Simplicity on Bond Funds

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Simplicity on Bond Funds

Post by abuss368 »

Bogleheads -

As I move further along in our investment journey, I am inclined to believe that portfolio management, in terms of number of holdings, is much easier when a one bond fund strategy is utilized. There may be cases where an investor has a preference for more than one bond fund but that is on a case by case basis.

In my opinion one simple short or intermediate term investment grade bond fund that is low cost and diversified will provide both safety and income to a portfolio. Anything additional results in more complexity. That one bond fund may include Total Bond, Treasuries, TIPS, as examples.

In the age of very low interest rates from bonds, holding multiple bond funds will not make much, if any difference, but will result in more complexity.

One bond fund makes rebalancing much easier. When an investor only has to focus on the overall asset allocation and stock sub-allocations, rebalancing in and out of one bond fund it is a much easier process.

Over the years, Taylor had provided a great analogy: Bonds let us sleep well. Stocks let us eat well.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Simplicity on Bond Funds

Post by LiveSimple »

Agree, Using Intermediate term treasuries...taking the risks and returns from the high risk equity assets.
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Re: Simplicity on Bond Funds

Post by abuss368 »

LiveSimple wrote: Thu Oct 01, 2020 12:17 pm Agree, Using Intermediate term treasuries...taking the risks and returns from the high risk equity assets.
Exactly. In my opinion Vanguard has a very weak case (all but noted in their research) for including international bonds. Previously the Target and LifeStratgey funds included simply Total Bond (TIPS were added near retirement).
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Re: Simplicity on Bond Funds

Post by Thesaints »

Which is riskier:

$100 in "intermediate term bonds"
or
$50 in "very short term bonds" + $50 in "very long term bonds"
?
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Re: Simplicity on Bond Funds

Post by LiveSimple »

Thesaints wrote: Thu Oct 01, 2020 12:41 pm Which is riskier:

$100 in "intermediate term bonds"
or
$50 in "very short term bonds" + $50 in "very long term bonds"
?
Risk It depends.
If the bonds duration do not match the needs duration.

Oh, I see what you are asking ...
the average of the second will be the first, hence go with the first, as the ask was which one bond fund.
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Re: Simplicity on Bond Funds

Post by Thesaints »

LiveSimple wrote: Thu Oct 01, 2020 12:46 pm Oh, I see the average of the second will be the first, hence go with the first, as the ask was which one bond fund.
very short term bonds are virtually riskless (or at least the less risky investment of all). Not much uncertainty about that.
very long term bonds are the riskiest of all bonds. Not much uncertainty about that either. Surprises are mostly in the direction of risk being actually lower.

intermediate bonds instead are "medium risk" and there much more uncertainty of what that means. Surprises are certainly possible in both direction.

My philosophy is that "total bond funds" are not the most suitable for just about anybody. Very different from total stock funds, which instead are the most suitable for just about everybody.
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Re: Simplicity on Bond Funds

Post by LiveSimple »

Sure, I am using intermediate treasuries to secure what the equities gave me, in a bucket strategy or “ Why play after winning”, so do not mind a few percentage drop here and there.

Still there are equities to give the returns as needed.

Again, save more than we do need and these risks will be meaningless.

I liked the GOVT, ishares total treasuries, but someone commented the average risk and return will or may match intermediate. I was convinced with that.

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Re: Simplicity on Bond Funds

Post by BJJ_GUY »

LiveSimple wrote: Thu Oct 01, 2020 12:17 pm Agree, Using Intermediate term treasuries...taking the risks and returns from the high risk equity assets.
Totally agree.

I think a lot of folks (maybe not in here though), don't fully understand the additional risks they are taking with aggregate bond funds, and especially with actively managed bond funds. Treasuries are deflation hedging and obviously a (virtual) pure play on duration risk. Aggregate bond indices add credit spread risk, short prepayment risk or interest rate volatility risk (from mortgages)... and in active mutual funds you get em debt and currency risk etc.

Because Treasuries are pure and reliable in composition, it actually allows an investor to increase the equity allocation because you require lower % FI with treasuries as you don't have to compensate for the other risks introduced by core bond fund strategies.
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Re: Simplicity on Bond Funds

Post by abuss368 »

Thesaints wrote: Thu Oct 01, 2020 12:50 pm
My philosophy is that "total bond funds" are not the most suitable for just about anybody. Very different from total stock funds, which instead are the most suitable for just about everybody.
That's reasonable and specific to each individual investor. Total Bond has worked very well for us over the long term.
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Re: Simplicity on Bond Funds

Post by Blue456 »

BJJ_GUY wrote: Thu Oct 01, 2020 2:12 pm
LiveSimple wrote: Thu Oct 01, 2020 12:17 pm Agree, Using Intermediate term treasuries...taking the risks and returns from the high risk equity assets.
Totally agree.

I think a lot of folks (maybe not in here though), don't fully understand the additional risks they are taking with aggregate bond funds, and especially with actively managed bond funds. Treasuries are deflation hedging and obviously a (virtual) pure play on duration risk. Aggregate bond indices add credit spread risk, short prepayment risk or interest rate volatility risk (from mortgages)... and in active mutual funds you get em debt and currency risk etc.

Because Treasuries are pure and reliable in composition, it actually allows an investor to increase the equity allocation because you require lower % FI with treasuries as you don't have to compensate for the other risks introduced by core bond fund strategies.
Wouldn't an 10 year duration investment grade corporate bond be better deflation hedge than a 2 year treasury?
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Re: Simplicity on Bond Funds

Post by darrvao777 »

the vast majority of my investing is done in a taxable account and i foresee (and strongly hope) i will remain in the top income bracket for the rest of my career

is solely using vanguards intermediate term muni bond fund considered reasonable?
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Re: Simplicity on Bond Funds

Post by dbr »

darrvao777 wrote: Thu Oct 01, 2020 5:04 pm the vast majority of my investing is done in a taxable account and i foresee (and strongly hope) i will remain in the top income bracket for the rest of my career

is solely using vanguards intermediate term muni bond fund considered reasonable?
You would probably want to consider your state tax situation as well. You might or might not just stick to a national fund that would be state taxable. In some states the state tax could be as much as around 10%
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Re: Simplicity on Bond Funds

Post by vineviz »

Thesaints wrote: Thu Oct 01, 2020 12:50 pm very short term bonds are virtually riskless (or at least the less risky investment of all). Not much uncertainty about that.
very long term bonds are the riskiest of all bonds. Not much uncertainty about that either. Surprises are mostly in the direction of risk being actually lower.

intermediate bonds instead are "medium risk" and there much more uncertainty of what that means. Surprises are certainly possible in both direction.
Actually, what’s written above is very much uncertain.

Short term bonds are only “riskless” for short term investors, and only then if they also present no credit or inflation risk.

Long term investors will find that long term bonds have less interest rate risk than short term bonds, and may have more or less of other types of risks.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Simplicity on Bond Funds

Post by abuss368 »

darrvao777 wrote: Thu Oct 01, 2020 5:04 pm the vast majority of my investing is done in a taxable account and i foresee (and strongly hope) i will remain in the top income bracket for the rest of my career

is solely using vanguards intermediate term muni bond fund considered reasonable?
Very reasonable. I have invested in the fund for a very long time. It has a little volatility here and there but does the job. I sleep well.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Simplicity on Bond Funds

Post by abuss368 »

vineviz wrote: Thu Oct 01, 2020 5:40 pm
Thesaints wrote: Thu Oct 01, 2020 12:50 pm very short term bonds are virtually riskless (or at least the less risky investment of all). Not much uncertainty about that.
very long term bonds are the riskiest of all bonds. Not much uncertainty about that either. Surprises are mostly in the direction of risk being actually lower.

intermediate bonds instead are "medium risk" and there much more uncertainty of what that means. Surprises are certainly possible in both direction.
Actually, what’s written above is very much uncertain.

Short term bonds are only “riskless” for short term investors, and only then if they also present no credit or inflation risk.

Long term investors will find that long term bonds have less interest rate risk than short term bonds, and may have more or less of other types of risks.
How sure are you short term bonds are only riskless for short term investors?
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Re: Simplicity on Bond Funds

Post by Dennisl »

Agree with above. There are pretty good reasons for long term investors to hold long term bonds, such as treasuries. Will give reasonable returns in relation to current rates. There is a risk of rising interested rates, but that usually means the economy is recovering, which means you should be able to make up for it on the equity side of your investment.
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Re: Simplicity on Bond Funds

Post by BJJ_GUY »

vineviz wrote: Thu Oct 01, 2020 5:40 pm
Thesaints wrote: Thu Oct 01, 2020 12:50 pm very short term bonds are virtually riskless (or at least the less risky investment of all). Not much uncertainty about that.
very long term bonds are the riskiest of all bonds. Not much uncertainty about that either. Surprises are mostly in the direction of risk being actually lower.

intermediate bonds instead are "medium risk" and there much more uncertainty of what that means. Surprises are certainly possible in both direction.
Actually, what’s written above is very much uncertain.

Short term bonds are only “riskless” for short term investors, and only then if they also present no credit or inflation risk.

Long term investors will find that long term bonds have less interest rate risk than short term bonds, and may have more or less of other types of risks.
I'm not entirely sure what point you are trying to make here. I'm guessing it's a confusion in terminology relative to the point you are trying to make.

Long term bonds have more duration risk, and it's pretty straight forward.

If you are making the case based on opportunity cost, and the idea that a lower returning asset introduces risks such as a lower expected return, then I get what you're saying -- but only if you are back-testing to support the point. Interest rates have been on a 30 year bull rally, so we should be care about assuming the same level of contribution to total returns coming from fixed income when we look into the future. (There's a good chance this was not the point you were making, so this was more of a general though for this thread.)

If you own a 30yr bond at current rates there is massive downside asymmetry to the asset. The best you can make is the stated yield, but if interest rates pick up even a few points your value will be absolutely destroyed.
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Re: Simplicity on Bond Funds

Post by Taylor Larimore »

abuss368 wrote: Thu Oct 01, 2020 12:03 pm Bogleheads -

As I move further along in our investment journey, I am inclined to believe that portfolio management, in terms of number of holdings, is much easier when a one bond fund strategy is utilized. There may be cases where an investor has a preference for more than one bond fund but that is on a case by case basis.

In my opinion one simple short or intermediate term investment grade bond fund that is low cost and diversified will provide both safety and income to a portfolio. Anything additional results in more complexity. That one bond fund may include Total Bond, Treasuries, TIPS, as examples.

In the age of very low interest rates from bonds, holding multiple bond funds will not make much, if any difference, but will result in more complexity.

One bond fund makes rebalancing much easier. When an investor only has to focus on the overall asset allocation and stock sub-allocations, rebalancing in and out of one bond fund it is a much easier process.

Over the years, Taylor had provided a great analogy: Bonds let us sleep well. Stocks let us eat well.
abuss 368:

I am pleased that you like my "one bond strategy." Mr. Bogle also liked a "one bond strategy." He wrote:

"Most American families will be well served by "holding their bonds in an all-U.S. bond-market index portfolio."

Vanguard Total Bond Market Index Fund/ETF is like owning nearly all good quality bonds in the United States. It currently contains 9,881 bonds of many types and maturities. In my opinion it is unnecessary to complicate a portfolio with additional bond funds.

Before buying more bond funds, investors should ask themselves: Why is Vanguard Total Bond Market Index Fund (VBTLX) the largest bond fund on the planet.

Strive for Simplicity -- not Complexity. Please read my "Simplicity" link below.

Best Wishes.
Taylor
Jack Bogle's Words of Wisdom: We ignore the real diamonds of simplicity, seeking instead the illusory rhinestones of complexity."
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Simplicity on Bond Funds

Post by vineviz »

abuss368 wrote: Thu Oct 01, 2020 6:05 pm
vineviz wrote: Thu Oct 01, 2020 5:40 pm
Thesaints wrote: Thu Oct 01, 2020 12:50 pm very short term bonds are virtually riskless (or at least the less risky investment of all). Not much uncertainty about that.
very long term bonds are the riskiest of all bonds. Not much uncertainty about that either. Surprises are mostly in the direction of risk being actually lower.

intermediate bonds instead are "medium risk" and there much more uncertainty of what that means. Surprises are certainly possible in both direction.
Actually, what’s written above is very much uncertain.

Short term bonds are only “riskless” for short term investors, and only then if they also present no credit or inflation risk.

Long term investors will find that long term bonds have less interest rate risk than short term bonds, and may have more or less of other types of risks.
How sure are you short term bonds are only riskless for short term investors?
100%
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Re: Simplicity on Bond Funds

Post by ChrisBenn »

It still seems to me like if simplicity is a goal just get an appropriate TDF or fixed allocation balanced fund.

Going from two bond funds and an equity fund to one bond fund and an equity fund is not really a material difference in effort savings. I mean what, it's a rebalance once a year?

If it's a cognitive issue (constantly thinking about fund choices, aa, etc) the going from 3 to two doesn't seem like that big of a deal as well.

I guess it just seems weird to me to advocate for simplicity, but then stop halfway.

Nothing wrong with your choice, I think it's reasonable. I just don't find the simplicity value proposition and final outcome completely logically consistent.
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Re: Simplicity on Bond Funds

Post by absolute zero »

ChrisBenn wrote: Thu Oct 01, 2020 7:41 pm It still seems to me like if simplicity is a goal just get an appropriate TDF or fixed allocation balanced fund.

Going from two bond funds and an equity fund to one bond fund and an equity fund is not really a material difference in effort savings. I mean what, it's a rebalance once a year?

If it's a cognitive issue (constantly thinking about fund choices, aa, etc) the going from 3 to two doesn't seem like that big of a deal as well.

I guess it just seems weird to me to advocate for simplicity, but then stop halfway.

Nothing wrong with your choice, I think it's reasonable. I just don't find the simplicity value proposition and final outcome completely logically consistent.
I agree, this obsession with simplicity is strange to me. As if 3 funds are just WAY too much, but a 2 fund portfolio is “just right.” The OP seems like a perfect candidate for a target date fund.
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Re: Simplicity on Bond Funds

Post by abuss368 »

absolute zero wrote: Thu Oct 01, 2020 7:50 pm
ChrisBenn wrote: Thu Oct 01, 2020 7:41 pm It still seems to me like if simplicity is a goal just get an appropriate TDF or fixed allocation balanced fund.

Going from two bond funds and an equity fund to one bond fund and an equity fund is not really a material difference in effort savings. I mean what, it's a rebalance once a year?

If it's a cognitive issue (constantly thinking about fund choices, aa, etc) the going from 3 to two doesn't seem like that big of a deal as well.

I guess it just seems weird to me to advocate for simplicity, but then stop halfway.

Nothing wrong with your choice, I think it's reasonable. I just don't find the simplicity value proposition and final outcome completely logically consistent.
I agree, this obsession with simplicity is strange to me. As if 3 funds are just WAY too much, but a 2 fund portfolio is “just right.” The OP seems like a perfect candidate for a target date fund.
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Re: Simplicity on Bond Funds

Post by 000 »

BJJ_GUY wrote: Thu Oct 01, 2020 7:08 pm I'm not entirely sure what point you are trying to make here. I'm guessing it's a confusion in terminology relative to the point you are trying to make.

Long term bonds have more duration risk, and it's pretty straight forward.

If you are making the case based on opportunity cost, and the idea that a lower returning asset introduces risks such as a lower expected return, then I get what you're saying -- but only if you are back-testing to support the point. Interest rates have been on a 30 year bull rally, so we should be care about assuming the same level of contribution to total returns coming from fixed income when we look into the future. (There's a good chance this was not the point you were making, so this was more of a general though for this thread.)

If you own a 30yr bond at current rates there is massive downside asymmetry to the asset. The best you can make is the stated yield, but if interest rates pick up even a few points your value will be absolutely destroyed.
You are missing reinvestment risk.

If I don't need the money for 30 years and I'm not concerned about inflation (or use TIPS) then there is more risk holding a bond of shorter duration because yields may drop between now and when the shorter term bond matures. i.e. a long term bond locks in the interest rate, a short term bond does not. Now, if interest rates increase, it might have been better to stay short term, but that is a market timing decision (to which I'm not opposed) and things certainly could have gone the other way.

The most sensible bond for a need X years away is one maturing in X years unless you believe in market timing interest rates.
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Re: Simplicity on Bond Funds

Post by 000 »

abuss368 wrote: Thu Oct 01, 2020 12:03 pm In my opinion one simple short or intermediate term investment grade bond fund that is low cost and diversified will provide both safety and income to a portfolio. Anything additional results in more complexity. That one bond fund may include Total Bond, Treasuries, TIPS, as examples.
abuss368,

Do you think a case could be made for a separate cash holding? Or using US Savings Bonds at Treasury Direct?

What about using separate funds for Treasuries and Corporates? Some of the Vanguard active corporate bond funds are low cost (admiral shares) and seem to target higher quality issues than a bond index.
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Re: Simplicity on Bond Funds

Post by abuss368 »

000 wrote: Thu Oct 01, 2020 8:13 pm
abuss368 wrote: Thu Oct 01, 2020 12:03 pm In my opinion one simple short or intermediate term investment grade bond fund that is low cost and diversified will provide both safety and income to a portfolio. Anything additional results in more complexity. That one bond fund may include Total Bond, Treasuries, TIPS, as examples.
abuss368,

Do you think a case could be made for a separate cash holding? Or using US Savings Bonds at Treasury Direct?

What about using separate funds for Treasuries and Corporates? Some of the Vanguard active corporate bond funds are low cost (admiral shares) and seem to target higher quality issues than a bond index.
I do have a separate account with just a money market fund there. I build cash over time. Slow and steady. Provides insurance when needed and let’s me sleep well at night.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Simplicity on Bond Funds

Post by BJJ_GUY »

000 wrote: Thu Oct 01, 2020 8:02 pm
BJJ_GUY wrote: Thu Oct 01, 2020 7:08 pm I'm not entirely sure what point you are trying to make here. I'm guessing it's a confusion in terminology relative to the point you are trying to make.

Long term bonds have more duration risk, and it's pretty straight forward.

If you are making the case based on opportunity cost, and the idea that a lower returning asset introduces risks such as a lower expected return, then I get what you're saying -- but only if you are back-testing to support the point. Interest rates have been on a 30 year bull rally, so we should be care about assuming the same level of contribution to total returns coming from fixed income when we look into the future. (There's a good chance this was not the point you were making, so this was more of a general though for this thread.)

If you own a 30yr bond at current rates there is massive downside asymmetry to the asset. The best you can make is the stated yield, but if interest rates pick up even a few points your value will be absolutely destroyed.
You are missing reinvestment risk.

If I don't need the money for 30 years and I'm not concerned about inflation (or use TIPS) then there is more risk holding a bond of shorter duration because yields may drop between now and when the shorter term bond matures. i.e. a long term bond locks in the interest rate, a short term bond does not. Now, if interest rates increase, it might have been better to stay short term, but that is a market timing decision (to which I'm not opposed) and things certainly could have gone the other way.

The most sensible bond for a need X years away is one maturing in X years unless you believe in market timing interest rates.
I don't see this as a timing strategy in the general 'tactical trader' way where the decision is driven by some belief that I can forecast where the market is going better than the average investor.

It's a simple comparison of upside/downside between the two. Reinvestment risk in short term t-bills today is de minimus. On the other hand, interest rate risk for long term bond holders can be absolutely crushing in a rising environment. If interest rates move to zero short term bonds will be relatively unscathed. If rates move up to 4-5% on long bonds they will plummet.

I understand the idea that you will receive the coupons and be able benefit from reinvesting at a higher rate. But when the asymmetry becomes more normalized (like 4-5% versus less than 2%) the short term bond owners can easily sell their assets and buy long bonds, and they can do a much bigger amount at that higher prevailing rate (not waiting to invest one coupon payment at a time). Not saying that's what I'd do, just saying there is still more freedom when holding safer assets when long bonds represent way more downside than upside.

Finally, the idea of holding those long bonds to maturity does make it nighty challenging to rebalance assets (for whatever reason) without locking in those severe losses.

Either way, not saying you're wrong, just explaining why I think interest rate risk from low yields is exponentially more of a concern than reinvestment risk. I believe the arithmetic is pretty supportive, but I also totally get the feeling that it looks like market timing.
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Re: Simplicity on Bond Funds

Post by BJJ_GUY »

000 wrote: Thu Oct 01, 2020 8:13 pm What about using separate funds for Treasuries and Corporates? Some of the Vanguard active corporate bond funds are low cost (admiral shares) and seem to target higher quality issues than a bond index.
What would be the reason for owning treasuries In one fund and corporates in another? If you are going to own them, why not just own the total bond fund? Are you trying to eliminate the mortgage exposure or something?
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Re: Simplicity on Bond Funds

Post by 000 »

BJJ_GUY wrote: Thu Oct 01, 2020 8:57 pm
000 wrote: Thu Oct 01, 2020 8:13 pm What about using separate funds for Treasuries and Corporates? Some of the Vanguard active corporate bond funds are low cost (admiral shares) and seem to target higher quality issues than a bond index.
What would be the reason for owning treasuries In one fund and corporates in another? If you are going to own them, why not just own the total bond fund? Are you trying to eliminate the mortgage exposure or something?
Indexing the corporate bond market may not be such a good idea. If you don't believe in the credit ratings, there is no reason to index corporate bonds at all and active management is needed. If you do believe in the credit ratings, the Vanguard active funds usually tilt to higher quality.

Additionally, a non-ETF bond index fund has to grapple with difficult liquidation issues during liquidity crises, which are lessened by an active fund or by the ETF format.
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Re: Simplicity on Bond Funds

Post by Ferdinand2014 »

My fixed income is an emergency fund and source for any larger expenses I am unable to cash flow with my monthly budget during my accumulation years. I view my needs as a continuous rolling series of repeating 1-3 years. I do not rebalance or hold a percent allocation to my equities and as such use my fixed income as liability matching and not as a reducer of volatility. I currently hold about 3 years of expenses. As a result, my fixed income during accumulation is 100% treasury bills. Near retirement I plan to add TIPS and increase my total fixed income to about 5-10 years of expenses depending on how much longer my DW works after I retire. One type of fixed income is all I need in my working years.
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Re: Simplicity on Bond Funds

Post by vineviz »

BJJ_GUY wrote: Thu Oct 01, 2020 8:55 pm I don't see this as a timing strategy in the general 'tactical trader' way where the decision is driven by some belief that I can forecast where the market is going better than the average investor.

It's a simple comparison of upside/downside between the two. Reinvestment risk in short term t-bills today is de minimus. On the other hand, interest rate risk for long term bond holders can be absolutely crushing in a rising environment. If interest rates move to zero short term bonds will be relatively unscathed. If rates move up to 4-5% on long bonds they will plummet.
Saying that you believe there is more upside in short term bonds than in long term bonds (despite the former having lower yields than the latter) is clearly a form of market timing. It's the expression of a view that somehow the market prices of the two assets are "wrong".

It might feel like a smart gamble, but it's definitely a gamble.
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Re: Simplicity on Bond Funds

Post by Dude2 »

If you constrain yourself to a single bond fund, you aren't likely to take advantage of what individual investors can, i.e. direct CDs, a stable value fund, I-bonds. From this perspective, we are not all created equal in terms of the investment landscape, and an individual investor should get what's coming to them.
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Re: Simplicity on Bond Funds

Post by aristotelian »

abuss368 wrote: Thu Oct 01, 2020 6:03 pm
darrvao777 wrote: Thu Oct 01, 2020 5:04 pm the vast majority of my investing is done in a taxable account and i foresee (and strongly hope) i will remain in the top income bracket for the rest of my career

is solely using vanguards intermediate term muni bond fund considered reasonable?
Very reasonable. I have invested in the fund for a very long time. It has a little volatility here and there but does the job. I sleep well.
VWLUX went down -9% in 2008 (with total return after yield -4%). Not exactly what I want from my bond fund in a crisis. Intermediate Treasuries were up 13%. Vanguard Total Bond had 4.86% yield with .2% capital gain.
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Re: Simplicity on Bond Funds

Post by Dude2 »

^^^ not to mention this year's craziness. Had the government not intervened, who knows how badly it would have done. I admit I had to have a stern talking to with myself to say, "At your tax bracket, you've got no business being in Munis. Just because it hasn't worked against you in the past doesn't mean it isn't without its risks."
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Re: Simplicity on Bond Funds

Post by Uncorrelated »

I have been advocating to "just buy total bond market" for some time now. There are some theoretical advantages to different bond choices, but the practical implications have been unclear.

Spend your efforts on the things that matter: stock/bond allocation, lifecycle investing, annuities, factor investing. All of these subject have a much larger impact on your overall asset allocation. If you have perfected these four subjects, then optimizing the bond portion of your portfolio might be the next lowest hanging fruit.
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Re: Simplicity on Bond Funds

Post by Broken Man 1999 »

Short-term Treasury Index MF and Intermediate-term Treasury Index ETF works for us in our TIRA accounts. The short-term treasury funds are close enough to cash if you squint hard enough. We have enough in short-term treasury fund to weather any real fallout of our intermediate term treasury holdings should interest rates start moving up. Certainly the short-term treasuries will also be affected, but if push came to shove we could wait them out as well by cashing in our I-bonds for a few years.

Perhaps lost on some bond holders, the treasury bond funds have had some very nice capital gains this year, though certainly have abysmal yields.

Because I am investing for legacy, I want the vast majority of our bond holdings to be treasuries, and our I-bond holdings. Safety for us, legacy for others.

One fear I have with the Fed intervention(s) is the moral hazard. I can't help to believe the more risky assets are back-stopped, the more risky assets will be attractive to some. I have no intention to change my investments. Hopefully I am wrong.

Probably for those who are not as conservative as I am, Total Bond would be just fine. Good for thee, but not for me! :D

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Re: Simplicity on Bond Funds

Post by abuss368 »

aristotelian wrote: Fri Oct 02, 2020 7:44 am
abuss368 wrote: Thu Oct 01, 2020 6:03 pm
darrvao777 wrote: Thu Oct 01, 2020 5:04 pm the vast majority of my investing is done in a taxable account and i foresee (and strongly hope) i will remain in the top income bracket for the rest of my career

is solely using vanguards intermediate term muni bond fund considered reasonable?
Very reasonable. I have invested in the fund for a very long time. It has a little volatility here and there but does the job. I sleep well.
VWLUX went down -9% in 2008 (with total return after yield -4%). Not exactly what I want from my bond fund in a crisis. Intermediate Treasuries were up 13%. Vanguard Total Bond had 4.86% yield with .2% capital gain.
Not a surprise at all. Treasuries always perform best in a market pullback or crisis. Total Bond has a large allocation.

In 2008, Vanguard's Muni Bonds declining 4% was not even on our radar when looking at the trauma in stocks!
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Re: Simplicity on Bond Funds

Post by lostdog »

abuss368 wrote: Thu Oct 01, 2020 7:55 pm
absolute zero wrote: Thu Oct 01, 2020 7:50 pm
ChrisBenn wrote: Thu Oct 01, 2020 7:41 pm It still seems to me like if simplicity is a goal just get an appropriate TDF or fixed allocation balanced fund.

Going from two bond funds and an equity fund to one bond fund and an equity fund is not really a material difference in effort savings. I mean what, it's a rebalance once a year?

If it's a cognitive issue (constantly thinking about fund choices, aa, etc) the going from 3 to two doesn't seem like that big of a deal as well.

I guess it just seems weird to me to advocate for simplicity, but then stop halfway.

Nothing wrong with your choice, I think it's reasonable. I just don't find the simplicity value proposition and final outcome completely logically consistent.
I agree, this obsession with simplicity is strange to me. As if 3 funds are just WAY too much, but a 2 fund portfolio is “just right.” The OP seems like a perfect candidate for a target date fund.
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+1!

VT+BNDW

Way more diversified!

Jack Bogle: “Simplicity is the master key to financial success!” except for international... :annoyed
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Re: Simplicity on Bond Funds

Post by abuss368 »

lostdog wrote: Fri Oct 02, 2020 10:55 am
abuss368 wrote: Thu Oct 01, 2020 7:55 pm
absolute zero wrote: Thu Oct 01, 2020 7:50 pm
ChrisBenn wrote: Thu Oct 01, 2020 7:41 pm It still seems to me like if simplicity is a goal just get an appropriate TDF or fixed allocation balanced fund.

Going from two bond funds and an equity fund to one bond fund and an equity fund is not really a material difference in effort savings. I mean what, it's a rebalance once a year?

If it's a cognitive issue (constantly thinking about fund choices, aa, etc) the going from 3 to two doesn't seem like that big of a deal as well.

I guess it just seems weird to me to advocate for simplicity, but then stop halfway.

Nothing wrong with your choice, I think it's reasonable. I just don't find the simplicity value proposition and final outcome completely logically consistent.
I agree, this obsession with simplicity is strange to me. As if 3 funds are just WAY too much, but a 2 fund portfolio is “just right.” The OP seems like a perfect candidate for a target date fund.
Jack Bogle: “Simplicity is the master key to financial success!”
+1!

VT+BNDW

Way more diversified!

Jack Bogle: “Simplicity is the master key to financial success!” except for international... :annoyed
Meh. I agree the Jack Bogle and Warren Buffet Two Fund Portfolio is an excellent choice!
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Simplicity on Bond Funds

Post by quicknss »

i treat bonds as cash these days since yield is embarrassing. i hold only as much as i want in cash
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Re: Simplicity on Bond Funds

Post by darrvao777 »

dbr wrote: Thu Oct 01, 2020 5:32 pm
darrvao777 wrote: Thu Oct 01, 2020 5:04 pm the vast majority of my investing is done in a taxable account and i foresee (and strongly hope) i will remain in the top income bracket for the rest of my career

is solely using vanguards intermediate term muni bond fund considered reasonable?
You would probably want to consider your state tax situation as well. You might or might not just stick to a national fund that would be state taxable. In some states the state tax could be as much as around 10%
thank you

0% state tax fortunately
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Re: Simplicity on Bond Funds

Post by JoMoney »

I kind of like the no "bond fund" and making the most of Savings Bonds and high-yield savings accounts.
Been seeing/hearing a lot more talk about "stable value" funds and MYGAs as well... seems like potentially good options for the right situation.
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Re: Simplicity on Bond Funds

Post by 1789 »

I dont own bonds. But when i do i will pick either TBM or intermediate term treasury. I haven't decided which one would be better or if there is a noticeable difference. One thing i noted thou in March treasuries did go up and not down like TBM.
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Re: Simplicity on Bond Funds

Post by BJJ_GUY »

vineviz wrote: Fri Oct 02, 2020 6:24 am
BJJ_GUY wrote: Thu Oct 01, 2020 8:55 pm I don't see this as a timing strategy in the general 'tactical trader' way where the decision is driven by some belief that I can forecast where the market is going better than the average investor.

It's a simple comparison of upside/downside between the two. Reinvestment risk in short term t-bills today is de minimus. On the other hand, interest rate risk for long term bond holders can be absolutely crushing in a rising environment. If interest rates move to zero short term bonds will be relatively unscathed. If rates move up to 4-5% on long bonds they will plummet.
Saying that you believe there is more upside in short term bonds than in long term bonds (despite the former having lower yields than the latter) is clearly a form of market timing. It's the expression of a view that somehow the market prices of the two assets are "wrong".

It might feel like a smart gamble, but it's definitely a gamble.
I never said I think there is more upside in short term bonds compared to long term. My point is that we know where yields are now, so upside is pretty well understood with simple bond math. My point is that one has significant downside (long-term) whereas, short-term has minimal duration risk.
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Re: Simplicity on Bond Funds

Post by BJJ_GUY »

000 wrote: Thu Oct 01, 2020 9:53 pm
BJJ_GUY wrote: Thu Oct 01, 2020 8:57 pm
000 wrote: Thu Oct 01, 2020 8:13 pm What about using separate funds for Treasuries and Corporates? Some of the Vanguard active corporate bond funds are low cost (admiral shares) and seem to target higher quality issues than a bond index.
What would be the reason for owning treasuries In one fund and corporates in another? If you are going to own them, why not just own the total bond fund? Are you trying to eliminate the mortgage exposure or something?
Indexing the corporate bond market may not be such a good idea. If you don't believe in the credit ratings, there is no reason to index corporate bonds at all and active management is needed. If you do believe in the credit ratings, the Vanguard active funds usually tilt to higher quality.

Additionally, a non-ETF bond index fund has to grapple with difficult liquidation issues during liquidity crises, which are lessened by an active fund or by the ETF format.
I agree with all of that. I totally missed the word active in your original comment. If people are absolutely dead set on owning a aggregate bond fund, then I agree you may as well go active.

I'll be interested to see how the ETFs hold up in a liquidity crisis of some shape. IGs will be fine I imagine, but HY and bank loan ETFs, I have no idea how they are expected to handle massive fund flows.

Either way, I agree with your comment entirely.
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Re: Simplicity on Bond Funds

Post by Northern Flicker »

Blue456 wrote: Wouldn't an 10 year duration investment grade corporate bond be better deflation hedge than a 2 year treasury?
It would not. Corporate bonds have significant exposure to deflation risk, so they are the opposite of a hedge for that. Deflation lowers prices, so corporate revenues are reduced, and fixed-term debt becomes a larger expense as a percentage of revenue, so it is harder for the company to meet the obligation. In other words, credit quality will deteriorate causing credit spreads to widen, probably significantly.

Credit spreads are the additional yield on a corporate bond relative to a treasury to compensate for credit risk. Such a rise in rates will cause the bond price to go down or offset some or all of the benefit of falling treasury rates. Liquidity problems are also common with corporate bonds at times of economic duress, with further downward pressure on corporate bond prices.

If you hold an individual corporate bond, the situation is much worse. You are taking additional credit risk specific to one company. Because this risk can be diversified away, you are not compensated for it in additional yield. And the credit risk is heightened because the company may default.
Last edited by Northern Flicker on Thu Oct 08, 2020 10:57 pm, edited 1 time in total.
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Re: Simplicity on Bond Funds

Post by vineviz »

BJJ_GUY wrote: Thu Oct 08, 2020 1:22 pm I never said I think there is more upside in short term bonds compared to long term. My point is that we know where yields are now, so upside is pretty well understood with simple bond math. My point is that one has significant downside (long-term) whereas, short-term has minimal duration risk.
Regardless of how you characterize the decision to employ a market timing strategy with respect to bonds, I hope you can understand that this is indeed what is being done.

In the second point, you seem to be conflating "downside" with "duration risk" which leaves me unsure of what you actually mean. Perhaps by "duration risk" you mean "interest rate risk", in which case it's simply not true that short-term bonds have less of it than long-term bonds.
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Re: Simplicity on Bond Funds

Post by BJJ_GUY »

vineviz wrote: Thu Oct 08, 2020 4:00 pm
BJJ_GUY wrote: Thu Oct 08, 2020 1:22 pm I never said I think there is more upside in short term bonds compared to long term. My point is that we know where yields are now, so upside is pretty well understood with simple bond math. My point is that one has significant downside (long-term) whereas, short-term has minimal duration risk.
Regardless of how you characterize the decision to employ a market timing strategy with respect to bonds, I hope you can understand that this is indeed what is being done.

In the second point, you seem to be conflating "downside" with "duration risk" which leaves me unsure of what you actually mean. Perhaps by "duration risk" you mean "interest rate risk", in which case it's simply not true that short-term bonds have less of it than long-term bonds.
Your definition of market timing means that anyone who is an active manager, or basically anything but an indexer at perfect global market cap % allocations is a market timer.

You realize all of the legendary investors buy things that are (deemed) cheap and sell that which is (deemed, by actual valuation) to be rich. Warren Buffet is an incredible market timer in this world you've created.
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Re: Simplicity on Bond Funds

Post by vineviz »

BJJ_GUY wrote: Thu Oct 08, 2020 4:30 pm Your definition of market timing means that anyone who is an active manager, or basically anything but an indexer at perfect global market cap % allocations is a market timer.
I'm not painting with anywhere nearly so broad a brush.

Your argument is that current market price of long-term bonds makes them unattractive, and that's a reason to avoid them. This is market timing.
BJJ_GUY wrote: Thu Oct 08, 2020 4:30 pmYou realize all of the legendary investors buy things that are (deemed) cheap and sell that which is (deemed, by actual valuation) to be rich. Warren Buffet is an incredible market timer in this world you've created.
Leaving aside any debate about whether "legendary investors" are worth emulating, there's an important difference between what "legendary" value investors do and what you're proposing. The future cash flows of a stock are not known, which creates an opportunity for value investors to take a contrarian approach to valuing that stock and making a coherent argument that they are buying it at a "cheap" price. There is no equivalent argument to be made for considering a 20-year Treasury bond to be "cheap" or "expensive" since there is no doubt whatsoever about the timing and/or size of the future cash flows from that bond.
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Re: Simplicity on Bond Funds

Post by BJJ_GUY »

vineviz wrote: Thu Oct 08, 2020 5:00 pm
BJJ_GUY wrote: Thu Oct 08, 2020 4:30 pm Your definition of market timing means that anyone who is an active manager, or basically anything but an indexer at perfect global market cap % allocations is a market timer.
I'm not painting with anywhere nearly so broad a brush.

Your argument is that current market price of long-term bonds makes them unattractive, and that's a reason to avoid them. This is market timing.
BJJ_GUY wrote: Thu Oct 08, 2020 4:30 pmYou realize all of the legendary investors buy things that are (deemed) cheap and sell that which is (deemed, by actual valuation) to be rich. Warren Buffet is an incredible market timer in this world you've created.
Leaving aside any debate about whether "legendary investors" are worth emulating, there's an important difference between what "legendary" value investors do and what you're proposing. The future cash flows of a stock are not known, which creates an opportunity for value investors to take a contrarian approach to valuing that stock and making a coherent argument that they are buying it at a "cheap" price. There is no equivalent argument to be made for considering a 20-year Treasury bond to be "cheap" or "expensive" since there is no doubt whatsoever about the timing and/or size of the future cash flows from that bond.
Investing, making choices based on opportunity cost, is about weighing the potential risk versus reward, right? If we can't agree on the basic risk/reward premise, then we are going to keep talking past each other.

If a 20 year bond has a current YTM of 1.5% (just using round numbers), then I know my upside. But, there is way more potential downside (compared to the 1.5% reward). With yields this low bonds are even more sensitive to a 1 or 2% change in rates.

Are you making a completely different point, or do you actually think a 20 yr bond has the exact same sensitivity (to a 2% change in rates) as a 3 month t-bill would have in the same environment?

I can't tell if you are just trolling
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Re: Simplicity on Bond Funds

Post by vineviz »

BJJ_GUY wrote: Thu Oct 08, 2020 5:33 pm If a 20 year bond has a current YTM of 1.5% (just using round numbers), then I know my upside.
No, you don’t “know your upside” unless you know something the market doesn’t know about whether that yield is going to increase or decrease.

And if by “know your upside” you mean you know your return if you hold to maturity, then yea but that’s trivially self-evident: that’s always true with fixed income investments. It’s right there in the name.

But what you DON’T know is the return of buying short term bonds and rolling them over for 20 years. The expected return is lower than just buying the 20-year bond but your upside and downside from this strategy are both uncertain.

And if you have a view on which of those is greater, you are a market timer. If you have no such view, it’s irrational to buy short term bonds if you have a long term investment horizon.
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