BND (or similar) vs. Using multiple bond funds

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
daacrusher2001
Posts: 108
Joined: Sat Oct 24, 2015 11:42 am

BND (or similar) vs. Using multiple bond funds

Post by daacrusher2001 »

Hey All...I was listening to a podcast yesterday and was wondering what you folks think of this approach.

The podcaster was saying that he does not put his clients into a Total Bond Fund but rather splits the allocation into several categories. For example, he suggested a mix of short term Treasury, Intermediate Treasury, LTT, short Corporates, and something else for fixed income...can't recall right now.

His reasoning was that he can rebalance within the bond portfolio and also, in a challenging bond market, draw money from the segment that's doing the best. He feels like a total bond fund prevents him from optimally managing withdrawals and rebalancing.

I don't know...seems like a lot to manage and I'm wondering if there is really much value in doing the extra work. People seem to recommend a similar approach with equity (e.g.; four fund portfolio).

Do y'all think this kind of approach is worthwhile?
bloom2708
Posts: 9059
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: BND (or similar) vs. Using multiple bond funds

Post by bloom2708 »

For advisors, more funds = more fees.

I can see mixing short with intermediate, but managing 5-6+ bond funds is not required.
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead
z3r0c00l
Posts: 3041
Joined: Fri Jul 06, 2012 11:43 am
Location: NYC

Re: BND (or similar) vs. Using multiple bond funds

Post by z3r0c00l »

I honestly don't see why it is needed but I do treat very short term money, essentially cash, as needing to be in something other than BND. In other words my active money and emergency fund will be in a bank account, liquid I-bond, or maybe a short CD. BND is money you want to have sitting for 6-10 years as this year demonstrated.
70% Global Stocks / 25% Bonds / 5% cash
NiceUnparticularMan
Posts: 3824
Joined: Sat Mar 11, 2017 7:51 am

Re: BND (or similar) vs. Using multiple bond funds

Post by NiceUnparticularMan »

daacrusher2001 wrote: Tue May 03, 2022 1:31 pm Hey All...I was listening to a podcast yesterday and was wondering what you folks think of this approach.

The podcaster was saying that he does not put his clients into a Total Bond Fund but rather splits the allocation into several categories. For example, he suggested a mix of short term Treasury, Intermediate Treasury, LTT, short Corporates, and something else for fixed income...can't recall right now.

His reasoning was that he can rebalance within the bond portfolio and also, in a challenging bond market, draw money from the segment that's doing the best. He feels like a total bond fund prevents him from optimally managing withdrawals and rebalancing.

I don't know...seems like a lot to manage and I'm wondering if there is really much value in doing the extra work. People seem to recommend a similar approach with equity (e.g.; four fund portfolio).

Do y'all think this kind of approach is worthwhile?
This sounds like a typical argument for a manager collecting a large percentage-based fee for very little work, but which is not actually justifiable by the predictable benefits.

I'm not sure which four-fund portfolio you have in mind. The classic one in my mind is US Total Stock, ex-US Total International, US "total" Bond (although it is not actually total!), and ex-US "total" Bond. I think the main good argument for doing that is simply because it is necessary in your case to cover all those investments. If you could get it all in one fund--and sometimes you can--I don't think there is usually a good argument not to, although maybe minor fee or tax issues could play a role. But definitely not a performance bonus just from doing that.

The other plausible reason not to use such an all-one-fund is you don't like the mix of assets. Like, maybe you believe in tilting to value stocks. Maybe you think REITS are underrepresented in listed stocks. Maybe you think nominal bonds are not useful for your purposes and you would prefer TIPS or other IP bonds. Or so on.

But each of those should be a fixed strategy. You should not be planning to tactically change strategies based on whatever you think is likely to happen next. Because that sort of approach has a very poor track record.
User avatar
Taylor Larimore
Advisory Board
Posts: 31287
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: BND (or similar) vs. Using multiple bond funds

Post by Taylor Larimore »

daacrusher2001 wrote: Tue May 03, 2022 1:31 pm Hey All...I was listening to a podcast yesterday and was wondering what you folks think of this approach.

The podcaster was saying that he does not put his clients into a Total Bond Fund but rather splits the allocation into several categories. For example, he suggested a mix of short term Treasury, Intermediate Treasury, LTT, short Corporates, and something else for fixed income...can't recall right now.

I cannot understand why anyone would want to split a total bond market index fund into its many individual funds.

His reasoning was that he can rebalance within the bond portfolio and also, in a challenging bond market, draw money from the segment that's doing the best. He feels like a total bond fund prevents him from optimally managing withdrawals and rebalancing.

I don't know...seems like a lot to manage and I'm wondering if there is really much value in doing the extra work. People seem to recommend a similar approach with equity (e.g.; four fund portfolio).

Do y'all think this kind of approach is worthwhile?
daacrusher2001

No. I think the podcaster is trying to drum-up business for themselves.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Never underrate either the majesty of simplicity or its proven effectiveness as a long-term strategy for productive investing."
"Simplicity is the master key to financial success." -- Jack Bogle
UpperNwGuy
Posts: 7916
Joined: Sun Oct 08, 2017 7:16 pm

Re: BND (or similar) vs. Using multiple bond funds

Post by UpperNwGuy »

I tried using multiple bond funds, and it was too much work, so I tax loss harvested them all into BND. The one-bond-fund solution has been much easier to manage.
shess
Posts: 1725
Joined: Wed May 17, 2017 12:02 am

Re: BND (or similar) vs. Using multiple bond funds

Post by shess »

daacrusher2001 wrote: Tue May 03, 2022 1:31 pm His reasoning was that he can rebalance within the bond portfolio and also, in a challenging bond market, draw money from the segment that's doing the best. He feels like a total bond fund prevents him from optimally managing withdrawals and rebalancing.

I don't know...seems like a lot to manage and I'm wondering if there is really much value in doing the extra work. People seem to recommend a similar approach with equity (e.g.; four fund portfolio).
There's probably a lot of value to the financial advisor. They get to charge their AUM and everything is moving all over the place and they look really busy!

But it's quite unlikely that the advisor is adding more value than they are extracting in AUM. And this doesn't even get into the question of whether an advisor can add value, on average. If bond funds are yielding under 3%, and the advisor is charging 1%, then it is basically mathematically impossible for the advisor to add net value, unless they are literally among the best fixed-income talents in the industry. In that case, they wouldn't be advising individual clients for 1% AUM, they'd be working at a hedge fund making many multiples of that from 2 and 20.
secondopinion
Posts: 3015
Joined: Wed Dec 02, 2020 1:18 pm

Re: BND (or similar) vs. Using multiple bond funds

Post by secondopinion »

daacrusher2001 wrote: Tue May 03, 2022 1:31 pm Hey All...I was listening to a podcast yesterday and was wondering what you folks think of this approach.

The podcaster was saying that he does not put his clients into a Total Bond Fund but rather splits the allocation into several categories. For example, he suggested a mix of short term Treasury, Intermediate Treasury, LTT, short Corporates, and something else for fixed income...can't recall right now.

His reasoning was that he can rebalance within the bond portfolio and also, in a challenging bond market, draw money from the segment that's doing the best. He feels like a total bond fund prevents him from optimally managing withdrawals and rebalancing.

I don't know...seems like a lot to manage and I'm wondering if there is really much value in doing the extra work. People seem to recommend a similar approach with equity (e.g.; four fund portfolio).

Do y'all think this kind of approach is worthwhile?
No. That is because rebalancing is for risk management and not for returns. Since bonds only really have two dimensions of risk (credit risk and duration risk), it is simple to fix it. Generally, we only need one or two funds if we tilt.

We have VGSH/VGIT/VGLT and VCSH/VCIT/VCLT (credit & duration tilts), GOVT/VTC (credit tilts), BSV/BIV/BLV (duration tilts), and BND (no tilt). Each of the ETFs mentioned is 0.05% ER or less; it is cheap to tilt.

For example, if an investor wants more corporate bonds but has no other bias on duration, then BND/VTC mix is fine. If one wants intermediate treasuries only, buy VGIT. However, we usually need only one or two funds to achieve what we need, not 5-6 funds.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Topic Author
daacrusher2001
Posts: 108
Joined: Sat Oct 24, 2015 11:42 am

Re: BND (or similar) vs. Using multiple bond funds

Post by daacrusher2001 »

Thanks for all the replies...this particular podcaster isn't even taking on new clients, it's just his approach, and I was wondering if all the extra slicing and dicing is really worthwhile. He is very connected to his approach, which is fine I guess.

Full disclosure, for my FI portfolio - I hold a lot of BND - a small amount in short term corporates and about 10% of my FI portfolio is in PONAX (I've had this one for a long time). PONAX throws off a lot of cash that I just use for various things...no longer reinvest dividends. I do have some cash as well, but not that much.

I'm likely going to bail on the corporate bond fund, it's not that large of an investment and I'm looking to simplify.
User avatar
Doc
Posts: 10313
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: BND (or similar) vs. Using multiple bond funds

Post by Doc »

daacrusher2001 wrote: Tue May 03, 2022 1:31 pm Do y'all think this kind of approach is worthwhile?
I use a 1-10 Corporate/Treasury fund as a bogey and break it into it's four parts for tax efficient placement into taxable or ROTHs.

Trying to guess which component might outperform is an non-starter.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
shess
Posts: 1725
Joined: Wed May 17, 2017 12:02 am

Re: BND (or similar) vs. Using multiple bond funds

Post by shess »

daacrusher2001 wrote: Thu May 05, 2022 7:22 am Thanks for all the replies...this particular podcaster isn't even taking on new clients, it's just his approach, and I was wondering if all the extra slicing and dicing is really worthwhile. He is very connected to his approach, which is fine I guess.
There are lots of dimensions involved with investing. You can easily find yourself optimizing a dimension which simply doesn't matter. This can be hard to move past, because if you have actual evidence that you are actually optimizing something, it feels powerful! But that does not mean that the amount of effort is worth it, nor does it mean that you aren't de-optimizing some other area.

A habit I developed to help prevent me from sliding into always assuming "complex" == "better" was to do a quick estimation of the absolute dollar value of an approach and an estimation of the effort required. It's hard to evaluate a percentage against hours of effort, but it's generally easy to evaluate a dollar amount. Often enough, I'd find that I'd be better off spending the time working for pay rather than spending that time working my portfolio harder.
KlangFool
Posts: 25053
Joined: Sat Oct 11, 2008 12:35 pm

Re: BND (or similar) vs. Using multiple bond funds

Post by KlangFool »

daacrusher2001 wrote: Tue May 03, 2022 1:31 pm Hey All...I was listening to a podcast yesterday and was wondering what you folks think of this approach.

The podcaster was saying that he does not put his clients into a Total Bond Fund but rather splits the allocation into several categories. For example, he suggested a mix of short term Treasury, Intermediate Treasury, LTT, short Corporates, and something else for fixed income...can't recall right now.

His reasoning was that he can rebalance within the bond portfolio and also, in a challenging bond market, draw money from the segment that's doing the best. He feels like a total bond fund prevents him from optimally managing withdrawals and rebalancing.

I don't know...seems like a lot to manage and I'm wondering if there is really much value in doing the extra work. People seem to recommend a similar approach with equity (e.g.; four fund portfolio).

Do y'all think this kind of approach is worthwhile?
daacrusher2001,

If this person is smart enough to do this well consistently, he would be an active bond fund manager earning millions every year. I prefer to hire my bond fund manager via the Wellington Fund Management. They are paid hundreds of millions every year to actively manage my bonds and my stocks. I only pay 0.16% per year for this service.

https://finance.yahoo.com/quote/VWENX?p=VWENX
VWENX = 118B

At 0.16%, the annual management fee = 189 millions

Why would I listen to podcast?

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
secondopinion
Posts: 3015
Joined: Wed Dec 02, 2020 1:18 pm

Re: BND (or similar) vs. Using multiple bond funds

Post by secondopinion »

KlangFool wrote: Thu May 05, 2022 1:45 pm
daacrusher2001 wrote: Tue May 03, 2022 1:31 pm Hey All...I was listening to a podcast yesterday and was wondering what you folks think of this approach.

The podcaster was saying that he does not put his clients into a Total Bond Fund but rather splits the allocation into several categories. For example, he suggested a mix of short term Treasury, Intermediate Treasury, LTT, short Corporates, and something else for fixed income...can't recall right now.

His reasoning was that he can rebalance within the bond portfolio and also, in a challenging bond market, draw money from the segment that's doing the best. He feels like a total bond fund prevents him from optimally managing withdrawals and rebalancing.

I don't know...seems like a lot to manage and I'm wondering if there is really much value in doing the extra work. People seem to recommend a similar approach with equity (e.g.; four fund portfolio).

Do y'all think this kind of approach is worthwhile?
daacrusher2001,

If this person is smart enough to do this well consistently, he would be an active bond fund manager earning millions every year. I prefer to hire my bond fund manager via the Wellington Fund Management. They are paid hundreds of millions every year to actively manage my bonds and my stocks. I only pay 0.16% per year for this service.

https://finance.yahoo.com/quote/VWENX?p=VWENX
VWENX = 118B

At 0.16%, the annual management fee = 189 millions

Why would I listen to podcast?

KlangFool
I have mixed feelings about Wellington and Wellesley. On one hand, they are actively managed and I have my concerns about that. On the other hand, I actually do not have an issue with the slants they take. I could never make up my mind about these funds (these and https://investor.vanguard.com/mutual-fu ... file/VWETX, which is long-term corporate bonds, and https://investor.vanguard.com/mutual-fu ... file/VWEAX, high-yield bonds, for their better credit ratings than usual).
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
LeoB
Posts: 41
Joined: Mon Feb 17, 2020 10:42 pm

Re: BND (or similar) vs. Using multiple bond funds

Post by LeoB »

daacrusher2001 wrote: Tue May 03, 2022 1:31 pm Hey All...I was listening to a podcast yesterday and was wondering what you folks think of this approach.

The podcaster was saying that he does not put his clients into a Total Bond Fund but rather splits the allocation into several categories. For example, he suggested a mix of short term Treasury, Intermediate Treasury, LTT, short Corporates, and something else for fixed income...can't recall right now.

His reasoning was that he can rebalance within the bond portfolio and also, in a challenging bond market, draw money from the segment that's doing the best. He feels like a total bond fund prevents him from optimally managing withdrawals and rebalancing.

I don't know...seems like a lot to manage and I'm wondering if there is really much value in doing the extra work. People seem to recommend a similar approach with equity (e.g.; four fund portfolio).

Do y'all think this kind of approach is worthwhile?
I think it might be worthwhile, depending on how much you value the time it takes for you to self-manage several bond funds versus just a total bond fund. For example, let's say you are retired and making annual withdrawals of $100,000. Vanguard Total Bond Fund (BND) is down roughly 10% YTD. If you sold shares of BND right now, you would lock in about 10% of losses.

On the other hand, let's suppose you slice and diced your bond portfolio and therefore held a combination of short-term treasury, long-term treasury, short-term corporate, and long-term corporate funds. Out of these funds, short-term treasuries (VGSH) have performed the best YTD. If you sold this instead of BND to fund your annual withdrawal, you would only lock in losses of about 3%.

In our hypothetical, using the total bond fund would cost you about 7% of your withdrawal ($7,000) versus using a combination of various bond funds. Is that $7,000 worth the time and effort to manage a more complex bond portfolio? I suppose that's up to you.
KlangFool
Posts: 25053
Joined: Sat Oct 11, 2008 12:35 pm

Re: BND (or similar) vs. Using multiple bond funds

Post by KlangFool »

secondopinion wrote: Thu May 05, 2022 2:17 pm
I have mixed feelings about Wellington and Wellesley. On one hand, they are actively managed and I have my concerns about that. On the other hand, I actually do not have an issue with the slants they take. I could never make up my mind about these funds (these and https://investor.vanguard.com/mutual-fu ... file/VWETX, which is long-term corporate bonds, and https://investor.vanguard.com/mutual-fu ... file/VWEAX, high-yield bonds, for their better credit ratings than usual).
secondopinion.

If you are 100% into passive indexing, so be it. If you are actively manage your bonds and/or stocks, why won't you pick the low cost option of Wellington and Wellesley?

"I could never make up my mind about these funds (these and https://investor.vanguard.com/mutual-fu ... file/VWETX, which is long-term corporate bonds, and https://investor.vanguard.com/mutual-fu ... file/VWEAX, high-yield bonds, for their better credit ratings than usual)."

To pick some bond funds other than Total Bond Market Index Fund means that you are actively managing your bond. Why do you think that you can do a better job than W&W?

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
User avatar
1789
Posts: 2210
Joined: Fri Aug 16, 2019 3:31 pm

Re: BND (or similar) vs. Using multiple bond funds

Post by 1789 »

UpperNwGuy wrote: Tue May 03, 2022 2:10 pm I tried using multiple bond funds, and it was too much work, so I tax loss harvested them all into BND. The one-bond-fund solution has been much easier to manage.
Congratulations. I am relatively new investor and from the get go I understand more funds mean more trouble for me. It doesn't work for me to have multiple stocks/bonds etc.
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)
secondopinion
Posts: 3015
Joined: Wed Dec 02, 2020 1:18 pm

Re: BND (or similar) vs. Using multiple bond funds

Post by secondopinion »

KlangFool wrote: Thu May 05, 2022 3:13 pm
secondopinion wrote: Thu May 05, 2022 2:17 pm
I have mixed feelings about Wellington and Wellesley. On one hand, they are actively managed and I have my concerns about that. On the other hand, I actually do not have an issue with the slants they take. I could never make up my mind about these funds (these and https://investor.vanguard.com/mutual-fu ... file/VWETX, which is long-term corporate bonds, and https://investor.vanguard.com/mutual-fu ... file/VWEAX, high-yield bonds, for their better credit ratings than usual).
secondopinion.

If you are 100% into passive indexing, so be it. If you are actively manage your bonds and/or stocks, why won't you pick the low cost option of Wellington and Wellesley?

"I could never make up my mind about these funds (these and https://investor.vanguard.com/mutual-fu ... file/VWETX, which is long-term corporate bonds, and https://investor.vanguard.com/mutual-fu ... file/VWEAX, high-yield bonds, for their better credit ratings than usual)."

To pick some bond funds other than Total Bond Market Index Fund means that you are actively managing your bond. Why do you think that you can do a better job than W&W?

KlangFool
With W&W, it is tempting; but I do not know tax efficient it is at the end of the day. Given that my taxable account outsizes my tax-advantaged by a lot, it seems like active management could be a bit of distributions. Also, the fixed-income is mingled together when I see that taxation of bonds could suggest a split into taxable and tax-advantaged accounts.

As far as deviation from the total bond market, I do not how this is about beating the market. An emergency fund is a fixed-income portfolio; so is a pension’s bond portfolio. Different durations completely as the former is very short duration and the latter is very long; which one is doing the better job? Different uses have different bonds meant for them.

W&W are general funds for general purposes; I am not supposing to go against that. I do not intend to beat the market or W&W; I just want to make decisions that will protect my after-tax returns while not being too short on duration in my retirement accounts (since short-term bonds are the most reasonable to place in the taxable account first for many reasons).
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Topic Author
daacrusher2001
Posts: 108
Joined: Sat Oct 24, 2015 11:42 am

Re: BND (or similar) vs. Using multiple bond funds

Post by daacrusher2001 »

This question wasn't really about trying to beat the market. Or even time the market. The response [below] from @LeoB is really what it's all about. Just wondering if enough value is there to manage a portfolio with multiple funds vs. a single bond fund.

While the podcast got me thinking more about this, I have been considering restructuring my overall portfolio as I'm entering retirement. Maybe keeping about 5 years of retirement expenses shorter duration funds. Possibly 2 years in cash and 3 years in STT or something else. I'm thinking of just keeping that model throughout retirement, using an intermediate fund like BND for the rest of my FI allocation.

It's a bucket approach which is helpful to me. This is really what prompted my question. I'm entering retirement this year and having some cash to use in lieu of selling investments, for at least some period of time, is something that'll work for me.
LeoB wrote: Thu May 05, 2022 3:02 pm
I think it might be worthwhile, depending on how much you value the time it takes for you to self-manage several bond funds versus just a total bond fund. For example, let's say you are retired and making annual withdrawals of $100,000. Vanguard Total Bond Fund (BND) is down roughly 10% YTD. If you sold shares of BND right now, you would lock in about 10% of losses.

On the other hand, let's suppose you slice and diced your bond portfolio and therefore held a combination of short-term treasury, long-term treasury, short-term corporate, and long-term corporate funds. Out of these funds, short-term treasuries (VGSH) have performed the best YTD. If you sold this instead of BND to fund your annual withdrawal, you would only lock in losses of about 3%.

In our hypothetical, using the total bond fund would cost you about 7% of your withdrawal ($7,000) versus using a combination of various bond funds. Is that $7,000 worth the time and effort to manage a more complex bond portfolio? I suppose that's up to you.
KlangFool
Posts: 25053
Joined: Sat Oct 11, 2008 12:35 pm

Re: BND (or similar) vs. Using multiple bond funds

Post by KlangFool »

OP,

It is very simple.

If you don't want to lose your principal, you keep it in cash. Short term Treasury doesn't achieve that.

A combination of bond funds doesn't achieve that either. Depending on your luck, it may do a lot worse or better than BND. Are you that lucky?

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
User avatar
vineviz
Posts: 11705
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: BND (or similar) vs. Using multiple bond funds

Post by vineviz »

daacrusher2001 wrote: Fri May 06, 2022 6:35 am This question wasn't really about trying to beat the market. Or even time the market. The response [below] from @LeoB is really what it's all about. Just wondering if enough value is there to manage a portfolio with multiple funds vs. a single bond fund.

While the podcast got me thinking more about this, I have been considering restructuring my overall portfolio as I'm entering retirement. Maybe keeping about 5 years of retirement expenses shorter duration funds. Possibly 2 years in cash and 3 years in STT or something else. I'm thinking of just keeping that model throughout retirement, using an intermediate fund like BND for the rest of my FI allocation.
If you're getting ready to start retirement soon, presumably you've got an investment horizon that is 15 to 20 years long. By constructing your retirement portfolio using bonds with a duration that is shorter than that you are effectively doing two things:

1) making an active bet that bond yields will rise faster than the market expects over the next 30 years; and
2) expressing a preference for certainty of portfolio value over a preference for certainty of retirement income.


A fund like BND already is a mix of various maturities of bonds, and it helps to think of thinks in buckets then think of BND like this:

5% cash
35% short-term bonds
50% intermediate-term bonds
10% long-term bonds

In other words, BND is already a bucket of cash + ST bonds + IT bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
Doc
Posts: 10313
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: BND (or similar) vs. Using multiple bond funds

Post by Doc »

I split my bond "bogey" (1-10 Corporate/Treasury index) into four parts and put the parts into different accounts for tax efficiency purposes.

It's no big deal.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
Topic Author
daacrusher2001
Posts: 108
Joined: Sat Oct 24, 2015 11:42 am

Re: BND (or similar) vs. Using multiple bond funds

Post by daacrusher2001 »

vineviz wrote: Fri May 06, 2022 7:07 am
daacrusher2001 wrote: Fri May 06, 2022 6:35 am This question wasn't really about trying to beat the market. Or even time the market. The response [below] from @LeoB is really what it's all about. Just wondering if enough value is there to manage a portfolio with multiple funds vs. a single bond fund.

While the podcast got me thinking more about this, I have been considering restructuring my overall portfolio as I'm entering retirement. Maybe keeping about 5 years of retirement expenses shorter duration funds. Possibly 2 years in cash and 3 years in STT or something else. I'm thinking of just keeping that model throughout retirement, using an intermediate fund like BND for the rest of my FI allocation.
If you're getting ready to start retirement soon, presumably you've got an investment horizon that is 15 to 20 years long. By constructing your retirement portfolio using bonds with a duration that is shorter than that you are effectively doing two things:

1) making an active bet that bond yields will rise faster than the market expects over the next 30 years; and
2) expressing a preference for certainty of portfolio value over a preference for certainty of retirement income.


A fund like BND already is a mix of various maturities of bonds, and it helps to think of thinks in buckets then think of BND like this:

5% cash
35% short-term bonds
50% intermediate-term bonds
10% long-term bonds

In other words, BND is already a bucket of cash + ST bonds + IT bonds.
@vineviz, thanks for that. I think I'm likely to just leave things as they are with maybe a bit more cash for the next couple of years.
User avatar
quisp65
Posts: 208
Joined: Wed Apr 10, 2019 7:44 am
Location: San Diego CA

Re: BND (or similar) vs. Using multiple bond funds

Post by quisp65 »

I'm dialing in my desire with a VCIT/VGIT (int corp/treasury) combo. If I was concerned with my duration I would add vcsh & vgsh to shorten it. I think combining funds works great but might be a pain for someone who withdraws several times a year.

I wonder if the number of withdrawal times would be the main deciding factor in difference in opinion?
User avatar
Doc
Posts: 10313
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: BND (or similar) vs. Using multiple bond funds

Post by Doc »

quisp65 wrote: Mon May 09, 2022 9:51 am I'm dialing in my desire with a VCIT/VGIT (int corp/treasury) combo. If I was concerned with my duration I would add vcsh & vgsh to shorten it. I think combining funds works great but might be a pain for someone who withdraws several times a year.

I wonder if the number of withdrawal times would be the main deciding factor in difference in opinion?
I don't have the withdrawal issue myself but depending on your withdrawal frequency taking the money from a different fund each time would give you a more general portfolio without causing much added bookkeeping or change in overall fixed income risk/return..
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
LeoB
Posts: 41
Joined: Mon Feb 17, 2020 10:42 pm

Re: BND (or similar) vs. Using multiple bond funds

Post by LeoB »

Doc wrote: Fri May 06, 2022 9:09 am I split my bond "bogey" (1-10 Corporate/Treasury index) into four parts and put the parts into different accounts for tax efficiency purposes.

It's no big deal.
I also like this idea and am thinking of doing something very similar with my bonds, especially as I get closer to retirement. In particular, I am planning on holding 25% VTIP, 25% VCSH, 25% VGIT, 25% VCIT, in addition to cash in a money market fund for emergency expenses.

VTIP = short-term inflation protected securities
VCSH = short-term investment grade corporate bonds
VGIT = intermediate-term treasuries
VCIT = intermediate-term investment grade corporate bonds

Do you think that using short-term inflation protected securities instead of short-term nominal treasuries (VGSH) would make much of a difference? I like VTIP because it is still backed by the faith and credit of the U.S. treasury. It also seems that VTIP should offer better protection than VGSH when interest rates rise faster than expected. Does this make sense?
secondopinion
Posts: 3015
Joined: Wed Dec 02, 2020 1:18 pm

Re: BND (or similar) vs. Using multiple bond funds

Post by secondopinion »

LeoB wrote: Mon May 09, 2022 11:21 am
Doc wrote: Fri May 06, 2022 9:09 am I split my bond "bogey" (1-10 Corporate/Treasury index) into four parts and put the parts into different accounts for tax efficiency purposes.

It's no big deal.
I also like this idea and am thinking of doing something very similar with my bonds, especially as I get closer to retirement. In particular, I am planning on holding 25% VTIP, 25% VCSH, 25% VGIT, 25% VCIT, in addition to cash in a money market fund for emergency expenses.

VTIP = short-term inflation protected securities
VCSH = short-term investment grade corporate bonds
VGIT = intermediate-term treasuries
VCIT = intermediate-term investment grade corporate bonds

Do you think that using short-term inflation protected securities instead of short-term nominal treasuries (VGSH) would make much of a difference? I like VTIP because it is still backed by the faith and credit of the U.S. treasury. It also seems that VTIP should offer better protection than VGSH when interest rates rise faster than expected. Does this make sense?
VTIP requires inflation to be greater than expectations to outperform; it does not protect against interest rate changes. However, if protecting real value is a concern, we definitely would want VTIP over VGSH. However, there were periods where it certainly underperformed. Essentially seven years underperforming "cash" (despite the risk taken) is not exactly ideal (although cash had gained almost nothing).

https://www.portfoliovisualizer.com/bac ... ion3_3=100

Only the current environment has really brought VTIP to the forefront. We are better to have some TIPS in a longer term holdings since that is where the protection is needed.

https://www.portfoliovisualizer.com/bac ... ion3_3=100
Last edited by secondopinion on Mon May 09, 2022 11:50 am, edited 1 time in total.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
User avatar
ApeAttack
Posts: 562
Joined: Wed Dec 23, 2020 8:28 pm
Location: Gorillatown

Re: BND (or similar) vs. Using multiple bond funds

Post by ApeAttack »

UpperNwGuy wrote: Tue May 03, 2022 2:10 pm I tried using multiple bond funds, and it was too much work, so I tax loss harvested them all into BND. The one-bond-fund solution has been much easier to manage.
In my 403b account, where most of my retirement savings are located, there are no multiple bond funds that are equivalent to total bond. But even if this were available, it would be too much of a headache. I like thinking about my retirement investments as little as possible, and love having minimal fees.
Just another lazy index investor.
Topic Author
daacrusher2001
Posts: 108
Joined: Sat Oct 24, 2015 11:42 am

Re: BND (or similar) vs. Using multiple bond funds

Post by daacrusher2001 »

ApeAttack wrote: Mon May 09, 2022 11:49 am
UpperNwGuy wrote: Tue May 03, 2022 2:10 pm I tried using multiple bond funds, and it was too much work, so I tax loss harvested them all into BND. The one-bond-fund solution has been much easier to manage.
I like thinking about my retirement investments as little as possible, and love having minimal fees.
That's my mission as well...LOL - just wanna enjoy myself.
User avatar
climber2020
Posts: 2197
Joined: Sun Mar 25, 2012 8:06 pm

Re: BND (or similar) vs. Using multiple bond funds

Post by climber2020 »

I have 3 different bonds funds in my 401k that are all very similar.

My 401k provider only allows transactions in whole number percentages, so by keeping it all in one bond fund, I don't have much precision when either rebalancing or doing RBD transactions. By splitting it up into multiple funds, each percentage of each fund ends up being a smaller dollar amount. Also, a percentage of my bonds are in a treasury fund, so if we have another repeat of March 2020, I can use the treasury fund to rebalance instead of selling from an intermediate bond with corporates that has also tanked at the same time as stocks.

In the grand scheme of things, it probably makes no significant difference but it gives me the illusion of control and a false sense of well being.
User avatar
ApeAttack
Posts: 562
Joined: Wed Dec 23, 2020 8:28 pm
Location: Gorillatown

Re: BND (or similar) vs. Using multiple bond funds

Post by ApeAttack »

daacrusher2001 wrote: Mon May 09, 2022 11:54 am
ApeAttack wrote: Mon May 09, 2022 11:49 am
UpperNwGuy wrote: Tue May 03, 2022 2:10 pm I tried using multiple bond funds, and it was too much work, so I tax loss harvested them all into BND. The one-bond-fund solution has been much easier to manage.
I like thinking about my retirement investments as little as possible, and love having minimal fees.
That's my mission as well...LOL - just wanna enjoy myself.
The best part of being a lazy investor is we have a great shot at doing just as well as someone who spends a lot of time micromanaging their account.
Just another lazy index investor.
Da5id
Posts: 4615
Joined: Fri Feb 26, 2016 8:20 am

Re: BND (or similar) vs. Using multiple bond funds

Post by Da5id »

daacrusher2001 wrote: Tue May 03, 2022 1:31 pm Hey All...I was listening to a podcast yesterday and was wondering what you folks think of this approach.

The podcaster was saying that he does not put his clients into a Total Bond Fund but rather splits the allocation into several categories. For example, he suggested a mix of short term Treasury, Intermediate Treasury, LTT, short Corporates, and something else for fixed income...can't recall right now.

His reasoning was that he can rebalance within the bond portfolio and also, in a challenging bond market, draw money from the segment that's doing the best. He feels like a total bond fund prevents him from optimally managing withdrawals and rebalancing.

I don't know...seems like a lot to manage and I'm wondering if there is really much value in doing the extra work. People seem to recommend a similar approach with equity (e.g.; four fund portfolio).

Do y'all think this kind of approach is worthwhile?
Nope.

Mind you "just do BND" isn't necessarily the best choice either, it is simply *good enough*. There is a reasonable case for some amount of TIPs/I-bonds. For high income investors who don't have space for bonds in tax sheltered accounts there also is a case for municipal bonds. And there are reasonable cases made for all treasuries, or some long term treasuries or such. I'm personally on team "some BND, some TIPs/I-bonds". But ultimately I think it ends up not mattering all that much.
User avatar
Doc
Posts: 10313
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: BND (or similar) vs. Using multiple bond funds

Post by Doc »

LeoB wrote: Mon May 09, 2022 11:21 am Do you think that using short-term inflation protected securities instead of short-term nominal treasuries (VGSH) would make much of a difference?
Definitely not. Two reasons.

1) Way back in the beginning the BH mantra was TIPS are just like nominal Treasuries except for the inflation protection. And then along came the 2005(?) stock crash and TIPS sank while nominal bonds performed as expected with price increases.

2) Why worry about inflation in the short term? The bonds in a 1-3 index are all going to go away in two years by themselves. And half of them in one year.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
LeoB
Posts: 41
Joined: Mon Feb 17, 2020 10:42 pm

Re: BND (or similar) vs. Using multiple bond funds

Post by LeoB »

Thanks for the feedback. I'll include intermediate-term TIPS in my allocation and make sure to use a decent amount of short-term nominal treasuries. I think a treasury money market fund like VUSXX should suffice rather than VGSH. In a deflationary environment, the money market wouldn't appreciate but would at least remain stable. This would allow me to have one fewer fund for simplicity.

My fixed income holdings are shaping up to be:
Treasury money market fund
Intermediate-term nominal treasuries
Intermediate-term TIPS
Short-term investment-grade corporates
Intermediate-term investment-grade corporates
secondopinion wrote: Mon May 09, 2022 11:44 am
VTIP requires inflation to be greater than expectations to outperform; it does not protect against interest rate changes. However, if protecting real value is a concern, we definitely would want VTIP over VGSH. However, there were periods where it certainly underperformed. Essentially seven years underperforming "cash" (despite the risk taken) is not exactly ideal (although cash had gained almost nothing).

https://www.portfoliovisualizer.com/bac ... ion3_3=100

Only the current environment has really brought VTIP to the forefront. We are better to have some TIPS in a longer term holdings since that is where the protection is needed.

https://www.portfoliovisualizer.com/bac ... ion3_3=100
Doc wrote: Mon May 09, 2022 3:48 pm
Definitely not. Two reasons.

1) Way back in the beginning the BH mantra was TIPS are just like nominal Treasuries except for the inflation protection. And then along came the 2005(?) stock crash and TIPS sank while nominal bonds performed as expected with price increases.

2) Why worry about inflation in the short term? The bonds in a 1-3 index are all going to go away in two years by themselves. And half of them in one year.
User avatar
vineviz
Posts: 11705
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: BND (or similar) vs. Using multiple bond funds

Post by vineviz »

LeoB wrote: Wed May 11, 2022 6:10 pm Thanks for the feedback. I'll include intermediate-term TIPS in my allocation and make sure to use a decent amount of short-term nominal treasuries. I think a treasury money market fund like VUSXX should suffice rather than VGSH. In a deflationary environment, the money market wouldn't appreciate but would at least remain stable. This would allow me to have one fewer fund for simplicity.

My fixed income holdings are shaping up to be:
Treasury money market fund
Intermediate-term nominal treasuries
Intermediate-term TIPS
Short-term investment-grade corporates
Intermediate-term investment-grade corporates

That still seems like two or three funds more than anyone would need.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
LeoB
Posts: 41
Joined: Mon Feb 17, 2020 10:42 pm

Re: BND (or similar) vs. Using multiple bond funds

Post by LeoB »

vineviz wrote: Wed May 11, 2022 7:07 pm
LeoB wrote: Wed May 11, 2022 6:10 pm Thanks for the feedback. I'll include intermediate-term TIPS in my allocation and make sure to use a decent amount of short-term nominal treasuries. I think a treasury money market fund like VUSXX should suffice rather than VGSH. In a deflationary environment, the money market wouldn't appreciate but would at least remain stable. This would allow me to have one fewer fund for simplicity.

My fixed income holdings are shaping up to be:
Treasury money market fund
Intermediate-term nominal treasuries
Intermediate-term TIPS
Short-term investment-grade corporates
Intermediate-term investment-grade corporates

That still seems like two or three funds more than anyone would need.
I suppose some do not think shortening duration is necessary. I would understand that objection.

However in certain states, a mutual fund or ETF must hold more than 50% treasuries to be exempt from state taxes. This precludes the usage of any total bond funds in taxable accounts. My state of residence is one of these.
User avatar
abuss368
Posts: 26242
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: BND (or similar) vs. Using multiple bond funds

Post by abuss368 »

UpperNwGuy wrote: Tue May 03, 2022 2:10 pm I tried using multiple bond funds, and it was too much work, so I tax loss harvested them all into BND. The one-bond-fund solution has been much easier to manage.
UpperNwGuy -

You have a much better portfolio as a result. I too had many bond funds when I returned to Vanguard over 15 years ago. I soon realized is was a lot of overlap, higher costs, and additional complexity.

We soon moved to Total Bond Index and in hindsight this has worked well.

There is a good reason why Total Bond is the largest bond fund on the PLANET!

Best.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
abuss368
Posts: 26242
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: BND (or similar) vs. Using multiple bond funds

Post by abuss368 »

daacrusher2001 wrote: Tue May 03, 2022 1:31 pm Hey All...I was listening to a podcast yesterday and was wondering what you folks think of this approach.

The podcaster was saying that he does not put his clients into a Total Bond Fund but rather splits the allocation into several categories. For example, he suggested a mix of short term Treasury, Intermediate Treasury, LTT, short Corporates, and something else for fixed income...can't recall right now.

His reasoning was that he can rebalance within the bond portfolio and also, in a challenging bond market, draw money from the segment that's doing the best. He feels like a total bond fund prevents him from optimally managing withdrawals and rebalancing.

I don't know...seems like a lot to manage and I'm wondering if there is really much value in doing the extra work. People seem to recommend a similar approach with equity (e.g.; four fund portfolio).

Do y'all think this kind of approach is worthwhile?
I would consider this investment porn and tune out this noise.

Best.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
abuss368
Posts: 26242
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: BND (or similar) vs. Using multiple bond funds

Post by abuss368 »

LeoB wrote: Wed May 11, 2022 6:10 pm
My fixed income holdings are shaping up to be:
Treasury money market fund
Intermediate-term nominal treasuries
Intermediate-term TIPS
Short-term investment-grade corporates
Intermediate-term investment-grade corporates
Hi LeoB -

This is a lot of complexity which will probably make zero difference over the long term. Any short or intermediate low cost and diversified bond fund will provide safety and income to a portfolio.

Keep investing and life simple!

Best.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
vineviz
Posts: 11705
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: BND (or similar) vs. Using multiple bond funds

Post by vineviz »

LeoB wrote: Wed May 11, 2022 7:58 pm
vineviz wrote: Wed May 11, 2022 7:07 pm
That still seems like two or three funds more than anyone would need.
I suppose some do not think shortening duration is necessary. I would understand that objection.

However in certain states, a mutual fund or ETF must hold more than 50% treasuries to be exempt from state taxes. This precludes the usage of any total bond funds in taxable accounts. My state of residence is one of these.
My comment wasn't about duration, which is a separate issue.

Even accounting for different account types, there is no allocation of the five fund types listed above that can't be replicated with just 2-3 funds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
LeoB
Posts: 41
Joined: Mon Feb 17, 2020 10:42 pm

Re: BND (or similar) vs. Using multiple bond funds

Post by LeoB »

Thanks for the clarification! Simplicity definitely has its virtues, particularly when adding extra funds does not contribute much benefit.
vineviz wrote: Thu May 12, 2022 8:55 am
Even accounting for different account types, there is no allocation of the five fund types listed above that can't be replicated with just 2-3 funds.
abuss368 wrote: Wed May 11, 2022 8:59 pm
Keep investing and life simple!

Best.
Tony
Post Reply