Do people in the forum hold foreign bonds?

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Always passive
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Do people in the forum hold foreign bonds?

Post by Always passive » Mon Jan 15, 2018 7:19 am

Do people in the forum hold foreign bonds?
In a technical paper, Vanguard recommends to hold some for diversification.
If yes, in which fund(s) and what percent of total bonds?
I welcome your input.

AntsOnTheMarch
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Re: Do people in the forum hold foreign bonds?

Post by AntsOnTheMarch » Mon Jan 15, 2018 7:49 am

No. Bogleheads have convinced me that I don’t need them and it simplifies my portfolio not hold them. Otoh, if I wanted to own one fund in the form of a vanguard target date fund, it wouldn’t bother me that I’d own some because nobody knows future and who knows? If I were to hold them separately for some reason, I’d take the percentage from Vanguard’s appropriate target date fund and consider adjusting down to personal taste.*

* WARNING! I am a very, very unsophisticated investor.

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Re: Do people in the forum hold foreign bonds?

Post by midareff » Mon Jan 15, 2018 8:04 am

70, retired and NO, I do not hold foreign bonds and have no expectation of adjusting portfolio to hold them.

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Re: Do people in the forum hold foreign bonds?

Post by Call_Me_Op » Mon Jan 15, 2018 8:07 am

Generally, I don't think foreign bonds are "necessary." We can argue about what that word means. I hold very few because my diversified bond fund in my 401k happens to hold some.

Bonds are supposed to constitute the low risk portion of your portfolio. With US bonds, you can dial your risk exactly where you want it. That's why I do not see the "need" for foreign bonds, especially unhedged.

That said, I have no problem with EM bonds as long as they are counted as risky investments.
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Re: Do people in the forum hold foreign bonds?

Post by whodidntante » Mon Jan 15, 2018 8:13 am

Ex-US bonds are the world's largest asset class. And you're saying you don't want to own them? Yeah, me neither. It's all about the yield.

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Re: Do people in the forum hold foreign bonds?

Post by TwstdSista » Mon Jan 15, 2018 8:22 am

I don't, but that's because I'm at Fidelity and they don't have a foreign bond index option. Not from a thought through choice. If they did have one, I'd probably at least consider it.

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Re: Do people in the forum hold foreign bonds?

Post by BogleMelon » Mon Jan 15, 2018 8:25 am

Call_Me_Op wrote:
Mon Jan 15, 2018 8:07 am

Bonds are supposed to constitute the low risk portion of your portfolio. With US bonds, you can dial your risk exactly where you want it.
This!
I too don't hold international bonds for the same reason.
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

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Re: Do people in the forum hold foreign bonds?

Post by Notsobad » Mon Jan 15, 2018 8:42 am

I have read some recommendations to hold international bonds, so I did add a global bond funds within my 401k. However it comprises only a small portion of my total assets at this point. Less than 5 percent. The theory is that the ex US bond rates and prices may March discordantly from US bids, I suppose.

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Re: Do people in the forum hold foreign bonds?

Post by oldcomputerguy » Mon Jan 15, 2018 8:46 am

There is a lot of debate both here and elsewhere over the topic of international investing. Regarding equities, many people think that it’s not necessary to invest in international equities because US companies have a large international presence. If one were to grant that, I can’t see why the same argument would not apply to international bonds.

That being said, I do not hold international bonds due to their higher risk, although I do hold international equities (30% of my equity allocation). Call me irrational.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

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Re: Do people in the forum hold foreign bonds?

Post by Call_Me_Op » Mon Jan 15, 2018 9:00 am

oldcomputerguy wrote:
Mon Jan 15, 2018 8:46 am
There is a lot of debate both here and elsewhere over the topic of international investing. Regarding equities, many people think that it’s not necessary to invest in international equities because US companies have a large international presence. If one were to grant that, I can’t see why the same argument would not apply to international bonds.
Big difference between equities and bonds. With equities, you benefit from massive diversification because they are so volatile. Very different situation compared to high-quality bonds.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Watty
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Re: Do people in the forum hold foreign bonds?

Post by Watty » Mon Jan 15, 2018 9:00 am

I mainly own the a Vanguard Target Retirement 2015 fund and it is about 14% international bonds.

For comparison it is about 44% US bonds and TIPS.

https://personal.vanguard.com/us/funds/ ... true#tab=2

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Re: Do people in the forum hold foreign bonds?

Post by jhfenton » Mon Jan 15, 2018 9:31 am

Developed market sovereign bonds? No. By the time you hedge them back to the dollar--which Vanguard does--you end up with something like slightly lower-yielding treasuries with a tiny bit of interest rate diversification. I will add a little bit when we get closer to retirement and have 30+% in fixed income, but I haven't yet.

I do have emerging market bonds. I recently invested in VEGBX (Vanguard Emerging Markets Bond Fund Admiral Shares), Vanguard's new active EM bond fund. It's a long-term holding, and I'm viewing it more as an alternative investment than a fixed income investment.

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Re: Do people in the forum hold foreign bonds?

Post by Ethelred » Mon Jan 15, 2018 9:34 am

No. But that's in large part because our bond holdings are in retirement accounts, and neither of our 401ks have any foreign bond choices.

student
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Re: Do people in the forum hold foreign bonds?

Post by student » Mon Jan 15, 2018 9:40 am

I do not invest in foreign bonds but looking at Personal Capital asset allocation, I have about 0.4% in it.

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Re: Do people in the forum hold foreign bonds?

Post by MnD » Mon Jan 15, 2018 9:58 am

Yes, I have Dodge and Cox Global Bond Fund which holds international and US bonds. Duration 3.6 years and SEC yield 3.5%.
This is paired with a blended treasury yield indexed stable value fund (TSP G fund) at duration 1 day yield 2.375%.
This pair at 33:67 has a blended duration and yield of 1.2 years at 2.75%.

I don't use indexing for bonds, either for "within" or "between" country allocation.
Allocating your money via the rule of "biggest debtors" (countries or issuers), irrespective of yield leads to things like your largest bond holdings in International Bond in Japanese Treasuries, a country with debt to GDP of 250% and 10-year govt bonds at 0.07%. Or a bond fund like Total Bond Market with 63.6% of the portfolio is US government issued or backed bonds due fundamentally to the US's role as the global reserve currency. Indexing in muni's leads to situations where you have 66 % of holding in just 6 states, including financial basket cases like Illinois and New Jersey.

The logic for having the largest equity positions in large, successful and very profitable companies does not extend to debt issuers.

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Re: Do people in the forum hold foreign bonds?

Post by SlowMovingInvestor » Mon Jan 15, 2018 10:04 am

TwstdSista wrote:
Mon Jan 15, 2018 8:22 am
I don't, but that's because I'm at Fidelity and they don't have a foreign bond index option. Not from a thought through choice. If they did have one, I'd probably at least consider it.
You can buy EMB ($ denominated emerging markets ETF) at Fidelity commission free. Although I confess I'm not sure ETFs are the right vehicle for an illiquid investment like this.

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Re: Do people in the forum hold foreign bonds?

Post by dcabler » Mon Jan 15, 2018 10:12 am

TwstdSista wrote:
Mon Jan 15, 2018 8:22 am
I don't, but that's because I'm at Fidelity and they don't have a foreign bond index option. Not from a thought through choice. If they did have one, I'd probably at least consider it.
There are 3 commission-free international bond ETF's from ishares available at Fidelity. IGOV, IAGG, and EMB

Speaking of Fidelity, I used to own FNMIX - dropped it after 2008. Currently no foreign bonds, but considering it. I don't move that fast on these things, so who knows if and when I'll ever do it....

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Re: Do people in the forum hold foreign bonds?

Post by nisiprius » Mon Jan 15, 2018 10:21 am

Not me. I think you mean the Vanguard paper, Global fixed income: Considerations for U.S. investors. I think it's a good paper, and I've read it, fairly carefully, a couple of times. The interesting thing is that the conclusions I drew from it were:

a) It doesn't make any sense to hold foreign bonds at all unless it is in a USD-hedged fund. Without hedging, it isn't really a bond investment at all, it's FOREX speculation with a little interest-earning sweetener.

b) The paper convinced me that it doesn't make a bit of difference. Bonds are bonds, foreigners can keep bond interest commitments just as well as Americans can, and once you take out currency fluctuations the diversification across national economic policies doesn't seem to amount to much. In particular, the chart that I think is the key chart, seems like a bad joke. The effect of making 50% of bonds international--which is more than what Vanguard is doing currently in their all-in-one funds--versus no international, is to reduce the standard deviation from 9.5 to 9.3. (60/40 stock-bond column, 0% and 50% international bonds rows)

Image

In an earlier version of that paper, with fewer years of data, they had shown a reduction from 9.6 to 9.5. Based on that, I posted this image. One of the two curves shows a fluctuating value with a standard deviation of 9.6, one with 9.5. Can you tell which has lower volatility? If you think the blue line has more volatility, would you bother to buy international bonds to smooth it out to the green line? If you think the green line has more volatility, would you bother to buy international bonds to smooth it out to the blue line?

Image

c) "No difference" means I don't think holding a currency-hedged international bond fund either helps or hurts. So, believing in what John C. Bogle has called "the majesty of simplicity," I don't do it. It is my personal belief that Vanguard includes international bonds in its all-in-one portfolios because that helps Vanguard in some way, helps them internationalize their core competencies, their relations with overseas exchanges... and perhaps help relieve the pressure of needing to buy so much in U.S. bonds for the Total Bond fund. If you assume that there isn't any important difference to their customers, then I can think of many reasons why it's good for Vanguard to be able to get "essentially the same thing" (investment-grade bonds) from "two sources."

P.S. The answer with regard to the blue and green lines is here.
Last edited by nisiprius on Mon Jan 15, 2018 10:27 am, edited 1 time in total.
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Re: Do people in the forum hold foreign bonds?

Post by TwstdSista » Mon Jan 15, 2018 10:26 am

Thank you for the ETF info re: Fidelity! I'm still scared if ETFs, so I'll stick with my mutual funds for now.

One of these days I'll learn up on them, but today is not that day.

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Re: Do people in the forum hold foreign bonds?

Post by bikechuck » Mon Jan 15, 2018 10:29 am

whodidntante wrote:
Mon Jan 15, 2018 8:13 am
Ex-US bonds are the world's largest asset class. And you're saying you don't want to own them? Yeah, me neither. It's all about the yield.
In addition to yield an investment in international bonds or bond funds exposes you to currency exchange risk which I do not need or want in the portion of my portfolio that is dedicated to safety and stability.

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Re: Do people in the forum hold foreign bonds?

Post by pennstater2005 » Mon Jan 15, 2018 10:36 am

Yes. Within the Vanguard Lifestrategy Growth fund. I have no preference either way so it is what it is.
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Re: Do people in the forum hold foreign bonds?

Post by nisiprius » Mon Jan 15, 2018 10:38 am

With regard to emerging markets bonds, I don't want to over emphasize this, but: 1998. It's important because it has dropped out of the ten-year time window through which people often look. EMB, for example, only had its inception in 2007.

FMNIX, Fidelity New Markets Income, is an emerging markets bond mutual fund that has existed for long enough to show what happened in 1998.

Source

Image

That is a -40% percent drop.

In six months.

In a "bond" fund.

By comparison, in 2008-2009 stocks dropped -52%, but it took about nine months.

Choose your interpretation.
  • That was a very exceptional, ten sigma event. A one-in-100,000,000,000,000,000,000,000-year event. Probably won't happen for another 100,000,000,000,000,000,000,000 but, come the year 100,000,000,000,000,000,001,998, oh boy, watch out!
  • Yeah, but so what? It did really well since then, and made all of it back.
  • Anything that has actually happened must be possible.
But at least know that it did happen... a long long ago, in a galaxy far away.
Last edited by nisiprius on Mon Jan 15, 2018 2:17 pm, edited 1 time in total.
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Re: Do people in the forum hold foreign bonds?

Post by oldcomputerguy » Mon Jan 15, 2018 10:54 am

nisiprius wrote:
Mon Jan 15, 2018 10:21 am
The effect of making 50% of bonds international--which is more than what Vanguard is doing currently in their all-in-one funds--versus no international, is to reduce the standard deviation from 9.5 to 9.3. (60/40 stock-bond column, 0% and 50% international bonds rows)
As a side note, looking at the chart seems to support the premise that putting 20-30% equity in international is the "sweet spot" for lowering volatility on the equity side.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

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Re: Do people in the forum hold foreign bonds?

Post by dcabler » Mon Jan 15, 2018 10:59 am

TwstdSista wrote:
Mon Jan 15, 2018 10:26 am
Thank you for the ETF info re: Fidelity! I'm still scared if ETFs, so I'll stick with my mutual funds for now.

One of these days I'll learn up on them, but today is not that day.
I hear ya! Went through the same thing myself and finally bit the bullet for some particular investments. Anyway, not always the lowest cost option going with ishares, but good enough for what I'm doing with them....

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Re: Do people in the forum hold foreign bonds?

Post by friar1610 » Mon Jan 15, 2018 11:49 am

I hold no foreign bonds. Previous posters who don't have stated a number of objections to them that I agree with. But from the reading I've done on the subject, I simply don't see a strong case for them. I'm a 72 yo retiree with a target of 55%-60% fixed income and cash. Also a target of 25% of my equities in international.
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Re: Do people in the forum hold foreign bonds?

Post by bklyn96 » Mon Jan 15, 2018 11:50 am

Always passive wrote:
Mon Jan 15, 2018 7:19 am
Do people in the forum hold foreign bonds?....in which fund(s) and what percent of total bonds?
Two of our three core holdings include foreign bonds: Total Bond Market Index is 5% foreign and Wellington's bond portfolio is 7% foreign.

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Re: Do people in the forum hold foreign bonds?

Post by lack_ey » Mon Jan 15, 2018 1:42 pm

Do you count Yankee bonds as foreign? I've got some, not really deliberately but I don't see a reason to exclude them. They're in most bond funds except those specifically focusing on US government or other municipality debt, MBS, and those kinds of categories.

If you mean actual non-USD bonds, no, but I don't have much against them (now). I have to say that the value of term risk diversification over more national yield curves is pretty marginal at best to most asset allocations, so there's not much of a strong argument to make for inclusion. It's not going to make much of a difference anyway.

I will say that the hedge return is not bad, if you're currency hedging bonds in the Eurozone, Japan, and many other large debt issuers.

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Re: Do people in the forum hold foreign bonds?

Post by saltycaper » Mon Jan 15, 2018 1:57 pm

No, but I wouldn't avoid them either.

Backtesting a few portfolios, in the short time since Vanguard launched their fund, substituting it for some of Total Bond seems to have increased return slightly, increased standard deviation slightly, and improved the Sharpe ratio slightly. None of the differences meaningful IMO.
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Re: Do people in the forum hold foreign bonds?

Post by Portfolio7 » Mon Jan 15, 2018 6:55 pm

Not any more. I'm in the accumulation phase.

I have come to ascribe to the idea that Fixed Income (FI) should be safe, especially if equity allocation outweighs FI, as mine does (70%). To me that means low chance of default, but also debt where my interests align somewhat with the issuer. Therefore, I use Treasuries, TIPS, or my 401k Stable Value Fund (which is backed by 8 top insurers and weathered 2008 in great shape.)

I am open-minded regarding hedged foreign debt in a bond-heavy portfolio, no strong convictions either way.
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Re: Do people in the forum hold foreign bonds?

Post by DetroitRick » Mon Jan 15, 2018 7:53 pm

Yes, via several managed mutual funds in our IRA's. At percentages of total fixed income between 15% and 20%. Have done so for the past 10 years and plan to continue at same rate. I want a bit of this type of diversification, and use funds that tend to only selectively hedge currency positions.

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Re: Do people in the forum hold foreign bonds?

Post by quantAndHold » Mon Jan 15, 2018 8:07 pm

No, not really. In theory, foreign bonds are a great idea. In practice, though, there are issues. I hold bonds for safety, so I’m really only interested in bonds that are of similar safety to treasuries. In practice, that means developed market sovereign bonds. Since currency hedged, developed market sovereign bonds have yields that are almost as good as US treasuries, I just use US treasuries.

I could be convinced to go for yield on some higher yielding second tier sovereign bonds, but the last time I checked, there was no way to get a the higher yield sovereigns in a way that’s properly diversified, reasonably safe, and still has a decent yield. All of the existing funds either threw in a bunch of stuff that was either too scary or yield crushing. Or both.

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Re: Do people in the forum hold foreign bonds?

Post by desafinado » Mon Jan 15, 2018 8:10 pm

I own some of the vanguard long-term bond fund, which is about 8% foreign bonds. In dollar terms, it's about one screw on a Japanese fishing boat.

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Re: Do people in the forum hold foreign bonds?

Post by michaeljc70 » Tue Jan 16, 2018 10:59 am

Yes. I keep 25% of my fixed income in international bonds (VTIBX). It is probably not enough of my portfolio to make a difference, but it is also not a lot of effort to hold it. There will be a time in my lifetime when the US is no longer the largest economy.

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Re: Do people in the forum hold foreign bonds?

Post by nedsaid » Tue Jan 16, 2018 8:34 pm

Always passive wrote:
Mon Jan 15, 2018 7:19 am
Do people in the forum hold foreign bonds?
In a technical paper, Vanguard recommends to hold some for diversification.
If yes, in which fund(s) and what percent of total bonds?
I welcome your input.
Yes, I hold foreign bonds in two funds. Neither are currency hedged. The two funds make up about 7% of my bond portfolio. The two funds are American Century International Bond and Templeton Global Bond. The first is held in an IRA and the second is held in a workplace savings plan.
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Re: Do people in the forum hold foreign bonds?

Post by StevieG72 » Tue Jan 16, 2018 8:39 pm

I hold foreign bonds.

Used the same ratio as the corresponding target retirement fund that closely matches my AA.
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Re: Do people in the forum hold foreign bonds?

Post by Watty » Tue Jan 16, 2018 9:02 pm

I am surprised that so few people own foreign bonds.

I have seen the past threads about them and understand the negative arguments but to me having them in my Target Date fund seems like a reasonable choice for diversification in case things get weird(er).

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Re: Do people in the forum hold foreign bonds?

Post by PFInterest » Tue Jan 16, 2018 9:03 pm

Always passive wrote:
Mon Jan 15, 2018 7:19 am
Do people in the forum hold foreign bonds?
In a technical paper, Vanguard recommends to hold some for diversification.
If yes, in which fund(s) and what percent of total bonds?
I welcome your input.
Have you heard of the TDF?

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Re: Do people in the forum hold foreign bonds?

Post by Yohanson » Tue Jan 16, 2018 11:08 pm

I don't own any bonds.

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Re: Do people in the forum hold foreign bonds?

Post by Always passive » Wed Jan 17, 2018 12:31 am

I am surprised that presently there is no appetite for foreign bonds. I suppose that like foreign stocks which not long ego were not in many portfolios, the time will come when foreign bonds will be a standard feature as well.

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Re: Do people in the forum hold foreign bonds?

Post by unclescrooge » Wed Jan 17, 2018 2:14 am

I own emerging market bonds. The yield is higher than US bonds

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Re: Do people in the forum hold foreign bonds?

Post by lazydavid » Wed Jan 17, 2018 11:10 am

I don't directly hold any foreign bond funds. But Personal Capital says a little over 5% of my portfolio (1/6th of my bonds) is comprised of ex-US bonds. Nearly all of that is in Wellington/Wellesley.

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Re: Do people in the forum hold foreign bonds?

Post by PolarInvest » Wed Jan 17, 2018 1:44 pm

nisiprius wrote:
Mon Jan 15, 2018 10:38 am
With regard to emerging markets bonds, I don't want to over emphasize this, but: 1998. It's important because it has dropped out of the ten-year time window through which people often look. EMB, for example, only had its inception in 2007.

FMNIX, Fidelity New Markets Income, is an emerging markets bond mutual fund that has existed for long enough to show what happened in 1998.

Source

Image

That is a -40% percent drop.

In six months.

In a "bond" fund.

By comparison, in 2008-2009 stocks dropped -52%, but it took about nine months.

Choose your interpretation.
  • That was a very exceptional, ten sigma event. A one-in-100,000,000,000,000,000,000,000-year event. Probably won't happen for another 100,000,000,000,000,000,000,000 but, come the year 100,000,000,000,000,000,001,998, oh boy, watch out!
  • Yeah, but so what? It did really well since then, and made all of it back.
  • Anything that has actually happened must be possible.
But at least know that it did happen... a long long ago, in a galaxy far away.

Maybe this is not quite on topic for the current thread, but I'd venture that your graph shows a compelling reason to own emerging markets bond as part of one's "equity" allocation. They provide equity-like returns with equity-like risks, but their risks are different from those in the US stock market dominated by tech companies such as Apple, Microsoft, etc. While emerging markets bonds tumbled in 1998 and stocks didn't, they also only had a 22% drawdown at their lowest point during the 2008-2009 financial crisis, which is not too shabby for something with equity-like returns.

On Portfolio Visualizer you can compare two portfolios:
Portfolio 1: 100% VTSMX
Portfolio 2: 50% VTSMX and 50% PREMX (T. Rowe Price Emerging Markets Bond; my personal choice)

From 1995-2017 (what there is data for), you get the following stats:

Portfolio 1: 10.02% return, 14.94 st. dev., 50.89% max drawdown, 0.56 Sharpe Ratio
Portfolio 2: 10.66% return, 12.32 st. dev., 36.07% max drawdown, 0.70 Sharpe Ratio

So emerging market bonds give you a much more efficient portfolio added to one's risky asset allocation. You have more drawdowns since there are more types of risks that can go south in a hurry, but the drawdowns aren't as bad due to the diversification.

One could argue that returns on emerging market bonds have come down in the past 20 years as markets have matured and yields have gone down, but I could make similar arguments about lower future expected returns for US stocks as well.

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Re: Do people in the forum hold foreign bonds?

Post by spdoublebass » Wed Jan 17, 2018 2:08 pm

nisiprius wrote:
Mon Jan 15, 2018 10:38 am


FMNIX, Fidelity New Markets Income, is an emerging markets bond mutual fund that has existed for long enough to show what happened in 1998.

Source

Image

That is a -40% percent drop.

In six months.

In a "bond" fund.

Just curious, is there an Emerging Markets Gov Bond index fund that goes back this far as well? I would imagine the two funds would still be similar, but have some differences.
Resist much, obey little.

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