's circulating currency is in JPY, but I don't put 900 ¥ in my wallet every morning.
I personally can accept the market risk/returns in retirement, so I don't care about the bond fund details. These bonds are part of my risk portfolio, not my liability matching portfolio. The market considers them investable assets and so does Vanguard.
Maybe if you paid more attention to your bond portfolio the overall performance could be even better. Not sure what "risk" and "liability matching" portfolios are.
I only have one portfolio, the vanilla one encompassing all my investable assets.
Please see William F. Sharpe's RISMAT e-book: https://web.stanford.edu/~wfsharpe/RISMAT/

Chapter 7 discusses the market portfolio including detailed assembly instructions. After reading and reflecting on this material, it's now clear to me that Bogleheads is not about investing, it's almost entirely about betting–including the total market four-fund portfolio allocations found in the VG TR and LS funds. The market portfolio is the default portfolio. It defines market risk and determines expected returns. Other portfolios having over-/under -weighted (size, value. growth, stock proportions, etc) assets are bets and should be acknowledged as such.

What I called a liability matching portfolio (Bill Bernstein), Sharpe calls a riskless portfolio (TIPS). So the the two portfolios, risk and riskless are separate.

The market amount of int'l bonds is presently 21%. Any other allocation is betting, not investing.

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Re: US and International Bond Fund Allocation

Post by Angst » Sun Jul 23, 2017 4:08 pm

pascalwager wrote:What I called a liability matching portfolio (Bill Bernstein), Sharpe calls a riskless portfolio (TIPS). So the the two portfolios, risk and riskless are separate.

The market amount of int'l bonds is presently 21%. Any other allocation is betting, not investing.
That's an interesting thought what you bring up about Boglehead investing in general. Regarding this last statement above however, I assume you mean it only with respect to one's "risk" portfolio. You wouldn't expect me to be putting UK (and other int'l) inflation protected Gilts into my "riskless" portfolio, I assume. And it would seem odd to label the "riskless" portfolio as a bet, unless that's just a "very safe bet" we're talking about. :)

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