Intermediate-Term bond vs Total Bond

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Intermediate-Term bond vs Total Bond

Post by danielc » Thu Jan 09, 2020 12:16 pm

Right now all our bonds are in IRAs due to limited choices in the other retirement accounts. Our US bonds are in Fidelity's "total bond" index fund. But I just discovered that the 403b plan at my new job offers Vanguard's intermediate term bond fund. So I'm hoping that someone could help me understand the pros and cons of using IT bonds vs Total bond as your US bond allocation.

I did some back testing in the portfolio visualizer to compare Vanguard's total bond index fund (because it has more history than Fidelity's) against their intermediate term fund. Overall, IT has been more volatile, had a slightly higher return, and had lower Sharpe and Sortino ratios. So... I'm not sure that I want it. But I'm hoping that someone here might help me understand why an investor might want one fund or the other. Thanks!

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Re: Intermediate-Term bond vs Total Bond

Post by mhalley » Thu Jan 09, 2020 1:08 pm

I believe there has been some discussion along the lines that int term has no mortgage backed bonds, which some people feel are riskier.

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Re: Intermediate-Term bond vs Total Bond

Post by abuss368 » Thu Jan 09, 2020 1:14 pm

I believe Intermediate Term has no mortgage bonds and has more corporate bonds. Thus the higher risk and volatility. I am not familiar with Fidelity's bond fund but perhaps it includes Treasury bonds and thus while lower yield it is more conservative. Over the long term you will probably be fine.

In my opinion and short or intermediate term investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio. We may be dancing on the head of a needle.
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Re: Intermediate-Term bond vs Total Bond

Post by anon_investor » Thu Jan 09, 2020 1:24 pm

I think long term they would likely have very similar performance. Both have a good helping of treasuries for security.

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Re: Intermediate-Term bond vs Total Bond

Post by danielc » Thu Jan 09, 2020 1:29 pm

abuss368 wrote:
Thu Jan 09, 2020 1:14 pm
I believe Intermediate Term has no mortgage bonds and has more corporate bonds. Thus the higher risk and volatility. I am not familiar with Fidelity's bond fund but perhaps it includes Treasury bonds and thus while lower yield it is more conservative. Over the long term you will probably be fine.

In my opinion and short or intermediate term investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio. We may be dancing on the head of a needle.
So... In the end it won't matter a lot if I use intermediate bonds instead of total bonds as my main bond allocation?

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Re: Intermediate-Term bond vs Total Bond

Post by danielc » Thu Jan 09, 2020 1:39 pm

Vanguard's intermediate bonds have the same duration but more corporate bonds than the total bond fund. Maybe the lower credit quality explains the higher return and higher volatility.

Code: Select all

              Vang Total Bond      Vang Intermediate Bond
---------------------------------------------------------
Duration      6.3 years            6.3 years
SEC Yield     2.25%                2.15%
---------------------------------------------------------
US Govt       62.3%                53.9%
Aaa            3.9%                 2.2%
Aa             3.4%                 3.0%
A             11.2%                16.1%
Baa           19.2%                24.8%

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Re: Intermediate-Term bond vs Total Bond

Post by anon_investor » Thu Jan 09, 2020 1:42 pm

danielc wrote:
Thu Jan 09, 2020 1:39 pm
Vanguard's intermediate bonds have the same duration but more corporate bonds than the total bond fund. Maybe the lower credit quality explains the higher return and higher volatility.

Code: Select all

              Vang Total Bond      Vang Intermediate Bond
---------------------------------------------------------
Duration      6.3 years            6.3 years
SEC Yield     2.25%                2.15%
---------------------------------------------------------
US Govt       62.3%                53.9%
Aaa            3.9%                 2.2%
Aa             3.4%                 3.0%
A             11.2%                16.1%
Baa           19.2%                24.8%
What was the long term performance difference? Also what periods did it cover. I would think in a rising stock market the IT index might do better (because it has more corporate) than the TBM, but in a falling market it would be the inverse (because TBM has more treasuries). Since the stock market is rising more than it is falling, that might explain the slight better performance of the IT index (but I think what I just said is a simplified version of what you just said). :beer

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Re: Intermediate-Term bond vs Total Bond

Post by dbr » Thu Jan 09, 2020 2:27 pm

You can spend a lot of unnecessary time and worry trying to parse the myriad infinitesimal differences between and among different reasonably appropriate bond funds.

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Re: Intermediate-Term bond vs Total Bond

Post by danielc » Thu Jan 09, 2020 2:39 pm

anon_investor wrote:
Thu Jan 09, 2020 1:42 pm
What was the long term performance difference? Also what periods did it cover. I would think in a rising stock market the IT index might do better (because it has more corporate) than the TBM, but in a falling market it would be the inverse (because TBM has more treasuries). Since the stock market is rising more than it is falling, that might explain the slight better performance of the IT index (but I think what I just said is a simplified version of what you just said). :beer
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Code: Select all

             Total Bond      Intermediate Bond
CAGR          5.36%           6.14%
Stdev         3.51%           4.97%
Max Down     -3.99%          -8.92%
Sharpe        0.86            0.76
Sortino       1.45            1.26
I had a look 2008 and IT did drop a fair bit more than total bond. That's when both had their biggest drop (-4% vs -9%).

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Re: Intermediate-Term bond vs Total Bond

Post by abuss368 » Thu Jan 09, 2020 2:45 pm

danielc wrote:
Thu Jan 09, 2020 1:29 pm
abuss368 wrote:
Thu Jan 09, 2020 1:14 pm
I believe Intermediate Term has no mortgage bonds and has more corporate bonds. Thus the higher risk and volatility. I am not familiar with Fidelity's bond fund but perhaps it includes Treasury bonds and thus while lower yield it is more conservative. Over the long term you will probably be fine.

In my opinion and short or intermediate term investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio. We may be dancing on the head of a needle.
So... In the end it won't matter a lot if I use intermediate bonds instead of total bonds as my main bond allocation?
If I understood the investment and was ok with the risks involved, and it fit your goals, then I would be fine with it.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: Intermediate-Term bond vs Total Bond

Post by anon_investor » Thu Jan 09, 2020 2:46 pm

danielc wrote:
Thu Jan 09, 2020 2:39 pm
anon_investor wrote:
Thu Jan 09, 2020 1:42 pm
What was the long term performance difference? Also what periods did it cover. I would think in a rising stock market the IT index might do better (because it has more corporate) than the TBM, but in a falling market it would be the inverse (because TBM has more treasuries). Since the stock market is rising more than it is falling, that might explain the slight better performance of the IT index (but I think what I just said is a simplified version of what you just said). :beer
March 1994 - Dec 2019.

Code: Select all

             Total Bond      Intermediate Bond
CAGR          5.36%           6.14%
Stdev         3.51%           4.97%
Max Down     -3.99%          -8.92%
Sharpe        0.86            0.76
Sortino       1.45            1.26
I had a look 2008 and IT did drop a fair bit more than total bond. That's when both had their biggest drop (-4% vs -9%).
That makes sense. Its funny, the IT index is closer to what Jack Bogle preferred vs the TBM (which he thought had too much treasuries). I still think long term you would be fine either way. Use them interchangeably to get your appropriate AA. Your AA is likely going to have a much larger impact on your long term portfolio performance than picking between those 2 bond funds.

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Re: Intermediate-Term bond vs Total Bond

Post by danielc » Thu Jan 09, 2020 3:02 pm

abuss368 wrote:
Thu Jan 09, 2020 2:45 pm
If I understood the investment and was ok with the risks involved, and it fit your goals, then I would be fine with it.
Well... my reason for posting is that I am not sure that I understand the difference between the two investments or whether they both meet my goals equally. I am trying to understand them. I thought you were telling me that there is very little practical difference between them for the purpose of a portfolio, but now I'm not sure I know what you are saying.

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Re: Intermediate-Term bond vs Total Bond

Post by danielc » Thu Jan 09, 2020 3:03 pm

anon_investor wrote:
Thu Jan 09, 2020 2:46 pm
That makes sense. Its funny, the IT index is closer to what Jack Bogle preferred vs the TBM (which he thought had too much treasuries). I still think long term you would be fine either way. Use them interchangeably to get your appropriate AA. Your AA is likely going to have a much larger impact on your long term portfolio performance than picking between those 2 bond funds.
Thanks!

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Re: Intermediate-Term bond vs Total Bond

Post by abuss368 » Thu Jan 09, 2020 4:22 pm

danielc wrote:
Thu Jan 09, 2020 3:02 pm
abuss368 wrote:
Thu Jan 09, 2020 2:45 pm
If I understood the investment and was ok with the risks involved, and it fit your goals, then I would be fine with it.
Well... my reason for posting is that I am not sure that I understand the difference between the two investments or whether they both meet my goals equally. I am trying to understand them. I thought you were telling me that there is very little practical difference between them for the purpose of a portfolio, but now I'm not sure I know what you are saying.
You may have a little volatility compared to Total Bond at times because there is less Treasury I believe. Personally I would be fine with the fund. It is a good fund.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: Intermediate-Term bond vs Total Bond

Post by jhawktx » Thu Jan 09, 2020 4:29 pm

One has a higher ER than the other.

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Re: Intermediate-Term bond vs Total Bond

Post by danielc » Thu Jan 09, 2020 4:44 pm

abuss368 wrote:
Thu Jan 09, 2020 4:22 pm
You may have a little volatility compared to Total Bond at times because there is less Treasury I believe. Personally I would be fine with the fund. It is a good fund.
Thanks!

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Re: Intermediate-Term bond vs Total Bond

Post by Triple digit golfer » Thu Jan 09, 2020 4:46 pm

I'm in the same boat. I use Vanguard's Total Bond in my rollover IRA that I don't contribute to anymore, but my 401k has Intermediate Term Bond Index available. As I am constantly adding bonds, my choices are use the Intermediate Term Index or constantly be doing exchanges in my rollover IRA. I chose to use Intermediate Term Index.

The differences are small. Many people use it as their only bond fund in place of Total Bond. The main difference is IT is 50/50 corporate/government and TBM is 30/70. At the end of the day, both are intermediate term bond funds holding highly rated bonds and either (or both) will serve you well as your bond holding.

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Re: Intermediate-Term bond vs Total Bond

Post by afan » Thu Jan 09, 2020 4:49 pm

If you want to have fun, also throw in intermediate term Treasuries and TIPS. They have lower yields but strikingly similar performance through the good and bad times. Credit quality is whatever you think of US full faith and credit.

When added at 40% to 60% total stock market, total bond and TIPS produced identical Sharpe ratios. Intermediate term Treasuries gave a higher Sharpe ratio and lowest volatility.

Almost all the risk came from the stock component. All three portfolios had between 0.96 and 0.99 correlation with the stock market.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: Intermediate-Term bond vs Total Bond

Post by RickBoglehead » Thu Jan 09, 2020 5:05 pm

I use intermediate-term investment grade.
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Re: Intermediate-Term bond vs Total Bond

Post by Doc » Thu Jan 09, 2020 5:23 pm

mhalley wrote:
Thu Jan 09, 2020 1:08 pm
I believe there has been some discussion along the lines that int term has no mortgage backed bonds, which some people feel are riskier.
Larry Swedroe has been making this point for a long time. The problem is the negative convexity of the MBS. This means that the borrower has the choice of refinancing his mortgage if rates go down or extending his mortgage if rates go up. This is good for the borrower and bad for the lender like all you good folks that like Total Bond.

FWIW I use Intermediate-Term bond as my bogey.
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Re: Intermediate-Term bond vs Total Bond

Post by 305pelusa » Thu Jan 09, 2020 5:25 pm

Doc wrote:
Thu Jan 09, 2020 5:23 pm
mhalley wrote:
Thu Jan 09, 2020 1:08 pm
I believe there has been some discussion along the lines that int term has no mortgage backed bonds, which some people feel are riskier.
Larry Swedroe has been making this point for a long time. The problem is the negative convexity of the MBS. This means that the borrower has the choice of refinancing his mortgage if rates go down or extending his mortgage if rates go up. This is good for the borrower and bad for the lender like all you good folks that like Total Bond.

FWIW I use Intermediate-Term bond as my bogey.
But the market should take that into account and provide a small reward for that additional risk right?

I don’t know much about those bonds. I understand the risk of negative convexity. But seems like a little of it is fine no? Diversification and all that.

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Re: Intermediate-Term bond vs Total Bond

Post by Elysium » Thu Jan 09, 2020 5:37 pm

danielc wrote:
Thu Jan 09, 2020 12:16 pm
Right now all our bonds are in IRAs due to limited choices in the other retirement accounts. Our US bonds are in Fidelity's "total bond" index fund. But I just discovered that the 403b plan at my new job offers Vanguard's intermediate term bond fund. So I'm hoping that someone could help me understand the pros and cons of using IT bonds vs Total bond as your US bond allocation.

I did some back testing in the portfolio visualizer to compare Vanguard's total bond index fund (because it has more history than Fidelity's) against their intermediate term fund. Overall, IT has been more volatile, had a slightly higher return, and had lower Sharpe and Sortino ratios. So... I'm not sure that I want it. But I'm hoping that someone here might help me understand why an investor might want one fund or the other. Thanks!
Right now I like Intermediate Term Corporate Bond Index Fund and Interm-Term Investment Grade Bond Fund. Both have higher yields than funds with Treasuries. Obviously, they are expected to be higher risk, but no more riskier than Total Bond in my opinion in the long run since there will be more up years than down years, the extra returns makes a difference in a low yielding environment. I would stay away from High Yield Corporate though.

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Re: Intermediate-Term bond vs Total Bond

Post by Doc » Thu Jan 09, 2020 6:18 pm

Regarding MBS
305pelusa wrote:
Thu Jan 09, 2020 5:25 pm
But the market should take that into account and provide a small reward for that additional risk right?
Larry Swedroe wrote:Now that the risks of MBS have been explained we can determine if they make appropriate investments for a portfolio. [Comments on credit risk omitted assuming Goverment backed issuers.) However, from the perspective of price risk, reinvestment risk and correlations with equities they cannot be recommended.
"The Only Guide to a Winning Bond Strategy You'll Ever Need" Larry E. Swedroe and & Joseph H. Hempen p 161

(For all you newbies Swedroe was our long term bond guru on this board until somebody really ticked him off. He even hosted the first meeting of the St. Louis Bogleheads chapter at his firm and bought us all lunch. :D )
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Re: Intermediate-Term bond vs Total Bond

Post by asset_chaos » Thu Jan 09, 2020 6:26 pm

While total bond has more government bonds, intermediate term has more treasury bonds. The difference is the government backed mortgage bonds in total that aren't part of intermediate. Intermediate has more corporates than total. Vangurad lists both currently as having the same average duration, but, of course, intermediate has nearly all it's assets in 5-10 year terms, while total spreads out to both shorter and longer terms. Bottom line is that either are solid bond investments.
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Re: Intermediate-Term bond vs Total Bond

Post by danielc » Thu Jan 09, 2020 8:09 pm

Triple digit golfer wrote:
Thu Jan 09, 2020 4:46 pm
I'm in the same boat. I use Vanguard's Total Bond in my rollover IRA that I don't contribute to anymore, but my 401k has Intermediate Term Bond Index available. As I am constantly adding bonds, my choices are use the Intermediate Term Index or constantly be doing exchanges in my rollover IRA. I chose to use Intermediate Term Index.

The differences are small. Many people use it as their only bond fund in place of Total Bond. The main difference is IT is 50/50 corporate/government and TBM is 30/70. At the end of the day, both are intermediate term bond funds holding highly rated bonds and either (or both) will serve you well as your bond holding.
The more I learn about IT the more I like it. While IT has less "government", it actually has more treasuries. What IT doesn't have is mortgage backed securities. Other posters who know more than have have commented on the issues with MBS. I don't have a problem with them, but I'm also not sorry to see them go. In an earlier post I said that TBM has a higher Sharpe ratio, but I made the mistake of looking at the funds in isolation. When I combine them with my stock portfolio, stocks+IT actually gives me a marginally higher Sharpe ratio.

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Re: Intermediate-Term bond vs Total Bond

Post by fortyofforty » Fri Jan 10, 2020 10:48 am

There are several choices to make when choosing a bond fund. Some are whether or not to include corporate bonds, and whether or not to include international bonds. Intermediate Term should be just fine for what you seek. Performance should be close enough to Total Bond to satisfy your goals. As I understand it, the duration of Total Bond ends up being close to Intermediate Term in any case.
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Re: Intermediate-Term bond vs Total Bond

Post by Doc » Fri Jan 10, 2020 11:31 am

danielc wrote:
Thu Jan 09, 2020 12:16 pm
I did some back testing in the portfolio visualizer to compare Vanguard's total bond index fund (because it has more history than Fidelity's) against their intermediate term fund.
I prefer looking at rolling return charts instead of statistical measurements to make this kind of comparison. How different funds respond in times of market stress is often significant but the difference gets hidden if you average it over a long period. Of course if you aren't going to rebalance during market upheavals it make little difference.

Here's an example of Vanguard's Total Bond, both Fidelity and Vanguard's Intermediate Bond and the Vanguard S&P 500 fund.

Image

Note the differences during the 2009-2010 period when both of the Intermediate term funds outperformed total bond Market.
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Re: Intermediate-Term bond vs Total Bond

Post by 305pelusa » Fri Jan 10, 2020 12:13 pm

Doc wrote:
Thu Jan 09, 2020 6:18 pm
Regarding MBS
305pelusa wrote:
Thu Jan 09, 2020 5:25 pm
But the market should take that into account and provide a small reward for that additional risk right?
Larry Swedroe wrote:Now that the risks of MBS have been explained we can determine if they make appropriate investments for a portfolio. [Comments on credit risk omitted assuming Goverment backed issuers.) However, from the perspective of price risk, reinvestment risk and correlations with equities they cannot be recommended.
"The Only Guide to a Winning Bond Strategy You'll Ever Need" Larry E. Swedroe and & Joseph H. Hempen p 161

(For all you newbies Swedroe was our long term bond guru on this board until somebody really ticked him off. He even hosted the first meeting of the St. Louis Bogleheads chapter at his firm and bought us all lunch. :D )
I guess I’m still confused. Is he saying it has too much risk and too little reward for it?

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Re: Intermediate-Term bond vs Total Bond

Post by Doc » Fri Jan 10, 2020 12:46 pm

305pelusa wrote:
Fri Jan 10, 2020 12:13 pm
I guess I’m still confused. Is he saying it has too much risk and too little reward for it?
Well that's understandable. It's very hard to reduce a whole chapter of a book into a few sentences.

If you only look at the added return you get for the added risk you are looking at only the bonds in isolation not as part of your whole portfolio.

But Swedroe wrote "... they make appropriate investments for a portfolio". If I am an annuity manager I need to be able to meet the future payments with some certainty. I cannot invest in small cap value for example because the return is not certain year to year so I invest in fixed income securites only. In this case the "weirdness" of MBS is not that important and as you imply because there is some extra return. And it is these kind of managers who are setting the market for MBS. It's not you and me. That is what I was trying illustrate with the rolling return chart. If you look at a growth chart instead then you find that the TBM fund and the Fidelity intermediate bond give the same result. The Vanguard intermediate bond fund stands out possibly because of a lower E/R than the Fidelity. I didn't look. I don't invest in TBM because of the MBS. For tax reasons an omnibus bond fund is inappropriate for me so it gets broken into pieces anyway and it is easy to not take the MBS piece.

(I also have a lot of faith in my neighbor so maybe I'm biased. :D )
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Re: Intermediate-Term bond vs Total Bond

Post by jhfenton » Fri Jan 10, 2020 1:32 pm

305pelusa wrote:
Fri Jan 10, 2020 12:13 pm
I guess I’m still confused. Is he saying it has too much risk and too little reward for it?
MBSs are fine. You can dance on the head of a pin and make an argument against them, and perhaps there's some merit to the argument if your alternative strategy is to go all treasuries. But MBSs do offer some extra yield for the increased theoretical risk, a risk that has never really shown up in a big way in practice. And to me the portfolio investment argument is just not as compelling as it is for corporate bonds. Mortgage refinancing/extension risk just doesn't look and behave like equity/credit risk. Portfolios with MBS perform just fine.

I own Vanguard Total Bond in my 401(k) because it's the only index option, and we own the Vanguard MBS Index fund in my wife's rollover IRA. I could swap everything out for Intermediate-Term Bond, Total Bond, an MBS fund, or even an intermediate treasury fund, and it wouldn't make much difference in the long run.

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Re: Intermediate-Term bond vs Total Bond

Post by Doc » Fri Jan 10, 2020 2:59 pm

jhfenton wrote:
Fri Jan 10, 2020 1:32 pm
I could swap everything out for Intermediate-Term Bond, Total Bond, an MBS fund, or even an intermediate treasury fund, and it wouldn't make much difference in the long run.
OK but what if you had to break up your bond portfolio into pieces for tax efficiency. What would you put into taxable and what in tax advantaged?

I suggest:

Short Treasuries -> Taxable

Short corporates -> Either
Intermediate Treasuries -> Either

Intermediate Corporates -> Tax Advantaged

MBS -> Nowhere?

(I thought that there was a WIKI page addressing this placement but I can't find it.)
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Re: Intermediate-Term bond vs Total Bond

Post by jhfenton » Fri Jan 10, 2020 4:15 pm

Doc wrote:
Fri Jan 10, 2020 2:59 pm
jhfenton wrote:
Fri Jan 10, 2020 1:32 pm
I could swap everything out for Intermediate-Term Bond, Total Bond, an MBS fund, or even an intermediate treasury fund, and it wouldn't make much difference in the long run.
OK but what if you had to break up your bond portfolio into pieces for tax efficiency. What would you put into taxable and what in tax advantaged?

I suggest:

Short Treasuries -> Taxable

Short corporates -> Either
Intermediate Treasuries -> Either

Intermediate Corporates -> Tax Advantaged

MBS -> Nowhere?
I used to do that before I convinced my 401(k) investment committee to add Vanguard Total Bond. (Or at least, they added both it and Vanguard Developed Markets after I asked for bond and ex-US index funds. Before that, the only option was PIMCO Total Return.) We owned intermediate treasury index, intermediate corp index, and short-term corporate index in the proportions I wanted. But with Vanguard Total Bond available in my 401(k), it made sense to move most of our fixed income into my 401(k).

So now I just keep a modest position in VSCSX/Vanguard Short-Term Corporate and a little bit in VMBSX/Vanguard MBS Index for the slightly higher yield. (We also have a little bit of VOHIX/Vanguard OH Long-Term Tax Exempt in taxable. And starting this week, we will have some RBFCX/American Funds Bond Fund of America R3 in my wife's 401(k). At 91 bp, it is the cheapest fund she has available. For the short-to-medium term we are putting 100% of her contributions in that account. It should minimize the assets we have subject to the high expenses in her plan.)

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Re: Intermediate-Term bond vs Total Bond

Post by danielc » Fri Jan 10, 2020 4:23 pm

Doc wrote:
Fri Jan 10, 2020 11:31 am
danielc wrote:
Thu Jan 09, 2020 12:16 pm
I did some back testing in the portfolio visualizer to compare Vanguard's total bond index fund (because it has more history than Fidelity's) against their intermediate term fund.
I prefer looking at rolling return charts instead of statistical measurements to make this kind of comparison. How different funds respond in times of market stress is often significant but the difference gets hidden if you average it over a long period. Of course if you aren't going to rebalance during market upheavals it make little difference.

Here's an example of Vanguard's Total Bond, both Fidelity and Vanguard's Intermediate Bond and the Vanguard S&P 500 fund.

Image

Note the differences during the 2009-2010 period when both of the Intermediate term funds outperformed total bond Market.
Do you think that in general intermediate bonds will do better than TBM in times of market stress? That would be important. Times of market stress is precisely the reason one buys bonds to begin with. I'm trying to figure out why IT beats TBM during market stress. The 2008 crisis was a mortgage crisis, so I imagine that the MBS inside TBM did particularly badly. Between 2000 and 2003 Vanguard's IT did a little bit better than TBM, but it wasn't a large difference.

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Re: Intermediate-Term bond vs Total Bond

Post by danielc » Fri Jan 10, 2020 4:32 pm

Doc wrote:
Fri Jan 10, 2020 12:46 pm
305pelusa wrote:
Fri Jan 10, 2020 12:13 pm
I guess I’m still confused. Is he saying it has too much risk and too little reward for it?
Well that's understandable. It's very hard to reduce a whole chapter of a book into a few sentences.

If you only look at the added return you get for the added risk you are looking at only the bonds in isolation not as part of your whole portfolio.

But Swedroe wrote "... they make appropriate investments for a portfolio". If I am an annuity manager I need to be able to meet the future payments with some certainty. I cannot invest in small cap value for example because the return is not certain year to year so I invest in fixed income securites only. In this case the "weirdness" of MBS is not that important and as you imply because there is some extra return. And it is these kind of managers who are setting the market for MBS. It's not you and me. That is what I was trying illustrate with the rolling return chart. If you look at a growth chart instead then you find that the TBM fund and the Fidelity intermediate bond give the same result. The Vanguard intermediate bond fund stands out possibly because of a lower E/R than the Fidelity. I didn't look. I don't invest in TBM because of the MBS. For tax reasons an omnibus bond fund is inappropriate for me so it gets broken into pieces anyway and it is easy to not take the MBS piece.

(I also have a lot of faith in my neighbor so maybe I'm biased. :D )
Why are those managers setting the market for MBS but they are not setting the market for IT?

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Re: Intermediate-Term bond vs Total Bond

Post by alluringreality » Fri Jan 10, 2020 6:21 pm

danielc wrote:
Fri Jan 10, 2020 4:23 pm
I'm trying to figure out why IT beats TBM during market stress.
I don't see a reason to necessarily make this presumption. It's possible a portfolio with more diversification (TBM) could be a better choice through a downturn, depending on the reason for the market stress. For example if something like a corporate downgrade event were to happen it might mean both funds may have to sell, but a fund holding less corporate debt could be in a better position.
The 2008 crisis was a mortgage crisis, so I imagine that the MBS inside TBM did particularly badly. Between 2000 and 2003 Vanguard's IT did a little bit better than TBM, but it wasn't a large difference.
The aggregate index has went through some changes since 2008, but I'm not sure that it was necessarily allowing a lot in the way of the items that really took a tumble from that time. If the Fannie Mae & Freddie Mac Conservatorships didn't happen the path through 2008 probably wouldn't have looked so good, yet subjectively I'm not sure that TBM underperformed Vanguard's Ginnie Mae fund (VFIIX) enough through the period that I'd lament the decision.
https://www.portfoliovisualizer.com/bac ... bol4=VBILX
https://www.bbhub.io/indices/sites/2/20 ... regate.pdf

My own interest in bonds probably allows for more risk than either intermediate or TBM, since I'd consider including below investment grade if I ever buy bond funds, like the Universal index or Morningstar intermediate core plus category. If the conservatorships went away I'd want more of a premium than currently exists in relation to Ginnie Mae funds, but right now MBS in the Aggregate index isn't the sort of thing that would worry me. Basically the way I see it the higher recent performance from intermediate is likely due to corporates, so I'd tend to presume that could also be a potential source of risk.

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Re: Intermediate-Term bond vs Total Bond

Post by longinvest » Fri Jan 10, 2020 7:10 pm

danielc wrote:
Thu Jan 09, 2020 12:16 pm
[...] Our US bonds are in Fidelity's "total bond" index fund. But I just discovered that the 403b plan at my new job offers Vanguard's intermediate term bond fund. So I'm hoping that someone could help me understand the pros and cons of using IT bonds vs Total bond as your US bond allocation.

[...] But I'm hoping that someone here might help me understand why an investor might want one fund or the other. Thanks!
Danielc, here's a different way to think about bond funds.

In another thread, I wrote the following comparison of a US intermediate treasury fund and a total-world bond fund (instead of a total US bond fund, as you're asking):
longinvest wrote:
Fri Dec 27, 2019 10:19 am
There are many risks to marketable securities. It's a behavioral mistake to only consider one risk (e.g. default) and ignore all other risks when deciding whether to include (or not) a security into a portfolio.

Vanguard's Intermediate-Term Treasury Index Fund (VSIGX) only contains 117 bonds. In contrast, Vanguard's Total World Bond ETF (BNDW) contains 15,203 bonds; that's 130 times as many bonds as VSIGX! There's a huge difference in market impact of investing some money in one or the other. It's obvious that investing into 15,203 bonds will have a much, much smaller impact than investing into 117 bonds.

I think that it's best to embrace the wide diversification across non-speculative investment-grade securities of Bill Sharpe's preferred portfolio (VT + BNDW) or a similar global balanced index One-Fund Portfolio with no more than a moderate amount of home bias.
I haven't found the information for Fidelity's US total bond fund, but Vanguard's US total bond contains over 9,000 bonds. The weight of intermediate bonds (including treasuries, corporates, and others) is approximately 30% of the total US bond market. Intermediate Treasury bonds are only a subset of this.

Do you want to completely exclude more than 70% of US investment-grade bonds (or more than 85% of world investment-grade bonds) out of your portfolio?
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Re: Intermediate-Term bond vs Total Bond

Post by mjb » Fri Jan 10, 2020 7:38 pm

FWIW, I prefer IT bond index. I really like the ability to "ride the yield curve" as it only holds between 5 and 10 years duration which is kind of a sweet spot. Bonds longer than 10 years are often better suited for institutions. Bonds shorter than 5 years are for liquidity and usually a small investor can get better rates at banks. Both of these are heavily driven by regulations.

The small appreciation gained by riding that sweet spot on the yield curve is one of the few free lunches in investing.

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Re: Intermediate-Term bond vs Total Bond

Post by danielc » Fri Jan 10, 2020 7:52 pm

longinvest wrote:
Fri Jan 10, 2020 7:10 pm
Danielc, here's a different way to think about bond funds.

In another thread, I wrote the following comparison of a US intermediate treasury fund and a total-world bond fund (instead of a total US bond fund, as you're asking):
longinvest wrote:
Fri Dec 27, 2019 10:19 am
There are many risks to marketable securities. It's a behavioral mistake to only consider one risk (e.g. default) and ignore all other risks when deciding whether to include (or not) a security into a portfolio.

Vanguard's Intermediate-Term Treasury Index Fund (VSIGX) only contains 117 bonds. In contrast, Vanguard's Total World Bond ETF (BNDW) contains 15,203 bonds; that's 130 times as many bonds as VSIGX! There's a huge difference in market impact of investing some money in one or the other. It's obvious that investing into 15,203 bonds will have a much, much smaller impact than investing into 117 bonds.

I think that it's best to embrace the wide diversification across non-speculative investment-grade securities of Bill Sharpe's preferred portfolio (VT + BNDW) or a similar global balanced index One-Fund Portfolio with no more than a moderate amount of home bias.
I haven't found the information for Fidelity's US total bond fund, but Vanguard's US total bond contains over 9,000 bonds. The weight of intermediate bonds (including treasuries, corporates, and others) is approximately 30% of the total US bond market. Intermediate Treasury bonds are only a subset of this.

Do you want to completely exclude more than 70% of US investment-grade bonds (or more than 85% of world investment-grade bonds) out of your portfolio?
Thanks. That's a useful perspective and I hadn't realized that the difference was so large. I'm the kind of investor that likes to hold everything, with only a small home bias. I hold international stocks and international bonds in the same ratios as Vanguard's Life Strategy funds, despite all the negativity toward those investments in this forum. I even hold emerging market bonds, and in fact I tilt toward those. If TBM has 77x more securities than IT, then TBM fits better with the way I generally prefer to invest.

I do have one question though. You said "It's obvious that investing into 15,203 bonds will have a much, much smaller impact than investing into 117 bonds." --- I'm not sure what you mean by that. I don't have enough money for me to personally have ANY impact on any mutual fund.

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Re: Intermediate-Term bond vs Total Bond

Post by dru808 » Fri Jan 10, 2020 8:06 pm

I did the backtesting when contemplating intermediate term bond and total bond, intermediate won everytime. The thing about int bond is it only holds int bonds. Total bond holds bonds from short to intermediate to long term. I feel it’s a better diversified fund, it’s like going 1/3 short, int, long. If we’re going by the best returning bonds long term and edv have whupped the other shorter duration bond classes.

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Re: Intermediate-Term bond vs Total Bond

Post by longinvest » Fri Jan 10, 2020 8:35 pm

danielc wrote:
Fri Jan 10, 2020 7:52 pm
I do have one question though. You said "It's obvious that investing into 15,203 bonds will have a much, much smaller impact than investing into 117 bonds." --- I'm not sure what you mean by that. I don't have enough money for me to personally have ANY impact on any mutual fund.
I always ask myself: If everyone invested like me, what would happen? Maybe my little transaction, all by itself, has almost no impact, but lots and lots of little transactions like mine into a "popular" segment of the market will end up having an impact. If lots of investors drop 70% of the market out of their portfolios, just because the 30% segment is supposedly best, then there will be an impact.

Here's how William Sharpe explains this:
The Market Portfolio
Let's say that the amount you wish to invest in a risky portfolio is x% of the total value of all the securities in the market and that your investment advisor advocates that you overweight (hold more than x% of) certain “underpriced” securities , market-weight (hold x% of) those that are “correctly priced”, and underweight (hold less than x% of) those that are “overpriced”. This, he or she says, is a portfolio with better risk and return characteristics than the market portfolio.

Perhaps it is, and by holding it you will indeed be smart. But if so, then those holding the market portfolio must be dumb. And those who underweight the securities that you overweight and overweight the securities that you underweight are even dumber. If this is the case, one might assume that sooner or later both groups will recognize their mistakes and try to buy the underpriced securities and sell the overpriced ones. But of course every buyer needs a seller and every seller needs a buyer. The net result will be for the prices of the formerly underpriced securities to increase and the prices of the formerly overpriced securities to decrease until every security is “correctly priced”. At this point it will be smart to hold the market portfolio. In this sense a strategy that can successfully “beat the market” will carry the seeds of its own destruction.
Financial history is replete with examples of cases in which an investment approach with superior past performance fails to “beat the market” in the future. In some cases, this may have been due to a focus on “noise” in a body of historic data. In others, is may be a change in market prices caused by the realization by sophisticated investors that some security prices were inappropriate in the past, resulting in corrections leading to more appropriate valuations.

In any event, it pays to be very skeptical indeed of schemes that purport to be able to “beat the market”.
This last sentence can save an investor a lot of money over a lifetime.
Last edited by longinvest on Fri Jan 10, 2020 8:50 pm, edited 1 time in total.
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Re: Intermediate-Term bond vs Total Bond

Post by ofckrupke » Fri Jan 10, 2020 8:41 pm

danielc wrote:
Fri Jan 10, 2020 4:23 pm
Doc wrote:
Fri Jan 10, 2020 11:31 am
danielc wrote:
Thu Jan 09, 2020 12:16 pm
I did some back testing in the portfolio visualizer to compare Vanguard's total bond index fund (because it has more history than Fidelity's) against their intermediate term fund.
I prefer looking at rolling return charts instead of statistical measurements to make this kind of comparison. How different funds respond in times of market stress is often significant but the difference gets hidden if you average it over a long period. Of course if you aren't going to rebalance during market upheavals it make little difference.

Here's an example of Vanguard's Total Bond, both Fidelity and Vanguard's Intermediate Bond and the Vanguard S&P 500 fund.

Image

Note the differences during the 2009-2010 period when both of the Intermediate term funds outperformed total bond Market.
Do you think that in general intermediate bonds will do better than TBM in times of market stress? That would be important. Times of market stress is precisely the reason one buys bonds to begin with. I'm trying to figure out why IT beats TBM during market stress. The 2008 crisis was a mortgage crisis, so I imagine that the MBS inside TBM did particularly badly. Between 2000 and 2003 Vanguard's IT did a little bit better than TBM, but it wasn't a large difference.
My beef with Doc's presentation nested in citations is that both of his chosen representative IT funds are actively managed, while of course Vanguard TBM is an index fund. These IT funds did better than Vanguard TBM in the stressful part(s) of the time interval shown, but how much of it was term structure and gross credit content...and how much was, ya know, secret sauce?

Related mumble from longinvest's post upthread: Fidelity Total Bond Fund is a (pricey) active fund; their counterpart to Vanguard TBM is called Fidelity US Bond Index Fund.

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Re: Intermediate-Term bond vs Total Bond

Post by Phineas J. Whoopee » Fri Jan 10, 2020 9:03 pm

We spill a lot of pixels around here analyzing minor differences between bond funds which are unlikely to make any predictable difference over the long term in a mixed equity / fixed income portfolio.

Any low-cost investment-grade short- to intermediate-term bond fund should do its job in a mixed portfolio. I'd go with what's readily available.

PJW

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Re: Intermediate-Term bond vs Total Bond

Post by longinvest » Fri Jan 10, 2020 9:26 pm

ofckrupke wrote:
Fri Jan 10, 2020 8:41 pm
Related mumble from longinvest's post upthread: Fidelity Total Bond Fund is a (pricey) active fund; their counterpart to Vanguard TBM is called Fidelity US Bond Index Fund.
Oh! I wasn't aware of this. I wouldn't invest into a pricey and active bond fund.
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Re: Intermediate-Term bond vs Total Bond

Post by Dude2 » Fri Jan 10, 2020 9:38 pm

In concept, but perhaps not in practice, Total Bond Index is what we want. It holds the ratio of entities that the market has decided are worth buying -- duration, credit quality, proportion of US government, etc. The market has spoken. In practice though, many posts deride the nature of the Aggregate Bond Index -- what it selects to include and exclude. Plus, there are no international bonds, i.e. the largest asset class. One might consider in the ideal world that BNDW is the bond fund we seek, i.e. Total Bond Index of the World (which still snubs TIPS).

But, Aggregate Bond Index has a plan, and it sticks to it. Maybe that's good enough. Intermediate Bond Index may indeed be the sweet spot for duration. Its ratio of government to investment grade is also a plan that it sticks to, although clearly less inclusive.

I would only be concerned if selecting only Intermediate Term Index that you have no protection if the market changes considerably. Your holding will not adjust automatically to reflect the market. We are buy-and-holders after all, so we don't want to have to manually make adjustments to the portfolio if such a change were to happen. For that reason, conceptually and agnostically, I would recommend Total Bond Index.

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Re: Intermediate-Term bond vs Total Bond

Post by palanzo » Fri Jan 10, 2020 9:46 pm

Doc wrote:
Fri Jan 10, 2020 2:59 pm
jhfenton wrote:
Fri Jan 10, 2020 1:32 pm
I could swap everything out for Intermediate-Term Bond, Total Bond, an MBS fund, or even an intermediate treasury fund, and it wouldn't make much difference in the long run.
OK but what if you had to break up your bond portfolio into pieces for tax efficiency. What would you put into taxable and what in tax advantaged?

I suggest:

Short Treasuries -> Taxable

Short corporates -> Either
Intermediate Treasuries -> Either

Intermediate Corporates -> Tax Advantaged

MBS -> Nowhere?

(I thought that there was a WIKI page addressing this placement but I can't find it.)
If you did break it up like this for tax reasons, which funds would you recommend for the various components?

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Re: Intermediate-Term bond vs Total Bond

Post by fortyofforty » Fri Jan 10, 2020 9:48 pm

longinvest wrote:
Fri Jan 10, 2020 8:35 pm
danielc wrote:
Fri Jan 10, 2020 7:52 pm
I do have one question though. You said "It's obvious that investing into 15,203 bonds will have a much, much smaller impact than investing into 117 bonds." --- I'm not sure what you mean by that. I don't have enough money for me to personally have ANY impact on any mutual fund.
I always ask myself: If everyone invested like me, what would happen? Maybe my little transaction, all by itself, has almost no impact, but lots and lots of little transactions like mine into a "popular" segment of the market will end up having an impact. If lots of investors drop 70% of the market out of their portfolios, just because the 30% segment is supposedly best, then there will be an impact.

Here's how William Sharpe explains this:
The Market Portfolio
Let's say that the amount you wish to invest in a risky portfolio is x% of the total value of all the securities in the market and that your investment advisor advocates that you overweight (hold more than x% of) certain “underpriced” securities , market-weight (hold x% of) those that are “correctly priced”, and underweight (hold less than x% of) those that are “overpriced”. This, he or she says, is a portfolio with better risk and return characteristics than the market portfolio.

Perhaps it is, and by holding it you will indeed be smart. But if so, then those holding the market portfolio must be dumb. And those who underweight the securities that you overweight and overweight the securities that you underweight are even dumber. If this is the case, one might assume that sooner or later both groups will recognize their mistakes and try to buy the underpriced securities and sell the overpriced ones. But of course every buyer needs a seller and every seller needs a buyer. The net result will be for the prices of the formerly underpriced securities to increase and the prices of the formerly overpriced securities to decrease until every security is “correctly priced”. At this point it will be smart to hold the market portfolio. In this sense a strategy that can successfully “beat the market” will carry the seeds of its own destruction.
Financial history is replete with examples of cases in which an investment approach with superior past performance fails to “beat the market” in the future. In some cases, this may have been due to a focus on “noise” in a body of historic data. In others, is may be a change in market prices caused by the realization by sophisticated investors that some security prices were inappropriate in the past, resulting in corrections leading to more appropriate valuations.

In any event, it pays to be very skeptical indeed of schemes that purport to be able to “beat the market”.
This last sentence can save an investor a lot of money over a lifetime.
Wouldn't those "lots and lots of little transactions" end up skewing any "total" index of bonds? If more and more investors lean towards intermediate term bonds, won't the indexes have to match this proportion (at least in the long run)?
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Re: Intermediate-Term bond vs Total Bond

Post by jhfenton » Fri Jan 10, 2020 9:53 pm

Dude2 wrote:
Fri Jan 10, 2020 9:38 pm
In concept, but perhaps not in practice, Total Bond Index is what we want. It holds the ratio of entities that the market has decided are worth buying -- duration, credit quality, proportion of US government, etc. The market has spoken.
I own Total Bond without objection, but this is not one of the reasons. I don't see how the proportion of US government securities in Total Bond is a market decision. The rates paid on those securities may be a market decision, but the volume of US government securities on the market is determined by US government borrowing needs (i.e. the size of the US federal deficit). It's a political decision.

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Re: Intermediate-Term bond vs Total Bond

Post by Dude2 » Fri Jan 10, 2020 10:17 pm

jhfenton wrote:
Fri Jan 10, 2020 9:53 pm
I own Total Bond without objection, but this is not one of the reasons. I don't see how the proportion of US government securities in Total Bond is a market decision. The rates paid on those securities may be a market decision, but the volume of US government securities on the market is determined by US government borrowing needs (i.e. the size of the US federal deficit). It's a political decision.
Yes, back to that Aggregate Bond Index problem. It makes me ask myself what is the ideal that I am trying to achieve. I think I want a piece of everything in proportion to what is deemed most desirable on the open market. That in itself should drive the choices to be made in terms of risk versus reward for credit quality and duration.

However, I do see that as an individual investor with a finite lifespan I am just one type of participant in the market, so the market solution may not be the best for my situation. I can do LMP of TIPS or CDs, individual munis, corporates, etc. to fund my future needs. Ultimately I can also see the argument that the choice between IT index and TBM index is simply a personal judgement call and will not void your Boglehead membership card.

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Re: Intermediate-Term bond vs Total Bond

Post by jhfenton » Fri Jan 10, 2020 10:21 pm

Dude2 wrote:
Fri Jan 10, 2020 10:17 pm
However, I do see that as an individual investor with a finite lifespan I am just one type of participant in the market, so the market solution may not be the best for my situation. I can do LMP of TIPS or CDs, individual munis, corporates, etc. to fund my future needs. Ultimately I can also see the argument that the choice between IT index and TBM index is simply a personal judgement call and will not void your Boglehead membership card.
I agree with all of that, including the final statement. :beer

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Re: Intermediate-Term bond vs Total Bond

Post by hoops777 » Fri Jan 10, 2020 10:52 pm

dbr wrote:
Thu Jan 09, 2020 2:27 pm
You can spend a lot of unnecessary time and worry trying to parse the myriad infinitesimal differences between and among different reasonably appropriate bond funds.
:D :D :D
K.I.S.S........so easy to say so difficult to do.

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