Low Bond Duration

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yousha
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Low Bond Duration

Post by yousha » Sun Jun 24, 2018 2:34 pm

Bob Brinker, a financial radio talk host, prefers low duration funds as opposed to let's say Vanguard Total Bond fund whose duration is around 6. His reasoning is that interest rates are and will continue to rise which will negatively effect principal. Any thoughts.

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JoMoney
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Re: Low Bond Duration

Post by JoMoney » Sun Jun 24, 2018 2:39 pm

I agree with Bob. I have agreed with Bob on this for the past 10 years, and that was a bad position to be in as interest rates continued to fall and did not rapidly rise. The past year or so it's been a position easier to defend.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Raybo
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Re: Low Bond Duration

Post by Raybo » Sun Jun 24, 2018 2:51 pm

JoMoney wrote:
Sun Jun 24, 2018 2:39 pm
I agree with Bob. I have agreed with Bob on this for the past 10 years, and that was a bad position to be in as interest rates continued to fall and did not rapidly rise. The past year or so it's been a position easier to defend.
I wonder if Bob happened to mention that on the show?
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aspirit
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Re: Low Bond Duration

Post by aspirit » Sun Jun 24, 2018 2:59 pm

yousha wrote:
Sun Jun 24, 2018 2:34 pm
Bob Brinker, a financial radio talk host, prefers low duration funds as opposed to let's say Vanguard Total Bond fund whose duration is around 6. His reasoning is that interest rates are and will continue to rise which will negatively effect principal. Any thoughts.
Thoughts?
How would he know? He's speculating like you. Whats saying about market direction, .."markets fluctuate".

Good Luck!
Last edited by aspirit on Mon Jun 25, 2018 7:54 pm, edited 1 time in total.
Time & tides wait for no one. A man has to know his limitations.

pascalwager
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Re: Low Bond Duration

Post by pascalwager » Sun Jun 24, 2018 6:29 pm

JoMoney wrote:
Sun Jun 24, 2018 2:39 pm
I agree with Bob. I have agreed with Bob on this for the past 10 years, and that was a bad position to be in as interest rates continued to fall and did not rapidly rise. The past year or so it's been a position easier to defend.
+1

In fact, I've agreed with Bob since 1995 (in a sense) since that was how I was tutored to invest in bonds by an investment company which used DFA funds. I like the IFA bond portfolio: four DFA bond funds with overall 2.4 years duration. IFA talks about managing your risk budget. Yes, four funds, but they're doing the rebalancing.

Retired, I now use VG ST Bond (2.7 yrs), DFA ST Fixed (1.0 yrs), DFA Global Bond (4.0 yrs) and VG Treasury MM scattered across four accounts for an overall 1.6 yrs duration.

Note: I'm not paying portfolio fees for the two DFA funds. My two DFA portfolios are self-managed (no advisor).

longinvest
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Re: Low Bond Duration

Post by longinvest » Sun Jun 24, 2018 6:45 pm

yousha wrote:
Sun Jun 24, 2018 2:34 pm
Bob Brinker, a financial radio talk host, prefers low duration funds as opposed to let's say Vanguard Total Bond fund whose duration is around 6. His reasoning is that interest rates are and will continue to rise which will negatively effect principal. Any thoughts.
Here's the opinion of our mentor, Jack Bogle (note the statement I've underlined within the citation):

http://www.aaii.com/journal/article/ach ... unds.touch (June 2014)

Charles Rotblut (CR)
John Bogle (JB)
CR: What about bond funds? A lot of our members are concerned about the direction of interest rates and how an increase in rates will impact bond funds.

JB: That’s a good question and a complicated one.

I don’t look at bond funds as a unity. You can hold a short-term bond fund if you’re willing to sacrifice income in favor or principal stability. You can hold a long-term bond fund if you want a higher interest rate and therefore a higher long-term return, but you have to be willing to tolerate the higher volatility.

I tend to favor, mostly for behavioral reasons, an intermediate-term maturity, which will only have roughly half the volatility of the stock market. Given the mathematics of all this, if you’re a holder of a bond fund, you really want interest rates to go up. Yes, the principal value will drop when rates go up, but the reinvestment rate on those bonds will also rise. If the rate today for a short-term, intermediate-term, long-term combined corporate bond portfolio (leaving aside the government bonds for the moment) is 4%, and yields go up to 6%, your return for the next 10 years will not be 4%. It’ll be 4.4% or 4.5%. This is because the reinvestment rate will rise. It does require discipline, and I would not fault someone for saying “it’s not worth it to me to get that low return; I’m going to put it all in the stock market.” If you can hold that investment in the stock market through thick and thin, that is likely to be the better strategy.

I used this example once many years ago in a different context. Think about a car that goes 80 mph and a car that goes 60 mph. The car that goes 80 mph will reach its destination first almost every time—almost, for it has a higher risk of crashing. The more aggressive investment should do better and it almost certainly will do better, but some of the strategies will fail you, some of the funds will fail you, and there may even be a long period where the market will fail you—where stocks will not do better than bonds.

We certainly saw from about 1980 through today that bonds outpaced stocks because rates were very high in the beginning. There was no way bonds could not outpace stocks, just because the rates got up to 13% or 14% on intermediate-term Treasury notes.

All these factors are confounding, and I operate on a rule of simplicity. Yes, this could happen and that could happen, so just take a position somewhere in the middle and hold on. Plan on keeping your strategy not only when things are going badly, but when things are going well. If you can do that, you’re going to end up with a good return in the long run.
Higher interest rates are good for bonds, as long as we can be patient enough (relative to duration).

Our philosophy tells us to never try to time the market. This applies to bonds too!
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

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Blueskies123
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Re: Low Bond Duration

Post by Blueskies123 » Sun Jun 24, 2018 7:46 pm

Higher interest rates are not always good for bonds. As with everything it depends. I am old enough to have lived through the 70's. A gradual rise in rates due to an improving economy may be good for bonds over the long term but a more rapid rise in rates due to inflation is a disaster for bonds. Maybe this is intuitive but not everyone reading this thread saw the inflation adjusted draw downs of bonds in the 70's.

longinvest
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Re: Low Bond Duration

Post by longinvest » Sun Jun 24, 2018 7:51 pm

Blueskies123 wrote:
Sun Jun 24, 2018 7:46 pm
Higher interest rates are not always good for bonds. As with everything it depends. I am old enough to have lived through the 70's. A gradual rise in rates due to an improving economy may be good for bonds over the long term but a more rapid rise in rates due to inflation is a disaster for bonds. Maybe this is intuitive but not everyone reading this thread saw the inflation adjusted draw downs of bonds in the 70's.
That's fear mongering. Let's look at what actually happened:
longinvest wrote:
Sat Apr 07, 2018 9:44 am
Taylor and Leesbro,
Leesbro63 wrote:
Sat Apr 07, 2018 8:06 am
Taylor Larimore wrote:
Sat Apr 07, 2018 7:22 am
Good post, Taylor. But this might be guilty of selective data picking. What about if you added the 10 years BEFORE this?
Leesbro63:

I did the best I could. If you can find the data please post it.

Thank you and best wishes.
Taylor
Perhaps someone better than me with charts, etc. can post it. My memory is that the first decade of the inflation era, beginning in 1966, was the worst for bonds. Because it caught people offguard. By the mid 1970s, it was "common knowledge" that we had inflation and fixed income markets had already responded. I get your point that over many periods, fixed income has held up when you consider higher coupons in response to lower bond price values. But as Dr. Bernstein points out, this is one of those things where the consequences of a bad result can be so severe ("safe" money getting hit) that the risk, even if the odds are low, should not be taken.

Because interest rates are now so low, relative to the last 40 years at least, I'm concerned that we are in 1966.
Here are historical U.S. Bonds returns and U.S. inflation extracted from the VPW backtesting spreadsheet for the period 1966 to 1975, inclusively:

Code: Select all

 Year   Bonds   Inflation 
  1966   5,08 %     3,46 %
  1967   0,79 %     3,65 %
  1968   2,75 %     4,40 %
  1969  -1,20 %     6,18 %
  1970  16,50 %     5,29 %
  1971   7,69 %     3,27 %
  1972   5,49 %     3,41 %
  1973   3,19 %     8,71 %
  1974   6,79 %    12,34 %
  1975   8,08 %     6,94 %
For those who are more visual, here's a chart showing the growth of bonds and inflation over that period:
Image

Here are the underlying data sources for bonds returns and inflation: Comments

Over that period, bonds had positive returns every year except for one year (1969, -1.20%) and mostly tracked inflation; the cumulative 10-year growth trailed inflation by only 2.9%, despite a spike of two consecutive high-inflation years near the end of the period -- 8.7% and 12.3% in 1973 and 1974, respectively.

In other words, bonds did just fine, especially when one considers that U.S. stocks lost 40% (cumulative) in 1973 and 1974 (meanwhile, bonds had positive returns).
Bond returns and inflation for 1976 and later can be found in Taylor's post: viewtopic.php?p=3867851#p3867851
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

pascalwager
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Re: Low Bond Duration

Post by pascalwager » Sun Jun 24, 2018 8:01 pm

longinvest wrote:
Sun Jun 24, 2018 6:45 pm
yousha wrote:
Sun Jun 24, 2018 2:34 pm
Bob Brinker, a financial radio talk host, prefers low duration funds as opposed to let's say Vanguard Total Bond fund whose duration is around 6. His reasoning is that interest rates are and will continue to rise which will negatively effect principal. Any thoughts.
Here's the opinion of our mentor, Jack Bogle (note the statement I've underlined within the citation):

http://www.aaii.com/journal/article/ach ... unds.touch (June 2014)

Charles Rotblut (CR)
John Bogle (JB)
CR: What about bond funds? A lot of our members are concerned about the direction of interest rates and how an increase in rates will impact bond funds.

JB: That’s a good question and a complicated one.

I don’t look at bond funds as a unity. You can hold a short-term bond fund if you’re willing to sacrifice income in favor or principal stability. You can hold a long-term bond fund if you want a higher interest rate and therefore a higher long-term return, but you have to be willing to tolerate the higher volatility.

I tend to favor, mostly for behavioral reasons, an intermediate-term maturity, which will only have roughly half the volatility of the stock market. Given the mathematics of all this, if you’re a holder of a bond fund, you really want interest rates to go up. Yes, the principal value will drop when rates go up, but the reinvestment rate on those bonds will also rise. If the rate today for a short-term, intermediate-term, long-term combined corporate bond portfolio (leaving aside the government bonds for the moment) is 4%, and yields go up to 6%, your return for the next 10 years will not be 4%. It’ll be 4.4% or 4.5%. This is because the reinvestment rate will rise. It does require discipline, and I would not fault someone for saying “it’s not worth it to me to get that low return; I’m going to put it all in the stock market.” If you can hold that investment in the stock market through thick and thin, that is likely to be the better strategy.

I used this example once many years ago in a different context. Think about a car that goes 80 mph and a car that goes 60 mph. The car that goes 80 mph will reach its destination first almost every time—almost, for it has a higher risk of crashing. The more aggressive investment should do better and it almost certainly will do better, but some of the strategies will fail you, some of the funds will fail you, and there may even be a long period where the market will fail you—where stocks will not do better than bonds.

We certainly saw from about 1980 through today that bonds outpaced stocks because rates were very high in the beginning. There was no way bonds could not outpace stocks, just because the rates got up to 13% or 14% on intermediate-term Treasury notes.

All these factors are confounding, and I operate on a rule of simplicity. Yes, this could happen and that could happen, so just take a position somewhere in the middle and hold on. Plan on keeping your strategy not only when things are going badly, but when things are going well. If you can do that, you’re going to end up with a good return in the long run.
Higher interest rates are good for bonds, as long as we can be patient enough (relative to duration).

Our philosophy tells us to never try to time the market. This applies to bonds too!
...but, for a retiree needing to pay for living expenses, patience may not be an option. He may need to sell shares from his devalued bond fund(s).

Deciding to reduce term risk on a long term basis would not be market timing, but would be a personal risk budget decision.

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JoMoney
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Re: Low Bond Duration

Post by JoMoney » Sun Jun 24, 2018 8:12 pm

pascalwager wrote:
Sun Jun 24, 2018 6:29 pm
JoMoney wrote:
Sun Jun 24, 2018 2:39 pm
I agree with Bob. I have agreed with Bob on this for the past 10 years, and that was a bad position to be in as interest rates continued to fall and did not rapidly rise. The past year or so it's been a position easier to defend.
+1

In fact, I've agreed with Bob since 1995 (in a sense) since that was how I was tutored to invest in bonds by an investment company which used DFA funds. I like the IFA bond portfolio: four DFA bond funds with overall 2.4 years duration. IFA talks about managing your risk budget. Yes, four funds, but they're doing the rebalancing.

Retired, I now use VG ST Bond (2.7 yrs), DFA ST Fixed (1.0 yrs), DFA Global Bond (4.0 yrs) and VG Treasury MM scattered across four accounts for an overall 1.6 yrs duration.

Note: I'm not paying portfolio fees for the two DFA funds. My two DFA portfolios are self-managed (no advisor).
He had a great call in keeping people heavy in the Vanguard GNMA fund for a long period of time, his call to move away from longer duration instruments and MBS hasn't worked out as well. He's was telling people to keep duration around 1 year since 2009.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

livesoft
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Re: Low Bond Duration

Post by livesoft » Sun Jun 24, 2018 8:16 pm

You know if you want to try your hand at market timing with bond durations, then I say go ahead. But before you do, write down what you are going to do, how you are going to decide whether what you do is better than what you were doing, and how you are going to decide when to stop market timing, too. That is, don't just follow some random person you heard about on the internet or elsewhere.

Example: I am going to change my bond allocation from 100% Total Bond to 50% Total Bond and 50% Short-term Corporate Bond Index. I am going to compare the performance of my 50:50 bond portfolio to 100% Total Bond for the next year and to 100% short-term corporate bond index for the next year. If the performance of my 50:50 bond portfolio lags the return of the 100% Total Bond Index by more than 1% at any time, then I am going to switch back to 100% Total Bond Index at that time. Otherwise, I will rebalance to 50:50 every month. If my 50:50 outpaces 100% total bond index, then I will stay at 50:50 until the FOMC does not raise interest rates at one of its meetings where website http://www.cmegroup.com/trading/interes ... -fomc.html has predicted a >50% probability of raising the FFR.
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willthrill81
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Re: Low Bond Duration

Post by willthrill81 » Mon Jun 25, 2018 7:24 pm

pascalwager wrote:
Sun Jun 24, 2018 8:01 pm
longinvest wrote:
Sun Jun 24, 2018 6:45 pm
yousha wrote:
Sun Jun 24, 2018 2:34 pm
Bob Brinker, a financial radio talk host, prefers low duration funds as opposed to let's say Vanguard Total Bond fund whose duration is around 6. His reasoning is that interest rates are and will continue to rise which will negatively effect principal. Any thoughts.
Here's the opinion of our mentor, Jack Bogle (note the statement I've underlined within the citation):

http://www.aaii.com/journal/article/ach ... unds.touch (June 2014)

Charles Rotblut (CR)
John Bogle (JB)
CR: What about bond funds? A lot of our members are concerned about the direction of interest rates and how an increase in rates will impact bond funds.

JB: That’s a good question and a complicated one.

I don’t look at bond funds as a unity. You can hold a short-term bond fund if you’re willing to sacrifice income in favor or principal stability. You can hold a long-term bond fund if you want a higher interest rate and therefore a higher long-term return, but you have to be willing to tolerate the higher volatility.

I tend to favor, mostly for behavioral reasons, an intermediate-term maturity, which will only have roughly half the volatility of the stock market. Given the mathematics of all this, if you’re a holder of a bond fund, you really want interest rates to go up. Yes, the principal value will drop when rates go up, but the reinvestment rate on those bonds will also rise. If the rate today for a short-term, intermediate-term, long-term combined corporate bond portfolio (leaving aside the government bonds for the moment) is 4%, and yields go up to 6%, your return for the next 10 years will not be 4%. It’ll be 4.4% or 4.5%. This is because the reinvestment rate will rise. It does require discipline, and I would not fault someone for saying “it’s not worth it to me to get that low return; I’m going to put it all in the stock market.” If you can hold that investment in the stock market through thick and thin, that is likely to be the better strategy.

I used this example once many years ago in a different context. Think about a car that goes 80 mph and a car that goes 60 mph. The car that goes 80 mph will reach its destination first almost every time—almost, for it has a higher risk of crashing. The more aggressive investment should do better and it almost certainly will do better, but some of the strategies will fail you, some of the funds will fail you, and there may even be a long period where the market will fail you—where stocks will not do better than bonds.

We certainly saw from about 1980 through today that bonds outpaced stocks because rates were very high in the beginning. There was no way bonds could not outpace stocks, just because the rates got up to 13% or 14% on intermediate-term Treasury notes.

All these factors are confounding, and I operate on a rule of simplicity. Yes, this could happen and that could happen, so just take a position somewhere in the middle and hold on. Plan on keeping your strategy not only when things are going badly, but when things are going well. If you can do that, you’re going to end up with a good return in the long run.
Higher interest rates are good for bonds, as long as we can be patient enough (relative to duration).

Our philosophy tells us to never try to time the market. This applies to bonds too!
...but, for a retiree needing to pay for living expenses, patience may not be an option. He may need to sell shares from his devalued bond fund(s).

Deciding to reduce term risk on a long term basis would not be market timing, but would be a personal risk budget decision.
It's not disputed much around here that bonds' primary purpose is safety and security. If it's returns you want, then stocks are the default option. Like Larry Swedroe says, "Take your risk on the equity side." As such, I think that holding short-duration bonds generally makes more sense than holding the total bond market or long-term bonds. That being said, longer-duration bonds might provide some desirable benefits to a portfolio overall.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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