Taylor Larimore wrote: If investors think that adding additional bond funds to already diversified Total Bond Market Index Fund is worth the complexity, they could be right (or wrong). I don't know.
I think a distinction should be made between a diversified fund and a diversified portfolio. Vanguard Total Bond Market fund is certainly diversified. But I believe Taylor himself has argued that adding TIPS to TBM adds to the diversification for example.
The problem we are running into here in this period of low yields is that people want to increase their bond yield while maintaining their diversification. But then we run into another problem. Are we trying to maintain the diversity of our FI portfolio or the diversity of the entire portfolio. The reason so many of us seem to cross swords in these discussions is often because we have not agreed up front what kind of diversity (or its counterpart risk reduction) we are addressing. Hence we are much too often addressing different questions without knowing it.
In the CAPM sense anything we do to increase return must also increase risk and therefore reduce diversity. We all or at least most of us believe in CAPM when we are talking about equities and then for FI we "forget about it".