A Stress Test of Four Bond Portfolios

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Northern Flicker
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A Stress Test of Four Bond Portfolios

Post by Northern Flicker »

The performance since the start of the pandemic (say since the start of 2020) of 4 recommended index-fund-based bond portfolios is interesting. There were two significant sources of volatility during the period-- the initial pandemic lockdowns in 3/2020 and the current bout of inflation and Fed tightening.

The Four portfolios are described, and an implementation of each with funds is shown.

1. The bond portfolio used by Vanguard in the LifeStrategy Funds and the early and midrange of Target Retirement Fund glide paths.

70% BND / 30% BNDX

2. The bond portfolio used by Vanguard for the fund Target Retirement Income (vtinx).

53% BND - 24% VTIP - 23% BNDX

3. The bond portfolio recommended by David Swensen in his Unconventional Success book.

50% FUAMX - 50% FIPDX

4. The bond portfolio recommended for the BH 3-fund portfolio.

100% BND

The results...

https://www.portfoliovisualizer.com/bac ... tion5_3=50

Looking at the graphs, the Swensen portfolio sailed through 3/3020 without skipping a beat, but all 4 took hits from rising rates since Aug. 2021. It is thus interesting also to look at the performance since Aug 2021.

https://www.portfoliovisualizer.com/bac ... tion5_3=50

The Swensen portfolio was again the winner on return, though the portfolio from Target Retirement Income (vtinx) achieved nearly the same result but with lower volatility.

This should not be construed as a prediction of future performance.
My postings represent my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
dbr
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Re: A Stress Test of Four Bond Portfolios

Post by dbr »

Northern Flicker wrote: Wed Sep 21, 2022 7:57 pm The performance since the start of the pandemic (say since the start of 2020) of 4 recommended index-fund-based bond portfolios is interesting. There were two significant sources of volatility during the period-- the initial pandemic lockdowns in 3/2020 and the current bout of inflation and Fed tightening.

The Four portfolios are described, and an implementation of each with funds is shown.

1. The bond portfolio used by Vanguard in the LifeStrategy Funds and the early and midrange of Target Retirement Fund glide paths.

70% BND / 30% BNDX

2. The bond portfolio used by Vanguard for the fund Target Retirement Income (vtinx).

53% BND - 24% VTIP - 23% BNDX

3. The bond portfolio recommended by David Swensen in his Unconventional Success book.

50% FUAMX - 50% FIPDX

4. The bond portfolio recommended for the BH 3-fund portfolio.

100% BND

The results...

https://www.portfoliovisualizer.com/bac ... tion5_3=50

Looking at the graphs, the Swensen portfolio sailed through 3/3020 without skipping a beat, but all 4 took hits from rising rates since Aug. 2021. It is thus interesting also to look at the performance since Aug 2021.

https://www.portfoliovisualizer.com/bac ... tion5_3=50

The Swensen portfolio was again the winner on return, though the portfolio from Target Retirement Income (vtinx) achieved nearly the same result but with lower volatility.

This should not be construed as a prediction of future performance.
The best choice would have been 100% FIPDX by a large margin.

Finding funds to test from back from more years is more work because most of those tested choices didn't exist that far back.

From 2000 to 2022 out of VIPSX, half VIPSX/half VFITX, and VBMFX the winner is 100% VIPSX.

This is just funning really because it is hard to relate backtests to future prospects.
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Northern Flicker
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Re: A Stress Test of Four Bond Portfolios

Post by Northern Flicker »

The portfolios are significant a priori recommendations by others. A stress test to see how some known/recommended bond portfolios held up during a time of duress is a different exercise from backtesting to find a top performer.
Last edited by Northern Flicker on Wed Sep 21, 2022 9:01 pm, edited 1 time in total.
My postings represent my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: A Stress Test of Four Bond Portfolios

Post by vineviz »

Northern Flicker wrote: Wed Sep 21, 2022 7:57 pm The performance since the start of the pandemic (say since the start of 2020) of 4 recommended index-fund-based bond portfolios is interesting. There were two significant sources of volatility during the period-- the initial pandemic lockdowns in 3/2020 and the current bout of inflation and Fed tightening.
Since none of the four portfolios was constructed for an investor with a 20-month investment horizon, I'm not sure looking at their short-run performance is actually a "stress test".
"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: A Stress Test of Four Bond Portfolios

Post by Northern Flicker »

Some investors also care about the ballast bonds can provide in times of duress. No investment horizon is guaranteed. With the exception of the portfolio used for TR Income (vtinx) all 4 portfolios have a similar duration.
My postings represent my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: A Stress Test of Four Bond Portfolios

Post by abuss368 »

vineviz wrote: Wed Sep 21, 2022 9:01 pm
Northern Flicker wrote: Wed Sep 21, 2022 7:57 pm The performance since the start of the pandemic (say since the start of 2020) of 4 recommended index-fund-based bond portfolios is interesting. There were two significant sources of volatility during the period-- the initial pandemic lockdowns in 3/2020 and the current bout of inflation and Fed tightening.
Since none of the four portfolios was constructed for an investor with a 20-month investment horizon, I'm not sure looking at their short-run performance is actually a "stress test".
What would be the significance of 20 months?
John C. Bogle: “Simplicity is the master key to financial success."
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Re: A Stress Test of Four Bond Portfolios

Post by vineviz »

abuss368 wrote: Wed Sep 21, 2022 9:14 pm
vineviz wrote: Wed Sep 21, 2022 9:01 pm
Northern Flicker wrote: Wed Sep 21, 2022 7:57 pm The performance since the start of the pandemic (say since the start of 2020) of 4 recommended index-fund-based bond portfolios is interesting. There were two significant sources of volatility during the period-- the initial pandemic lockdowns in 3/2020 and the current bout of inflation and Fed tightening.
Since none of the four portfolios was constructed for an investor with a 20-month investment horizon, I'm not sure looking at their short-run performance is actually a "stress test".
What would be the significance of 20 months?
I was referring to the arbitrary period of evaluation chosen by the OP (though I misread the post initially, and see that it's more like 32 months.

Still meaningless compared to the investment horizon of the investors those portfolios were designed for.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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vineviz
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Re: A Stress Test of Four Bond Portfolios

Post by vineviz »

Northern Flicker wrote: Wed Sep 21, 2022 9:03 pm Some investors also care about the ballast bonds can provide in times of duress. No investment horizon is guaranteed. With the exception of the portfolio used for TR Income (vtinx) all 4 portfolios have a similar duration.
Such investors would not (or should not) have chosen ANY of the compared bond allocations though: anyone with a time horizon of less than 3 years should have been in short-term or ultrashort bonds, or even cash.
"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: A Stress Test of Four Bond Portfolios

Post by abuss368 »

vineviz wrote: Wed Sep 21, 2022 10:19 pm
abuss368 wrote: Wed Sep 21, 2022 9:14 pm
vineviz wrote: Wed Sep 21, 2022 9:01 pm
Northern Flicker wrote: Wed Sep 21, 2022 7:57 pm The performance since the start of the pandemic (say since the start of 2020) of 4 recommended index-fund-based bond portfolios is interesting. There were two significant sources of volatility during the period-- the initial pandemic lockdowns in 3/2020 and the current bout of inflation and Fed tightening.
Since none of the four portfolios was constructed for an investor with a 20-month investment horizon, I'm not sure looking at their short-run performance is actually a "stress test".
What would be the significance of 20 months?
I was referring to the arbitrary period of evaluation chosen by the OP (though I misread the post initially, and see that it's more like 32 months.

Still meaningless compared to the investment horizon of the investors those portfolios were designed for.
Hi Vince -

Got it. Thought I was missing something. I would agree that 20 or 32 months is meaningless!

Hope you are well.

Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Northern Flicker
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Re: A Stress Test of Four Bond Portfolios

Post by Northern Flicker »

As I stated, it was a stress test, not data mining to find the best performer. I selected the portfolios before running any of the tests based on their pedigree. If you don't care how much ballast your bond portfolio provides to your overall portfolio, then I agree 32 months is a short period. But it is no less problematic to insist on a rigid investment horizon. Life is unpredictable and may not cooperate with the best laid plans.

I don't take a 32-month test as being in any way meaningful for selecting the best performing portfolio. A stress test for a bond portfolio looks at how well it held up during times of market stress, which usually are shorter time periods.

The bond portfolio for VTINX worked as advertised. Vanguard has described that they included short TIPS so that there would be a good source of income and liquidity if and when stocks and intermediate bonds experience volatility while a bout of inflation works through the markets. So far, it has worked.

But the Swensen bond portfolio also achieved a similar result. Conventional wisdom is that one can afford to take more term risk if taking less inflation risk, and this bore this out in the period in question.
Last edited by Northern Flicker on Thu Sep 22, 2022 12:37 am, edited 1 time in total.
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Re: A Stress Test of Four Bond Portfolios

Post by Beensabu »

Northern Flicker wrote: Wed Sep 21, 2022 10:34 pm A stress test for a bond portfolio looks at how well it held up during times of market stress, which usually are shorter time periods.
It's helpful info, thanks for thinking to compare these over the time frames you did. Will be a handy thing to look back at later on when someone thinks to ask "well, what happened the last time [this thing] happened?"
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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Northern Flicker
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Re: A Stress Test of Four Bond Portfolios

Post by Northern Flicker »

vineviz wrote: Wed Sep 21, 2022 10:20 pm
Northern Flicker wrote: Wed Sep 21, 2022 9:03 pm Some investors also care about the ballast bonds can provide in times of duress. No investment horizon is guaranteed. With the exception of the portfolio used for TR Income (vtinx) all 4 portfolios have a similar duration.
Such investors would not (or should not) have chosen ANY of the compared bond allocations though: anyone with a time horizon of less than 3 years should have been in short-term or ultrashort bonds, or even cash.
They may have a longer horizon but still care about drawdown risk over shorter timeframes. Both total bond and the Swensen portfolio have about the same duration and are appropriate for the same investment horizons. That does not preclude the possibility of reasons to prefer one or the other.
My postings represent my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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