Bond Strategy

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justsomeguy2018
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Bond Strategy

Post by justsomeguy2018 » Tue Mar 24, 2020 6:58 pm

I've been thinking about bonds in light of the recent crisis. I used to just do Total Bond, or Muni Bonds in taxable. I then realized there was corporate risk which negates the point of bonds being "safety in a crisis" (as much as that is possible) as well as muni bonds not being super safe either. I wonder if a better strategy is 33% Int. Treasuries, 33% Total Bond, and 33% Inflation Protected Bonds. Maybe even add stable value/money market into the mix possibly.

Am I overthinking this?

alex_686
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Re: Bond Strategy

Post by alex_686 » Tue Mar 24, 2020 7:02 pm

Have you factored in yet that lower coupons and the growing duration means that bonds will have historically lower returns and higher risk?

Honestly, I am being tempted to go in the other direction. Drop my bond allocation, and increase HY which is offering 8%.

And no - I don't think you are. It is a reasonable plan. Just be aware that the economics have shfited.

tesuzuki2002
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Re: Bond Strategy

Post by tesuzuki2002 » Tue Mar 24, 2020 7:11 pm

I'm selling bonds and buying equity in the current times...

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vineviz
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Re: Bond Strategy

Post by vineviz » Tue Mar 24, 2020 7:27 pm

justsomeguy2018 wrote:
Tue Mar 24, 2020 6:58 pm
I wonder if a better strategy is 33% Int. Treasuries, 33% Total Bond, and 33% Inflation Protected Bonds. Maybe even add stable value/money market into the mix possibly.

Am I overthinking this?
Over-complicating it, I'd say more than over-thinking it.

All asset allocation decisions SHOULD start by thinking through your investment goals, and especially about the risks you face with respect to those goals.

1/3 each in intermediate Treasuries, total bond market, and TIPS looks a lot to me like a random assortment of bond funds without any clear rationale behind them.

What is your overall stock/bond allocation?

If it's 20% bonds or less or you're 10+ years from retirement, long-term nominal US Treasury bonds are almost certainly the only bonds you need.

If the allocation is more than 20% bonds or you're within 10+ years of retirement, you probably have to decide how big a risk unexpectedly high inflation would be for you. If you expect that Social Security and inflation-adjusted pensions/annuities are covering (or you expect it to cover) more than 60-70% of your post-retirement spending needs, then inflation probably isn't a big risk for you and you can stick with nominal Treasuries. If less, you probably should consider some inflation protection for your fixed income, which likely means at least some TIPS plus (maybe) some real assets.

Bottom line: figure out what problem you're trying to solve and THEN pick the tool for the job. If that sounds too complicated, put the first 20% of your bond allocation in long-term Treasuries and the rest in intermediate term TIPS.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

averagedude
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Re: Bond Strategy

Post by averagedude » Tue Mar 24, 2020 7:34 pm

Whatever bond strategy you come up with, their will be days when the sun shines on it, and their will be days when dark clouds loom over it. A perfect bond allocation doesn't exist except in hindsight.

Gufomel
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Re: Bond Strategy

Post by Gufomel » Tue Mar 24, 2020 7:41 pm

vineviz wrote:
Tue Mar 24, 2020 7:27 pm
justsomeguy2018 wrote:
Tue Mar 24, 2020 6:58 pm
I wonder if a better strategy is 33% Int. Treasuries, 33% Total Bond, and 33% Inflation Protected Bonds. Maybe even add stable value/money market into the mix possibly.

Am I overthinking this?
Over-complicating it, I'd say more than over-thinking it.

All asset allocation decisions SHOULD start by thinking through your investment goals, and especially about the risks you face with respect to those goals.

1/3 each in intermediate Treasuries, total bond market, and TIPS looks a lot to me like a random assortment of bond funds without any clear rationale behind them.

What is your overall stock/bond allocation?

If it's 20% bonds or less or you're 10+ years from retirement, long-term nominal US Treasury bonds are almost certainly the only bonds you need.

If the allocation is more than 20% bonds or you're within 10+ years of retirement, you probably have to decide how big a risk unexpectedly high inflation would be for you. If you expect that Social Security and inflation-adjusted pensions/annuities are covering (or you expect it to cover) more than 60-70% of your post-retirement spending needs, then inflation probably isn't a big risk for you and you can stick with nominal Treasuries. If less, you probably should consider some inflation protection for your fixed income, which likely means at least some TIPS plus (maybe) some real assets.

Bottom line: figure out what problem you're trying to solve and THEN pick the tool for the job. If that sounds too complicated, put the first 20% of your bond allocation in long-term Treasuries and the rest in intermediate term TIPS.
I’ve definitely come around to the idea of holding LT Treasuries over the last few days. Count me among the people who had previously put very little thought into my bond holdings.

With that said, I really struggle to understand how LT treasuries make sense now. The Vanguard LT Treasury fund has a yield of 1.54% and an 18 year duration. Seems like incredibly low reward for pretty significant risk. I know very little about bonds though, so I’m happy to be informed 😁

rerod
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Re: Bond Strategy

Post by rerod » Tue Mar 24, 2020 7:57 pm

Bonds do well when interest rates are dropping. With rates at zero, bond values will drop as the fed starts raising rates. In other words, the 40 year bond bull is over.

gjlynch17
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Re: Bond Strategy

Post by gjlynch17 » Tue Mar 24, 2020 8:02 pm

alex_686 wrote:
Tue Mar 24, 2020 7:02 pm
Have you factored in yet that lower coupons and the growing duration means that bonds will have historically lower returns and higher risk?

Honestly, I am being tempted to go in the other direction. Drop my bond allocation, and increase HY which is offering 8%.
+1 At current yields, I would not touch Treasuries.

Also, as I get closer to retirement (~5 years), I am becoming increasingly enamored with the idea of reducing my equity exposure and substituting fixed income risk assets such as high yield bonds and emerging market bonds to better protect against sequence of returns risk. Yes, high yield bonds and emerging market bonds both got hammered in the last month but not as much as equities so they provide more downside protection than equities. You lose on the upside in bull markets but in strong markets one does not need to worry about sequence of returns risk.

Blue456
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Re: Bond Strategy

Post by Blue456 » Tue Mar 24, 2020 8:08 pm

justsomeguy2018 wrote:
Tue Mar 24, 2020 6:58 pm
I've been thinking about bonds in light of the recent crisis. I used to just do Total Bond, or Muni Bonds in taxable. I then realized there was corporate risk which negates the point of bonds being "safety in a crisis" (as much as that is possible) as well as muni bonds not being super safe either. I wonder if a better strategy is 33% Int. Treasuries, 33% Total Bond, and 33% Inflation Protected Bonds. Maybe even add stable value/money market into the mix possibly.
Am I overthinking this?
I decided to completely get rid of total bond fund:
- 50% equities
- 25% Cash
- 25% TIPS
- Fixed $20,000 per year into I-Bonds

Topic Author
justsomeguy2018
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Re: Bond Strategy

Post by justsomeguy2018 » Tue Mar 24, 2020 8:12 pm

alex_686 wrote:
Tue Mar 24, 2020 7:02 pm
Have you factored in yet that lower coupons and the growing duration means that bonds will have historically lower returns and higher risk?

Honestly, I am being tempted to go in the other direction. Drop my bond allocation, and increase HY which is offering 8%.

And no - I don't think you are. It is a reasonable plan. Just be aware that the economics have shfited.
Good point....I had thought of going to a higher equity allocation given the recent 37% drop and bond yields/interest rates being trash.

Topic Author
justsomeguy2018
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Re: Bond Strategy

Post by justsomeguy2018 » Tue Mar 24, 2020 8:20 pm

vineviz wrote:
Tue Mar 24, 2020 7:27 pm
justsomeguy2018 wrote:
Tue Mar 24, 2020 6:58 pm
I wonder if a better strategy is 33% Int. Treasuries, 33% Total Bond, and 33% Inflation Protected Bonds. Maybe even add stable value/money market into the mix possibly.

Am I overthinking this?
Over-complicating it, I'd say more than over-thinking it.

All asset allocation decisions SHOULD start by thinking through your investment goals, and especially about the risks you face with respect to those goals.

1/3 each in intermediate Treasuries, total bond market, and TIPS looks a lot to me like a random assortment of bond funds without any clear rationale behind them.

What is your overall stock/bond allocation?

If it's 20% bonds or less or you're 10+ years from retirement, long-term nominal US Treasury bonds are almost certainly the only bonds you need.

If the allocation is more than 20% bonds or you're within 10+ years of retirement, you probably have to decide how big a risk unexpectedly high inflation would be for you. If you expect that Social Security and inflation-adjusted pensions/annuities are covering (or you expect it to cover) more than 60-70% of your post-retirement spending needs, then inflation probably isn't a big risk for you and you can stick with nominal Treasuries. If less, you probably should consider some inflation protection for your fixed income, which likely means at least some TIPS plus (maybe) some real assets.

Bottom line: figure out what problem you're trying to solve and THEN pick the tool for the job. If that sounds too complicated, put the first 20% of your bond allocation in long-term Treasuries and the rest in intermediate term TIPS.
This is helpful...yes it was pretty much a random assortment of bond funds - trying to protect against credit risk and inflation risk primarily, while keeping some in Total Bond for diversification purposes.

I am 39 and my overall allocation is 75/25, but I am not counting a large cash position/excess EF in that allocation.

I hear LT bonds as the way to go around here, but with rates so low, seems risky to me - why wouldn't an intermediate treasury fund be better, in case interest rates go up?

I guess as far as investment goals go, my goal is growth with stability. Though I have a long time horizon, I don't want to get wiped out by the unexpected.

Explorer
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Re: Bond Strategy

Post by Explorer » Tue Mar 24, 2020 8:28 pm

I still think aggregate bond funds are the best way to hold bonds.. anything else is a sector bet on bonds.

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vineviz
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Re: Bond Strategy

Post by vineviz » Tue Mar 24, 2020 8:39 pm

Gufomel wrote:
Tue Mar 24, 2020 7:41 pm
With that said, I really struggle to understand how LT treasuries make sense now. The Vanguard LT Treasury fund has a yield of 1.54% and an 18 year duration. Seems like incredibly low reward for pretty significant risk. I know very little about bonds though, so I’m happy to be informed 😁
For starters, I'd argue that 1.5% is a lot better than 0.5%: compounded over, say, 20 years the former makes you 20% richer than the latter.

More importantly (and this is really key), if your investment horizon is long-term then long-term bonds have LESS interest rate risk than short- or intermediate-term bonds. What makes bonds risky is the mismatch between their duration and your investment horizon. Keep the duration reasonably well matched to the weighted average time until you spend the money, and you reduce your interest rate risk.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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vineviz
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Re: Bond Strategy

Post by vineviz » Tue Mar 24, 2020 8:44 pm

justsomeguy2018 wrote:
Tue Mar 24, 2020 8:20 pm

I hear LT bonds as the way to go around here, but with rates so low, seems risky to me - why wouldn't an intermediate treasury fund be better, in case interest rates go up?
If bond yields go up a lot, then intermediate Treasury's will likely outperform long-term Treasuries.

If bond yields go up a little or go down, long-term Treasuries will outperform intermediate-term Treasuries.

What will the yield on 10-year Treasuries be in 2046 when you retire?

You aren't sure? Then the only sensible thing to do is to pick the bond fund that leaves you relatively indifferent to future changes in the yield curve: that's Vanguard Long-Term Treasury Index Fund (VLGSX) or something similar.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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timboktoo
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Re: Bond Strategy

Post by timboktoo » Tue Mar 24, 2020 9:08 pm

Total Bond Market is an excellent fund. Intermediate treasuries are excellent as well. You probably can't go wrong either way, over the long-term.

Total Bond usually outperforms treasuries in equity bull markets. Treasuries sometimes outperform Total Bond in equity bear markets. You can't count on any relationship to always stay the same in the world of investing, though. Every asset has its day/decade.

Figure out what you want bonds for. The stronger you lean toward wanting bonds for preservation of capital and to ensure good behavior on your part during bear markets, the higher the quality of your bonds ought to be. Total Bond Market is investment-grade. It is a high quality fund. However, if you find yourself unable to sleep at night while holding this fund, then Intermediate Treasuries might be more suitable.

I found the bond component to be the toughest part to settle on.

- Tim

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careytilden
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Re: Bond Strategy

Post by careytilden » Tue Mar 24, 2020 9:14 pm

vineviz wrote:
Tue Mar 24, 2020 7:27 pm
What is your overall stock/bond allocation?

If it's 20% bonds or less or you're 10+ years from retirement, long-term nominal US Treasury bonds are almost certainly the only bonds you need.
I've been seeing this advice lately. I'm curious, has this been the general advice for a while and I just never noticed? Or is this a newer idea?

I ask because it seems like great advice and I'm considering making the change from Total Bond to LTT with my 20% bond allocation. But I'm worried about recency bias. Does this seem like a good idea now because LTT had done better in this crisis than Total Bond? 🤔

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Hector
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Re: Bond Strategy

Post by Hector » Wed Mar 25, 2020 12:51 am

Do what helps you sleep better at night. Remember how you are feeling right now if/when you are in a bull market again. It is important to have a plan and stick to it.

The right strategy is the one that works for you.
personally I do not care about making $$ with bond and am in short term Treasurys/CDs/MM/Stable value/cash...

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vineviz
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Re: Bond Strategy

Post by vineviz » Wed Mar 25, 2020 6:56 am

careytilden wrote:
Tue Mar 24, 2020 9:14 pm
vineviz wrote:
Tue Mar 24, 2020 7:27 pm
What is your overall stock/bond allocation?

If it's 20% bonds or less or you're 10+ years from retirement, long-term nominal US Treasury bonds are almost certainly the only bonds you need.
I've been seeing this advice lately. I'm curious, has this been the general advice for a while and I just never noticed? Or is this a newer idea?

I ask because it seems like great advice and I'm considering making the change from Total Bond to LTT with my 20% bond allocation. But I'm worried about recency bias. Does this seem like a good idea now because LTT had done better in this crisis than Total Bond? 🤔
The traditional Boglehead approach has been to use total bond market funds as a "good enough" approach, but long-term Treasuries as a core bond holding has historically been a more typical approach from experts.

The "first 20%" guideline is my own attempt to make a rule of thumb that made it easier for Bogleheads to implement a smarter bond allocation. IMHO, the idea is sound regardless of recent performance thought it does seem that the idea is a lot easier sell now than it was 18 months ago.

My advice is that implementing any change in portfolio allocation should be done in a way that insulates you from recency bias. I wish I could remember which member suggested it, but I like the idea of introducing a "tape delay" or "cooling off period" into your process: any decision you make to change your portfolio that you make today can't be implemented for 90 days. That should create enough emotional distance to ensure you still think the idea is a good one.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

alex_686
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Re: Bond Strategy

Post by alex_686 » Wed Mar 25, 2020 7:03 am

gjlynch17 wrote:
Tue Mar 24, 2020 8:02 pm
alex_686 wrote:
Tue Mar 24, 2020 7:02 pm
Have you factored in yet that lower coupons and the growing duration means that bonds will have historically lower returns and higher risk?

Honestly, I am being tempted to go in the other direction. Drop my bond allocation, and increase HY which is offering 8%.
+1 At current yields, I would not touch Treasuries.

Also, as I get closer to retirement (~5 years), I am becoming increasingly enamored with the idea of reducing my equity exposure and substituting fixed income risk assets such as high yield bonds and emerging market bonds to better protect against sequence of returns risk. Yes, high yield bonds and emerging market bonds both got hammered in the last month but not as much as equities so they provide more downside protection than equities. You lose on the upside in bull markets but in strong markets one does not need to worry about sequence of returns risk.
To expand on this a tad, my thinking is more along the tactical lines with maybe a 5 year horizon. For retirement I would be skeptical about stretching for yield. I would probably decrease my discount rate, which implies more saving and lowering goals. I would probably shift my AA away from bonds in general and more towards a low-vol equity index, which I think is probably a more rational way to stretch for returns.

hudson
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Re: Bond Strategy

Post by hudson » Wed Mar 25, 2020 7:31 am

justsomeguy2018 wrote:
Tue Mar 24, 2020 6:58 pm
I've been thinking about bonds in light of the recent crisis. I used to just do Total Bond, or Muni Bonds in taxable. I then realized there was corporate risk which negates the point of bonds being "safety in a crisis" (as much as that is possible) as well as muni bonds not being super safe either. I wonder if a better strategy is 33% Int. Treasuries, 33% Total Bond, and 33% Inflation Protected Bonds. Maybe even add stable value/money market into the mix possibly.
I think that your plan would work just fine. I'd at least consider munis depending on your tax bracket.

Larry Swedroe would probably say, "Intermediate Treasuries and Inflation Protected Bonds...OK. Total Bonds...no."
He would say munis are OK if you can get intermediate AAA/AA bonds. Intermediate funds/ETFs such as MUB, VTEB, or VWIUX wouldn't work. Baird's BMBIX would be the only fund that he might like. He would say that intermediate term fixed income is the sweet spot. Consider reading his bond book...but you probably already have.

William Bernstein would say...“If, at any point, a bull market pushes your portfolio over the LMP [liability matching portfolio] ‘magic number’ of 20 to 25 times your annual cash-flow needs beyond Social Security and pensions, you’ve won the investing game. Why keep playing? Start bailing. After you’ve put enough TIPS, plain vanilla Treasuries, and CDs into your mental LMP, you’re free to start adding again to your RP [risk portfolio].” Source...Mike Piper's article: https://obliviousinvestor.com/getting-o ... etirement/

Bernstein's book...only 55 pages...fits this discussion...https://www.amazon.com/gp/product/B008C ... ype=ebooks

As a 72 year old retiree, I vote for zero equities with 10% VWIUX and 90% intermediate duration CDs.
But, you aren't me, your situation is probably completely different. Always look at all angles and do the math.
Last edited by hudson on Wed Mar 25, 2020 8:38 am, edited 1 time in total.

alluringreality
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Re: Bond Strategy

Post by alluringreality » Wed Mar 25, 2020 7:36 am

Personally I would prefer to use my tax advantaged space for equities, and I'm not interested in rebalancing from bonds to equities. With these considerations, a mix of EE Bonds and I Bonds seems close enough to the recommendation by David Swensen to buy US treasury bonds and US inflation protected bonds. EE Bonds currently double at 20 years for potentially one of the highest long-term rates available at this time. All near-term bonds offer nearly zero real return, so inflation protection with I Bonds seems fairly cheap. While I generally agree with the market that deflation is probably more likely than inflation at this point, there are also times that I'm wrong or the market opinion changes with time. I'm always going to keep some sort of near-term money to avoid the recent selling of all marketable investments, and I Bonds seem as reasonable a choice for my purposes as CDs and high yield savings. Basically I'm just choosing a barbell strategy with some near-term (I Bonds) and some long-term (EE Bonds) investments.

gjlynch17
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Re: Bond Strategy

Post by gjlynch17 » Wed Mar 25, 2020 8:13 am

alex_686 wrote:
Wed Mar 25, 2020 7:03 am
For retirement I would be skeptical about stretching for yield. I would probably decrease my discount rate, which implies more saving and lowering goals. I would probably shift my AA away from bonds in general and more towards a low-vol equity index, which I think is probably a more rational way to stretch for returns.
I agree on decreasing the discount rate which implies more savings. I also that low volatility funds are intriguing, but they still have not been fully tested. So far the results have been mixed in this bear market. The iShares low volatility U.S. fund (USMV) has lost almost as much as iShares Total Market (ITOT) from high to low (-33% vs. -35%). The Developed International low volatility fund (EFAV) has done slightly better than the EAFA Fund (IEFA) (-28% vs. -35%).

High yield bond funds have lost a lot but much less than equities. iShares U.S. high yield (USHY) lost -21% and iShares Emerging Markets Bond Index lost -22%. A retiree could reasonably have an allocation of risk assets (equities and high yield bonds) and fixed income assets. The latter could primarily consist of cash (high yield savings accounts), CDs, TIPS, investment grade corporate bond funds (including bulletshares from iShares and Invesco) and multi-year guaranteed annuities. The risk component could be a combination of Total Market U.S. and international funds, low volatility funds, U.S. high yield bond funds (VWEAX would be my recommendation) and emerging market bond funds. I agree that is a tactical component to this recommendation that is premised on the historically low treasury yields. However, unlike a person who is 10+ years from retirement where long-term Treasuries may make sense as vinevez to hedge against deflation risk and loss of job income, as a pre-retiree who is 5-6 years from early retirement, I am not inclined to invest in Treasuries at current yields.

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dunkmachine
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Re: Bond Strategy

Post by dunkmachine » Wed Mar 25, 2020 3:10 pm

I've definitely buy into going all in on treasuries/TIPS after seeing the Total Bond Market go down the past couple weeks. It has been a tough pill to swallow to rebalance out of bonds into equities. Both had losses, just the TBM lost less than TSM. I'd rather be able to rebalance out of something that has risen in times like these even though I may take the hit long term on lower yields. My equity portion has enough risk with its US SCV and International Small-cap allocations. I'd prefer a less bumpy ride during market crashes and be totally removed from any corporate bond exposure.

Rajsx
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Re: Bond Strategy

Post by Rajsx » Wed Mar 25, 2020 9:04 pm

I do not understand Bonds too much, probably that is the reason I chose only VBTLX Total Bond & a little of International Bond Index in Tax Deferred & VWIUX in Taxable.

My all Vanguard 5 fund portfolio - VTSAX, Total International Stock Index & VWIUX (in 22% Tax Bracket) in Taxable & above mentioned two funds in Tax Deferred accounts.

Telling you a little more, I am 63, monthly income ends in around a year's time & the plan is to start tapping VBTLX in tax deferred for living expenses along with dividends, no SS till 72(now). My AA is 50/50 Fixed Income

Knowing what we know now from the recent down turn that Bonds are not all that stable as made out to be, the volatility of VWIUX & also VBTLX and VTSAX not exactly running in opposite directions as supposed to either. I am thinking of changing my Bond Fund choices in my portfolio.

Any suggestions are welcome &Thank you in advance .

I will provide any other required details. I did not mean to hijack the thread, but I want to learn about Bonds.
We do not stop laughing because we grow old, we grow old because we stop laughing !!

restingonmylaurels
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Re: Bond Strategy

Post by restingonmylaurels » Thu Mar 26, 2020 6:03 am

alex_686 wrote:
Tue Mar 24, 2020 7:02 pm
Honestly, I am being tempted to go in the other direction. Drop my bond allocation, and increase HY which is offering 8%.
I am curious what you meant by dropping your bond allocation and increasing HY, because HY are of course bonds.

As I recall, a VG study concluded that HY acts 1/3 like equity. In recent market action, it has been more like 2/3 equity but it is hard to separate the equity like features from the widening credit spread.

How would you liken the volatility of HY, as 1/3 equity and 2/3 bond or some other combination?

alex_686
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Re: Bond Strategy

Post by alex_686 » Thu Mar 26, 2020 6:22 am

restingonmylaurels wrote:
Thu Mar 26, 2020 6:03 am
alex_686 wrote:
Tue Mar 24, 2020 7:02 pm
Honestly, I am being tempted to go in the other direction. Drop my bond allocation, and increase HY which is offering 8%.
I am curious what you meant by dropping your bond allocation and increasing HY, because HY are of course bonds.

As I recall, a VG study concluded that HY acts 1/3 like equity. In recent market action, it has been more like 2/3 equity but it is hard to separate the equity like features from the widening credit spread.

How would you liken the volatility of HY, as 1/3 equity and 2/3 bond or some other combination?
I am thinking of cutting my fixed income allocation by 20%. Right now my FI has about 20% in alternative assets. That number might go up to 35%.

I thought I said this was more of a tactical allocation for the next 5 years. I expect equity returns to be around 5%. With that expectation junk bonds start looking good.

I try to keep my eye on the total return and risk of the portfolio, and right now I am trying to reduce risks. I don’t see how return free bonds helps my risk-adjusted returns.

restingonmylaurels
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Re: Bond Strategy

Post by restingonmylaurels » Thu Mar 26, 2020 6:25 am

gjlynch17 wrote:
Tue Mar 24, 2020 8:02 pm
Also, as I get closer to retirement (~5 years), I am becoming increasingly enamored with the idea of reducing my equity exposure and substituting fixed income risk assets such as high yield bonds and emerging market bonds to better protect against sequence of returns risk. Yes, high yield bonds and emerging market bonds both got hammered in the last month but not as much as equities so they provide more downside protection than equities. You lose on the upside in bull markets but in strong markets one does not need to worry about sequence of returns risk.
As someone who finally be eligible for SS this year, I have long held both VG's HY and EM bond funds and would strongly recommend both.

I intend to use these to help fund the gap from 62 to FRA (and possibly to 70), without having to worry about the current volatility in the market.

The advice about low vol funds is certainly worth considering. I am watching those now without coming to any conclusion.

You might also consider using a fund like Wellesley, which is kind of a low vol fund in effect, although not technically.

It throws off lots of dividends and has appreciation upside from its stock (37.25%) and investment grade bond portions.

restingonmylaurels
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Re: Bond Strategy

Post by restingonmylaurels » Thu Mar 26, 2020 6:31 am

alex_686 wrote:
Thu Mar 26, 2020 6:22 am
I am thinking of cutting my fixed income allocation by 20%. Right now my FI has about 20% in alternative assets. That number might go up to 35%.

I thought I said this was more of a tactical allocation for the next 5 years. I expect equity returns to be around 5%. With that expectation junk bonds start looking good.
Yes, HY are looking like the way to go now.

I am just wondering if the increasing prices for oil will keep the shale oil producers solvent and their junk bonds out of default, then what category of junk bond issuers is the next largest group that could default?

It would certainly help to analyze the proper entry point for more HY funds.

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Munir
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Re: Bond Strategy

Post by Munir » Thu Mar 26, 2020 7:44 am

I am 82 and have had a 30% equity and 70% fixed income allocation. Most of the FI has been in intermediate aggregate bond funds but now 40% of the FI allocation is in US Treasuries (Money market and short term bond fund). The intermediate aggregate bond funds were my security pillar that let me sleep well at night. Their current volatility and their decline at the same time as equities was quite an educational experience. I knew that theoretically it could happen but thought it would be rare- until it happens.

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justsomeguy2018
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Re: Bond Strategy

Post by justsomeguy2018 » Thu Mar 26, 2020 7:56 am

I am curious why many are suggesting HY and EM bonds right now. Yes, the yield is good but seems like there is a high risk of default which would crater the value of the bonds when that happens, no?

restingonmylaurels
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Re: Bond Strategy

Post by restingonmylaurels » Thu Mar 26, 2020 8:43 am

justsomeguy2018 wrote:
Thu Mar 26, 2020 7:56 am
I am curious why many are suggesting HY and EM bonds right now. Yes, the yield is good but seems like there is a high risk of default which would crater the value of the bonds when that happens, no?
VGAVX is for emerging market government bonds. I would think risk of total default might be small for a country and there are many, many countries in the index. Largest country is Mexico which is 10% of the fund.

VG's high yield (VWEAX) primarily holds better junk with lower default risk.

IMHO, these types of funds should be used as income enhancers as part of an otherwise diversified portfolio, especially for those in retirement.

The current yields are such that they would seem to be so generous as to outweigh the historical/expected default rates.

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vineviz
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Re: Bond Strategy

Post by vineviz » Thu Mar 26, 2020 10:18 am

restingonmylaurels wrote:
Thu Mar 26, 2020 8:43 am
justsomeguy2018 wrote:
Thu Mar 26, 2020 7:56 am
I am curious why many are suggesting HY and EM bonds right now. Yes, the yield is good but seems like there is a high risk of default which would crater the value of the bonds when that happens, no?
VGAVX is for emerging market government bonds. I would think risk of total default might be small for a country and there are many, many countries in the index. Largest country is Mexico which is 10% of the fund.

VG's high yield (VWEAX) primarily holds better junk with lower default risk.
Be careful with these because the risks are not all, or even mostly, idiosyncratic. It's not as if Brazil is going into default because someone forgot to write a check or raise taxes. Global economic factors like exchange rates, productivity, commodity demand, economic growth, etc. are what drive defaults across MULTIPLE sovereign and corporate bond issuers.

Having multiple countries in a EM debt fund provides limited benefit if all the countries get hit with a strong dollar and weak consumer demand at the same time.

That said, there is a diversification role for EM debt in portfolios (especially local currency debt) which can't be said for US high yield debt.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

atdharris
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Re: Bond Strategy

Post by atdharris » Thu Mar 26, 2020 10:20 am

I've been holding long-term treasuries for about a year, and they have served me well during this market sell-off. However, interest rates are close to rock bottom, and I am not sure how much higher my fund can go - does it make sense to sell it off and buy into a more intermidiate treasury fund now before I re-balance back into more equities? I am not sure I am interested in commercial paper. My target allocations are 90/10 stock to bond.

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vineviz
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Re: Bond Strategy

Post by vineviz » Thu Mar 26, 2020 11:53 am

atdharris wrote:
Thu Mar 26, 2020 10:20 am
I've been holding long-term treasuries for about a year, and they have served me well during this market sell-off. However, interest rates are close to rock bottom, and I am not sure how much higher my fund can go - does it make sense to sell it off and buy into a more intermidiate treasury fund now before I re-balance back into more equities? I am not sure I am interested in commercial paper. My target allocations are 90/10 stock to bond.
The reasons that prompted you to allocate to long-term treasuries "about a year" ago are presumably still true: you are, I imagine, still investing with a long-term financial goal; and long-term treasuries are definitely still the best diversifier for a portfolio that is 90% equity.

So, no, it almost certainly doesn't make sense to rotate to intermediate-term Treasuries now.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

FireHorse
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Re: Bond Strategy

Post by FireHorse » Thu Mar 26, 2020 1:01 pm

I am retired. My allocation is 45/32/23 (equity/bond/CD and money market). Within the bond, besides 6% in vg muni bond fund (vwiux) the rest is in vg Wellesley fund in an ira account. The Wellesley has dropped significantly but I didn't sell. that being said, bond fund starting to get me worried.

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FelixTheCat
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Re: Bond Strategy

Post by FelixTheCat » Thu Mar 26, 2020 1:05 pm

Everyone is dumping yield for safety. When the crisis is over, will you be looking at Total Bond's 1.89% 30 day yield or Intermediate Term Treasury Index .80% yield?

What's more important to you?
Felix is a wonderful, wonderful cat.

MarkBarb
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Re: Bond Strategy

Post by MarkBarb » Thu Mar 26, 2020 1:19 pm

vineviz wrote:
Tue Mar 24, 2020 8:39 pm
Gufomel wrote:
Tue Mar 24, 2020 7:41 pm
With that said, I really struggle to understand how LT treasuries make sense now. The Vanguard LT Treasury fund has a yield of 1.54% and an 18 year duration. Seems like incredibly low reward for pretty significant risk. I know very little about bonds though, so I’m happy to be informed 😁
For starters, I'd argue that 1.5% is a lot better than 0.5%: compounded over, say, 20 years the former makes you 20% richer than the latter.

More importantly (and this is really key), if your investment horizon is long-term then long-term bonds have LESS interest rate risk than short- or intermediate-term bonds. What makes bonds risky is the mismatch between their duration and your investment horizon. Keep the duration reasonably well matched to the weighted average time until you spend the money, and you reduce your interest rate risk.
I thought that long term bonds exposed you to inflation risk. You got paid a premium in interest to cover the additional inflation risk If you have a long time horizon and hold only long term bonds, you may be guaranteed to get your nominal return, but you could lose substantial purchasing power.

atdharris
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Re: Bond Strategy

Post by atdharris » Thu Mar 26, 2020 1:54 pm

vineviz wrote:
Thu Mar 26, 2020 11:53 am
atdharris wrote:
Thu Mar 26, 2020 10:20 am
I've been holding long-term treasuries for about a year, and they have served me well during this market sell-off. However, interest rates are close to rock bottom, and I am not sure how much higher my fund can go - does it make sense to sell it off and buy into a more intermidiate treasury fund now before I re-balance back into more equities? I am not sure I am interested in commercial paper. My target allocations are 90/10 stock to bond.
The reasons that prompted you to allocate to long-term treasuries "about a year" ago are presumably still true: you are, I imagine, still investing with a long-term financial goal; and long-term treasuries are definitely still the best diversifier for a portfolio that is 90% equity.

So, no, it almost certainly doesn't make sense to rotate to intermediate-term Treasuries now.
Thank you. Yes, I did buy TLT to diversify away from my heavy equities allocation. At 31, with a multi-decade time horizon, it made the most sense to me. I suppose my only worry is once rates reach 0%, if that happens, there will really be nowhere to do but up, which would crush TLT. I am sure I am overthinking it, and who knows when we will be in a rising rate environment again.

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vineviz
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Re: Bond Strategy

Post by vineviz » Thu Mar 26, 2020 3:32 pm

atdharris wrote:
Thu Mar 26, 2020 1:54 pm
vineviz wrote:
Thu Mar 26, 2020 11:53 am
atdharris wrote:
Thu Mar 26, 2020 10:20 am
I've been holding long-term treasuries for about a year, and they have served me well during this market sell-off. However, interest rates are close to rock bottom, and I am not sure how much higher my fund can go - does it make sense to sell it off and buy into a more intermidiate treasury fund now before I re-balance back into more equities? I am not sure I am interested in commercial paper. My target allocations are 90/10 stock to bond.
The reasons that prompted you to allocate to long-term treasuries "about a year" ago are presumably still true: you are, I imagine, still investing with a long-term financial goal; and long-term treasuries are definitely still the best diversifier for a portfolio that is 90% equity.

So, no, it almost certainly doesn't make sense to rotate to intermediate-term Treasuries now.
Thank you. Yes, I did buy TLT to diversify away from my heavy equities allocation. At 31, with a multi-decade time horizon, it made the most sense to me. I suppose my only worry is once rates reach 0%, if that happens, there will really be nowhere to do but up, which would crush TLT. I am sure I am overthinking it, and who knows when we will be in a rising rate environment again.
You might be overthinking it, as you say, but you are also probably MIS-thinking it.

There is no lower bound on bond yields, so there is nothing magical that happens when yields hit 0%. And we’re still far from there for 20+ year maturities.

Plus, even if bond yields rise significantly “crushed” is not what happens to TLT’s returns. Mildly underperform intermediate term bonds? Maybe, but it’s far from certain.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

pascalwager
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Re: Bond Strategy

Post by pascalwager » Thu Mar 26, 2020 4:12 pm

justsomeguy2018 wrote:
Thu Mar 26, 2020 7:56 am
I am curious why many are suggesting HY and EM bonds right now. Yes, the yield is good but seems like there is a high risk of default which would crater the value of the bonds when that happens, no?
El-Erian seemed to be warning about these two in his recent M* interview where he advised practicing asset allocation "regret minimization". He also emphasized that default losses are permanent.
Retired, pension, no SS | 55/45 | <1% cash | 20% rebalancing band

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watchnerd
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Re: Bond Strategy

Post by watchnerd » Thu Mar 26, 2020 4:40 pm

Explorer wrote:
Tue Mar 24, 2020 8:28 pm
I still think aggregate bond funds are the best way to hold bonds.. anything else is a sector bet on bonds.
Are Treasuries a sector?

Also, I think there is a major hole in agg bond funds when it comes to inflation-protected securities.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

alex_686
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Re: Bond Strategy

Post by alex_686 » Thu Mar 26, 2020 4:43 pm

watchnerd wrote:
Thu Mar 26, 2020 4:40 pm
Also, I think there is a major hole in agg bond funds when it comes to inflation-protected securities.
No. The TIPS market is highly distorted by insurance regulations and relatively illiquid. It is not a good fit for the agg bond index.

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watchnerd
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Re: Bond Strategy

Post by watchnerd » Thu Mar 26, 2020 5:09 pm

alex_686 wrote:
Thu Mar 26, 2020 4:43 pm
watchnerd wrote:
Thu Mar 26, 2020 4:40 pm
Also, I think there is a major hole in agg bond funds when it comes to inflation-protected securities.
No. The TIPS market is highly distorted by insurance regulations and relatively illiquid. It is not a good fit for the agg bond index.
Which is a hole in using agg bonds as one-stop-shopping when thinking of bonds, IMHO.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

gjlynch17
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Re: Bond Strategy

Post by gjlynch17 » Thu Mar 26, 2020 7:46 pm

alex_686 wrote:
Thu Mar 26, 2020 4:43 pm
The TIPS market is highly distorted by insurance regulations.
Alex, could you please elaborate on this comment? It is the first time I heard it and I am intrigued to know more, especially from someone who has been in the fund industry. Thank you.

alex_686
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Re: Bond Strategy

Post by alex_686 » Thu Mar 26, 2020 8:05 pm

gjlynch17 wrote:
Thu Mar 26, 2020 7:46 pm
alex_686 wrote:
Thu Mar 26, 2020 4:43 pm
The TIPS market is highly distorted by insurance regulations.
Alex, could you please elaborate on this comment? It is the first time I heard it and I am intrigued to know more, especially from someone who has been in the fund industry. Thank you.
Many retirement plans (pensions and certain annuities) offer guaranteed inflation adjusted payouts. The retirement plans build models and submit them to the state insurance regulator. Any guesses what the best asset is in the models? The one and only guaranteed inflation adjusted asset - TIPS. You have to hold more nominal treasures then TIPS, and even more corporate debt. Sometimes the Treasury does not auction enough TIPS to meet the retirement plans demands. And then things go wonky. It is a case where regulation can override or distort rational investing.

Note, they don't have this problem in the UK. The mandates to hold inflation adjusted bonds is even higher. But IIRC the government prints more inflation adjusted gilts than nominal gilts. So they don't have the supply issue that the US does.

There are other distortions out there. Retirement plans which have long dated obligations are encouraged to due asset-liability matching. This might be why the 10 year government bond yield is so low. BBB investment grade bonds and BB junk bonds have historically had the same default rate. Yet, most funds can only hold BBB, not BB. So there is a huge price gap between the 2. I could go on.
Last edited by alex_686 on Thu Mar 26, 2020 8:17 pm, edited 1 time in total.

gjlynch17
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Re: Bond Strategy

Post by gjlynch17 » Thu Mar 26, 2020 8:14 pm

alex_686 wrote:
Thu Mar 26, 2020 8:05 pm

Many retirement plans (pensions and certain annuities) offer guaranteed inflation adjusted payouts. The retirement plans build models and submit them to the state insurance regulator. Any guesses what the best asset is in the models? The one and only guaranteed inflation adjusted asset - TIPS. You have to hold more nominal treasures then TIPS, and even more corporate debt. Sometimes the Treasury does not auction enough TIPS to meet the retirement plans demands. And then things go wonky. It is a case where regulation can override or distort rational investing.
Thank you Alex. I have guessed there was a supply-demand issue with TIPS. Even with that, the past week has been crazy. Only one week ago, 30-year TIPS were yielding 0.78%. Today, they are yielding a negative -.05%. A bond-boggling yield drop of 83 bp in five trading days. Some investors anticipate that all of the liquidity the Fed is injecting into the system and the spending by Congress is going to result in an uptick inflation.

invest4
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Re: Bond Strategy

Post by invest4 » Fri Mar 27, 2020 4:00 am

I am relatively new to bonds with an allocation in my portfolio only in the last year or so. While I was also surprised at some of the behavior of BND (for example) during the most recent volatility, it is difficult for me to discern the various causes and what (if any) changes may need to be considered as a result.

In particular:

LT Treasuries: strong results in recent times, but one certainly notices the flip side when it goes the other way. Had nearly taken a stake several times during the past year, but the swings coupled with interest rates and potential for exaggerated effects with any future inflation kept me from doing so.

BND: in addition to the oft cited underlying corporates, understood that liquidity also created an issue (addressed by the Fed)? Do I understand correctly that BND has been a prominent fixture in many portfolio for decades? After most recent events, now no longer fit for purpose? Of course, this may indeed be the case, only struggling a bit to understand what has fundamentally changed (including needs or expectations from its owners) throughout the entire market cycle (up and down)...long term.

Appreciate the overall discussion.

Call_Me_Op
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Re: Bond Strategy

Post by Call_Me_Op » Fri Mar 27, 2020 6:32 am

justsomeguy2018 wrote:
Tue Mar 24, 2020 6:58 pm
I've been thinking about bonds in light of the recent crisis. I used to just do Total Bond, or Muni Bonds in taxable. I then realized there was corporate risk which negates the point of bonds being "safety in a crisis" (as much as that is possible) as well as muni bonds not being super safe either. I wonder if a better strategy is 33% Int. Treasuries, 33% Total Bond, and 33% Inflation Protected Bonds. Maybe even add stable value/money market into the mix possibly.

Am I overthinking this?
If you are looking for safety, why not just hold the int treasury and TIPS? Adding Stable Value is OK, but keep in mind that it is not guaranteed by the government, but instead subject to the solvency of an insurance company.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

Indexer99
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Re: Bond Strategy

Post by Indexer99 » Fri Mar 27, 2020 8:03 am

rerod wrote:
Tue Mar 24, 2020 7:57 pm
Bonds do well when interest rates are dropping. With rates at zero, bond values will drop as the fed starts raising rates. In other words, the 40 year bond bull is over.
So, this is interesting. What does this really mean for bonds? Does this mean one might be better in CD's or a short term bond fund? How does a diversified bond fund behave in an environment of rising interest rates? Did we have a situation like after the 2008/9 crises, when the Fed very slowly raised rates?

I am thinking about the situation of putting a lot of cash all at once into Vanguard's Total Bond VBTLX fund at a time such as this. Or really anytime....

Is this similar to the situation in which the stock market is very high, so one should not invest everything?

I also noticed, even before the crisis, that VBTLX had some fluctuations. Should one time a large purchase or make smaller purchases over a certain time frame?

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justsomeguy2018
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Re: Bond Strategy

Post by justsomeguy2018 » Fri Mar 27, 2020 9:04 am

Call_Me_Op wrote:
Fri Mar 27, 2020 6:32 am
justsomeguy2018 wrote:
Tue Mar 24, 2020 6:58 pm
I've been thinking about bonds in light of the recent crisis. I used to just do Total Bond, or Muni Bonds in taxable. I then realized there was corporate risk which negates the point of bonds being "safety in a crisis" (as much as that is possible) as well as muni bonds not being super safe either. I wonder if a better strategy is 33% Int. Treasuries, 33% Total Bond, and 33% Inflation Protected Bonds. Maybe even add stable value/money market into the mix possibly.

Am I overthinking this?
If you are looking for safety, why not just hold the int treasury and TIPS? Adding Stable Value is OK, but keep in mind that it is not guaranteed by the government, but instead subject to the solvency of an insurance company.
Didn't know that about stable value....

the portion allotted to total bond is to provide a little bit of extra diversification and yield, without being totally exposed at 100% allocation.

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