Simplicity on Bond Funds

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BJJ_GUY
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Re: Simplicity on Bond Funds

Post by BJJ_GUY »

vineviz wrote: Thu Oct 08, 2020 6:28 pm
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.
Hey, we finally got on the same page. I absolutely mean you know your upside in nominal terms from the YTM of a long bond.

Maybe explaining, from a different perspective, how I'm comparing downside risk. Imagine a scenario in which interest rates jump by 2% at the same time the equity markets sell-off. A 20 year treasury will likely have lost more than 25% of market value, and let's say equities lost the same -25% for simplicity. Now I have no way to rebalance into my suddenly much more attractive equities without locking in the losses in the long bonds.... With 2-3 yr bonds (let alone shorter-term which I prefer right now), I've lost less than 5%, and I can more easily sell bonds and buy stocks.

If that scenario is one you don't care about, then that's fine, and I'm not arguing your preference at all. All I'm saying is that I disagree that when yields change the relative attractiveness between short term bonds and long term bonds absolutely shifts. At lower yields, bonds tend to be more sensitive to jumps in rates, and also lose their reliability of negative correlation to equity markets.

To clarify, I am in no way saying I know where rates will go, inflation/deflation. I dont know if fixed income will be positive (or negatively) correlated to equities over any given situation. However, if I probability weight all these binary scenarios at 50% each, the picture becomes clear to me that I don't want to be on the long bond side of that coin flip.
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Re: Simplicity on Bond Funds

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BJJ_GUY wrote: Thu Oct 08, 2020 6:56 pm However, if I probability weight all these binary scenarios at 50% each, the picture becomes clear to me that I don't want to be on the long bond side of that coin flip.
Ok, but many investors are on that side of the coin. In fact, long-term rates have dropped so much precisely because there was a higher demand for those bonds. If these long bonds are as bad as you make them out to be ("very sensitive to rates", "long bonds lose their reliability of negative correlation with equities", "way more potential downside than upside", etc), then why are they in such high demand, so richly priced and so desired?
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Re: Simplicity on Bond Funds

Post by BJJ_GUY »

Steve Reading wrote: Thu Oct 08, 2020 7:04 pm
BJJ_GUY wrote: Thu Oct 08, 2020 6:56 pm However, if I probability weight all these binary scenarios at 50% each, the picture becomes clear to me that I don't want to be on the long bond side of that coin flip.
Ok, but many investors are on that side of the coin. In fact, long-term rates have dropped so much precisely because there was a higher demand for those bonds. If these long bonds are as bad as you make them out to be ("very sensitive to rates", "long bonds lose their reliability of negative correlation with equities", "way more potential downside than upside", etc), then why are they in such high demand, so richly priced and so desired?
That's a good question. I'd give you my theory but the last time I gave an opinion (which was actually supported by data available from the Fed), I was told that I somehow broke forum rules. By the way, on this one, while I think I understand a lot of the behavioral, technical and other factors, I certainly don't think I'm necessarily correct, nor do I understand all of the dynamics - or even close to it.

On the flip side, is the thought process behind that question a good investment indicator? A whole lot of people asked that same question in the late 90s about tech stocks, while telling skeptics they didn't understand valuations. Greater Fools Theory was made up and used as an excuse by those who were willing to miss out on those short term gains. But hey, one thing we both agree on, none of this is a certainty. I simply have my philosophy and principles, and I try to stick to them.

BTW... And I guarantee I'm lagging most people's performance in this forum because I only only equity, cash, and some gold (because I refuse to own long bonds! but especially in a taxable account). So what the heck do I know
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Re: Simplicity on Bond Funds

Post by abuss368 »

I think this thread has gone in another direction! I had started the thread in terms of having one bond fund in a portfolio for simplicity purposes.

One short or intermediate investment grade bond fund that is low cost will provide safety and income to a portfolio.

In my opinion any short or intermediate term bond fund will work!
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Simplicity on Bond Funds

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abuss368 wrote: Thu Oct 08, 2020 8:36 pm I think this thread has gone in another direction! I had started the thread in terms of having one bond fund in a portfolio for simplicity purposes.

One short or intermediate investment grade bond fund that is low cost will provide safety and income to a portfolio.

In my opinion any short or intermediate term bond fund will work!
So if you have 40 years to retirement but want bonds you’re saying any short or intermediate bond fund will do? Why not factor in the duration of the fund?
I know you are trying to simplify things, but everyone’s situation is different. Making a rule and repeating it for EVERYBODY to follow just so we can all say we are doing the same thing is foolish.
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Re: Simplicity on Bond Funds

Post by Northern Flicker »

abuss368 wrote: Thu Oct 08, 2020 8:36 pm I think this thread has gone in another direction! I had started the thread in terms of having one bond fund in a portfolio for simplicity purposes.

One short or intermediate investment grade bond fund that is low cost will provide safety and income to a portfolio.

In my opinion any short or intermediate term bond fund will work!
With all due respect, that is not sound advice. Many, if not all intermediate-term investment-grade corporate bond funds failed to provide ballast to portfolios in the downturns in 2008/2009 or 3/2020.
Risk is not a guarantor of return.
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Re: Simplicity on Bond Funds

Post by Northern Flicker »

Corporate bonds failed to provide adequate ballast on 2008/2009. For instance, VFIDX the Vanguard investment-grade intermediate corporate bond fund, one of the best funds available for this bond subclass, was down about 13% in 2008/2009 just when you needed a bond fund to offset losses in equities. Here is a comparison with VFIUX, intermediate treasuries:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

This is not a good result-- too much correlation with equities, and typical behavior of corporate bonds during equity downturns, when credit spreads often widen significantly. This is why the bogleheads wiki recommends that a bond portfolio should be built around a core of treasuries.
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Re: Simplicity on Bond Funds

Post by 000 »

Northern Flicker wrote: Fri Oct 09, 2020 6:21 pm Corporate bonds failed to provide adequate ballast on 2008/2009. For instance, VFIDX the Vanguard investment-grade intermediate corporate bond fund, one of the best funds available for this bond subclass, was down about 13% in 2008/2009 just when you needed a bond fund to offset losses in equities. Here is a comparison with VFIUX, intermediate treasuries:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

This is not a good result-- too much correlation with equities, and typical behavior of corporate bonds during equity downturns, when credit spreads often widen significantly. This is why the bogleheads wiki recommends that a bond portfolio should be built around a core of treasuries.
Although I don't invest in bonds at all, I will push back a bit here.

Correlations such as this really only matter if you rebalance during equity downturns and... most investors don't. Or if you are using your portfolio as a liquidity fund, but there is no true replacement for that purpose other than cash, not even government bonds.
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Re: Simplicity on Bond Funds

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spdoublebass wrote: Fri Oct 09, 2020 11:01 am
abuss368 wrote: Thu Oct 08, 2020 8:36 pm I think this thread has gone in another direction! I had started the thread in terms of having one bond fund in a portfolio for simplicity purposes.

One short or intermediate investment grade bond fund that is low cost will provide safety and income to a portfolio.

In my opinion any short or intermediate term bond fund will work!
So if you have 40 years to retirement but want bonds you’re saying any short or intermediate bond fund will do? Why not factor in the duration of the fund?
I know you are trying to simplify things, but everyone’s situation is different. Making a rule and repeating it for EVERYBODY to follow just so we can all say we are doing the same thing is foolish.
Someone 40 years from retirement probably should have $0 in bonds. Maybe I Bonds as part of an emergency fund, but that is it...
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Re: Simplicity on Bond Funds

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anon_investor wrote: Fri Oct 09, 2020 6:34 pm
spdoublebass wrote: Fri Oct 09, 2020 11:01 am
abuss368 wrote: Thu Oct 08, 2020 8:36 pm I think this thread has gone in another direction! I had started the thread in terms of having one bond fund in a portfolio for simplicity purposes.

One short or intermediate investment grade bond fund that is low cost will provide safety and income to a portfolio.

In my opinion any short or intermediate term bond fund will work!
So if you have 40 years to retirement but want bonds you’re saying any short or intermediate bond fund will do? Why not factor in the duration of the fund?
I know you are trying to simplify things, but everyone’s situation is different. Making a rule and repeating it for EVERYBODY to follow just so we can all say we are doing the same thing is foolish.
Someone 40 years from retirement probably should have $0 in bonds. Maybe I Bonds as part of an emergency fund, but that is it...
I totally agree.

My point is only that in each case is different. While there are some sayings that apply to everyone, some do not.

What if you were 35 and had a 4 million. Say you wanted bonds because you didn't want to be fully exposed to the market. Are you sure you want short term?

Every investor is different. Deciding on the type of bonds someone holds implies that they already made the decision to hold bonds.

The above saying is good, but doesn't apply to everyone.
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Re: Simplicity on Bond Funds

Post by Northern Flicker »

000 wrote: Fri Oct 09, 2020 6:29 pm
Northern Flicker wrote: Fri Oct 09, 2020 6:21 pm Corporate bonds failed to provide adequate ballast on 2008/2009. For instance, VFIDX the Vanguard investment-grade intermediate corporate bond fund, one of the best funds available for this bond subclass, was down about 13% in 2008/2009 just when you needed a bond fund to offset losses in equities. Here is a comparison with VFIUX, intermediate treasuries:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

This is not a good result-- too much correlation with equities, and typical behavior of corporate bonds during equity downturns, when credit spreads often widen significantly. This is why the bogleheads wiki recommends that a bond portfolio should be built around a core of treasuries.
Although I don't invest in bonds at all, I will push back a bit here.

Correlations such as this really only matter if you rebalance during equity downturns and... most investors don't. Or if you are using your portfolio as a liquidity fund, but there is no true replacement for that purpose other than cash, not even government bonds.
Investors without the nerve to rebalance generally are more emotionally sensitive to total drawdown. And if a downturn is prolonged and severe, the higher risk is more unwelcome. In case of a job loss, the investor may need to tap some of the funds. And it would expose a retiree in withdrawal phase to additional sequence of return risk.

The investor may compensate by holding a slightly lower equity allocation. But that is the inpact of the bond portfolio having correlated risk with the equity portfolio.

A 13% drawdown of the asset that was supposed to provide ballast during an equity downturn does not meet my definition of providing stability to an equity portfolio.
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Re: Simplicity on Bond Funds

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Northern Flicker wrote: Fri Oct 09, 2020 7:06 pm Investors without the nerve to rebalance generally are more emotionally sensitive to total drawdown. And if a downturn is prolonged and severe, the higher risk is more unwelcome. In case of a job loss, the investor may need to tap some of the funds. And it would expose a retiree in withdrawal phase to additional sequence of return risk.

The investor may compensate by holding a slightly lower equity allocation. But that is the inpact of the bond portfolio having correlated risk with the equity portfolio.

A 13% drawdown of the asset that was supposed to provide ballast during an equity downturn does not meet my definition of providing stability to an equity portfolio.
Sure, but there's two big problems with the alternative you propose, namely if the next stock crash coincides with rising interest rates (causing all bond funds to show NAV losses) or a US default fear (which, even if unjustified, is likely to lead to the Treasuries market becoming goopy for a few days or weeks).

I posit that for a investor averse to even temporary price drawdowns, non-marketable cash is better than Treasury bonds or bonds of any kind.
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Re: Simplicity on Bond Funds

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Corporate bonds are still quite likely to fare worse than treasuries in those scenarios.
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Re: Simplicity on Bond Funds

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Northern Flicker wrote: Fri Oct 09, 2020 8:17 pm Corporate bonds are still quite likely to fare worse than treasuries in those scenarios.
I figured a bond yielding 2% would likely be less interest rate sensitive than one yielding 0.75% in terms of NAV shock. I could be wrong.
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Re: Simplicity on Bond Funds

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Northern Flicker wrote: Fri Oct 09, 2020 3:42 pm
abuss368 wrote: Thu Oct 08, 2020 8:36 pm I think this thread has gone in another direction! I had started the thread in terms of having one bond fund in a portfolio for simplicity purposes.

One short or intermediate investment grade bond fund that is low cost will provide safety and income to a portfolio.

In my opinion any short or intermediate term bond fund will work!
With all due respect, that is not sound advice. Many, if not all intermediate-term investment-grade corporate bond funds failed to provide ballast to portfolios in the downturns in 2008/2009 or 3/2020.
I can see the misunderstanding. Your thoughts are reasonable for sure. Corporate bonds can be volatile for sure. I have used Total Bond in tax advantaged and tax exempt in taxable for many years and it simply works.
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Re: Simplicity on Bond Funds

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Northern Flicker wrote: Fri Oct 09, 2020 3:42 pm
abuss368 wrote: Thu Oct 08, 2020 8:36 pm I think this thread has gone in another direction! I had started the thread in terms of having one bond fund in a portfolio for simplicity purposes.

One short or intermediate investment grade bond fund that is low cost will provide safety and income to a portfolio.

In my opinion any short or intermediate term bond fund will work!
With all due respect, that is not sound advice. Many, if not all intermediate-term investment-grade corporate bond funds failed to provide ballast to portfolios in the downturns in 2008/2009 or 3/2020.
Corporate bonds can be volatile for sure. I have used Total Bond in tax advantaged and tax exempt in taxable for many years and it simply works.
Last edited by abuss368 on Fri Oct 09, 2020 9:43 pm, edited 1 time in total.
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Re: Simplicity on Bond Funds

Post by abuss368 »

Northern Flicker wrote: Fri Oct 09, 2020 8:17 pm Corporate bonds are still quite likely to fare worse than treasuries in those scenarios.
In any market pullback, Treasuries perform the best. David Swensen, Yale University, has recommended one half of bonds to Treasuries and one half to TIPS.
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Re: Simplicity on Bond Funds

Post by Northern Flicker »

abuss368 wrote: Fri Oct 09, 2020 9:38 pm
Northern Flicker wrote: Fri Oct 09, 2020 3:42 pm
abuss368 wrote: Thu Oct 08, 2020 8:36 pm I think this thread has gone in another direction! I had started the thread in terms of having one bond fund in a portfolio for simplicity purposes.

One short or intermediate investment grade bond fund that is low cost will provide safety and income to a portfolio.

In my opinion any short or intermediate term bond fund will work!
With all due respect, that is not sound advice. Many, if not all intermediate-term investment-grade corporate bond funds failed to provide ballast to portfolios in the downturns in 2008/2009 or 3/2020.
I can see the misunderstanding. Your thoughts are reasonable for sure. Corporate bonds can be volatile for sure. I have used Total Bond in tax advantaged and tax exempt in taxable for many years and it simply works.
total bond has more exposure to treasuries than corporate credit. your bond holdings satisfy the principle in the boglehead's wiki of building a bond portfolio on a foundation of treasuries. CDs and savings bonds also would qualify as being free of credit risk.
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Re: Simplicity on Bond Funds

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I for one am thinking about using corporate bonds exclusively if I ever add bonds. Probably long term or maybe high yield corporates. :twisted:

The cash emergency fund seems to provide enough liquidity and safety. :moneybag
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Re: Simplicity on Bond Funds

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000 wrote: Fri Oct 09, 2020 8:42 pm
Northern Flicker wrote: Fri Oct 09, 2020 8:17 pm Corporate bonds are still quite likely to fare worse than treasuries in those scenarios.
I figured a bond yielding 2% would likely be less interest rate sensitive than one yielding 0.75% in terms of NAV shock. I could be wrong.
Corporate bonds are priced as a credit spread on top of a duration-matched treasury. In the past, credit spreads have usually widened at times when equities and the economy are struggling. If interest rates rise when the economy and equities are doing well, credit spreads tend to narrow at such times so that credit will tend to do better than treasuries at such times.

In the 1970's, corporate bonds did not fare much, if any better than treasuries. Of course, things are always unpredictable moving forward.
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Re: Simplicity on Bond Funds

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000 wrote: Fri Oct 09, 2020 10:44 pm I for one am thinking about using corporate bonds exclusively if I ever add bonds. Probably long term or maybe high yield corporates. :twisted:

The cash emergency fund seems to provide enough liquidity and safety. :moneybag
Why even bother with bonds then? Just do the Buffet 2 fund: 90% S&P500 / 10% cash or T Bills.
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Re: Simplicity on Bond Funds

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000 wrote: Fri Oct 09, 2020 10:44 pm I for one am thinking about using corporate bonds exclusively if I ever add bonds. Probably long term or maybe high yield corporates. :twisted:

The cash emergency fund seems to provide enough liquidity and safety. :moneybag
Just under 10 years of data, but it provides a look at risk and return characteristics of long-term credit:

https://www.portfoliovisualizer.com/bac ... ion3_2=100

Long-term credit and junk bonds may be incorporated into a portfolio, but they would not be part of the fixed income assets you hold for safety. A total bond index includes a small allocation to long-term credit, which is fine.
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Re: Simplicity on Bond Funds

Post by 000 »

anon_investor wrote: Fri Oct 09, 2020 10:54 pm Why even bother with bonds then? Just do the Buffet 2 fund: 90% S&P500 / 10% cash or T Bills.
Northern Flicker wrote: Fri Oct 09, 2020 10:56 pm Long-term credit and junk bonds may be incorporated into a portfolio, but they would not be part of the fixed income assets you hold for safety. A total bond index includes a small allocation to long-term credit, which is fine.
It is an oft-repeated and false trope that corporate bonds are equivalent to a mix of stocks and "safe" treasuries.

Corporate bonds including junk can do well in a situation where stocks do poorly but the underlying businesses do fine. One such situation is where stocks are overvalued but the underlying businesses are able to survive and pay their debt. The performance of stocks is not equal to that of the businesses, it is the difference between business performance and expectations. Think about European stocks recently.

My reason for thinking about corporate bonds is as insurance for stock hype and/or deflation in a portfolio that seeks safety elsewhere than fiat bonds.
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Re: Simplicity on Bond Funds

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000 wrote: Fri Oct 09, 2020 11:05 pm
anon_investor wrote: Fri Oct 09, 2020 10:54 pm Why even bother with bonds then? Just do the Buffet 2 fund: 90% S&P500 / 10% cash or T Bills.
Northern Flicker wrote: Fri Oct 09, 2020 10:56 pm Long-term credit and junk bonds may be incorporated into a portfolio, but they would not be part of the fixed income assets you hold for safety. A total bond index includes a small allocation to long-term credit, which is fine.
It is an oft-repeated and false trope that corporate bonds are equivalent to a mix of stocks and "safe" treasuries.
It is often repeated because it’s true.

There is a beauty in having a rigorous and proven m analytical framework you can use to answer questions like this.
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Re: Simplicity on Bond Funds

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anon_investor wrote: Fri Oct 09, 2020 10:54 pm
000 wrote: Fri Oct 09, 2020 10:44 pm I for one am thinking about using corporate bonds exclusively if I ever add bonds. Probably long term or maybe high yield corporates. :twisted:

The cash emergency fund seems to provide enough liquidity and safety. :moneybag
Why even bother with bonds then? Just do the Buffet 2 fund: 90% S&P500 / 10% cash or T Bills.
If investors can stomach the risk, and sleep well at night, Warren Buffett’s portfolio is an excellent choice.
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Re: Simplicity on Bond Funds

Post by abuss368 »

000 wrote: Fri Oct 09, 2020 11:05 pm
anon_investor wrote: Fri Oct 09, 2020 10:54 pm Why even bother with bonds then? Just do the Buffet 2 fund: 90% S&P500 / 10% cash or T Bills.
Northern Flicker wrote: Fri Oct 09, 2020 10:56 pm Long-term credit and junk bonds may be incorporated into a portfolio, but they would not be part of the fixed income assets you hold for safety. A total bond index includes a small allocation to long-term credit, which is fine.
It is an oft-repeated and false trope that corporate bonds are equivalent to a mix of stocks and "safe" treasuries.

Corporate bonds including junk can do well in a situation where stocks do poorly but the underlying businesses do fine. One such situation is where stocks are overvalued but the underlying businesses are able to survive and pay their debt. The performance of stocks is not equal to that of the businesses, it is the difference between business performance and expectations. Think about European stocks recently.

My reason for thinking about corporate bonds is as insurance for stock hype and/or deflation in a portfolio that seeks safety elsewhere than fiat bonds.
I agree. When the markets experience trauma, corporate bonds react much differently than Treasuries. Their stock like risk shines through at times.

I have always found that Total Bond has worked well for us. During market pullbacks, the healthy allocation to Treasuires provides ballast.
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Re: Simplicity on Bond Funds

Post by Northern Flicker »

000 wrote: It is an oft-repeated and false trope that corporate bonds are equivalent to a mix of stocks and "safe" treasuries.
I don't recall seeing the word equivalent used. The behavior is similar. Credit spreads have a fairly high correlation with the equity risk premium.

I'm not opposed to corporate bonds as an investment.

I was just responding to the idea that any short or intermediate bond fund will provide income and stability to a portfolio. In the actively managed bond fund space, there are examples much more severe than the 12.3% drawdown of VFIDX in 2008/2009.
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Re: Simplicity on Bond Funds

Post by 000 »

vineviz wrote: Sat Oct 10, 2020 6:41 am It is often repeated because it’s true.

There is a beauty in having a rigorous and proven m analytical framework you can use to answer questions like this.
No, it is not. It was not true for American investors in the 19th century. It has not been true for European investors in the 21st century.
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Re: Simplicity on Bond Funds

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000 wrote: Sat Oct 10, 2020 5:20 pm
vineviz wrote: Sat Oct 10, 2020 6:41 am It is often repeated because it’s true.

There is a beauty in having a rigorous and proven m analytical framework you can use to answer questions like this.
No, it is not. It was not true for American investors in the 19th century. It has not been true for European investors in the 21st century.
What index of European investment grade bonds can you name which can’t be replicated using a combination of sovereign bonds and common stocks?
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Re: Simplicity on Bond Funds

Post by 000 »

vineviz wrote: Sat Oct 10, 2020 5:33 pm
000 wrote: Sat Oct 10, 2020 5:20 pm
vineviz wrote: Sat Oct 10, 2020 6:41 am It is often repeated because it’s true.

There is a beauty in having a rigorous and proven m analytical framework you can use to answer questions like this.
No, it is not. It was not true for American investors in the 19th century. It has not been true for European investors in the 21st century.
What index of European investment grade bonds can you name which can’t be replicated using a combination of sovereign bonds and common stocks?
Of course we can replicate past results based on our knowledge of other past results, but it is not meaningful. With enough data mining and fitting, nearly any index can be shown to have been "equivalent" to some combination of other indices over a given past period.

Stocks + Treasuries can underperform Corporates for a long time.

A 1%+ yield premium + richly valued equities + disappointing but not catastrophic corporate performance fits the bill, and is not an especially unlikely event.
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Re: Simplicity on Bond Funds

Post by UpperNwGuy »

Northern Flicker wrote: Fri Oct 09, 2020 3:42 pm
abuss368 wrote: Thu Oct 08, 2020 8:36 pm I think this thread has gone in another direction! I had started the thread in terms of having one bond fund in a portfolio for simplicity purposes.

One short or intermediate investment grade bond fund that is low cost will provide safety and income to a portfolio.

In my opinion any short or intermediate term bond fund will work!
With all due respect, that is not sound advice. Many, if not all intermediate-term investment-grade corporate bond funds failed to provide ballast to portfolios in the downturns in 2008/2009 or 3/2020.
But if you didn't sell bonds during the month of March 2020, you were just fine because they recovered quite quickly. I hardly noticed the bond dip because I'm a buy and hold investor.
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Re: Simplicity on Bond Funds

Post by palanzo »

abuss368 wrote: Sat Oct 10, 2020 7:31 am
anon_investor wrote: Fri Oct 09, 2020 10:54 pm
000 wrote: Fri Oct 09, 2020 10:44 pm I for one am thinking about using corporate bonds exclusively if I ever add bonds. Probably long term or maybe high yield corporates. :twisted:

The cash emergency fund seems to provide enough liquidity and safety. :moneybag
Why even bother with bonds then? Just do the Buffet 2 fund: 90% S&P500 / 10% cash or T Bills.
If investors can stomach the risk, and sleep well at night, Warren Buffett’s portfolio is an excellent choice.
This is not Buffet's portfolio. This is often repeated here and incorrectly. This was a recommendation to his executor for his wife. The 10% cash might well be many millions so it is not sound advice for everyone.
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Re: Simplicity on Bond Funds

Post by Northern Flicker »

UpperNWGuy wrote: But if you didn't sell bonds during the month of March 2020, you were just fine because they recovered quite quickly. I hardly noticed the bond dip because I'm a buy and hold investor.
That was also true of stocks-- it doesn't make them less risky. There was no guarantee that either would recover quickly. During the great depression, both stocks and corporate bonds were hammered for an extended period.

The point of diversification is to hold uncorrelated assets so that portfolio volatility is lessened with smoothing out of sharp peaks and steep valleys. Corporate bonds have in the past not been ideal diversifiers of equity risk.
Risk is not a guarantor of return.
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Re: Simplicity on Bond Funds

Post by abuss368 »

palanzo wrote: Sat Oct 10, 2020 5:48 pm
abuss368 wrote: Sat Oct 10, 2020 7:31 am
anon_investor wrote: Fri Oct 09, 2020 10:54 pm
000 wrote: Fri Oct 09, 2020 10:44 pm I for one am thinking about using corporate bonds exclusively if I ever add bonds. Probably long term or maybe high yield corporates. :twisted:

The cash emergency fund seems to provide enough liquidity and safety. :moneybag
Why even bother with bonds then? Just do the Buffet 2 fund: 90% S&P500 / 10% cash or T Bills.
If investors can stomach the risk, and sleep well at night, Warren Buffett’s portfolio is an excellent choice.
This is not Buffet's portfolio. This is often repeated here and incorrectly. This was a recommendation to his executor for his wife. The 10% cash might well be many millions so it is not sound advice for everyone.
I thought it was cash or treasuries?
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Simplicity on Bond Funds

Post by vineviz »

000 wrote: Sat Oct 10, 2020 5:44 pm Stocks + Treasuries can underperform Corporates for a long time.
What is one example of a corporate bond index or mutual fund (US or European, take your pick) that has underperformed a combination of stocks and Treasury bonds by a statistically significant margin over any 10 year period ( or whatever you consider to be “a long time”)?
"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 Uncorrelated »

000 wrote: Sat Oct 10, 2020 5:44 pm
vineviz wrote: Sat Oct 10, 2020 5:33 pm
000 wrote: Sat Oct 10, 2020 5:20 pm
vineviz wrote: Sat Oct 10, 2020 6:41 am It is often repeated because it’s true.

There is a beauty in having a rigorous and proven m analytical framework you can use to answer questions like this.
No, it is not. It was not true for American investors in the 19th century. It has not been true for European investors in the 21st century.
What index of European investment grade bonds can you name which can’t be replicated using a combination of sovereign bonds and common stocks?
Of course we can replicate past results based on our knowledge of other past results, but it is not meaningful. With enough data mining and fitting, nearly any index can be shown to have been "equivalent" to some combination of other indices over a given past period.

Stocks + Treasuries can underperform Corporates for a long time.

A 1%+ yield premium + richly valued equities + disappointing but not catastrophic corporate performance fits the bill, and is not an especially unlikely event.
If you search for "credit premium" among academic literature, you'll find various articles where they attempt to quantify the excess return of corporate bonds relative to equities and treasury bonds. Depending on which paper you open, the excess return is between -0.02% and 0.04% per month, not statistically significantly different from zero.

It might not be possible to replicate all facets of corporate bonds with equities and treasuries, but in the past it has been possible to replicate all positive parts. The benefits of corporate bonds, if any, are unclear. Spend your energy optimizing things that are clear.
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Re: Simplicity on Bond Funds

Post by 000 »

vineviz wrote: Sat Oct 10, 2020 6:00 pm
000 wrote: Sat Oct 10, 2020 5:44 pm Stocks + Treasuries can underperform Corporates for a long time.
What is one example of a corporate bond index or mutual fund (US or European, take your pick) that has underperformed a combination of stocks and Treasury bonds by a statistically significant margin over any 10 year period ( or whatever you consider to be “a long time”)?
That's not my claim.
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Re: Simplicity on Bond Funds

Post by Northern Flicker »

Here is one comparison of stock+treasuries and corporate credit from 2002 to present with the stock/treasury allocation chosen to match the volatility of the corporate bond fund. Both bond funds are intermediate-term.

https://www.portfoliovisualizer.com/bac ... ion3_2=100
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Re: Simplicity on Bond Funds

Post by 000 »

Uncorrelated wrote: Sat Oct 10, 2020 6:07 pm If you search for "credit premium" among academic literature, you'll find various articles where they attempt to quantify the excess return of corporate bonds relative to equities and treasury bonds. Depending on which paper you open, the excess return is between -0.02% and 0.04% per month, not statistically significantly different from zero.
Right.... and how have all those premiums in the academic literature been doing lately?
Uncorrelated wrote: Sat Oct 10, 2020 6:07 pm It might not be possible to replicate all facets of corporate bonds with equities and treasuries, but in the past it has been possible to replicate all positive parts. The benefits of corporate bonds, if any, are unclear. Spend your energy optimizing things that are clear.
Like SCV? :twisted:
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Re: Simplicity on Bond Funds

Post by palanzo »

abuss368 wrote: Sat Oct 10, 2020 5:59 pm
palanzo wrote: Sat Oct 10, 2020 5:48 pm
abuss368 wrote: Sat Oct 10, 2020 7:31 am
anon_investor wrote: Fri Oct 09, 2020 10:54 pm
000 wrote: Fri Oct 09, 2020 10:44 pm I for one am thinking about using corporate bonds exclusively if I ever add bonds. Probably long term or maybe high yield corporates. :twisted:

The cash emergency fund seems to provide enough liquidity and safety. :moneybag
Why even bother with bonds then? Just do the Buffet 2 fund: 90% S&P500 / 10% cash or T Bills.
If investors can stomach the risk, and sleep well at night, Warren Buffett’s portfolio is an excellent choice.
This is not Buffet's portfolio. This is often repeated here and incorrectly. This was a recommendation to his executor for his wife. The 10% cash might well be many millions so it is not sound advice for everyone.
I thought it was cash or treasuries?
Whatever. Cash or T Bills. The point is this is not Buffet's portfolio.
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Re: Simplicity on Bond Funds

Post by vineviz »

000 wrote: Sat Oct 10, 2020 6:11 pm
vineviz wrote: Sat Oct 10, 2020 6:00 pm
000 wrote: Sat Oct 10, 2020 5:44 pm Stocks + Treasuries can underperform Corporates for a long time.
What is one example of a corporate bond index or mutual fund (US or European, take your pick) that has underperformed a combination of stocks and Treasury bonds by a statistically significant margin over any 10 year period ( or whatever you consider to be “a long time”)?
That's not my claim.
You said “ Stocks + Treasuries can underperform Corporates for a long time”.

How is that different from what I asked you to show ?
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Re: Simplicity on Bond Funds

Post by abuss368 »

palanzo wrote: Sat Oct 10, 2020 6:14 pm
abuss368 wrote: Sat Oct 10, 2020 5:59 pm
palanzo wrote: Sat Oct 10, 2020 5:48 pm
abuss368 wrote: Sat Oct 10, 2020 7:31 am
anon_investor wrote: Fri Oct 09, 2020 10:54 pm

Why even bother with bonds then? Just do the Buffet 2 fund: 90% S&P500 / 10% cash or T Bills.
If investors can stomach the risk, and sleep well at night, Warren Buffett’s portfolio is an excellent choice.
This is not Buffet's portfolio. This is often repeated here and incorrectly. This was a recommendation to his executor for his wife. The 10% cash might well be many millions so it is not sound advice for everyone.
I thought it was cash or treasuries?
Whatever. Cash or T Bills. The point is this is not Buffet's portfolio.
I have to look that up! I thought Mr. Buffett has said cash or Treasuries in some interviews. Has the Warren Buffett portfolio worked well for you as a strategy?
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Simplicity on Bond Funds

Post by palanzo »

abuss368 wrote: Sat Oct 10, 2020 6:53 pm
palanzo wrote: Sat Oct 10, 2020 6:14 pm
abuss368 wrote: Sat Oct 10, 2020 5:59 pm
palanzo wrote: Sat Oct 10, 2020 5:48 pm
abuss368 wrote: Sat Oct 10, 2020 7:31 am

If investors can stomach the risk, and sleep well at night, Warren Buffett’s portfolio is an excellent choice.
This is not Buffet's portfolio. This is often repeated here and incorrectly. This was a recommendation to his executor for his wife. The 10% cash might well be many millions so it is not sound advice for everyone.
I thought it was cash or treasuries?
Whatever. Cash or T Bills. The point is this is not Buffet's portfolio.
I have to look that up! I thought Mr. Buffett has said cash or Treasuries in some interviews. Has the Warren Buffett portfolio worked well for you as a strategy?
My point is that 90% S&P500 / 10% cash or T Bills is not Buffet's portfolio and it is not sound advice for everyone.
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Re: Simplicity on Bond Funds

Post by 000 »

vineviz wrote: Sat Oct 10, 2020 6:28 pm You said “ Stocks + Treasuries can underperform Corporates for a long time”.

How is that different from what I asked you to show ?
You asked the opposite. Anyway, I'm not a research assistant and I don't think bonds are really a good investment at all, so I'll leave verification as an exercise for the reader.
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Re: Simplicity on Bond Funds

Post by abuss368 »

palanzo wrote: Sat Oct 10, 2020 6:55 pm
abuss368 wrote: Sat Oct 10, 2020 6:53 pm
palanzo wrote: Sat Oct 10, 2020 6:14 pm
abuss368 wrote: Sat Oct 10, 2020 5:59 pm
palanzo wrote: Sat Oct 10, 2020 5:48 pm

This is not Buffet's portfolio. This is often repeated here and incorrectly. This was a recommendation to his executor for his wife. The 10% cash might well be many millions so it is not sound advice for everyone.
I thought it was cash or treasuries?
Whatever. Cash or T Bills. The point is this is not Buffet's portfolio.
I have to look that up! I thought Mr. Buffett has said cash or Treasuries in some interviews. Has the Warren Buffett portfolio worked well for you as a strategy?
My point is that 90% S&P500 / 10% cash or T Bills is not Buffet's portfolio and it is not sound advice for everyone.
I have to look that up! I am not so sure about that as I believe he mentioned Treasuries as well. Do you have a source that you could share?

Warren Buffett’s portfolio is an excellent strategy for many investors. Most investors would be wise to listen. I am glad it has worked for you too.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Simplicity on Bond Funds

Post by Northern Flicker »

000 wrote: Sat Oct 10, 2020 6:56 pm
vineviz wrote: Sat Oct 10, 2020 6:28 pm You said “ Stocks + Treasuries can underperform Corporates for a long time”.

How is that different from what I asked you to show ?
You asked the opposite. Anyway, I'm not a research assistant and I don't think bonds are really a good investment at all, so I'll leave verification as an exercise for the reader.
It would be much easier to verify the opposite of your claim.
Risk is not a guarantor of return.
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Re: Simplicity on Bond Funds

Post by 000 »

Northern Flicker wrote: Sat Oct 10, 2020 7:56 pm
000 wrote: Sat Oct 10, 2020 6:56 pm
vineviz wrote: Sat Oct 10, 2020 6:28 pm You said “ Stocks + Treasuries can underperform Corporates for a long time”.

How is that different from what I asked you to show ?
You asked the opposite. Anyway, I'm not a research assistant and I don't think bonds are really a good investment at all, so I'll leave verification as an exercise for the reader.
It would be much easier to verify the opposite of your claim.
I don't think anyone can prove that a certain mix of Stocks + Treasuries will perform equivalent to Corporates over the next X years.
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Re: Simplicity on Bond Funds

Post by Northern Flicker »

Also not the negation of your claim, which was:
000 wrote: Stocks + Treasuries can underperform Corporates for a long time.
viewtopic.php?p=5540799#p5540799

Anything can of course happen.

You have to quantify the mix of stocks and treasuries, typically done by holding volatility constant in the comparison.

The correlation between the equity risk premium and corporate credit spreads was analyzed by Merton:

Merton, R.C.: On the pricing of corporate debt: the risk structure of interest rates, in: Journal of Finance, Vol. 29, p. 449-470, 1974.
Risk is not a guarantor of return.
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Re: Simplicity on Bond Funds

Post by 000 »

Northern Flicker wrote: Sat Oct 10, 2020 10:04 pm Also not the negation of your claim, which was:
000 wrote: Stocks + Treasuries can underperform Corporates for a long time.
I wrote out a response but deleted it.

Anyway, eschewing corporate bonds from a portfolio of stocks and bonds reduces diversification.

Bogle suggested more corporate bonds than were in total bond market.
Last edited by 000 on Sat Oct 10, 2020 11:05 pm, edited 2 times in total.
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Re: Simplicity on Bond Funds

Post by abuss368 »

Keeping on topic, I am not so sure more than one bond fund is really needed in a portfolio.
John C. Bogle: “Simplicity is the master key to financial success."
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