International bonds - lazy portfolios

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IRT
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International bonds - lazy portfolios

Post by IRT » Sun Feb 04, 2018 12:36 am

I’ve noticed that all lazy portfolios include domestic and international stocks along with domestic bonds, but never seem to include international bonds. Why is this?

lack_ey
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Re: International bonds - lazy portfolios

Post by lack_ey » Sun Feb 04, 2018 12:50 am

A lot of lazy portfolio formulations were conceived years ago. There weren't cheap international bond funds until less than 5 years ago.

Also, the level of impact is relatively low. If you replace some domestic stocks with international stocks, it will likely make a difference over a given period, for better or worse. If you do the same for bonds, it won't make much difference unless there are big currency swings and the bonds are currency unhedged.

If you're asking a question more about the actual merits, use the search bar. This has been discussed a lot in the past.

Güero
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Re: International bonds - lazy portfolios

Post by Güero » Sun Feb 04, 2018 10:10 am

As an addendum to lack-ey's post, the actual merits question will end up being something like "How much quality do you want to sacrifice for yield?"

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iceport
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Re: International bonds - lazy portfolios

Post by iceport » Sun Feb 04, 2018 11:32 am

lack_ey wrote:
Sun Feb 04, 2018 12:50 am
A lot of lazy portfolio formulations were conceived years ago. There weren't cheap international bond funds until less than 5 years ago.
That's generally true, but it doesn't mention — nor does it explain — the level of animosity most folks here on the forum used to have for international bonds. Any mention of them would usually inspire a torrent of intolerant and reflexive "take your risk on the equity side" refrains. This all changed rather suddenly when Vanguard created its first international bond index fund and instantaneously seeded it with an enormous infusion of assets by including it in the asset allocation for its target retirement and lifestyle funds. The move was accompanied by a research paper that seemed to justify the asset class. But as nisiprius so ably pointed out at the time, all the paper really showed was that it hardly mattered at all. (A version of the paper is here.)
lack_ey wrote:
Sun Feb 04, 2018 12:50 am
Also, the level of impact is relatively low. If you replace some domestic stocks with international stocks, it will likely make a difference over a given period, for better or worse. If you do the same for bonds, it won't make much difference unless there are big currency swings and the bonds are currency unhedged.
This is really a key point. And the international bonds most tolerated are all the hedged variety, neutralizing the foreign currency exposure.

The way I see it, international bonds never deserved the level of contempt most Bogleheads reserved for them in the past, nor do they deserve the relatively prominent role they now play in Vanguard's all-in-one funds. The bottom line is that they hardly matter.
"Discipline matters more than allocation.” ─William Bernstein

tesuzuki2002
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Re: International bonds - lazy portfolios

Post by tesuzuki2002 » Wed Jun 13, 2018 11:23 pm

iceport wrote:
Sun Feb 04, 2018 11:32 am
lack_ey wrote:
Sun Feb 04, 2018 12:50 am
A lot of lazy portfolio formulations were conceived years ago. There weren't cheap international bond funds until less than 5 years ago.
That's generally true, but it doesn't mention — nor does it explain — the level of animosity most folks here on the forum used to have for international bonds. Any mention of them would usually inspire a torrent of intolerant and reflexive "take your risk on the equity side" refrains. This all changed rather suddenly when Vanguard created its first international bond index fund and instantaneously seeded it with an enormous infusion of assets by including it in the asset allocation for its target retirement and lifestyle funds. The move was accompanied by a research paper that seemed to justify the asset class. But as nisiprius so ably pointed out at the time, all the paper really showed was that it hardly mattered at all. (A version of the paper is here.)
lack_ey wrote:
Sun Feb 04, 2018 12:50 am
Also, the level of impact is relatively low. If you replace some domestic stocks with international stocks, it will likely make a difference over a given period, for better or worse. If you do the same for bonds, it won't make much difference unless there are big currency swings and the bonds are currency unhedged.
This is really a key point. And the international bonds most tolerated are all the hedged variety, neutralizing the foreign currency exposure.

The way I see it, international bonds never deserved the level of contempt most Bogleheads reserved for them in the past, nor do they deserve the relatively prominent role they now play in Vanguard's all-in-one funds. The bottom line is that they hardly matter.
Iceport,

Thanks for sharing these details. I have been trying to align my portfolio much better as it is passing into 7 seven figure territory and more and more this is no longer about savings rate as much as getting the allocation balanced. I noticed in the Vanguard Portfolio Analysis tools that there is a recommendation / consideration for holding International Bonds. I currently only hold VBTLX, of which is also a small part of the portfolio (4%). I'm starting to shift some more into bonds, but mostly during the new contributions at this point.

After reading the report and forum threads. I am still not against adding International bonds... but as I have been working towards simplifying my holdings this is going the other way. But in reality adding a little different ix of Bonds doesn't seem like a burden.

Thank you for your thoughts as well!

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pokebowl
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Re: International bonds - lazy portfolios

Post by pokebowl » Thu Jun 14, 2018 6:35 am

tesuzuki2002 wrote:
Wed Jun 13, 2018 11:23 pm

Iceport,

Thanks for sharing these details. I have been trying to align my portfolio much better as it is passing into 7 seven figure territory and more and more this is no longer about savings rate as much as getting the allocation balanced. I noticed in the Vanguard Portfolio Analysis tools that there is a recommendation / consideration for holding International Bonds. I currently only hold VBTLX, of which is also a small part of the portfolio (4%). I'm starting to shift some more into bonds, but mostly during the new contributions at this point.

After reading the report and forum threads. I am still not against adding International bonds... but as I have been working towards simplifying my holdings this is going the other way. But in reality adding a little different ix of Bonds doesn't seem like a burden.

Thank you for your thoughts as well!
Another factor to consider with Vanguard and its allocation towards international bonds, Vanguard themselves are in the long term attempting to position themselves as a global brokerage provider. With that in mind it makes sense for them to offer funds that align more neutral and apply to as many investors as possible world wide. While in today's economic climate, international bonds do not favor US investors holding them in large quantities, those funds may better serve their ex-US client base.
There is nothing more expensive than something offered for free.

Valuethinker
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Re: International bonds - lazy portfolios

Post by Valuethinker » Thu Jun 14, 2018 7:22 am

pokebowl wrote:
Thu Jun 14, 2018 6:35 am
tesuzuki2002 wrote:
Wed Jun 13, 2018 11:23 pm

Iceport,

Thanks for sharing these details. I have been trying to align my portfolio much better as it is passing into 7 seven figure territory and more and more this is no longer about savings rate as much as getting the allocation balanced. I noticed in the Vanguard Portfolio Analysis tools that there is a recommendation / consideration for holding International Bonds. I currently only hold VBTLX, of which is also a small part of the portfolio (4%). I'm starting to shift some more into bonds, but mostly during the new contributions at this point.

After reading the report and forum threads. I am still not against adding International bonds... but as I have been working towards simplifying my holdings this is going the other way. But in reality adding a little different ix of Bonds doesn't seem like a burden.

Thank you for your thoughts as well!
Another factor to consider with Vanguard and its allocation towards international bonds, Vanguard themselves are in the long term attempting to position themselves as a global brokerage provider. With that in mind it makes sense for them to offer funds that align more neutral and apply to as many investors as possible world wide. While in today's economic climate, international bonds do not favor US investors holding them in large quantities, those funds may better serve their ex-US client base.
AFAIK though we access entirely different funds?

US investors are highly constrained by IRS PFIC rules and by SEC regs. Conversely we have EU Directives as adopted in national FS legislation. MIFID II a particular bugbear of late (brokers will not sell us funds/ ETFs that lack correct European documentation e.g. all US funds).

So what Vanguard does in the international market is totally separate from what it does for US investors?

The main difference is an international investor has to be much more aware of home country bias. If you are Australian, Canadian or German maybe holding only home country bonds is a wise move, but not so much for other investors.

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