I bonds instead of Total bond in a 3-fund portfolio?

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BogleMelon
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I bonds instead of Total bond in a 3-fund portfolio?

Post by BogleMelon » Fri Feb 16, 2018 2:18 pm

I was recently thinking, since the goal of the bonds in a portfolio is not to make money as much as to smooth the investing ride (diluting the risk) meanwhile keep up with inflation, then why I-bonds is not considered for that job, instead of the Total Bond fund?

I bonds are:
- Inflation risk free
- Federal tax deferred
- State tax exempted

Yet, Total bond is the bond that is recommended by Bogleheads. Is it because I-bonds can not be purchased in IRA accounts? Or because of the $10K limitation purchasing limit per person? Or other technical reasons that make Total bond more attractive over the long run?
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Jack FFR1846
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Re: I bonds instead of Total bond in a 3-fund portfolio?

Post by Jack FFR1846 » Fri Feb 16, 2018 2:22 pm

I have both. About $350k in iBonds and about 2 commas in total bond. The iBonds second as emergency fund.
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Noobvestor
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Re: I bonds instead of Total bond in a 3-fund portfolio?

Post by Noobvestor » Fri Feb 16, 2018 2:26 pm

I think I Bonds are great, and hold I Bonds myself (along with EE, TIPS and Treasuries). I think using them in a 3-fund would be fine.

That said, some potential downsides you might consider:

1) If you're picking I Bonds over putting money in tax-advantaged space, you could lose out on tax-advantaged space overall
2) If you're only using I Bonds, rebalancing is a bit more challenging, and with annual purchase maximums, that goes both ways
3) Sometimes, Total Bond goes up (in part due to its sizable Treasuries holdings) when stocks go down, which can be helpful
4) I Bonds may or may not beat Total Bond - they are safer, but you may be trading off some return for that safety

Notably, a lot of people with three-fund portfolios use TIPS or Treasuries instead of Total Bond anyway. For purists, who want something ultra-safe, these may make more sense than Total Bond. And I Bonds in taxable have (as you noted) some particularly nice advantages. One thing I really like about them is that you can cash them in during 'down years' (either during or after a career but before RMDs) for tax savings.
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SocalLiving
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Re: I bonds instead of Total bond in a 3-fund portfolio?

Post by SocalLiving » Fri Feb 16, 2018 2:30 pm

My husband and I purchase the maximum allowed i-Bonds each year as part of our fixed income allocation. This is 20k+ per year because we use any federal refund to purchase i-bonds as well.

All additional contributions to fixed income go into Total Bond Fund in our 401k according to our AA. Total Bond Fund in our tax-deferred makes it easy to rebalance if we need to.

hoops777
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Re: I bonds instead of Total bond in a 3-fund portfolio?

Post by hoops777 » Fri Feb 16, 2018 2:33 pm

We are using Ibonds as our emergency fund for later in retirement.They will in all likelihood become an inheritance.
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chevca
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Re: I bonds instead of Total bond in a 3-fund portfolio?

Post by chevca » Fri Feb 16, 2018 3:55 pm

BogleMelon wrote:
Fri Feb 16, 2018 2:18 pm
Yet, Total bond is the bond that is recommended by Bogleheads. Is it because I-bonds can not be purchased in IRA accounts? Or because of the $10K limitation purchasing limit per person? Or other technical reasons that make Total bond more attractive over the long run?
I'd say some of all the above. Along with, rebalancing out of I bonds to stocks seems a little difficult... say, one doesn't even have a taxable account.

I bonds are perfectly fine to have as part of the EF or even part of the bond portion. But, "instead of" or to replace TBM in a 3-fund portfolio seems a little unlikely or impractical.

ThrustVectoring
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Re: I bonds instead of Total bond in a 3-fund portfolio?

Post by ThrustVectoring » Fri Feb 16, 2018 4:08 pm

Noobvestor wrote:
Fri Feb 16, 2018 2:26 pm
4) I Bonds may or may not beat Total Bond - they are safer, but you may be trading off some return for that safety
If your fixed income investment choice is safer and has a lower return, that's easily fixed by increasing your equity allocation. The question is how much safer it is vs how much return you're giving up.

aceoperations
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Re: I bonds instead of Total bond in a 3-fund portfolio?

Post by aceoperations » Fri Feb 16, 2018 4:26 pm

Based on the premise that any portfolio should take on risk by increasing equities in the asset allocation, it is not unreasonable to account for iBonds as part of the fixed income portion of the portfolio. It could serve as an emergency fund too, which, if you ended up actually using, you can rebalance in the 401k, provided there is room to do so.

dbr
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Re: I bonds instead of Total bond in a 3-fund portfolio?

Post by dbr » Sat Feb 17, 2018 9:43 am

A comment in general is that the 3 fund portfolio is not an idea that is so prescriptive that anyone should take the discussion as a prohibition against holding anything other than TBM. There is an idea in the 3 fund portfolio that it is very simple to just invest in diverse, low cost, index funds and not complicate decision making and management by agonizing over all the possible variations that can and do work just as well.

As seen in the responses there are some practical complexities involving I bonds. Note Treasury Direct does not support IRAs, so it can be an issue to figure out how to buy I bonds in an account that allows pretax income to be tax deferred.

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Clever_Username
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Re: I bonds instead of Total bond in a 3-fund portfolio?

Post by Clever_Username » Sat Feb 17, 2018 9:09 pm

I like Series I Bonds. I have bought the maximum every year since 2014, when I first bought them. I plan to do so in 2018 as well and I don't foresee a reason why I wouldn't do so in the next several years too. But I also don't see how to re-balance out of them or into them if desired or needed.

I don't see what one would do if $10,000 is more than the bond portion I'd be adding to your portfolio for the year. Even if I were limited to strictly what I contribute through my workplace plan plus I Bonds, I'd be over $10,000 worth of bonds in a year. So they can't replace total bond there, even if I could somehow rebalance out or into them easily.

A while back, I was convinced to stop thinking of my portfolio as stocks-and-bonds and instead think of the portfolio as stocks and conservative assets. The conservative assets portion of my portfolio includes Total Bond market in my workplace plan and in a rollover IRA, Series I Bonds held at treasury direct, some Series EE bonds I have (paper), money in a California municipal bond fund in non-tax-advantaged account, and a small amount of cash between my bank and a money market fund at Vanguard.

Where in the spectrum of these things are the I Bonds? They don't decrease in value and don't have interest rate risk. That's nice. They're super liquid, other than the ones at any given point that I bought less than a year ago, but I have enough that are over a year old that this isn't an issue. I am told that withdrawing from the treasury direct to one's bank takes a matter of days, which is fine unless I need cash-as-in-bills in a hurry for some reason. Series I Bonds a lot like having a cash holding really. I saw the term "inflation indexed cash" used to describe them a few times, and that's where I think of them.

What do they have in common with bonds? The name, but I wouldn't count my DVD of Casino Royale in my bond portfolio either though. But they (the I Bonds, not the 007 movie) is part of the not-stocks, conservative assets part of my total portfolio. But they haven't totally replaced Total Bond, which I keep in my workplace plan and in a rollover, with stock funds there too, so I can rebalance those as needed or desired.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_

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