vanguard total bond versus intermediate bond

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boglethis
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vanguard total bond versus intermediate bond

Post by boglethis » Thu Jun 02, 2011 4:34 pm

hello and good afternoon:

simple noobie question: what is the big difference between owning VBIIX (intermediate) and VBMFX (total bond)? is there any? thanks.

........................................................VBIIX...................................... VBMFX
Number of bonds................................1140........................................4925
Average maturity ........................7.3 years ...............................7.2 years
Average duration ........................6.3 years ..............................5.1 years
Average coupon ..................................4.7% ..............................4.3%

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Taylor Larimore
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The difference

Post by Taylor Larimore » Thu Jun 02, 2011 4:41 pm

boglethis wrote:hello and good afternoon:

simple noobie question: what is the big difference between owning VBIIX (intermediate) and VBMFX (total bond)?
Hi boglethis:

There is a significant difference. Total Bond Market Index Fund is diversified among different bond types; VBIIX is not.
"Simplicity is the master key to financial success." -- Jack Bogle

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Post by boglethis » Thu Jun 02, 2011 4:42 pm

Vanguard Intermediate-Term Bond Index Fund Investor Shares (VBIIX)

The fund employs a “passive management”—or indexing—strategy designed to track the performance of the Barclays Capital U.S. 5–10 Year Government/Credit Float Adjusted Bond Index. This index includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities between 5 and 10 years and are publicly issued. The fund invests by sampling the index, meaning that it holds a range of securities that, in the aggregate, approximate the full index in terms of key risk factors and other characteristics. All of the fund’s investments will be selected through the sampling process, and at least 80% of the fund’s assets will be invested in bonds held in the index. The fund maintains a dollar-weighted average maturity consistent with that of the index, which ranges between 5 and 10 years.



Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)

The fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. Aggregate Float Adjusted Bond Index. This index measures a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States—including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than 1 year. The fund invests by sampling the index, meaning that it holds a range of securities that, in the aggregate, approximate the full index in terms of key risk factors and other characteristics. All of the fund’s investments will be selected through the sampling process, and at least 80% of the fund’s assets will be invested in bonds held in the index. The fund maintains a dollar-weighted average maturity consistent with that of the index, which currently ranges between 5 and 10 years.

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Re: The difference

Post by boglethis » Thu Jun 02, 2011 4:50 pm

Taylor Larimore wrote:
boglethis wrote:hello and good afternoon:

simple noobie question: what is the big difference between owning VBIIX (intermediate) and VBMFX (total bond)?
Hi boglethis:

There is a significant difference. Total Bond Market Index Fund is diversified among different bond types; VBIIX is not.
thank you

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Post by nisiprius » Thu Jun 02, 2011 4:57 pm

Growth charts show the behavior of a mutual fund if you buy it and just hold it, like a bank account, reinvesting the dividends (just as a bank account reinvests interest) and not adding more.

When viewed in this way, this is the difference between Vanguard Intermediate-Term Bond Index (VBIIX) and Vanguard Total Bond Market Index (VBMFX)--that is, between two intermediate-term, investment-grade bond funds.

Image

And this is the difference between two intermediate-term, investment-grade bond funds... and a stock fund.

Image

By the way, the difference between the two bond funds is probably mostly because VBIIX is a little longer-term (6.33 years) than VBMFX (5.11 years). That usually means higher return and also higher risk-in-the-sense-of-fluctuation. VBMFX is slower but steadier. [Added] RuralAvalon's observation below--slightly lower credit quality in VBIIX--makes sense too, because lower-quality bonds would also have higher return and higher risk-in-the-sense-of-fluctuation.

I personally happen to hold VBMFX, for the following highly sophisticated reasons: I didn't and don't know what the heck I was doing, beyond wanting "bonds;" "total" sounded good, and everything I've read suggests that it's a perfectly good, handy-dandy, one-size-fits-all, solid, reliable workhorse. I've never bothered to change because I can't convince myself that I know for sure that anything else is better for what I need it to do... and because the performance of my portfolio as a whole obviously depends a lot on how much of the lime-colored stuff I put in the recipe, and not very much on whether the rest of it is the orange-colored stuff or the blue-colored stuff.
Last edited by nisiprius on Thu Jun 02, 2011 8:40 pm, edited 5 times in total.
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Post by ruralavalon » Thu Jun 02, 2011 5:02 pm

The difference is that TBM has: (1) greater diversification, in the sense of # of bonds; (2) with somewhat greater reliance on government issued bonds; and (3) somewhat better credit quality on the other bonds.

.....................TBM.......vs ........IB
# of bonds.....4925.............1140
govt bonds...69.7%...........54.7%
A or better....20.7%..........26.1%
Baa................9.6%...........19.2%

https://personal.vanguard.com/us/funds/ ... IntExt=INT .

https://personal.vanguard.com/us/funds/ ... IntExt=INT .
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Post by abuss368 » Thu Jun 02, 2011 8:03 pm

The Total Bond Market Index fund provides a lot more diversification.

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Post by Johm221122 » Thu Jun 02, 2011 8:08 pm

not right answer for this site but,I like spectrum income( any income fund) stable value. Or saving bonds.just something to think about

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MooseDad
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Re: The difference

Post by MooseDad » Thu Jun 02, 2011 8:31 pm

Taylor Larimore wrote: There is a significant difference. Total Bond Market Index Fund is diversified among different bond types; VBIIX is not.
That's a little simplistic, I think.

Here are the current holdings for VBMFX:
Asset-Backed 0.3%
Commercial Mortgage-Backed 2.7%
Finance 7.8%
Foreign 5.3%
Government Mortgage-Backed 28.3%
Industrial 11.2%
Other 0.6%
Treasury/Agency 41.5%
Utilities 2.3%

And for VBIIX:
Asset-Backed 0.0%
Commercial Mortgage-Backed 0.0%
Finance 14.3%
Foreign 6.3%
Government Mortgage-Backed 0.1%
Industrial 20.3%
Other 0.0%
Treasury/Agency 54.7%
Utilities 4.3%

VBMFX does hold a little bit of everything, and VBIIX is missing a few categories, but it's not as concentrated as the investment-grade or treasury funds. I guess it depends on what "diversified" means. If you said "diversified among all different taxable bond types" I'd agree with you.

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"Simplistic"

Post by Taylor Larimore » Thu Jun 02, 2011 9:37 pm

MooseDad wrote:
Taylor Larimore wrote: There is a significant difference. Total Bond Market Index Fund is diversified among different bond types; VBIIX is not.
That's a little simplistic, I think.
Hi Moose Dad:

You are correct. My statement was simplistic, misleading and poorly phrased.

Boglethis's follow-up Reply caused me to check the two funds. The similarity in their holdings which he copied and which you listed surprised me.

However, the funds do have significant differences--most important of which is the added risk in Intermediate-Term Bond Index Fund (VBIIX) which we can see in Nisprisius's chart in 2008.

Morningstar reports the Standard Deviation for Total Bond Market is 4.14 vs. 7.01 for Intermediate Term Index Fund.

According to Vanguard, Total Bond Market has 39.1% of its bonds in the 5-10 year category vs 99.1% in Intermediate Term Index Fund.

In my opinion, either fund should provide safety and income in a portfolio.
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Post by 555 » Fri Jun 03, 2011 2:37 am

Also TBM has short, int, and long term bonds, while int has just int (exc abbr).

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Re: "Simplistic"

Post by boglethis » Fri Jun 03, 2011 7:52 am

Taylor Larimore wrote:
MooseDad wrote:
Taylor Larimore wrote: There is a significant difference. Total Bond Market Index Fund is diversified among different bond types; VBIIX is not.
That's a little simplistic, I think.
Hi Moose Dad:

You are correct. My statement was simplistic, misleading and poorly phrased.

Boglethis's follow-up Reply caused me to check the two funds. The similarity in their holdings which he copied and which you listed surprised me.

However, the funds do have significant differences--most important of which is the added risk in Intermediate-Term Bond Index Fund (VBIIX) which we can see in Nisprisius's chart in 2008.

Morningstar reports the Standard Deviation for Total Bond Market is 4.14 vs. 7.01 for Intermediate Term Index Fund.

According to Vanguard, Total Bond Market has 39.1% of its bonds in the 5-10 year category vs 99.1% in Intermediate Term Index Fund.

In my opinion, either fund should provide safety and income in a portfolio.
If "either fund should provide safety and income," it might be reasonable to bet on both horses and use both funds? Although it decreases the "simplicity" of a portfolio, at the very least there should be no harm in doing that, correct?

Thank you.

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Re: "Simplistic"

Post by FNK » Fri Jun 03, 2011 9:22 am

boglethis wrote:If "either fund should provide safety and income," it might be reasonable to bet on both horses and use both funds? Although it decreases the "simplicity" of a portfolio, at the very least there should be no harm in doing that, correct?
I believe this is called naive diversification. Since intermediate is more or less a subset of total, you're not diversifying, you're tilting towards intermediate. If you're going to take TBM apart and make choices between durations, you might as well kill long-term bonds and hold short and intermediate term funds instead of total.

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Post by kenyan » Fri Jun 03, 2011 9:27 am

Well, to specifically answer your question...no, it doesn't really do harm. Take a look at the charts nisiprius provided - do you think it mattered much if you were between 0-100% of one and the balance of the other?

I'm actually in both funds, but it's more to fund restrictions in different accounts than for a desire to "diversify" by holding both; as pointed out, it's not really more diversification, it's an ever so slight tilt to your bond portfolio. I consider them to be identical for AA and rebalancing purposes.

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Post by Sidney » Fri Jun 03, 2011 9:46 am

By the way, the difference between the two bond funds is probably mostly because VBIIX is a little longer-term (6.33 years) than VBMFX (5.11 years). That usually means higher return and also higher risk-in-the-sense-of-fluctuation. VBMFX is slower but steadier. [Added] RuralAvalon's observation below--slightly lower credit quality in VBIIX--makes sense too, because lower-quality bonds would also have higher return and higher risk-in-the-sense-of-fluctuation.
Makes sense to me. And if you really squint at the squiggly parts, you can almost see the difference in volatility.
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Post by Don Robins » Fri Jun 03, 2011 10:44 am

I own VFICX because I think that corporates are a better place to be than in Treasuries at this time. I could be wrong, but I could be right.

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Re: vanguard total bond versus intermediate bond

Post by Imperabo » Wed Feb 08, 2012 10:32 pm

The difference was fairly apparent in October, 2008. Still nothing like stocks, and they both recovered, but if you were counting on your bonds for safety you were happy to have total bond.

Image

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Re: vanguard total bond versus intermediate bond

Post by alanf56 » Wed Feb 08, 2012 10:59 pm

edited below
Last edited by alanf56 on Thu Feb 09, 2012 12:46 am, edited 2 times in total.

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Re: vanguard total bond versus intermediate bond

Post by alanf56 » Wed Feb 08, 2012 11:00 pm

Imperabo wrote:The difference was fairly apparent in October, 2008. Still nothing like stocks, and they both recovered, but if you were counting on your bonds for safety you were happy to have total bond.

Image
Your chart is different than the one nisi showed because the VBIIX is below that of VBMFX in your chart and above it on his.

What's up with that???

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Re: vanguard total bond versus intermediate bond

Post by SteveB3005 » Wed Feb 08, 2012 11:07 pm

It's a magnified glimpse of that Fall in 2008, looking closer at the dip in that time frame from nisi's chart. My guess at least.

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Re: vanguard total bond versus intermediate bond

Post by pascalwager » Thu Feb 09, 2012 12:00 am

According to the VG product summaries, TBM is 30:70 corp:govt, and ITB is 50:50 corp:govt. Mr. Bogle holds TBM, but thinks it's a little too light in corporate for the present interest rate situation. But he may believe ITB is too heavy in govt as he doesn't mention this fund as a replacement. (He presently splits 50/50 between TBM and ST Investment Grade in his tax-advantaged account.)

I guess ITB would attract someone who wants to overweight corporates for higher returns with greater risk--and it has been the superior fund (compared to TBM) over the last ten years.

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Re: vanguard total bond versus intermediate bond

Post by momar » Thu Feb 09, 2012 12:24 am

alanf56 wrote:
Imperabo wrote:The difference was fairly apparent in October, 2008. Still nothing like stocks, and they both recovered, but if you were counting on your bonds for safety you were happy to have total bond.

Image
Your chart is different than the one nisi showed because the VBIIX is below that of VBMFX in your chart and above it on his.

What's up with that???
It has a different starting date. In nisiprius' chart, VBIIX had already outpaced VBMFX and so was higher when the dip started; both charts show it dipping more, though.
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Re: vanguard total bond versus intermediate bond

Post by Compounding » Thu Feb 09, 2012 12:59 am

If the major concern is to protect yourself during major market downturns like the fall of 2008 (as evidenced in the magnified chart), then IT Treasuries (VFITX) would be your best bet. Larry Swedroe did a great job convincing me that the corporate premium was negligible in the bond market and wasn't worth the risk in intermediate and long term bonds. Worse yet, the risk shows up at the wrong time - ala 2008 - as corporate bonds have a small equity-like quality to them (when a company's stock gets hammered, it can be bad news for their bonds as well). So I personally have eschewed TBM (Larry convinced me to stay away from MBS as well) and corporate in the IT category, as treasuries seem to offer greater protection and negative correlation when it matters most.

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Re: vanguard total bond versus intermediate bond

Post by john94549 » Thu Feb 09, 2012 8:25 am

Nisi's composite chart from 1994 (showing both bond funds as compared to the total stock fund) is an eye-opener. I mean, you sort of know this stuff in the back of your mind, but to actually "see" it. Talk about tortoise and hare.

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Re: vanguard total bond versus intermediate bond

Post by steadyeddy » Thu Feb 09, 2012 10:56 am

john94549 wrote:Nisi's composite chart from 1994 (showing both bond funds as compared to the total stock fund) is an eye-opener. I mean, you sort of know this stuff in the back of your mind, but to actually "see" it. Talk about tortoise and hare.
Yes, but with some re-balancing it's probably more like a motor-assisted tortoise. :lol:

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Re: vanguard total bond versus intermediate bond

Post by Senin » Mon May 07, 2012 5:09 am

If we are going to focus on that negative time frame, how did VFIIX (Gnma's) do?

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Re: vanguard total bond versus intermediate bond

Post by nisiprius » Mon May 07, 2012 5:51 am

john94549 wrote:Nisi's composite chart from 1994 (showing both bond funds as compared to the total stock fund) is an eye-opener. I mean, you sort of know this stuff in the back of your mind, but to actually "see" it. Talk about tortoise and hare.
Yep. This is why I keep pushing growth charts. Do it yourself--everybody can.

Morningstar's site is currently the best I know because they go back to inception and not just the last ten years, because they let you compare up to six or seven mutual funds from any companies, and because if you plot a mutual fund first and ETFs or individual stocks as compare-to's it will show you growth with reinvested dividends for ETFs and individual stocks. And you can slide the start and end points to anywhere you want, with some frustrating "sticktion." But Vanguard's website all by itself will let you compare growth charts for Vanguard funds, under the "price and performance" tab.

It is a very powerful tool, and I honestly feel that everyone should be using it. Without it, you always get sucked into seeing the trees instead of the forest. And it shows you what questions to ask. It shows you whether active funds that are allegedly "consistent" outperformers really are, or whether the outperformance consists of a small number of spectacular years in the dim past followed by years of yes-winning-but-by-a-nose. And it is a constant quantitative reality check on qualitative statements, such as "dividend stocks are less risky than the stock market as a whole."
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Re: vanguard total bond versus intermediate bond

Post by nisiprius » Mon May 07, 2012 5:57 am

Senin wrote:If we are going to focus on that negative time frame, how did VFIIX (Gnma's) do?
Is that a rhetorical question? If it isn't, please, go to Morningstar or some similar site (Imperabo, what site are you using) and look for yourself. Try sliding the endpoints to 1/7/2008 and 5/11/2009 or thereabouts.

For bonds, another interesting period to look at is 1993-94, which were described in the financial press as a "bond bubble" and "bond massacre."
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Re: vanguard total bond versus intermediate bond

Post by Munir » Mon May 07, 2012 10:42 am

nisiprius wrote:
john94549 wrote:Nisi's composite chart from 1994 (showing both bond funds as compared to the total stock fund) is an eye-opener. I mean, you sort of know this stuff in the back of your mind, but to actually "see" it. Talk about tortoise and hare.
Yep. This is why I keep pushing growth charts. Do it yourself--everybody can.

Morningstar's site is currently the best I know because they go back to inception and not just the last ten years, because they let you compare up to six or seven mutual funds from any companies, and because if you plot a mutual fund first and ETFs or individual stocks as compare-to's it will show you growth with reinvested dividends for ETFs and individual stocks. And you can slide the start and end points to anywhere you want, with some frustrating "sticktion." But Vanguard's website all by itself will let you compare growth charts for Vanguard funds, under the "price and performance" tab.

It is a very powerful tool, and I honestly feel that everyone should be using it. Without it, you always get sucked into seeing the trees instead of the forest. And it shows you what questions to ask. It shows you whether active funds that are allegedly "consistent" outperformers really are, or whether the outperformance consists of a small number of spectacular years in the dim past followed by years of yes-winning-but-by-a-nose. And it is a constant quantitative reality check on qualitative statements, such as "dividend stocks are less risky than the stock market as a whole."
Growth charts are very helpful but can also unintentionally be deceiving depending on the time peiord chosen. An example is choosing only 2008 to compare intermediate treasury performance (high) with intermediate investment grade (low) instead of combining the 2008-2009 performance which can lead you to a different conclusion (intermediate investment grade comes out ahead). Therefore, one can choose a time period to support a certain argument favoring a specific fund when choosing another period may not lead to the same conclusion.

The $64 question is which time period should one choose? Of course, it depends on what you are looking for.

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Using past performance.

Post by Taylor Larimore » Mon May 07, 2012 10:46 am

The $64 question is which time period should one choose? Of course, it depends on what you are looking for.
Be careful what you look for:

Past performance does not forecast future performance.

Best wishes.
Taylor
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Re: vanguard total bond versus intermediate bond

Post by tc101 » Mon May 07, 2012 10:59 am

If the major concern is to protect yourself during major market downturns like the fall of 2008 (as evidenced in the magnified chart), then IT Treasuries (VFITX) would be your best bet.
Why intermediate rather than short term treasury for maximum protection?
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Re: Using past performance.

Post by Johm221122 » Mon May 07, 2012 11:58 am

Taylor Larimore wrote:
The $64 question is which time period should one choose? Of course, it depends on what you are looking for.
Be careful what you look for:

Past performance does not forecast future performance.

Best wishes.
Taylor
Which is what scares me about total bond market

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Re: vanguard total bond versus intermediate bond

Post by YDNAL » Mon May 07, 2012 12:18 pm

boglethis wrote:hello and good afternoon:

simple noobie question: what is the big difference between owning VBIIX (intermediate) and VBMFX (total bond)? is there any? thanks.
Boglethis,

These types of questions light the passionate candle in some responses. :)

1. Total Bond Market VBMFX is an *all maturity* Index, Interm Index VBIIX is NOT. Some people may discuss "diversification" by looking at things like number of Bonds, etc. If you don't need Bonds with <5 year maturies, you don't need 54% of the Bonds in VBMFX. Same with Bonds (14%) with >10 year maturities.
For VBMFX, Vanguard wrote:Under 1 Year 2.6%
1 - 3 Years 24.0%
3 - 5 Years 27.1%
5 - 10 Years 32.6%
10 - 20 Years 3.9%
20 - 30 Years 9.5%
Over 30 Years 0.3%
Total 100.0%
For VBIIX, Vanguard wrote:Under 1 Year 0.1%
1 - 3 Years 0.1%
3 - 5 Years 3.3%
5 - 10 Years 96.4%
10 - 20 Years 0.1%
20 - 30 Years 0.0%
Over 30 Years 0.0%
Total 100.0%
2. Total Bond Index owns mortgage-backed Bonds and Interm Index does NOT. Same as above applies.
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Re: Using past performance.

Post by Tom_T » Mon May 07, 2012 2:40 pm

Johm221122 wrote:
Taylor Larimore wrote:
The $64 question is which time period should one choose? Of course, it depends on what you are looking for.
Be careful what you look for:

Past performance does not forecast future performance.

Best wishes.
Taylor
Which is what scares me about total bond market
I don't understand your comment. What is scary about TBM?

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Re: vanguard total bond versus intermediate bond

Post by tetractys » Mon May 07, 2012 3:36 pm

I've chosen Intermediate Term Bond Index Fund (ITB) over Total Bond Market Index Fund (TBM) because of the Mortgage Backed Securities (MBS) that TBM holds; I don't want the negative convexity of those in my portfolio (Read Larry Swedroe's books for an explanation). I've been very satisfied with that choice. If one looks closely, they will see that because of the lack of MBS, ITB has proven to be a better diversifier against stock volatility.

I also like the slightly longer duration of ITB. -- Tet

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Re: vanguard total bond versus intermediate bond

Post by nisiprius » Mon May 07, 2012 4:33 pm

Munir wrote:Growth charts are very helpful but can also unintentionally be deceiving depending on the time peiord chosen....The $64 question is which time period should one choose?
And that's why I like Morningstar's site. Most sites show the last ten, five, three, or one years. Morningstar lets you pick any starting or ending date within the time the fund has existed. Try it with Wellington (VWELX) or Massachusetts Investors' Trust (MITTX) sometime.

There's no perfect answer. You can't calculate any rate of return unless you pick a start point and an end point. One should always be skeptical if someone else picks those points, and the best defense is to pick them yourself. And any growth chart is better than just looking at the 1-3-5-10 year return numbers.

A few years ago the computer science people were getting very creative at make stereo, rotating images of 3-dimension cross sections of multidimensional data, but that doesn't seem to have made it into finance. Wouldn't you love to rotate a swarm of points around and see whether the Fama-French factors show up visibly?

As for focussing on 2008-2009, it all depends on what you are trying to do. When people talk about "safety," if they don't say anything more, I figure they are worried about a 2008-2009-like event. At any rate, that's certainly a relevant thing to look at and it's something you really ought to know for any fund you're interested in. Does past performance in 2008-2009 predict performance in future 2008-2009's? I hope never to find out, but "if it happens, then it must be possible." People who already know what happened in 2008-2009 and want to focus on subtler aspects of risk, like convexity, will usually say so.
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A second look.

Post by Taylor Larimore » Mon May 07, 2012 4:49 pm

If one looks closely, they will see that because of the lack of MBS, ITB has proven to be a better diversifier against stock volatility.

I also like the slightly longer duration of ITB. -- Tet
Hi Tet:

I did "look closely" at the worst year for stocks in several decades (2008). These are the returns:

-37.04% = Total Stock Market (VTSMX)
+3.91%= Intermediate-Term Bond Index (VBIIX)
+5.15% = Total Bond Market (VBMFX)

According to Morningstar, the 15-year Standard Deviation of VBIIX is 5.32. It's only 3.56 for VBMFX.

Bonds with longer duration have more interest rate risk.

Bottom line: Both bond funds should provide safety and income in a long-term portfolio.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: A second look.

Post by tetractys » Mon May 07, 2012 10:04 pm

Taylor Larimore wrote:I did "look closely" at the worst year for stocks in several decades (2008). These are the returns:

-37.04% = Total Stock Market (VTSMX)
+3.91%= Intermediate-Term Bond Index (VBIIX)
+5.15% = Total Bond Market (VBMFX)

According to Morningstar, the 15-year Standard Deviation of VBIIX is 5.32. It's only 3.56 for VBMFX.

Bonds with longer duration have more interest rate risk.

Bottom line: Both bond funds should provide safety and income in a long-term portfolio.
Yes there was a short period where TBM had a run; but anomalous. ITB's higher volatility at just the right times in relation to stocks is what makes it a better diversifier.

The difference in duration is not the whole explanation. The negative convexity of Mortgage Backed Securities in TBM are part of it as well. More derivative than bond, they are a method mortgage bankers use to externalize losses onto investors. When interest rates go up, MBS prices drop like long-term bonds. Down, their prices rise slowly or not at all. -- Tet

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Re: vanguard total bond versus intermediate bond

Post by CrossOverGuy » Sun Jul 21, 2013 2:32 pm

The negative convexity of Mortgage Backed Securities in TBM are part of it as well. More derivative than bond, they are a method mortgage bankers use to externalize losses onto investors. When interest rates go up, MBS prices drop like long-term bonds. Down, their prices rise slowly or not at all.
If one has Intermediate Term Bond instead of Total Bond, partially because of not wanting to have mortgage backed securities in your bond fund, and also because one wants to avoid long-term duration bonds, both of which TBM has, wouldn't one still be diversifying and covering some of that MBS market by also owning the REIT Index, since in that way you are still participating in the real estate market (but calling it part of your stocks allocation)?

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Re: vanguard total bond versus intermediate bond

Post by grabiner » Sun Jul 21, 2013 11:17 pm

CrossOverGuy wrote:
The negative convexity of Mortgage Backed Securities in TBM are part of it as well. More derivative than bond, they are a method mortgage bankers use to externalize losses onto investors. When interest rates go up, MBS prices drop like long-term bonds. Down, their prices rise slowly or not at all.
If one has Intermediate Term Bond instead of Total Bond, partially because of not wanting to have mortgage backed securities in your bond fund, and also because one wants to avoid long-term duration bonds, both of which TBM has, wouldn't one still be diversifying and covering some of that MBS market by also owning the REIT Index, since in that way you are still participating in the real estate market (but calling it part of your stocks allocation)?
The GNMAs which Total Bond Market holds are not correlated with the real estate market, because the payments are backed by the Government, so the value doesn't depend on what happens to the underlying real estate. The GNMAs are effectively invested only in the payment rights of mortgages; they are affected by interest rates because falling rates will lead more homeowners to refinance and pay back the mortgage early.

(Commercial mortgage-backed bonds do depend somewhat on real estate; if real estate prices fall, borrowers will make short sales or lose underwater homes to foreclosure, and the mortgage holders will take losses.)
Wiki David Grabiner

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Re:

Post by sadie wess » Mon Jul 22, 2013 9:10 am

nisiprius wrote:Growth charts show the behavior of a mutual fund if you buy it and just hold it, like a bank account, reinvesting the dividends (just as a bank account reinvests interest) and not adding more.

When viewed in this way, this is the difference between Vanguard Intermediate-Term Bond Index (VBIIX) and Vanguard Total Bond Market Index (VBMFX)--that is, between two intermediate-term, investment-grade bond funds.

Image

And this is the difference between two intermediate-term, investment-grade bond funds... and a stock fund.

Image

By the way, the difference between the two bond funds is probably mostly because VBIIX is a little longer-term (6.33 years) than VBMFX (5.11 years). That usually means higher return and also higher risk-in-the-sense-of-fluctuation. VBMFX is slower but steadier. [Added] RuralAvalon's observation below--slightly lower credit quality in VBIIX--makes sense too, because lower-quality bonds would also have higher return and higher risk-in-the-sense-of-fluctuation.

I personally happen to hold VBMFX, for the following highly sophisticated reasons: I didn't and don't know what the heck I was doing, beyond wanting "bonds;" "total" sounded good, and everything I've read suggests that it's a perfectly good, handy-dandy, one-size-fits-all, solid, reliable workhorse. I've never bothered to change because I can't convince myself that I know for sure that anything else is better for what I need it to do... and because the performance of my portfolio as a whole obviously depends a lot on how much of the lime-colored stuff I put in the recipe, and not very much on whether the rest of it is the orange-colored stuff or the blue-colored stuff.
Good God, I love Nisiprius and his honest responses. Thanks you, Nisiprius. I did the same things he did and I don't feel like such a schlup now.

Sadie

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Re: Re:

Post by dbr » Mon Jul 22, 2013 9:41 am

sadie wess wrote:
Good God, I love Nisiprius and his honest responses. Thanks you, Nisiprius. I did the same things he did and I don't feel like such a schlup now.

Sadie
It's not just honesty but also common sense view of things that matter and things that don't.

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Re: vanguard total bond versus intermediate bond

Post by Senin » Wed Jul 24, 2013 3:10 am

I dumped my bonds a while ago. All of them.

I take responsibility for my own mistake. I never dabbled in bonds before. But they had done so well in recent years, and I kept hearing "you need a 70-30 split" that I ventured into bonds.

It was a mistake.

I could see the handwriting on the wall this year. Interest rates would be rising. Meaning bonds would be declining.

Past performance is no guarantee of future results. Bonds would be declining, despite the last few years.

I sold them all.

Oh, I am sure bond funds will have the place again in the future. But things will need to stabilize first.

But the big bond decline has yet to strike. Wait to the Fed finally says, okay that's it, it's now hands off. That's when bonds will really dive. We had a taste of that about a month ago. Only a taste.

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Re: Using past performance.

Post by Johm221122 » Wed Jul 24, 2013 6:26 am

Tom_T wrote:
Johm221122 wrote:
Taylor Larimore wrote:
The $64 question is which time period should one choose? Of course, it depends on what you are looking for.
Be careful what you look for:

Past performance does not forecast future performance.

Best wishes.
Taylor
Which is what scares me about total bond market
I don't understand your comment. What is scary about TBM?
What scares me is giving all the gains from capital gains back.In today's interest rate environment I choose mostly stable value and my old savings bonds for fixed income
John

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Scary bonds

Post by Taylor Larimore » Wed Jul 24, 2013 8:52 am

John:

If bonds scare you, you must be petrified of stocks. :wink:

Thanks for your reply.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Scary bonds

Post by Johm221122 » Wed Jul 24, 2013 9:15 am

Taylor Larimore wrote:John:

If bonds scare you, you must be petrified of stocks. :wink:

Thanks for your reply.

Best wishes.
Taylor
Your right, but the more I read this forum the more I think bonds are for safety :sharebeer
John

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Re: Scary bonds

Post by dbr » Wed Jul 24, 2013 9:45 am

Johm221122 wrote:
Taylor Larimore wrote:John:

If bonds scare you, you must be petrified of stocks. :wink:

Thanks for your reply.

Best wishes.
Taylor
Your right, but the more I read this forum the more I think bonds are for safety :sharebeer
John
Which, however, does not mean bonds have to be "safe."

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Re: vanguard total bond versus intermediate bond

Post by Default User BR » Wed Jul 24, 2013 11:33 am

Senin wrote:I dumped my bonds a while ago. All of them.
And did what with the money?


Brian

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Re: Scary bonds

Post by Johm221122 » Wed Jul 24, 2013 11:44 am

dbr wrote:
Johm221122 wrote:
Taylor Larimore wrote:John:

If bonds scare you, you must be petrified of stocks. :wink:

Thanks for your reply.

Best wishes.
Taylor
Your right, but the more I read this forum the more I think bonds are for safety :sharebeer
John
Which, however, does not mean bonds have to be "safe."
I believe cd's and stable value have better risk/reward outlook than bond fund at this time.Plus stable value is a good choice for me in my bad 401
John

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Re: vanguard total bond versus intermediate bond

Post by pastafarian » Wed Jul 24, 2013 12:41 pm

Senin wrote: I never dabbled in bonds before. But they had done so well in recent years, and I kept hearing "you need a 70-30 split" that I ventured into bonds. It was a mistake. I could see the handwriting on the wall this year. Interest rates would be rising. Meaning bonds would be declining. Past performance is no guarantee of future results. Bonds would be declining, despite the last few years.
So you had a 70/30 portfolio, and dumped the portion of your portfolio that is less volatile for...? Cash? Individual stocks? [edit]Point being that you seem to have a major case of loss aversion with respect to that portion with lower volatility.
Senin wrote:Oh, I am sure bond funds will have the place again in the future. But things will need to stabilize first.
Stabilize to what exactly? What will be your signal to jump back in?
Senin wrote:But the big bond decline has yet to strike. Wait to the Fed finally says, okay that's it, it's now hands off. That's when bonds will really dive. We had a taste of that about a month ago. Only a taste.
Okay, we'll see. But the opinion of say, Vanguard's and Fidelity's fixed income gurus, seems to point to fairly stable low interest rates for the next decade or so.
Last edited by pastafarian on Wed Jul 24, 2013 2:11 pm, edited 1 time in total.

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