triceratop wrote: ↑Wed Feb 21, 2018 5:35 pm
Taylor Larimore wrote: ↑Wed Feb 21, 2018 5:13 pm
I've never liked VBTLX as a bond fund. Returns are dismal. There are a lot better choices (PONDX comes to mind) out there.
We sometimes forget that bonds are for safety.
In the stock bear market of 2008, PONDX fell
-5.8% when safety was needed. Meanwhile Total Bond Market gained
+5% (a 10.8% difference). The .79% Expense Ratio for PONDX does not help.
The most efficient way to increase return is to increase our stock allocation
--not by using risky bond funds.
09/12/2008 - 04/03/2009 Max Drawdown:
Total Bond Market: -4.94%
It is true that starting at 01/01/2008 gives different results. But Total Bond Market had drawdowns too; corporate spreads widened considerably and that obviously hurt the prices of the corporate issues that Total Bond Market holds.
And, for reference, intermediate term Treasury bonds had a max drawdown of -3.43% from April-May 2008. In my backtesting of a 60/40 portfolio, holding an intermediate Treasury fund in place of TBM slightly improved returns and slightly reduced risk. (This is on top of the state tax efficiency of Treasuries, as well as the ability to build your own ladder at an expense ratio of 0, if you want to spend the time. You could even achieve similar results with FDIC-insured CDs.) I tried PONDX in place of the intermediate term Treasury fund, and although the PONDX-based portfolio returned better, it was much riskier.
I'm not convinced that corporate bonds are worth holding. Yes, TBM holds more issues than a Treasury-only bond portfolio, but it's not more diversified in a risk sense. The Treasuries have the same term risk as TBM, and then there's default risk, which is technically more diversified in TBM than in Treasuries-only. However, if the Treasury defaults (or even the FDIC), we've got much bigger problems on our hands -- the broad market would collapse. Meanwhile, the default risk on corporate bonds is essentially the same risk you get from the stock market.
I agree with Taylor that you shouldn't chase yield in fixed income. However, I think the ideal case is to to hold only government bonds and/or CDs. That provides better protection against a stock market correction than anything else.