Slice and dice for bonds

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elglanto
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Slice and dice for bonds

Post by elglanto » Tue Jun 11, 2019 2:21 pm

Hello there,

I have spent a fair amount of time reading these board and while there are a lot of topics on equity slice and dice, there are much less (but still a few) on bond slice and dice.

For the bond allocation, I am tending towards a barbell strategy so something around 50% short term, 50% long term with only government bonds. Since I am already heavy on equity, I am not planning to go with anything else that government bonds because as far as I understood, there is a strong correlation between corporate bonds and equities. However, any comment on that would be highly appreciated. For my equities, I tried to slice between US, developed ex-US and emerging markets while following world market capitalisation with a tilt towards small cap/small cap value.

Then, why not doing something similar for bond? So slice and dice between one long term and one short term for US, developped ex-US and emerging markets. On one side, maybe 6 bonds funds sounds like too many and maybe something like a world short term and a world long term might be better or at least easier to manage. However, I don’t mind a bit of micromanaging and I would think that having this separation might help for rebalancing. Therefore, beside the potential micromanaging hassle, I would like to ear pro and especially the cons of doing that.

Thanks for your reponses.

Erratum: I know that in reality, it might be tricky to do exactly since, e.g., I think that there is no short or long term ETFs for emerging markets (or at least I haven't found any). But I do not think that it prevents the discussion.
Last edited by elglanto on Tue Jun 11, 2019 2:30 pm, edited 1 time in total.

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Re: Slice and dice for bonds

Post by livesoft » Tue Jun 11, 2019 2:27 pm

What is your trigger for rebalance among your slice-and-diced bonds? Can you please give specific examples of the last 3 times that you made rebalancing transactions among your bonds?
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Re: Slice and dice for bonds

Post by Jack FFR1846 » Tue Jun 11, 2019 2:29 pm

Personally, I think it makes as much sense as slice and dice for equities.

(which is zero)
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Re: Slice and dice for bonds

Post by MotoTrojan » Tue Jun 11, 2019 2:30 pm

I do not personally have any interest in holding International bonds but emerging market bonds seem even scarier. Currency risk is something you will get some diversification with on your equity, but relative to bond fluctuations I would wager currency volatility to be the dominant force.

There are some rational reasons to do a barbell, but I would strongly consider just holding Intermediate treasuries over 50/50 short/long.

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Re: Slice and dice for bonds

Post by Day9 » Tue Jun 11, 2019 2:57 pm

Some ideas:

FDIC insured CDs sometimes have higher yields than equivalent duration treasuries. This is partly due to the $250k per institution limit that acts as a limit to arbitrage for big money institutions to take advantage of this. So perhaps you may want to go all 5-year CDs instead of a mix of 1-year Treasury Bills and 10-year Treasury Notes.

I bonds are very attractive right now compared to TIPS, offering 0.5% real yield, and furthermore they have deflationary guarantees that you can't lose nominal dollars with these. Therefore I treat I bonds as the short end of my bond barbell. I bought I bonds then extended the duration of the rest of my bond portfolio so the overall duration is the same. I believe this is an optimization over what I had previously. Again medium to large investors can't take advantage of this because of the $10k/year limit.

You might find similar deals that have limits to arbitrage because you are a small money investor (compared to the big institutions). I would let this drive your decision like in my two above examples, one leading to bullet, and one barbell approach.
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Re: Slice and dice for bonds

Post by willthrill81 » Tue Jun 11, 2019 3:04 pm

I can see a compelling case made for holding both Treasuries and TIPS in a portfolio, with the main idea being that Treasuries would be preferred if inflation is lower than expected and vice versa for TIPS. Beyond that, I don't see much to gain. Holding both short- and long-term bonds simultaneously seems little or no different from just holding intermediate-term bonds, I see no reason to hold foreign bonds unless you're chasing yield, and I prefer to 'take my risk on the equity side', so corporate bonds are unappealing to me.
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Re: Slice and dice for bonds

Post by pdavi21 » Tue Jun 11, 2019 3:05 pm

Slicing and dicing bonds has less impact than slicing and dicing stocks. Neither are (EDIT: unquestionably and universally) logical, and neither are guaranteed to make more money than not doing them.

EDIT: Good point willthrill. There can be logical implementations of any slice and dice strategy that either perform or don't perform.
Last edited by pdavi21 on Tue Jun 11, 2019 3:25 pm, edited 1 time in total.
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Re: Slice and dice for bonds

Post by willthrill81 » Tue Jun 11, 2019 3:06 pm

pdavi21 wrote:
Tue Jun 11, 2019 3:05 pm
Slicing and dicing bonds has less impact than slicing and dicing stocks. Neither are logical, and neither are guaranteed to make more money than not doing them.
There is some logic to 'slicing and dicing' stocks, if for no other reason than to increase diversification somewhat. But yes, there are no guarantees in the world of investing.
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Re: Slice and dice for bonds

Post by laidback_and_relaxed » Wed Jun 12, 2019 8:17 am

I structure my bonds in a Liability Matching Portfolio, or a ladder, that matches up with expected withdrawals in retirement, sort of. I say sort of due to the variability in my withdrawal amounts, hard to predicted years in the future. So I'm more interested in duration, quality, return, and ability to replace or reinvest in bonds. I will use CDs and Treasuries for short term, less than 2 years or so to fill in gaps, but use mostly corporate investment grade A+ bonds. I have a mix of US and non-US bonds, but as mentioned before, my interest is more in credit quality not so much US vs xUS.

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Re: Slice and dice for bonds

Post by Sandtrap » Wed Jun 12, 2019 8:23 am

An option:

Why not simplify and diversify by using a broad based bond index like VBTLX (Vanguard Total Bond) and then choose a percentage of your total fixed allocaiton and diversify that percentage into; CD ladders, treasuries, munis, etc.?

Therefore your short and int. term needs are covered and the bond index portion anchors the fixed side.

What are the appreciable gains to be had by "slice and dicing" either fixed or equities to make it worthwhile in the long term?

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Re: Slice and dice for bonds

Post by Sandtrap » Wed Jun 12, 2019 8:24 am

laidback_and_relaxed wrote:
Wed Jun 12, 2019 8:17 am
I structure my bonds in a Liability Matching Portfolio, or a ladder, that matches up with expected withdrawals in retirement, sort of. I say sort of due to the variability in my withdrawal amounts, hard to predicted years in the future. So I'm more interested in duration, quality, return, and ability to replace or reinvest in bonds. I will use CDs and Treasuries for short term, less than 2 years or so to fill in gaps, but use mostly corporate investment grade A+ bonds. I have a mix of US and non-US bonds, but as mentioned before, my interest is more in credit quality not so much US vs xUS.
Good points, good strategy!
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Re: Slice and dice for bonds

Post by Sandtrap » Wed Jun 12, 2019 8:25 am

Jack FFR1846 wrote:
Tue Jun 11, 2019 2:29 pm
Personally, I think it makes as much sense as slice and dice for equities.

(which is zero)
+1
Perfect sense!
Added complexity without appreciable return, and often, increased costs.
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Re: Slice and dice for bonds

Post by JoMoney » Wed Jun 12, 2019 8:35 am

Sandtrap wrote:
Wed Jun 12, 2019 8:25 am
Jack FFR1846 wrote:
Tue Jun 11, 2019 2:29 pm
Personally, I think it makes as much sense as slice and dice for equities.

(which is zero)
+1
Perfect sense!
Added complexity without appreciable return, and often, increased costs.
j
Whether or not it increases (or reduces) returns over a particular time period is questionable,
What I do like, is keeping the relative duration of my bonds somewhere around my expected need of the money. If I have liabilities one year out and I've got that money in a portfolio of bonds maturing 5 years from now I've introduced risk that isn't necessary... there's usually a higher yield associated with longer term bonds, so one could argue about higher "expected returns" but if you're using bonds to de-risk or liability match it creates unnecessary risk/uncertainty that might be better rewarded in assets other than bonds.
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Re: Slice and dice for bonds

Post by Sandtrap » Wed Jun 12, 2019 8:47 am

JoMoney wrote:
Wed Jun 12, 2019 8:35 am
Sandtrap wrote:
Wed Jun 12, 2019 8:25 am
Jack FFR1846 wrote:
Tue Jun 11, 2019 2:29 pm
Personally, I think it makes as much sense as slice and dice for equities.

(which is zero)
+1
Perfect sense!
Added complexity without appreciable return, and often, increased costs.
j
Whether or not it increases (or reduces) returns over a particular time period is questionable,
What I do like, is keeping the relative duration of my bonds somewhere around my expected need of the money. If I have liabilities one year out and I've got that money in a portfolio of bonds maturing 5 years from now I've introduced risk that isn't necessary... there's usually a higher yield associated with longer term bonds, so one could argue about higher "expected returns" but if you're using bonds to de-risk or liability match it creates unnecessary risk/uncertainty that might be better rewarded in assets other than bonds.
+1
Same approach here. :D
j
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Re: Slice and dice for bonds

Post by Dialectical Investor » Wed Jun 12, 2019 8:59 am

elglanto wrote:
Tue Jun 11, 2019 2:21 pm

For the bond allocation, I am tending towards a barbell strategy so something around 50% short term, 50% long term with only government bonds. Since I am already heavy on equity, I am not planning to go with anything else that government bonds because as far as I understood, there is a strong correlation between corporate bonds and equities.
I wouldn't say the correlation between corporate bonds and equities has been "strong," not for investment-grade, even though I think a Treasury-only fund could be justified under any stock/bond allocation. A barbell strategy is okay, but I would not expect a significant difference between that and just holding an intermediate-term fund. Aside from that, the main reason I would not bother slicing a bond allocation in an equity-heavy portfolio is the slices likely will be too small for any correlation differences to have a meaningful impact.

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Re: Slice and dice for bonds

Post by sgr000 » Wed Jun 12, 2019 9:57 am

elglanto wrote:
Tue Jun 11, 2019 2:21 pm
For the bond allocation, I am tending towards a barbell strategy so something around 50% short term, 50% long term with only government bonds. Since I am already heavy on equity, I am not planning to go with anything else that government bonds because as far as I understood, there is a strong correlation between corporate bonds and equities. However, any comment on that would be highly appreciated.

Then, why not doing something similar for bond? So slice and dice between one long term and one short term for US, developped ex-US and emerging markets.
I have a 60/40 asset allocation.* The 40% in bond funds is almost totally devoted to government bonds (pace the international part), for less correlation with equities and keeping most of the risk-taking in equities. They are divided into equal amounts as follows:

Code: Select all

10% VSBSX: Short-Term Treasury Index
10% VSIGX: Intermediate-Term Treasury Index
10% VTAPX: Short-Term TIPS Index
10% VTABX: International Bond Index
So it's got nominal bonds of for nominal times (low inflation), it's got some TIPS for inflationary times, it's duration-limited for volatile times, and it's got some international because that's a big slice of the market and who am I to say I know better?**

* Notionally. For now, I'm still (!) working and thus have slices in a 401(k) and a taxable portfolio, and the IRA portfolio is split across Trad and Roth slices. But the trajectory is planned to end up like this.

** Someone will be along momentarily to begin the now-traditional ritual denunciation ceremony for international bonds. It's fun to watch, the first 5 or 10 times. But Vanguard's evidence in the past (Figure 7, page 10) showed currency-hedged international bonds at least won't hurt (though they probably won't help much either). So I'm neither enthused nor repelled by hedged international bonds.

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Re: Slice and dice for bonds

Post by 3-20Characters » Wed Jun 12, 2019 10:20 am

Over the years, I have sliced and diced bonds (TIPS, investment grade of varying durations, treasuries, etc) but I have realized that I don’t have the commitment to any particular strategy. I now hold mostly intermediate treasuries and some cash. I have come to prefer treasures only and I would add to equities by 5% increments if seeking higher returns, rather than adjust bond holdings.

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Re: Slice and dice for bonds

Post by vineviz » Wed Jun 12, 2019 3:59 pm

elglanto wrote:
Tue Jun 11, 2019 2:21 pm
Then, why not doing something similar for bond? So slice and dice between one long term and one short term for US, developped ex-US and emerging markets. On one side, maybe 6 bonds funds sounds like too many and maybe something like a world short term and a world long term might be better or at least easier to manage.
I think the main challenge is that, empirically speaking, such a fragmented bond portfolio is unlikely to add any discernible benefit in terms of diversification unless your bond allocation is substantial (i.e. 40% or more).
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Re: Slice and dice for bonds

Post by Doc » Wed Jun 12, 2019 9:12 pm

vineviz wrote:
Wed Jun 12, 2019 3:59 pm
elglanto wrote:
Tue Jun 11, 2019 2:21 pm
Then, why not doing something similar for bond? So slice and dice between one long term and one short term for US, developped ex-US and emerging markets. On one side, maybe 6 bonds funds sounds like too many and maybe something like a world short term and a world long term might be better or at least easier to manage.
I think the main challenge is that, empirically speaking, such a fragmented bond portfolio is unlikely to add any discernible benefit in terms of diversification unless your bond allocation is substantial (i.e. 40% or more).
Look at it from the other end of the spectrum. If you are 80%+ equities your recommended bond slice might be 100% long T's. Would you call that one slice a dice? :D
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Re: Slice and dice for bonds

Post by KyleAAA » Wed Jun 12, 2019 9:15 pm

I do 50/50 intermediate term bond index and TIPS. Works for me.

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Re: Slice and dice for bonds

Post by NYCwriter » Wed Jun 12, 2019 10:10 pm

I'm guessing slice and dice is anything that isn't just Total Bond?

I think the 3 reasons for doing so are 1) interest rate or inflation risk, 2) tax efficiency, and 3) return

In my Roth I hold Total Bond.
In Taxable I hold floating rate short treasuries, Schwab Total Bond, and NY Municipal. I'm not in a high tax bracket, but I get some benefit from Munis.
In 457b I have the Blackrock Debt Fund, which is basically Total

The Schwab has a slightly lesser duration, but other than that the core funds are all similar.

There was some benefit to the shorter term floating rates in 2017-2018 but on the whole the floating rate fund seems superfluous, and at a slightly higher fee. It will likely be rolled into my Schwab fund.

The last two years have been a teachable moment in not making decisions on predicted interest rates.

A lot of folks hold TIPS or choose an intermediate treasury fund (or both) rather than Total. I haven't researched whether there's a value for a barbell strategy, but under 40% allocation it may not make sense.

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Re: Slice and dice for bonds

Post by elglanto » Thu Jun 13, 2019 12:49 am

Thank you all for the answers. It was very insightful. I also realized that I did not search properly since I should have searched those boards for international bonds too. There are much more discussions on that.

Also, little disclaimer. I must add that I am not an US resident. The reason I posted here and not in the non-US investing sub-forum was to maybe get more answers from US-based bogleheads and food for thoughts. However, I now guess that for an US domiciled person, it usually preferable to stay with US bonds.

My idea was to take e.g. Vanguard Total World Bond ETF (BNDW) to see the different weightings and somehow reproduce them but with longer and shorter term bonds at the expense of a lower diversity. So something like 65% US gvt. bonds, 30% Europe gvt. bonds and 5% emerging market. Please note that in the end, I might not have add any emerging market because 5% of my bond allocation is in the end almost nothing so probably not worth even adding it. So when this allocation is set, I don’t feel that it is too hard to rebalance.

For sure I have to give this some more thoughts and since I initially posted, I read a bit more. In the end, due to being in my early thirties and my 30 years of remaining working time, I have quite some investment time remaining. Therefore, I might skip the short-term bonds for now and go only long term.

Again, thanks for all the replies.

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Re: Slice and dice for bonds

Post by vineviz » Thu Jun 13, 2019 7:11 am

Doc wrote:
Wed Jun 12, 2019 9:12 pm
vineviz wrote:
Wed Jun 12, 2019 3:59 pm
elglanto wrote:
Tue Jun 11, 2019 2:21 pm
Then, why not doing something similar for bond? So slice and dice between one long term and one short term for US, developped ex-US and emerging markets. On one side, maybe 6 bonds funds sounds like too many and maybe something like a world short term and a world long term might be better or at least easier to manage.
I think the main challenge is that, empirically speaking, such a fragmented bond portfolio is unlikely to add any discernible benefit in terms of diversification unless your bond allocation is substantial (i.e. 40% or more).
Look at it from the other end of the spectrum. If you are 80%+ equities your recommended bond slice might be 100% long T's. Would you call that one slice a dice? :D
I wouldn't call that a slice and dice, no. Maybe others would?
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Re: Slice and dice for bonds

Post by Tyler Aspect » Thu Jun 13, 2019 1:01 pm

I have looked at slice and dice for bond portfolio. I will show some of my results below.

Slice and dicing the total bond market:

https://www.portfoliovisualizer.com/bac ... 0&total3=0


Slice and dicing the Vanguard Intermediate-Term Bond ETF:

https://www.portfoliovisualizer.com/bac ... 0&total3=0
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Re: Slice and dice for bonds

Post by One Ping » Thu Jun 13, 2019 1:48 pm

Sandtrap wrote:
Wed Jun 12, 2019 8:47 am
JoMoney wrote:
Wed Jun 12, 2019 8:35 am
What I do like, is keeping the relative duration of my bonds somewhere around my expected need of the money. If I have liabilities one year out and I've got that money in a portfolio of bonds maturing 5 years from now I've introduced risk that isn't necessary... there's usually a higher yield associated with longer term bonds, so one could argue about higher "expected returns" but if you're using bonds to de-risk or liability match it creates unnecessary risk/uncertainty that might be better rewarded in assets other than bonds.
+1
Same approach here. :D
j
So, if you follow this approach, do you shift the duration of your bond holdings to shorter and shorter duration as your need date for the money draws closer and closer? Seems like that would be the natural fallout of this approach, no?
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Re: Slice and dice for bonds

Post by Doc » Thu Jun 13, 2019 1:57 pm

Tyler Aspect wrote:
Thu Jun 13, 2019 1:01 pm
I have looked at slice and dice for bond portfolio. I will show some of my results below.
The second is not a good slice and dice comparison example. The Treasury fund has a 3-10 year range. The other two have a 5-10 year range. So you are looking at duration differences not a slice and dice of a given portfolio. You probably have the same problem with the TBM case. I didn't bother to check.

As a general concept I would look at the slice and diced bond protfolio versus an omnibus type fund when coupled with an equity portfolio. One doesn't rebalnce the parts of a TBM fund but we do rebalance bonds vs. equities. That's is where you will see a benefit for slice and dice if any exists. And if you rebalance the parts of your bond portfolio monthly like portfolio visualizer does you are going to miss the way different bond sectors behave when equities tank.
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Re: Slice and dice for bonds

Post by Sandtrap » Thu Jun 13, 2019 3:14 pm

One Ping wrote:
Thu Jun 13, 2019 1:48 pm
Sandtrap wrote:
Wed Jun 12, 2019 8:47 am
JoMoney wrote:
Wed Jun 12, 2019 8:35 am
What I do like, is keeping the relative duration of my bonds somewhere around my expected need of the money. If I have liabilities one year out and I've got that money in a portfolio of bonds maturing 5 years from now I've introduced risk that isn't necessary... there's usually a higher yield associated with longer term bonds, so one could argue about higher "expected returns" but if you're using bonds to de-risk or liability match it creates unnecessary risk/uncertainty that might be better rewarded in assets other than bonds.
+1
Same approach here. :D
j
So, if you follow this approach, do you shift the duration of your bond holdings to shorter and shorter duration as your need date for the money draws closer and closer? Seems like that would be the natural fallout of this approach, no?
Diversification of fixed ranges from the average duration of the bond index funds. Then downward half of that.
Anything less is short term reserves and working capital.
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Re: Slice and dice for bonds

Post by friar1610 » Thu Jun 13, 2019 3:33 pm

I guess I do slice/dice in my fixed income not to get a better return necessarily but to have different characteristics in the different vehicles:

Total Bond index: liquid, reasonable but variable return, moderately volatile
Short Term Bond Index: liquid, more modest return In exchange for less volatility
I-Bonds: liquid (after a year), inflation adjusted, tax-deferred, govt guarantee
CDs: liquid (albeit with an EWP), guaranteed rate and maturity, FDIC insured
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Re: Slice and dice for bonds

Post by Doc » Thu Jun 13, 2019 5:20 pm

NYCwriter wrote:
Wed Jun 12, 2019 10:10 pm
I'm guessing slice and dice is anything that isn't just Total Bond?

I think the 3 reasons for doing so are 1) interest rate or inflation risk, 2) tax efficiency, and 3) return
I don't look at it that way at all. My bond portfolio is not modeled after Total Bond but after the Bloomberg Barclays US Government/Credit Intermediate Total Return Index. This contains Treasuries and investment grade corporates with durations in the 1-10 year range. It does not have any mortgage backed securites.

I slice and dice that index into the four basic groups: short or intermediate and Treasuries or corporates. For tax reasons the short Treasuries go into taxable and the intermediate corporates into tax advantaged. Also when equity markets are under stress these four groups do not behave in the usual way with respect to each other. The Treasury prices tend to rise while the corporate prices fall. If your IPS calls for you to buy equities in that situation having Treasuries separate from corporates gives you more bang for the buck.

Of your three reasons the only one I think is valid with respect to slice and dice is the tax efficiency. The others may be valid depending on your own situation but I wouldn't call those factors a reason to slice and dice.

(I use this index instead of TBM based on ideas expressed by Larry Swedroe that has been discussed here in some length many years ago.)
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Re: Slice and dice for bonds

Post by One Ping » Thu Jun 13, 2019 7:55 pm

Sandtrap wrote:
Thu Jun 13, 2019 3:14 pm
One Ping wrote:
Thu Jun 13, 2019 1:48 pm
Sandtrap wrote:
Wed Jun 12, 2019 8:47 am
JoMoney wrote:
Wed Jun 12, 2019 8:35 am
What I do like, is keeping the relative duration of my bonds somewhere around my expected need of the money. If I have liabilities one year out and I've got that money in a portfolio of bonds maturing 5 years from now I've introduced risk that isn't necessary... there's usually a higher yield associated with longer term bonds, so one could argue about higher "expected returns" but if you're using bonds to de-risk or liability match it creates unnecessary risk/uncertainty that might be better rewarded in assets other than bonds.
+1
Same approach here. :D
j
So, if you follow this approach, do you shift the duration of your bond holdings to shorter and shorter duration as your need date for the money draws closer and closer? Seems like that would be the natural fallout of this approach, no?
Diversification of fixed ranges from the average duration of the bond index funds. Then downward half of that.
Anything less is short term reserves and working capital.
So, let’s work a couple of scenarios.

Assume we have bond funds available with the following durations:

Code: Select all

Fund			Duration
Cash/Money Market (CMM)	0 yr
Short-Term Bond (STB)	2.5 yr
Interm-Term Bond (ITB)	5.5 yr
Long-Term Bond (LTB)	15.0 yr
So, obligations with the following need dates would be invested in …

Code: Select all

Money Needed in:	Fund
<=~1 year		Cash
>1 year, <=4 years	STB Fund
>4 years, <=10 years	ITB Fund
>10 years		LTB Fund
Scenario 1 - $100K is needed in 12 years.

• $100K is invested in LTB.
• 2 years later (money needed in 10 years), the $100K is sold and reinvested in ITB.
• 6 years later (money needed in 4 years), the $100K is sold and reinvested in STB.
• 3 years later (money needed in 1 year), the $100K is sold and put into CMM.
• 1 year later, money is used for intended purpose.

This is straightforward and makes sense. As the time when the money gets shorter and approaches a duration boundary, it is sold and invested in the next shorter duration bonds.

Scenario 2 - $50K is needed annually for the next 12 years.

Initially invest,
• $50K in CMM (needed in 1 year),
• $150K in STB (needed in years 2 through 4),
• $300K in ITB (needed in years 5 through 10)
• $100K in LTB (needed in years 11 and 12)

1 year later the money would be deployed like this,
• $50K in CMM (needed in 1 year),
• $150K in STB (needed in years 2 through 4),
• $300K in ITB (needed in years 5 through 10)
• $50K in LTB (needed in year 11)

1 year later again the money would be deployed like this,
• $50K in CMM (needed in 1 year),
• $150K in STB (needed in years 2 through 4),
• $300K in ITB (needed in years 5 through 10)

So, what’s really happening in this scenario is rather than taking money from your short term / cash fund, you are really selling from the remaining longest duration fund to fund the shortest term need!

Is this really how you would implement this, or am I missing something?

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Re: Slice and dice for bonds

Post by abuss368 » Thu Jun 13, 2019 8:07 pm

Sandtrap wrote:
Wed Jun 12, 2019 8:23 am
An option:

Why not simplify and diversify by using a broad based bond index like VBTLX (Vanguard Total Bond) and then choose a percentage of your total fixed allocaiton and diversify that percentage into; CD ladders, treasuries, munis, etc.?

Therefore your short and int. term needs are covered and the bond index portion anchors the fixed side.

What are the appreciable gains to be had by "slice and dicing" either fixed or equities to make it worthwhile in the long term?

j
What bond allocation do you recommend and invest in?
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Re: Slice and dice for bonds

Post by abuss368 » Thu Jun 13, 2019 8:08 pm

Vanguard investment experts have recommended a two fund strategy for bonds: Total Bond Index and Total International Bond Index.

The Target Retirement Fund will also include an allocation to Short Term TIPS.
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Re: Slice and dice for bonds

Post by abuss368 » Thu Jun 13, 2019 8:09 pm

elglanto wrote:
Tue Jun 11, 2019 2:21 pm
Hello there,

I have spent a fair amount of time reading these board and while there are a lot of topics on equity slice and dice, there are much less (but still a few) on bond slice and dice.

For the bond allocation, I am tending towards a barbell strategy so something around 50% short term, 50% long term with only government bonds. Since I am already heavy on equity, I am not planning to go with anything else that government bonds because as far as I understood, there is a strong correlation between corporate bonds and equities. However, any comment on that would be highly appreciated. For my equities, I tried to slice between US, developed ex-US and emerging markets while following world market capitalisation with a tilt towards small cap/small cap value.

Then, why not doing something similar for bond? So slice and dice between one long term and one short term for US, developped ex-US and emerging markets. On one side, maybe 6 bonds funds sounds like too many and maybe something like a world short term and a world long term might be better or at least easier to manage. However, I don’t mind a bit of micromanaging and I would think that having this separation might help for rebalancing. Therefore, beside the potential micromanaging hassle, I would like to ear pro and especially the cons of doing that.

Thanks for your reponses.

Erratum: I know that in reality, it might be tricky to do exactly since, e.g., I think that there is no short or long term ETFs for emerging markets (or at least I haven't found any). But I do not think that it prevents the discussion.
Any good short or intermediate term investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio.
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Re: Slice and dice for bonds

Post by Sandtrap » Thu Jun 13, 2019 8:44 pm

abuss368 wrote:
Thu Jun 13, 2019 8:07 pm
Sandtrap wrote:
Wed Jun 12, 2019 8:23 am
An option:

Why not simplify and diversify by using a broad based bond index like VBTLX (Vanguard Total Bond) and then choose a percentage of your total fixed allocaiton and diversify that percentage into; CD ladders, treasuries, munis, etc.?

Therefore your short and int. term needs are covered and the bond index portion anchors the fixed side.

What are the appreciable gains to be had by "slice and dicing" either fixed or equities to make it worthwhile in the long term?

j
What bond allocation do you recommend and invest in?
Allocation is about 50/50
With the Fixed side as 40 Total Bond and 10 Diversified Fixed. The diversified fixed bond portion is equiv to 4X or so.
Works for me. Others may want it more complex or such.
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Re: Slice and dice for bonds

Post by abuss368 » Thu Jun 13, 2019 10:19 pm

Sandtrap wrote:
Thu Jun 13, 2019 8:44 pm
abuss368 wrote:
Thu Jun 13, 2019 8:07 pm
Sandtrap wrote:
Wed Jun 12, 2019 8:23 am
An option:

Why not simplify and diversify by using a broad based bond index like VBTLX (Vanguard Total Bond) and then choose a percentage of your total fixed allocaiton and diversify that percentage into; CD ladders, treasuries, munis, etc.?

Therefore your short and int. term needs are covered and the bond index portion anchors the fixed side.

What are the appreciable gains to be had by "slice and dicing" either fixed or equities to make it worthwhile in the long term?

j
What bond allocation do you recommend and invest in?
Allocation is about 50/50
With the Fixed side as 40 Total Bond and 10 Diversified Fixed. The diversified fixed bond portion is equiv to 4X or so.
Works for me. Others may want it more complex or such.
Thanks! What is 10% diversified fixed? A fund or a combination of CD's, Treasuries, etc?
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Re: Slice and dice for bonds

Post by Sandtrap » Thu Jun 13, 2019 11:41 pm

abuss368 wrote:
Thu Jun 13, 2019 10:19 pm
Sandtrap wrote:
Thu Jun 13, 2019 8:44 pm
abuss368 wrote:
Thu Jun 13, 2019 8:07 pm
Sandtrap wrote:
Wed Jun 12, 2019 8:23 am
An option:

Why not simplify and diversify by using a broad based bond index like VBTLX (Vanguard Total Bond) and then choose a percentage of your total fixed allocaiton and diversify that percentage into; CD ladders, treasuries, munis, etc.?

Therefore your short and int. term needs are covered and the bond index portion anchors the fixed side.

What are the appreciable gains to be had by "slice and dicing" either fixed or equities to make it worthwhile in the long term?

j
What bond allocation do you recommend and invest in?
Allocation is about 50/50
With the Fixed side as 40 Total Bond and 10 Diversified Fixed. The diversified fixed bond portion is equiv to 4X or so.
Works for me. Others may want it more complex or such.
Thanks! What is 10% diversified fixed? A fund or a combination of CD's, Treasuries, etc?
Latter.
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Re: Slice and dice for bonds

Post by NYCwriter » Fri Jun 14, 2019 9:37 pm

Doc wrote:
Thu Jun 13, 2019 5:20 pm
NYCwriter wrote:
Wed Jun 12, 2019 10:10 pm
I'm guessing slice and dice is anything that isn't just Total Bond?

I think the 3 reasons for doing so are 1) interest rate or inflation risk, 2) tax efficiency, and 3) return
I don't look at it that way at all. My bond portfolio is not modeled after Total Bond but after the Bloomberg Barclays US Government/Credit Intermediate Total Return Index. This contains Treasuries and investment grade corporates with durations in the 1-10 year range. It does not have any mortgage backed securites.

I slice and dice that index into the four basic groups: short or intermediate and Treasuries or corporates. For tax reasons the short Treasuries go into taxable and the intermediate corporates into tax advantaged. Also when equity markets are under stress these four groups do not behave in the usual way with respect to each other. The Treasury prices tend to rise while the corporate prices fall. If your IPS calls for you to buy equities in that situation having Treasuries separate from corporates gives you more bang for the buck.

Of your three reasons the only one I think is valid with respect to slice and dice is the tax efficiency. The others may be valid depending on your own situation but I wouldn't call those factors a reason to slice and dice.

(I use this index instead of TBM based on ideas expressed by Larry Swedroe that has been discussed here in some length many years ago.)
This makes sense. My short floating treasury fund has worked well for rebalancing in taxable, since it's the most cash-like instrument. In my Roth, Total Bond is ballast, and I'm mostly bond in my 457b, but I don't rebalance that often so I don't see a need to use other options.

By return I meant higher risk, higher yield funds. I use bond funds for stability, so I don't own these, but in low-interest environments they are often tempting.

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Re: Slice and dice for bonds

Post by Dandy » Sat Jun 15, 2019 7:46 am

For those with a large allocation to fixed income, especially retirees, it can make sense to consider several different products. CDs until recently had much higher rates than corresponding Treasuries - at one time 100 bp higher. Treasuries are not only government guaranteed but do well when there are bad times and a flight to quality. Taxable fixed income benefits from muni's and somewhat with Treasuries in a high state income tax situation. Inflation is a concern that can be addressed with a fund or I bonds.

While there might be an occasion for fixed income to provide growth the most common use is portfolio stability and modest income. I would suggest that many retirees would benefit from:
1. an Inflation protection fund/ I bonds
2.Treasuries in some form
3. An intermediate bond fund
4. FDIC product(s)/money market fund and/or muni bond fund if in a high tax bracket

I also think that, for the most part, rebalancing this portion of the portfolio could be minimal. i.e. if there is a bit more in Treasuries vs an intermediate bond fund it won't make much difference. So, the thought that this "complexity" is too much to manage isn't really warranted.

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Re: Slice and dice for bonds

Post by Doc » Sat Jun 15, 2019 8:23 am

Dandy wrote:
Sat Jun 15, 2019 7:46 am
I also think that, for the most part, rebalancing this portion of the portfolio could be minimal. i.e. if there is a bit more in Treasuries vs an intermediate bond fund it won't make much difference. So, the thought that this "complexity" is too much to manage isn't really warranted.
Agreed.
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Re: Slice and dice for bonds

Post by abuss368 » Sat Jun 15, 2019 11:13 am

I have relatives that have been retired for many years and hold Total Bond in tax advantage and intermediate term tax exempt in taxable. This one bond fund in each account has worked well.
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Re: Slice and dice for bonds

Post by Doc » Sat Jun 15, 2019 11:36 am

abuss368 wrote:
Sat Jun 15, 2019 11:13 am
I have relatives that have been retired for many years and hold Total Bond in tax advantage and intermediate term tax exempt in taxable. This one bond fund in each account has worked well.
That may work well if you consider the FI portion of your portfolio in isolation but it does nothing for the different interaction of FI segments with equities.
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Re: Slice and dice for bonds

Post by garlandwhizzer » Sat Jun 15, 2019 12:14 pm

There is nothing wrong IMO with a barbell approach to bond portfolios. The advantage for those who are retired and need to periodically sell bonds for living expenses is that short term bonds can be sold when inflation and rates are high/rising and long term bonds can be sold when rates and inflation are low/decreasing. Hence principal losses from sales can be reduced. On the other hand, intermediate term bonds take a middle course between the two and in practical terms the differences between sales of IT and barbell are modest which raises the question: is the increased complexity of barbell worth the minimal gains? If you like to tinker with the portfolio to optimize it and you're in the de-cumulation phase it's probably worthwhile. If you are a long term bond investor in the accumulation phase and will not need to sell bonds in the foreseeable future it makes negligible difference. From an entirely practical point of view TBM, IT quality bonds, or barbell quality bonds--all 3 will reliably fulfill the important role that bonds play in a portfolio. Suit your choice to your particular circumstances and don't agonize over it much. There are no losers in this choice.

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Re: Slice and dice for bonds

Post by DecumulatorDoc » Sat Jun 15, 2019 2:36 pm

KyleAAA wrote:
Wed Jun 12, 2019 9:15 pm
I do 50/50 intermediate term bond index and TIPS. Works for me.
That was the Boglehead way...until it wasn't. I am amazed at the number of people that think they are diversified by just holding the aggregate bond index. There is no inflation now or the foreseeable future, is that why TIPS have fallen out of favor? Probably. To some of us, the reason to hold an allocation to TIPS is for unexpected inflation. Would you like to add flood or hurricane insurance once Jim Cantore shows the next named storm coming at you...good luck with that.

I find it interesting that the 3 fund portfolio group refers to any attempt at increased diversification with 4,5, or 6 funds as slice and dice. I guess Jack Bogle was a "slicer and dicer" with bonds. In addition to recognizing a role for TIPS, he felt that adding corporate bonds to the heavily government weighted aggregate bond index was worthwhile for added yield.

If anything more than 3 funds is too complex, how in the world do these folks manage the mathematics to rebalance or increase their bond allocation as they age? I am convinced that as target-date funds continue to lower their expenses, the next book out will be The Bogleheads Guide to a single Target-Date Fund.

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Re: Slice and dice for bonds

Post by willthrill81 » Sat Jun 15, 2019 2:42 pm

DecumulatorDoc wrote:
Sat Jun 15, 2019 2:36 pm
KyleAAA wrote:
Wed Jun 12, 2019 9:15 pm
I do 50/50 intermediate term bond index and TIPS. Works for me.
That was the Boglehead way...until it wasn't. I am amazed at the number of people that think they are diversified by just holding the aggregate bond index. There is no inflation now or the foreseeable future, is that why TIPS have fallen out of favor? Probably. To some of us, the reason to hold an allocation to TIPS is for unexpected inflation. Would you like to add flood or hurricane insurance once Jim Cantore shows the next named storm coming at you...good luck with that.

I find it interesting that the 3 fund portfolio group refers to any attempt at increased diversification with 4,5, or 6 funds as slice and dice. I guess Jack Bogle was a "slicer and dicer" with bonds. In addition to recognizing a role for TIPS, he felt that adding corporate bonds to the heavily government weighted aggregate bond index was worthwhile for added yield.

If anything more than 3 funds is too complex, how in the world do these folks manage the mathematics to rebalance or increase their bond allocation as they age? I am convinced that as target-date funds continue to lower their expenses, the next book out will be The Bogleheads Guide to a single Target-Date Fund.
I'm inclined to agree. If a fund name has the word "total" in it, then many on this forum are all over it and eschew all others. TIPS are a great way to add another layer of diversification that TBM simply cannot do.

Interestingly, many of Bogle's recommendations, including a 5% allocation to gold, are distinctly viewed as robustly "un-Boglehead." :oops:
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Re: Slice and dice for bonds

Post by DesertInvestor » Sat Jun 15, 2019 5:58 pm

I'm 40 and own no bonds, but have lot of cash right now. I have limited low cost option in my 401k and prefer to keep Roth all equity. So basically I'm good just with the total bond market index at vanguard based on this analysis? I'm thinking of converting some of the 401k to total bond market and increasing stock in taxable. The different bond portfolios are making me dizzy and prefer to keep it simple if the overall result is similar.
Tyler Aspect wrote:
Thu Jun 13, 2019 1:01 pm
I have looked at slice and dice for bond portfolio. I will show some of my results below.

Slice and dicing the total bond market:

https://www.portfoliovisualizer.com/bac ... 0&total3=0


Slice and dicing the Vanguard Intermediate-Term Bond ETF:

https://www.portfoliovisualizer.com/bac ... 0&total3=0

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Re: Slice and dice for bonds

Post by Tyler Aspect » Sat Jun 15, 2019 7:30 pm

DecumulatorDoc wrote:
Sat Jun 15, 2019 2:36 pm
KyleAAA wrote:
Wed Jun 12, 2019 9:15 pm
I do 50/50 intermediate term bond index and TIPS. Works for me.
That was the Boglehead way...until it wasn't. I am amazed at the number of people that think they are diversified by just holding the aggregate bond index. There is no inflation now or the foreseeable future, is that why TIPS have fallen out of favor? Probably. To some of us, the reason to hold an allocation to TIPS is for unexpected inflation. Would you like to add flood or hurricane insurance once Jim Cantore shows the next named storm coming at you...good luck with that.

I find it interesting that the 3 fund portfolio group refers to any attempt at increased diversification with 4,5, or 6 funds as slice and dice. I guess Jack Bogle was a "slicer and dicer" with bonds. In addition to recognizing a role for TIPS, he felt that adding corporate bonds to the heavily government weighted aggregate bond index was worthwhile for added yield.

If anything more than 3 funds is too complex, how in the world do these folks manage the mathematics to rebalance or increase their bond allocation as they age? I am convinced that as target-date funds continue to lower their expenses, the next book out will be The Bogleheads Guide to a single Target-Date Fund.
TIPs are not part of the Barclay Capital Aggregate Bond Market index, that is why the total bond market index funds typically does not include this type of bonds. Obviously some people like certainty, and TIPs do serve a specific purpose. Traditionally stock has been recognized as the inflation fighting security. TIPs' inflation indexed feature is a form of inflation insurance over traditional Treasury notes, and all insurance represents a cost over the long term. The market capitalization of TIPs is currently about a tenth of traditional Treasury securities. That rounds out to about 3% to 4% of the total bond market. My opinion is that if the TIPs market were larger then Barclay could have included it in the index.
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Re: Slice and dice for bonds

Post by UpperNwGuy » Sat Jun 15, 2019 9:19 pm

I don't know why anyone would to slice and dice their bond holdings. The Total Bond funds pretty nice solution for most investors. For those in high tax brackets who want to have bonds in taxable accounts, there are tax-exempt municipal bond funds. I don't see the need for TIPS, international bonds, or high yield bonds.

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Re: Slice and dice for bonds

Post by willthrill81 » Sun Jun 16, 2019 12:47 pm

UpperNwGuy wrote:
Sat Jun 15, 2019 9:19 pm
I don't know why anyone would to slice and dice their bond holdings. The Total Bond funds pretty nice solution for most investors. For those in high tax brackets who want to have bonds in taxable accounts, there are tax-exempt municipal bond funds. I don't see the need for TIPS, international bonds, or high yield bonds.
Take a look at how bonds fared during the 1970s, and you might see the potential benefit of TIPS.

Contrary to what many believe, interest rate risk is not the real long-term threat to bonds. That honor goes to unexpected inflation.

Currently, the break-even point of 10 year TIPS vs. Treasuries is only 1.68%. The cost of their 'insurance' seems very low.
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Re: Slice and dice for bonds

Post by UpperNwGuy » Sun Jun 16, 2019 5:48 pm

willthrill81 wrote:
Sun Jun 16, 2019 12:47 pm
UpperNwGuy wrote:
Sat Jun 15, 2019 9:19 pm
I don't know why anyone would to slice and dice their bond holdings. The Total Bond funds pretty nice solution for most investors. For those in high tax brackets who want to have bonds in taxable accounts, there are tax-exempt municipal bond funds. I don't see the need for TIPS, international bonds, or high yield bonds.
Take a look at how bonds fared during the 1970s, and you might see the potential benefit of TIPS.

Contrary to what many believe, interest rate risk is not the real long-term threat to bonds. That honor goes to unexpected inflation.

Currently, the break-even point of 10 year TIPS vs. Treasuries is only 1.68%. The cost of their 'insurance' seems very low.
Are you expecting some unexpected inflation? If so, why? I lived through the 1970s, and I don't see that decade repeating itself during my investment window.

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Re: Slice and dice for bonds

Post by willthrill81 » Sun Jun 16, 2019 5:53 pm

UpperNwGuy wrote:
Sun Jun 16, 2019 5:48 pm
willthrill81 wrote:
Sun Jun 16, 2019 12:47 pm
UpperNwGuy wrote:
Sat Jun 15, 2019 9:19 pm
I don't know why anyone would to slice and dice their bond holdings. The Total Bond funds pretty nice solution for most investors. For those in high tax brackets who want to have bonds in taxable accounts, there are tax-exempt municipal bond funds. I don't see the need for TIPS, international bonds, or high yield bonds.
Take a look at how bonds fared during the 1970s, and you might see the potential benefit of TIPS.

Contrary to what many believe, interest rate risk is not the real long-term threat to bonds. That honor goes to unexpected inflation.

Currently, the break-even point of 10 year TIPS vs. Treasuries is only 1.68%. The cost of their 'insurance' seems very low.
Are you expecting some unexpected inflation? If so, why? I lived through the 1970s, and I don't see that decade repeating itself during my investment window.
Please reread my post. If inflation is higher than 1.68%, 10 year TIPS will beat Treasuries. Circa 1970s' inflation is not needed for TIPS to be a good bet.

Unexpected inflation is, by definition, unexpected.
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