Do you know your bond portfolio's REAL 12 month total return?

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hoops777
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by hoops777 » Sat Sep 02, 2017 5:22 pm

I know what my CDs return is and will be.
K.I.S.S........so easy to say so difficult to do.

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Tycoon
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Re: Vanguard Total Bond Market Index Fund

Post by Tycoon » Sat Sep 02, 2017 5:32 pm

Taylor Larimore wrote:
Fri Sep 01, 2017 2:34 pm
Bogleheads:

It is a common mistake to judge a bond fund by its return. This is because higher return (yield) in bonds nearly always means higher risk of loss.

Bonds are for safety--not higher return (use a greater percentage of stocks in your portfolio for higher return).

This is one reason why Vanguard Total Bond Market Index Funds, which has never had an annual loss greater than -2.66%, is now the largest bond fund in the world.

Best wishes.
Taylor
Exactly.
...I might be just beginning | I might be near the end. Enya | | C'est la vie

lazyday
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by lazyday » Sun Sep 03, 2017 12:33 pm

AlohaJoe wrote:
Sat Sep 02, 2017 1:05 pm
I'm not sure what you mean by permanent loss? You mean like when GM had a permanent loss for everyone who owned the S&P 500? Aren't we all total return investors here, anyway? :)
The concept is more useful to a stockpicker, but it could apply here.

If you own a long term TIPS fund and the price suddenly drops, you have an unrealized loss. This loss is likely temporary because your yield is now higher. If you instead owned a 10 year TIPS, your loss will disappear over time.

If you own a junk bond fund and the price suddenly drops because companies are going bankrupt, part of that loss is permanent. Some of the bonds will never recover.

Some say that the time to buy junk bonds is when the spread over IG corporates is high. If you buy when the spread is low, you aren’t being compensated enough for the risk of permanent loss of capital. Of course this isn’t very compatible with your view of efficiency:
I don't believe markets are perfect but I think they're smarter than me and everyone who writes about markets on the internet. So I default to assuming that markets have priced the yield for the risks.
My opinion is that markets usually price securities efficiently relative to similar securities. But asset classes often aren’t efficiently priced relative to each other.

But since the JP Morgan EM debt indexes were created, they've had positive returns so I guess the yield is priced high enough to make up for all those things.
It’s possible that this was a lucky period with fewer defaults than was expected at the start of the period. If the EM spread over Treasuries shrank in this period, that might reflect an unexpected improvement in credit quality.

siamond wrote:
Sat Sep 02, 2017 1:04 pm
Besides gold (which comes with all sorts of issues of its own), this is the ONLY asset class I know which displayed fairly low correlation with both stocks and (US) bonds. And it did display pretty solid returns(~9% nominal).
My portfolio has lots of EM equity, so I doubt EM bonds would be a great diversifier for me. Though I haven’t tried to backtest.


Anyway, siamond and AlohaJoe, I suppose my problem with EM bonds at today’s price is about feelings and belief. If you believe that asset classes are efficiently priced, then I’m an irrational market timer. Maybe there’s some argument like “with today’s spread, you only need x% default to lose money, and historically we had y*x% default, do you really think risk fell that much?” But I don’t have the data or ambition.

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siamond
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by siamond » Sun Sep 03, 2017 2:51 pm

lazyday wrote:
Sun Sep 03, 2017 12:33 pm
My portfolio has lots of EM equity, so I doubt EM bonds would be a great diversifier for me. Though I haven’t tried to backtest.
That's a really good point. EM Bonds does display significant correlation with EM Equities (0.58 on a monthly basis) - while US equities and US bonds are much more decorrelated than that. Also, the 0.75% purchase fee on Vanguard VGOVX is hard to swallow. Finally the ER for such funds (Vanguard, or iShares, or SPDR) remains a tad high (around 0.40%). I like the idea, but maybe I'll wait a bit longer...

cromwell
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Re: Vanguard Total Bond Market Index Fund

Post by cromwell » Sun Sep 03, 2017 3:24 pm

Taylor Larimore wrote:
Fri Sep 01, 2017 2:34 pm
Bogleheads:

It is a common mistake to judge a bond fund by its return. This is because higher return (yield) in bonds nearly always means higher risk of loss.

Bonds are for safety--not higher return (use a greater percentage of stocks in your portfolio for higher return).

This is one reason why Vanguard Total Bond Market Index Funds, which has never had an annual loss greater than -2.66%, is now the largest bond fund in the world.

Best wishes.
Taylor
Bonds are also for income or they would be unattractive for retirees especially when their real yield is negative, unless you live in Japan.

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spdoublebass
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by spdoublebass » Sun Sep 03, 2017 4:21 pm

siamond wrote:
Sun Sep 03, 2017 2:51 pm
lazyday wrote:
Sun Sep 03, 2017 12:33 pm
My portfolio has lots of EM equity, so I doubt EM bonds would be a great diversifier for me. Though I haven’t tried to backtest.
That's a really good point. EM Bonds does display significant correlation with EM Equities (0.58 on a monthly basis) - while US equities and US bonds are much more decorrelated than that. Also, the 0.75% purchase fee on Vanguard VGOVX is hard to swallow. Finally the ER for such funds (Vanguard, or iShares, or SPDR) remains a tad high (around 0.40%). I like the idea, but maybe I'll wait a bit longer...
Disclaimer:
I am in no way an authority on anything I will mention, only tossing it out for discussion.

Few things:
- Instead of VGOVX, you can always get the ETF version. No purchase fee, but still a .32% ER
- While I find the EM equity vs bond discussion very interesting. There seems to be 3 groups of people in regards to how they invest in bonds. Group 1 doesn't want any foreign bonds, Group 2 will add foreign bonds but only funds such as Vanguards TIBM (BNDX/VTIBX), Group 3 will do whatever. One question I have always had is if you are going to leave group one and go to group 2 by adding international bonds, why wouldn't you add the EM bonds?

I know EM bonds are in the TIBM index, but they are only 3.8% of it. I'm not advocating for Sharpe's Global Market Portfolio, but I do think the numbers are interesting. Sharpe doesn't use EM bond funds either. If you look at J.P. Morgans Guide to the Markets you get the breakdown of the Global Bond market, from last June it was US 38.9%, INT 41.7%, and EM 19.4%

If you wanted to accomplish this with the 3 Vanguard ETFs you would need 38.9% BND, 43.35% BNDX, and 17.75% VOWB (EM Bonds).

I'm not saying one should or should not do this, what I'm getting at is if you look at the EM Bond to International Bond Ratio, it's roughly 70% BNDX to 30% VOWB.

Most people from group 2 listed above are willing to go with 30% of their bond fund to international bonds, following what Vanguard is doing. I ask, why not make EM bonds 30% of that international portion? You could go 20% International bond, 10% EM Bond.

I am not advanced enough to run all the figures...I can see the past few years (which I know means nothing) through portfolio visualizer. By adding that amount of EM to international bonds it seems to make it more worth while, beyond just the diversification aspect of adding only International.

Again, Only tossing this out for discussion.
Resist much, obey little.

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siamond
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by siamond » Sun Sep 03, 2017 4:34 pm

spdoublebass wrote:
Sun Sep 03, 2017 4:21 pm
- Instead of VGOVX, you can always get the ETF version. No purchase fee, but still a .32% ER
Didn't notice... Thank you, that's interesting. I wonder how Vanguard justifies that?
spdoublebass wrote:
Sun Sep 03, 2017 4:21 pm
- While I find the EM equity vs bond discussion very interesting. There seems to be 3 groups of people in regards to how they invest in bonds. Group 1 doesn't want any foreign bonds, Group 2 will add foreign bonds but only funds such as Vanguards TIBM (BNDX/VTIBX), Group 3 will do whatever. One question I have always had is if you are going to leave group one and go to group 2 by adding international bonds, why wouldn't you add the EM bonds?
Personally, I struggle to understand Group 2. I ran the numbers a while ago, and this really doesn't seem to have displayed any advantage in the past, compared to a Group 1 strategy. Int'l bonds are just too similar to US bonds... So I'd ponder about a "Group 3b", mixing US bonds and EM bonds, to benefit from higher AND (somewhat) decorrelated returns.

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spdoublebass
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by spdoublebass » Sun Sep 03, 2017 4:45 pm

siamond wrote:
Sun Sep 03, 2017 4:34 pm

Personally, I struggle to understand Group 2. I ran the numbers a while ago, and this really doesn't seem to have displayed any advantage in the past, compared to a Group 1 strategy. Int'l bonds are just too similar to US bonds... So I'd ponder about a "Group 3b", mixing US bonds and EM bonds, to benefit from higher AND (somewhat) decorrelated returns.
I totally agree. I worded it poorly above, but that is what I was getting at. If you are going to add the international bonds, why not go all the way with the EM Bonds?
Again, this it over my head, just something I was wondering about.
Resist much, obey little.

aj76er
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by aj76er » Sun Sep 03, 2017 5:14 pm

Why are we nitpicking the 1yr returns of a 5.5yr duration bond fund?

To account for BND's duration, I hold 2yrs of expenses in Ally no-penalty CD's, and another 1yr in IBonds. And I'm working on saving another 1yr of expenses in IBonds.

Thus, all together my FI allocation represents a reasonable store of value over the long term. And I do consider it pretty darn safe - not 100% garauntee'd, but good enough.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

AlohaJoe
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by AlohaJoe » Sun Sep 03, 2017 10:42 pm

lazyday wrote:
Sun Sep 03, 2017 12:33 pm
But since the JP Morgan EM debt indexes were created, they've had positive returns so I guess the yield is priced high enough to make up for all those things.
It’s possible that this was a lucky period with fewer defaults than was expected at the start of the period. If the EM spread over Treasuries shrank in this period, that might reflect an unexpected improvement in credit quality.
While this is possible -- and I think we've seen a few cases like with TIPS and REITs where the first 5, 10, or 15 years of the asset class are a bit of an outlier -- keep in mind that the JP Morgan index went through the the Asian Crisis, 2000, and 2008. There was also the recent commodity crash (which nearly caused a bear market in 2016 in the US but affected emerging countries more profoundly). There were also defaults in Russia, Ukraine, Argentina (twice), and a dozen other countries over that period. (Defaults average one a year over the past ~20 years.

Also keep in mind that "default" usually doesn't mean "goes to zero". It just means "is restructured in some way".

Image

This chart shows that actually many defaults actually result in a recovery after the debt is restructured -- because markets often overreact initially. To pick one example. Russia defaulted in 1999. On the day Russia defaulted its bonds were actually up 33% from where they had been 6 months prior. And 12 months after the default, bonds were up 130%. The whitepaper the chart above comes from concludes, "Even when accounting for haircuts, savvy creditors can recover much of the value of their investment." Keep in mind that they are an asset management firm trying to convince you that they are EM bond experts and you should give them your money, so take it with a grain of salt. But my main point is that an EM default doesn't mean "lose everything".

Admiral
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by Admiral » Mon Sep 04, 2017 7:50 am

spdoublebass wrote:
Sun Sep 03, 2017 4:45 pm
siamond wrote:
Sun Sep 03, 2017 4:34 pm

Personally, I struggle to understand Group 2. I ran the numbers a while ago, and this really doesn't seem to have displayed any advantage in the past, compared to a Group 1 strategy. Int'l bonds are just too similar to US bonds... So I'd ponder about a "Group 3b", mixing US bonds and EM bonds, to benefit from higher AND (somewhat) decorrelated returns.
I totally agree. I worded it poorly above, but that is what I was getting at. If you are going to add the international bonds, why not go all the way with the EM Bonds?
Again, this it over my head, just something I was wondering about.
The reason is because people are chasing returns with bonds when they should be using stocks to goose their returns. They want the "safety" of bonds but they are unhappy with 2% yield. Thus, EM bonds.

lazyday
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by lazyday » Mon Sep 04, 2017 11:16 am

AlohaJoe wrote:
Sun Sep 03, 2017 10:42 pm
-- keep in mind that the JP Morgan index went through the the Asian Crisis, 2000, and 2008. There was also the recent commodity crash
That's true.

I don't know how the severity of defaults over the last 20 years compare to those of prior decades. Or how spreads to Treasuries changed over time. Personally, before investing I'd want to know how spreads changed.

GMO and Research Affiliates, both value investors, seem positive about EM bonds. So my skepticism might be misguided.
The whitepaper the chart above comes from
That chart is surprising. Is it from a publicly available paper?
I think we've seen a few cases like with TIPS and REITs where the first 5, 10, or 15 years of the asset class are a bit of an outlier
I'm pretty sure institutional investment in EM bonds has a longer history than the index, so I don't think I could argue the period is an outlier for that reason.

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