Do you know your bond portfolio's REAL 12 month total return?

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midareff
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Do you know your bond portfolio's REAL 12 month total return?

Post by midareff » Fri Sep 01, 2017 11:01 am

M* has a column available in their portfolio manager for 12 month total return, which accounts for bond fund's NAV changes, in computing the 12 month total return for each asset. In the case of the last 12 months the total return (after accounting for changes in fund NAV) of the Total Bond Market for the last 12 months was .33%. The last 12 month rolling average of the CPI-U was 1.91%. A REAL return of a negative ( - ) 1.58%.

Just as a comparison, the IT Corporate Bond Index has a REAL return for the same period of .8% and the VG High Yield Fund had a REAL return for the same period of 5.77%

An Ally 5 year 2.25% CD has a REAL total return of .34% for the last 12 months.

All is that is before tax of course. ... which would apply to your RMD distribution or your taxable bonds distributions.

FWIW, my combined bond portfolio, IRA and taxable has a REAL 12 month total return of .71%

Do you know yours, and if you do what is it?

lazyday
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by lazyday » Fri Sep 01, 2017 11:11 am

I know my I bond total return. :)

Something between 0.0 and 0.1.

Lookng forwards, a 5 yr TIPS has 0.12% real yield as of yesterday.

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saltycaper
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by saltycaper » Fri Sep 01, 2017 11:48 am

I don't know exactly what it is, but I know it's higher than Total Bond Market, with less risk too.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

trueblueky
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by trueblueky » Fri Sep 01, 2017 12:14 pm

G Fund was $15.4228 at the end of the month.
August 31, 2016, it was $15.0924.
That's 2.19% increase.
2.19 - 1.91 = 0.28% Real.
Handily beating TBM with no risk. It made a little less than a good 5-year CD, which is the comparison I use.

F Fund went from $17.9811 to $18.1218 during the same period, or 0.78%.
0.78 - 1.91 = (-) 1.13% Real.
FWIW, I don't hold F.

Nate79
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by Nate79 » Fri Sep 01, 2017 12:50 pm

What's the point? I know more or less the total return of the funds I hold but I don't find knowing the bond total return any different than known TSM or SCV fund total return.

Or are you trying to make a cute conclusion that holding TBM is a bad choice?

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spdoublebass
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by spdoublebass » Fri Sep 01, 2017 1:50 pm

I've noticed that column before.

In the spirit of learning can someone please define and explain the difference between YTD and the "real" 12 month return?

Preferable in laymens terms.

I know YTD is only from the beginning of the year...so not a full 12 months.

Again, I'm only trying to learn. I currently only hold TBM and am fine with that.
Resist much, obey little.

bigred77
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by bigred77 » Fri Sep 01, 2017 2:28 pm

spdoublebass wrote:
Fri Sep 01, 2017 1:50 pm
I've noticed that column before.

In the spirit of learning can someone please define and explain the difference between YTD and the "real" 12 month return?

Preferable in laymens terms.

I know YTD is only from the beginning of the year...so not a full 12 months.

Again, I'm only trying to learn. I currently only hold TBM and am fine with that.
YTD is from 1/1/17 until today. The most recent new year is the start date.
12 month returns are typically the trailing 12 months. So for today (9/1/17) the trailing 12 month return is from 9/1/16 - 9/1/17.

You will typically see the above return numbers expressed in "nominal" terms. That means if I had a 10% return and started with 10k dollars on the start date, then today I have exactly 11k dollars in my account. it does not take inflation into account.

Bogleheads will often discuss "real" returns. Real returns take inflation into account. If I had a 10% real return and started with 10k dollars in my account on the start date, then today I have a sum of money in my account that gives me the purchasing power that I would have had if I had 11k dollars on the start date. It typically means I have more than 11k actual dollars in my account, but real returns are expressing my investment returns adjusted for the effects of inflation.

If I have a portfolio that returns a nominal 10% per year over a number of years, and inflation averaged 2% over that same time period, then my real return was only 8%.

Hope that helps some.

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Taylor Larimore
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Vanguard Total Bond Market Index Fund

Post by Taylor Larimore » Fri Sep 01, 2017 2:34 pm

Bogleheads:

It is a common mistake to judge a bond fund by its return. This is because higher return (yield) in bonds nearly always means higher risk of loss.

Bonds are for safety--not higher return (use a greater percentage of stocks in your portfolio for higher return).

This is one reason why Vanguard Total Bond Market Index Funds, which has never had an annual loss greater than -2.66%, is now the largest bond fund in the world.

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

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spdoublebass
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by spdoublebass » Fri Sep 01, 2017 2:35 pm

bigred77 wrote:
Fri Sep 01, 2017 2:28 pm
spdoublebass wrote:
Fri Sep 01, 2017 1:50 pm
I've noticed that column before.

In the spirit of learning can someone please define and explain the difference between YTD and the "real" 12 month return?

Preferable in laymens terms.

I know YTD is only from the beginning of the year...so not a full 12 months.

Again, I'm only trying to learn. I currently only hold TBM and am fine with that.
YTD is from 1/1/17 until today. The most recent new year is the start date.
12 month returns are typically the trailing 12 months. So for today (9/1/17) the trailing 12 month return is from 9/1/16 - 9/1/17.

You will typically see the above return numbers expressed in "nominal" terms. That means if I had a 10% return and started with 10k dollars on the start date, then today I have exactly 11k dollars in my account. it does not take inflation into account.

Bogleheads will often discuss "real" returns. Real returns take inflation into account. If I had a 10% real return and started with 10k dollars in my account on the start date, then today I have a sum of money in my account that gives me the purchasing power that I would have had if I had 11k dollars on the start date. It typically means I have more than 11k actual dollars in my account, but real returns are expressing my investment returns adjusted for the effects of inflation.

If I have a portfolio that returns a nominal 10% per year over a number of years, and inflation averaged 2% over that same time period, then my real return was only 8%.

Hope that helps some.
This absolutely helps. Thank you for keeping it simple.

One last question if I may. Is there any other place to find the "real" return? Or maybe, is there a way to calculate this on your own from the YTD or another stat? Or is this morningstar the only place to easily see it?

On another note, this makes things pretty clear about some other issues I read about like LT Treasuries. It becomes deceiving based on YTD returns only.

Again, I keep it very simple with TBM, but i still like to be informed.
Thanks again.
Resist much, obey little.

bigred77
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by bigred77 » Fri Sep 01, 2017 2:47 pm

spdoublebass wrote:
Fri Sep 01, 2017 2:35 pm
bigred77 wrote:
Fri Sep 01, 2017 2:28 pm
spdoublebass wrote:
Fri Sep 01, 2017 1:50 pm
I've noticed that column before.

In the spirit of learning can someone please define and explain the difference between YTD and the "real" 12 month return?

Preferable in laymens terms.

I know YTD is only from the beginning of the year...so not a full 12 months.

Again, I'm only trying to learn. I currently only hold TBM and am fine with that.
YTD is from 1/1/17 until today. The most recent new year is the start date.
12 month returns are typically the trailing 12 months. So for today (9/1/17) the trailing 12 month return is from 9/1/16 - 9/1/17.

You will typically see the above return numbers expressed in "nominal" terms. That means if I had a 10% return and started with 10k dollars on the start date, then today I have exactly 11k dollars in my account. it does not take inflation into account.

Bogleheads will often discuss "real" returns. Real returns take inflation into account. If I had a 10% real return and started with 10k dollars in my account on the start date, then today I have a sum of money in my account that gives me the purchasing power that I would have had if I had 11k dollars on the start date. It typically means I have more than 11k actual dollars in my account, but real returns are expressing my investment returns adjusted for the effects of inflation.

If I have a portfolio that returns a nominal 10% per year over a number of years, and inflation averaged 2% over that same time period, then my real return was only 8%.

Hope that helps some.
This absolutely helps. Thank you for keeping it simple.

One last question if I may. Is there any other place to find the "real" return? Or maybe, is there a way to calculate this on your own from the YTD or another stat? Or is this morningstar the only place to easily see it?

On another note, this makes things pretty clear about some other issues I read about like LT Treasuries. It becomes deceiving based on YTD returns only.

Again, I keep it very simple with TBM, but i still like to be informed.
Thanks again.
I'm not all that familiar with Morningstar other than their portfolio instant x-ray tool, but they very well might provide real returns for a number of funds. Many white papers will discuss real returns and I'm sure there are a few sites online that will give you real returns for a number of asset classes.

Real returns aren't all that useful IMO when looking at year to date and trailing 12 month returns. They are very important over 20 year or 30 year or longer time horizons.

My rule of thumb is just look at nominal returns and mentally deduct 2% - 3% for inflation from past returns. That's a pretty decent approximation. Know when looking at returns from the 70s and 80s that inflation was very high. From the 90s forward it has been relatively tame (in the US).

TBM is fine for fixed income IMO. I expect it to give 0% - 2% real returns over the next couple of decades. If it's 0% or slightly negative, I don't really care. I don't hold TBM for it's return in isolation, I hold it as a component of my overall portfolio to dampen volatility and hopefully continue to have a negative correlation to equities during recessions. I care about real returns from my entire portfolio, but expect the equity component to do the vast majority of the heavy lifting.

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siamond
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by siamond » Fri Sep 01, 2017 3:04 pm

Looking at the Morningstar growth chart of VBILX (the bond fund I use nowadays), I got 0.5% of nominal total returns in the past 12 months. So if CPI increased by 1.9% in the same time period, that's roughly -1.5% in real terms. OUCH, that s***. This being said, if we look at performance since Jan 1st, 2017, this is much better... Looking at the chart, the past 12 months poor performance is all due to Nov/Dec 2016... Hm, what happened by then? :shock:

PS. this is a rhetorical question... Don't feel obligated to answer... :twisted:

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midareff
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by midareff » Fri Sep 01, 2017 3:15 pm

Nate79 wrote:
Fri Sep 01, 2017 12:50 pm
What's the point? I know more or less the total return of the funds I hold but I don't find knowing the bond total return any different than known TSM or SCV fund total return.

Or are you trying to make a cute conclusion that holding TBM is a bad choice?
I'm not making any conclusions Nate.. cute or otherwise. YOU, on the other hand are free to draw any conclusions that suit you and your portfolio.

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midareff
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by midareff » Fri Sep 01, 2017 3:24 pm

spdoublebass wrote:
Fri Sep 01, 2017 2:35 pm
bigred77 wrote:
Fri Sep 01, 2017 2:28 pm
spdoublebass wrote:
Fri Sep 01, 2017 1:50 pm
I've noticed that column before.

In the spirit of learning can someone please define and explain the difference between YTD and the "real" 12 month return?

Preferable in laymens terms.

I know YTD is only from the beginning of the year...so not a full 12 months.

Again, I'm only trying to learn. I currently only hold TBM and am fine with that.
YTD is from 1/1/17 until today. The most recent new year is the start date.
12 month returns are typically the trailing 12 months. So for today (9/1/17) the trailing 12 month return is from 9/1/16 - 9/1/17.

You will typically see the above return numbers expressed in "nominal" terms. That means if I had a 10% return and started with 10k dollars on the start date, then today I have exactly 11k dollars in my account. it does not take inflation into account.

Bogleheads will often discuss "real" returns. Real returns take inflation into account. If I had a 10% real return and started with 10k dollars in my account on the start date, then today I have a sum of money in my account that gives me the purchasing power that I would have had if I had 11k dollars on the start date. It typically means I have more than 11k actual dollars in my account, but real returns are expressing my investment returns adjusted for the effects of inflation.

If I have a portfolio that returns a nominal 10% per year over a number of years, and inflation averaged 2% over that same time period, then my real return was only 8%.

Hope that helps some.
This absolutely helps. Thank you for keeping it simple.

One last question if I may. Is there any other place to find the "real" return? Or maybe, is there a way to calculate this on your own from the YTD or another stat? Or is this morningstar the only place to easily see it?

On another note, this makes things pretty clear about some other issues I read about like LT Treasuries. It becomes deceiving based on YTD returns only.

Again, I keep it very simple with TBM, but i still like to be informed.
Thanks again.
There is the 12 month return % and there is the total 12 month return of a bond fund which includes any changes in a bonds net asset value (NAV which means share price in a bond fund). Let's say that at market close on January 1, 2016, a share of bond fund XYZ was $10.00. Let's also say that at market close on January 1, 2017 one year later the NAV was $10.20 and the fund had paid 2% in dividends. The total 12 month return is the 2% paid as dividends plus the 2% the fund gained in NAV, or 4% total 12 month return. If the CPI-U had been 3% for that year your REAL return for the year was 1%.

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midareff
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Re: Vanguard Total Bond Market Index Fund

Post by midareff » Fri Sep 01, 2017 3:26 pm

Taylor Larimore wrote:
Fri Sep 01, 2017 2:34 pm
Bogleheads:

It is a common mistake to judge a bond fund by its return. This is because higher return (yield) in bonds nearly always means higher risk of loss.

Bonds are for safety--not higher return (use a greater percentage of stocks in your portfolio for higher return).

This is one reason why Vanguard Total Bond Market Index Funds, which has never had an annual loss greater than -2.66%, is now the largest bond fund in the world.

Best wishes.
Taylor
That's very true Taylor, but not the subject of the thread.

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siamond
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Re: Vanguard Total Bond Market Index Fund

Post by siamond » Fri Sep 01, 2017 4:03 pm

Taylor Larimore wrote:
Fri Sep 01, 2017 2:34 pm
Bonds are for safety--not higher return (use a greater percentage of stocks in your portfolio for higher return).

This is one reason why Vanguard Total Bond Market Index Funds, which has never had an annual loss greater than -2.66%, is now the largest bond fund in the world.
Ok, sorry, but I have read this piece of 'common wisdom' one time too many. Let's look at facts. Let's take 100% Total-Bonds (US) against a 60/40 (US) portfolio. I didn't include any international in there because we don't have a long history for those returns. In nominal terms, the drawdown chart seems to confirm the common wisdom.

Image

Now, if we switch to an inflation-adjusted (real) representation, things look a bit different, do they? No stock crisis has been as bad as this 'red' trajectory, none (and it was even worse in European countries). Asserting that 'bonds are for safety' may get a little more difficult, now.

Image

Now every time this factual point is made that bonds were not safe by any means after WW-II and after the oil crisis, some people answer that we haven't seen the issue in decades, that inflation is now under control. Recency bias at work, if you ask me. We had no world war in the past few decades, but I am not going to bet that this will not happen in my lifetime.

Still, admittedly, the past 30 years looked much better, and held pretty well during the two major crisis we've seen, and that is THE nice property of bonds, the lack of correlation with stocks. Not negative correlation, mind you (go back to the previous chart, check the 1947 crisis, or 1972/73), but lack of correlation is (was) definitely there. If that is the way we define the word 'safety' for bonds, then yes, I would concede the point, but that is stretching words imho. Bonds allow to diversify your portfolio, which is a good thing, but that's it. It is not 'safe' by any mean. Amusingly, a 60% stocks, 40% gold allocation would display a rather similar chart, and nobody would state that gold is safe, I suspect...

Image

Some other people argue that now that we have TIPS, this is the best invention since sliced bread and everything is going to be ok. Personally, I cannot stomach the following chart, but that's just me. Yes, no mistake, VIPSX (and its index) dropped 10% in real terms in 2013, and didn't recover since then.

Image

stlutz
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by stlutz » Fri Sep 01, 2017 4:13 pm

As of 8/31, the one-year total return for some commonly-used funds here:

IT Tax Exempt: .96%
IT Govt' Bond: -.19%
Total Bond: .33%
IT Bond Index: .51%
VG TIPS Fund: .49%

Interestingly, the damage was done in the later part of 2016, not this year in the so-called "rising rate environment". Same funds YTD return:

IT Tax Exempt: 4.76%
IT Govt' Bond: 3.07%
Total Bond: 3.69%
IT Bond Index: 4.65%
VG TIPS Fund: 2.44%

So, did anybody sell all of their bonds in August of last year and re-buy at the beginning of 2017? If you did, I will subscribe to your market timing newsletter. :moneybag

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spdoublebass
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Re: Vanguard Total Bond Market Index Fund

Post by spdoublebass » Fri Sep 01, 2017 4:16 pm

siamond wrote:
Fri Sep 01, 2017 4:03 pm
Taylor Larimore wrote:
Fri Sep 01, 2017 2:34 pm
Bonds are for safety--not higher return (use a greater percentage of stocks in your portfolio for higher return).

This is one reason why Vanguard Total Bond Market Index Funds, which has never had an annual loss greater than -2.66%, is now the largest bond fund in the world.
Ok, sorry, but I have read this piece of 'common wisdom' one time too many. Let's look at facts. Let's take 100% Total-Bonds (US) against a 60/40 (US) portfolio. I didn't include any international in there because we don't have a long history for those returns. In nominal terms, the drawdown chart seems to confirm the common wisdom.
For us common folk who stalk this thread....what bond fund should one hold? Most of us hold TBM because every other thread on this forum says we will probably be just fine with it.

Speaking for myself, It's really confusing. I see three different opinions.
1. TBM is all you need
2. Bogle quoted as saying you need to add some corporates to TBM. (or maybe add them to the Intermediate Bond Index)
3. Hold only Treasuries.
-and maybe a 4th, which is shorten your duration.

I'll be honest, I hold TBM out of knowing that I could do a lot worse. I have bought Thau's "The Bond Book", but can't dive into it for another month. I'm hoping that will clear some things up.
Resist much, obey little.

lazyday
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Re: Vanguard Total Bond Market Index Fund

Post by lazyday » Fri Sep 01, 2017 4:24 pm

siamond wrote:
Fri Sep 01, 2017 4:03 pm
http://i.imgur.com/r7fPhfEl.jpg
Nice drawdown charts! We don't see enough of them.

TBM before the fund existed, I take is some combination of corporate and Treasuries?

TIPS before 1997, are you using UK gilts?

lazyday
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Re: Vanguard Total Bond Market Index Fund

Post by lazyday » Fri Sep 01, 2017 4:26 pm

spdoublebass wrote:
Fri Sep 01, 2017 4:16 pm
Speaking for myself, It's really confusing. I see three different opinions.
1. TBM is all you need
2. Bogle quoted as saying you need to add some corporates to TBM. (or maybe add them to the Intermediate Bond Index)
3. Hold only Treasuries.
-and maybe a 4th, which is shorten your duration.
I like Swensen's advice in Unconventional Success: 50% TIPS and 50% nominal Treasuries, such as intermediate term.

Each can be considered a separate and diversifying asset class.

You can replace nominals with CDs and/or EE bonds, and replace TIPS with I bonds.

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Munir
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by Munir » Fri Sep 01, 2017 4:44 pm

stlutz wrote:
Fri Sep 01, 2017 4:13 pm
As of 8/31, the one-year total return for some commonly-used funds here:

IT Tax Exempt: .96%
IT Govt' Bond: -.19%
Total Bond: .33%
IT Bond Index: .51%
VG TIPS Fund: .49%

Interestingly, the damage was done in the later part of 2016, not this year in the so-called "rising rate environment". Same funds YTD return:

IT Tax Exempt: 4.76%
IT Govt' Bond: 3.07%
Total Bond: 3.69%
IT Bond Index: 4.65%
VG TIPS Fund: 2.44%

So, did anybody sell all of their bonds in August of last year and re-buy at the beginning of 2017? If you did, I will subscribe to your market timing newsletter. :moneybag
Just to add a couple of funds to the one year performance table above:

Intermediate Investment Grade (VFIDX) 1.61%; YTD 4.57%
Short Term Investment Grade (VFSUX) 1.60% (!!!); YTD 2.32%

For those of us with 70% bond portfolios, bond returns are much more important than just being for stability only. Combining the Investment Grade funds with the Total Bond Market (VBTLX) or Total Bond Index (VBILX) could jack up the returns (a la Bogle).

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siamond
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Re: Vanguard Total Bond Market Index Fund

Post by siamond » Fri Sep 01, 2017 4:55 pm

lazyday wrote:
Fri Sep 01, 2017 4:24 pm
Nice drawdown charts! We don't see enough of them.

TBM before the fund existed, I take is some combination of corporate and Treasuries?

TIPS before 1997, are you using UK gilts?
Thanks. This all comes (historical returns and drawdown charts) from the Simba spreadsheet. Go take a look, it is quite easy to use. Questions welcome by PM.

Here are the data sources (more information in the spreadsheet; and yes, TIPS history is rather short, and we had to resort to a very crude mapping before 1997 - I have the UK Inflation-Adjusted Gilt numbers, but this is not directly comparable):

TBM = Total Bond Market (P)
==============================
Longinvest's bonds fund spreadsheet (10-2 model) 1871-1975
(crude mapping, as it only models treasuries)
Bloomberg Barclays US Aggregate Bond TR USD 1976-1986
Vanguard Total Bond Index Fund (VBMFX) 1987+

TIPS = Treasury Inflation Protected Securities (A)
=========================================
Longinvest's bonds fund spreadsheet (10-4 model) 1985-1991
Bloomberg Barclays 5-10 Yr Treasury TR USD 1992-1996
Bloomberg Barclays US TIPS index (Series L) TR USD 1997-2000
Vanguard Inflation-Protected Security Fund (VIPSX) 2001+

Valuethinker
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Re: Vanguard Total Bond Market Index Fund

Post by Valuethinker » Fri Sep 01, 2017 4:59 pm

siamond wrote:
Fri Sep 01, 2017 4:03 pm

Now every time this factual point is made that bonds were not safe by any means after WW-II and after the oil crisis, some people answer that we haven't seen the issue in decades, that inflation is now under control. Recency bias at work, if you ask me. We had no world war in the past few decades, but I am not going to bet that this will not happen in my lifetime.
OK if there is a world war then quite seriously you and I will have worse problems than our bond portfolio ;-).

Can inflation reoccur? Of course it can. However the Great Inflation of roughly 1948 (I discount right after the war because of the release of price controls) to 1981 (and then the disinflation -- it was not, after all, clear even into the 1990s that inflation was well and truly defeated) is quite unique the world economic history that we have.

What happened? Basically you had War Keynesianism, but in peacetime. To "fight" the Cold War and maintain the allegiance of their populations against internal subversion, both the capitalist and communist powers engaged in high levels of state spending and intervention in the economy and mopped up any excess supply of labour. It was probably the best time in world history for the average family (in a developed country) in terms of wage gains (fuelled by unprecedented productivity gains), low unemployment, new educational, housing & transportation opportunities.

Then in the 1970s commodity prices spiked and a series of systematic mistakes in monetary policy were made. For most countries, the actual really bad bit of inflation was roughly 1970-1980.

So I think the main thing about a recurrence of inflation is it presumes that the Central Banks have lost the lessons of the 1970s when they got "behind the curve" on inflation.

So far, I see no evidence that they will so get behind.

BTW I am a big fan of TIPS and other Real Return securities, however at these real yields, you really are taking a lot of pain on these things (UK indexed Linked Gilts have average real yields of around (1.5%).

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siamond
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Re: Vanguard Total Bond Market Index Fund

Post by siamond » Fri Sep 01, 2017 5:52 pm

Valuethinker wrote:
Fri Sep 01, 2017 4:59 pm
So I think the main thing about a recurrence of inflation is it presumes that the Central Banks have lost the lessons of the 1970s when they got "behind the curve" on inflation.

So far, I see no evidence that they will so get behind.
Maybe. Maybe not. There are still quite a few countries struggling with inflation. You're assuming that competent people will stay in charge at Central Banks. A questionable assumption nowadays, maybe? (all right, all right, that was rhetorical too). Anyway, historical data points are what they are, great depression, wars, bonds crises, this all happened. Will this happen again, I don't know, but anytime I read that bonds are for safety, I cringe. Bonds are a nice diversifier, and the rest is just mythology.

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spdoublebass
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by spdoublebass » Fri Sep 01, 2017 6:21 pm

bigred77 wrote:
Fri Sep 01, 2017 2:28 pm
spdoublebass wrote:
Fri Sep 01, 2017 1:50 pm
I've noticed that column before.

In the spirit of learning can someone please define and explain the difference between YTD and the "real" 12 month return?

Preferable in laymens terms.

I know YTD is only from the beginning of the year...so not a full 12 months.

Again, I'm only trying to learn. I currently only hold TBM and am fine with that.
YTD is from 1/1/17 until today. The most recent new year is the start date.
12 month returns are typically the trailing 12 months. So for today (9/1/17) the trailing 12 month return is from 9/1/16 - 9/1/17.

You will typically see the above return numbers expressed in "nominal" terms. That means if I had a 10% return and started with 10k dollars on the start date, then today I have exactly 11k dollars in my account. it does not take inflation into account.

Bogleheads will often discuss "real" returns. Real returns take inflation into account. If I had a 10% real return and started with 10k dollars in my account on the start date, then today I have a sum of money in my account that gives me the purchasing power that I would have had if I had 11k dollars on the start date. It typically means I have more than 11k actual dollars in my account, but real returns are expressing my investment returns adjusted for the effects of inflation.

If I have a portfolio that returns a nominal 10% per year over a number of years, and inflation averaged 2% over that same time period, then my real return was only 8%.

Hope that helps some.
It helps very much. I just wish there was a place to see this information already calculated.
If you plug these funds into portfolio visualizer for 2017, then click annual returns, you see the return, but then also the inflation adjusted return. This still doesn't line up entirely with the Morningstar numbers, but that could be because of the last 12 months vs YTD issue.

With the above comments, TBM trails short term corporates. When I look at inflation adjusted returns in the visualizer it still has TBM coming out ahead.
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by columbia » Fri Sep 01, 2017 6:25 pm

No. I don't own a bond fund. :P

Very satisfied with TIAA Traditional.

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midareff
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Re: Vanguard Total Bond Market Index Fund

Post by midareff » Fri Sep 01, 2017 6:52 pm

siamond wrote:
Fri Sep 01, 2017 5:52 pm
Valuethinker wrote:
Fri Sep 01, 2017 4:59 pm
So I think the main thing about a recurrence of inflation is it presumes that the Central Banks have lost the lessons of the 1970s when they got "behind the curve" on inflation.

So far, I see no evidence that they will so get behind.
Maybe. Maybe not. There are still quite a few countries struggling with inflation. You're assuming that competent people will stay in charge at Central Banks. A questionable assumption nowadays, maybe? (all right, all right, that was rhetorical too). Anyway, historical data points are what they are, great depression, wars, bonds crises, this all happened. Will this happen again, I don't know, but anytime I read that bonds are for safety, I cringe. Bonds are a nice diversifier, and the rest is just mythology.

OP Here............

Well said. Bonds were/are supposed to be for safety. In a paper published in the Journal of Financial Planning written in looking historically (but not forever) backward from 2004, William P. Bengen wrote "that common stocks had returned 10.3 percent compounded over the years, and intermediate-term Treasuries had returned 5.1 percent. Inflation averaged 3 percent over the same period. Therefore, a client with a portfolio consisting of 60-percent stocks and 40-percent bonds could expect an average compounded return of 8.2 percent, assuming continual rebalancing. The "real" return, adjusted for inflation, would be almost 5.1 percent."

Does anyone in the room expect this to resemble reality over the next decade? I know I have no expectations that match this and with today's 5 year Treasury at 1.71, or thereabouts, with the CPI-U at 1.91, or thereabouts, when 40, 50, 60 or more percent of a conservative retiree's portfolio's is a bond fund holding, that may need review, as does any bond fund heavy in treasuries. Granted, this is supposed to be our safe money, but what is this safe money risk if it returns a negative REAL over the next decade and stocks produce the guru's 5%, maybe 6%, before adjustment calculation to REAL?

If government bonds return zero REAL over the next decade ans stocks return (perhaps) 3% REAL .... how does that 50/50 AA portfolio, or one even more conservative survive a thirty year inflation adjusted retirement? ... when that money is needed to maintain critical lifestyle needs and expenses?

It's supposed to be a thought proving set of question, I'm not crying the blues personally by any means.

FWIW, Taylor was absolutely correct that the worst year for the Total Bond Market was a -2.66%. Unfortunately, inflation was 2.6% that year so the fund lost 5.26% of it's purchasing power that year. Don't get me wrong, for many, maybe even most investors the Total Bond Market is a perfectly good fund to counterbalance their equities. Others may find the additional potential volatility of other bond funds more than tolerable and view bond risk as a measure of volatility.

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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by siamond » Fri Sep 01, 2017 7:29 pm

Personally, having acknowledged that bonds are a diversifier and little else, and in all likelihood a low-return diversifier for a decade to come, I do ask myself questions. I find Malkiel's recommendation to move to dividend stocks quite silly, but I have been pondering about his 2nd recommendation, i.e. emerging market bonds, for a little while now.

I figured out a JP Morgan EM Bonds index which has ~20 years of history, I ran monthly returns, drawdowns, etc. And it appeared to be an effective diversifier, while bringing much more decent returns. And yes, definitely more volatility as an asset class than US bonds, but at the portfolio level, with the lack of correlation, this actually provided satisfying results. Now 20 years of history, that isn't much, and emerging markets could go just about anywhere and this can't predicted, but... that's the entire point, a decorrelated asset! So... I am pondering about reallocating some of my bonds (say 25% of it) in such a way. Will not decide until the end of the year to stay true to my IPS, but it is tempting.

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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by Taylor Larimore » Fri Sep 01, 2017 8:08 pm

Bogleheads:

Below are two columns: U.S. inflation and Vanguard Total Bond Market returns, since Mr. Bogle introduced TBM in 1986:

YEAR..INFLATION....RETURN
1986-------1.1%--------15.2%
1987-------4.4-----------2.8
1988-------4.4-----------7.9
1989-------4.6----------14.5
1990-------6.1-----------8.9 (Inflation increased 5.0% -- TBM average return 9.86%)

1991-------3.1----------16.0
1992-------2.9-----------7.4
1993-------2.7-----------9.7
1994-------2.7---------(-2.7)
1995-------2.5----------18.5
1996-------3.3-----------3.6

1997-------1.7-----------9.7
1998-------1.6-----------8.7
1999-------2.7---------(-0.8)
2000-------3.4----------11.6 (Inflation increased 1.7% --TBM average return 7.3%)

2001-------1.6-----------8.4
2002-------2.4----------10.3
2003-------1.9-----------4.1
2004-------3.3-----------4.3
2005-------3.4-----------2.4 (Inflation increased 1.8% -- TBM average return 5.9%)

2006-------2.5-----------4.3
2007-------4.1-----------7.0

2008-------0.1-----------5.2
2009-------2.7-----------5.9
2010-------1.5-----------6.5
2011-------3.0-----------7.7 (Inflation increased 2.9% -- TBM average return 6.3%)

2012-------1.7-----------4.3
2013-------1.5---------(-2.0)
2014-------0.8-----------6.0
2015-------0.7-----------0.5
2016-------2.1-----------2.5

Observations:

* During ALL four periods of rising inflation since 1986, Total Bond Market enjoyed positive returns.

* During the 2008 bear market when the Vanguard S&P 500 index fund plunged -37%, Vanguard Total Bond Market gained +5%. Investors were VERY happy to hold Total Bond Market Index Fund. I know. It is my only bond fund.

It is easy to be dazzled and misled by complexity.

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

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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by venkman » Sat Sep 02, 2017 12:06 am

spdoublebass wrote:
Fri Sep 01, 2017 2:35 pm
One last question if I may. Is there any other place to find the "real" return? Or maybe, is there a way to calculate this on your own from the YTD or another stat? Or is this morningstar the only place to easily see it?

https://www.portfoliovisualizer.com/
will give you inflation-adjusted returns.

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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by spdoublebass » Sat Sep 02, 2017 12:28 am

venkman wrote:
Sat Sep 02, 2017 12:06 am
spdoublebass wrote:
Fri Sep 01, 2017 2:35 pm
One last question if I may. Is there any other place to find the "real" return? Or maybe, is there a way to calculate this on your own from the YTD or another stat? Or is this morningstar the only place to easily see it?

https://www.portfoliovisualizer.com/
will give you inflation-adjusted returns.

Right, but if I have it right, in order to get the "real" return of say TBM (VBMFX) you'd have to:
-Select August 2016 to August 2017 as a time frame
-Put in 100% VBMFX
-then click on the annual returns tab
- look for the inflation adjusted column

I just didn't know if there was an easier way. To me, it seems like a more informative statistic than YTD. Maybe I'm missing something.
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by MIpreRetirey » Sat Sep 02, 2017 12:37 am

^^^ spdoublebass,

In the Summary tab, the final balance has a little "i" next to it. Mouse over it for real dollar final balance.

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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by spdoublebass » Sat Sep 02, 2017 12:42 am

MIpreRetirey wrote:
Sat Sep 02, 2017 12:37 am
^^^ spdoublebass,

In the Summary tab, the final balance has a little "i" next to it. Mouse over it for real dollar final balance.
Holy cow, you just changed my world. Thank you.

My apologies for sidetracking this thread.
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by AlohaJoe » Sat Sep 02, 2017 7:14 am

siamond wrote:
Fri Sep 01, 2017 7:29 pm
So... I am pondering about reallocating some of my bonds (say 25% of it) in such a way. Will not decide until the end of the year to stay true to my IPS, but it is tempting.
I went through a similar thought process a while (~2 years) ago and came to a similar conclusion. EM is 1/3rd of my bond holdings. Why 1/3rd? I couldn't think of a satisfactory weighting other than dumb "equal-weighting" so....Of course, after the past few years I'm feeling like a genius :twisted: . My personal IRR on my Emerging Markets bonds is 9.54%, though that is admittedly over a short period of time so doesn't really mean anything. But I was also convinced by data from -- I think it was a Vanguard whitepaper? -- that showed that Emerging Markets bonds had higher return and lower standard deviation than Emerging Market equities over the past few decades. Which left me unclear why people always recommend EM equities and never recommend EM debt.

On the other hand, I understand that EM debt has some equity components -- a factor regression on PortfolioVisualiser says Vanguard's Emerging Bonds fund has 0.29 beta, while Vanguard's Total Bond is only 0.02. But I've never lost too much sleep over having not exactly the right equity/bond split in my asset allocation.
siamond wrote:
Fri Sep 01, 2017 7:29 pm
And yes, definitely more volatility as an asset class than US bonds, but at the portfolio level, with the lack of correlation, this actually provided satisfying results.
This is something I've never fully understood about the "bonds are for safety" line of argument, since it seems to fly in the face of the entire point of Modern Portfolio Theory -- which is that you're supposed to look at your portfolio as a whole and not parts of it.
Last edited by AlohaJoe on Sat Sep 02, 2017 9:21 am, edited 4 times in total.

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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by longinvest » Sat Sep 02, 2017 7:15 am

spdoublebass wrote:
Sat Sep 02, 2017 12:28 am
Right, but if I have it right, in order to get the "real" return of say TBM (VBMFX) you'd have to:
-Select August 2016 to August 2017 as a time frame
-Put in 100% VBMFX
-then click on the annual returns tab
- look for the inflation adjusted column.
This would give 13 months return. To get 12 months return:
-Select September 2016 to August 2017 as a time frame
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by longinvest » Sat Sep 02, 2017 8:34 am

Here's an example Portfolio Visualizer link.

We enter a 100% allocation to Vanguard Total Bond Market ETF (BND) and select the 12-month period spanning from September 2016 to August 2017.
Image

The annual return 0.46% CAGR matches the growth of $10,000 to $10,046. We discover the real return by hovering the mouse over the small i-circle besides 0.46%. This reveals: "Inflation adjusted CAGR is -1.15%"
Image

Just to make sure that we are effectively looking at 12 months returns, we can hover the mouse over the first dot on the growth chart. This reveals: "Aug 31, 2016", which is effectively 12 months ago. We could also count the number of periods between the 13 dots. The total is 12. The first period corresponds to September 2016, and the twelfth corresponds to August 2017.
Image
Last edited by longinvest on Sat Sep 02, 2017 10:04 am, edited 1 time in total.
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by longinvest » Sat Sep 02, 2017 9:45 am

Bonds aren't cash investments. Unlike bank CDs and savings accounts, bonds have a fluctuating value. Sometimes, this value goes up, other times it goes down.

A non-defaulting nominal bond is guaranteed to mature at par. But, its value fluctuates before maturity. These fluctuations are usually bigger when the bond is far from maturity, and much smaller when near maturity.

A non-defaulting zero-coupon nominal bond is vulnerable to inflation. When it's bought, we know its exact nominal yield to maturity (YTM) which is its future nominal return over the specific period spanning from the buy transaction to maturity. Inflation might be higher or lower than YTM over that period. If inflation is higher, an investor holding the bond to maturity will experience an inflation-adjusted loss over that period.

A bond fund held perpetually works differently; though. It might be easier to illustrate this using a rolling bond ladder. Every year, one rung of the ladder matures, and a bunch of coupons are paid. These coupons and maturing principal are reinvested into a new longer-maturity rung. As long as the yield on this new rung is as high as the current (one-year trailing?) inflation rate, the bond ladder will keep up with inflation over the long term, but (potentially) with a few years lag.

The problem is that this isn't always the case. In the 1940s and 1950s, for example, long-term yields were 15% to 20% below the current inflation rate, due to interest-rate controls by government. This had a terrible effect on the return of bonds over the next 30 years! Just to make things worse, at the end of these 30 years, in the 1970s, there was a huge run up in inflation. In the 1970s, nominal interest rates went up with inflation; this had the normal immediate impact on the market value of bonds, and lead to increasing the length of the inflation-adjusted bond drawdown (started in the 1940s) to 40 years.

It's interesting to note, though, that the returns of bonds since the 1960s have kept up with inflation, but with a lag, as our mental experiment with a bond ladder implies when long-term yields adjust to current inflation.

So, what a current nominal bond fund holder, interested in metrics, should be more concerned with isn't the last year's nominal or real return, nor the current YTM of his bond fund (assuming the fund holds bonds to maturity, or near maturity). He should be concerned with the yield to maturity on the long-end of his fund relative to current inflation.

But, even then, this might not be of much help, unless he's able to find a safer place (from an inflation risk point of view) to put his money. If cash investments have even lower yields (like in the 1940s), he might not have much choice but to accept that his bond investments are likely to lose relative to inflation.

One could hope that stocks, which are certificates of ownership of companies, might fare better, but there's no such guarantee. In the mid-1970s, stocks actually lost up to 50% of their value in inflation-adjusted terms (30% lost to market, 20% lost to inflation), while bonds lost less. They recovered quickly, but over the 1970s-early-1980s period, bonds and stocks had relatively similar cumulative returns, stocks exhibiting significantly more volatility.

There now exist inflation-indexed bonds (TIPS), which aren't vulnerable to inflation. But, they can still lose relative to inflation. A zero-coupon 5-year TIPS with a real YTM of -0.50% will have a negative real return over the 5 years spanning from the buy transaction to its maturity. And, TIPS aren't cash; they have a fluctuating market value, and they are currently less liquid than nominal Treasuries, leading to higher bid/ask spreads.

All financial securities are exposed to a variety of risks. Some are more exposed to some risks than others. A good defense we can take is to diversify our portfolio across different types of securities. Note how my emphasis isn't on maximizing potential returns; it's about averting being fully invested into the worst performing asset.

I've structured my own portfolio accordingly, diversifying it across domestic stocks, international stocks, nominal bonds, and inflation-indexed bonds. I wouldn't feel safe investing 100% of my money into any of these 4 assets. I can't even say that having it invested across all four assets is perfectly safe, as it isn't. I've accepted that there is no such thing as a perfectly safe portfolio. What's important is that I am able to sleep well at night, and that I am confident I will be able to stay the course in bull, bear, and sideways markets.
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by lazyday » Sat Sep 02, 2017 10:30 am

siamond wrote:
Fri Sep 01, 2017 7:29 pm
I figured out a JP Morgan EM Bonds index which has ~20 years of history, I ran monthly returns, drawdowns, etc. And it appeared to be an effective diversifier, while bringing much more decent returns. And yes, definitely more volatility as an asset class than US bonds, but at the portfolio level, with the lack of correlation, this actually provided satisfying results. Now 20 years of history, that isn't much, and emerging markets could go just about anywhere and this can't predicted, but... that's the entire point, a decorrelated asset! So... I am pondering about reallocating some of my bonds (say 25% of it) in such a way.
AlohaJoe wrote:
Sat Sep 02, 2017 7:14 am
But I was also convinced by data from -- I think it was a Vanguard whitepaper? -- that showed that Emerging Markets bonds had higher return and lower standard deviation than Emerging Market equities over the past few decades.
Is today's yield high enough to compensate for longer term risks? Haven’t EM bonds suffered some permanent loss every few decades? On top of the volatility.

I haven’t tried researching this, but it seems you’d need quite high yield to make up for the occasional hyperinflation, renegotiation/default, and confiscation. Even if all those are less likely than in the past.

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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by Taylor Larimore » Sat Sep 02, 2017 10:48 am

spdoublebass wrote:
One last question if I may. Is there any other place to find the "real" return? Or maybe, is there a way to calculate this on your own from the YTD or another stat? Or is this morningstar the only place to easily see it?
spdoublebass:

If you look at my last post showing inflation and year by year returns for Total Bond Market, you can easily figure each year's real return by subtracting the inflation figure from annual return return figure. The result is "real" return.

For example, in 1986, the first year Mr. Bogle introduced the fund, inflation was 1.1% and TBMs total return was 15.2%. The real return was therefore 14.1%.

Best wishes.
Taylor
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by Admiral » Sat Sep 02, 2017 10:56 am

Taylor Larimore wrote:
Sat Sep 02, 2017 10:48 am
spdoublebass wrote:
One last question if I may. Is there any other place to find the "real" return? Or maybe, is there a way to calculate this on your own from the YTD or another stat? Or is this morningstar the only place to easily see it?
spdoublebass:

If you look at my last post showing inflation and year by year returns for Total Bond Market, you can easily figure each year's real return by subtracting the inflation figure from annual return return figure. The result is "real" return.

For example, in 1986, the first year Mr. Bogle introduced the fund, inflation was 1.1% and TBMs total return was 15.2%. The real return was therefore 14.1%.

Best wishes.
Taylor
Taylor, good chart. Do your numbers assume monthly payments are reinvested in the fund?

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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by Taylor Larimore » Sat Sep 02, 2017 11:18 am

Taylor, good chart. Do your numbers assume monthly payments are reinvested in the fund?
Admiral:

My total return figures are from Morningstar. They do not reflect monthly payments being reinvested. They assume a one-time investment at the beginning of each year.

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

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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by Ricola » Sat Sep 02, 2017 11:20 am

Taylor Larimore wrote:
Fri Sep 01, 2017 8:08 pm
Bogleheads:

Below are two columns: U.S. inflation and Vanguard Total Bond Market returns, since Mr. Bogle introduced TBM in 1986:

YEAR..INFLATION....RETURN
1986-------1.1%--------15.2%
1987-------4.4-----------2.8
1988-------4.4-----------7.9
1989-------4.6----------14.5
1990-------6.1-----------8.9 (Inflation increased 5.0% -- TBM average return 9.86%)

1991-------3.1----------16.0
1992-------2.9-----------7.4
1993-------2.7-----------9.7
1994-------2.7---------(-2.7)
1995-------2.5----------18.5
1996-------3.3-----------3.6

1997-------1.7-----------9.7
1998-------1.6-----------8.7
1999-------2.7---------(-0.8)
2000-------3.4----------11.6 (Inflation increased 1.7% --TBM average return 7.3%)

2001-------1.6-----------8.4
2002-------2.4----------10.3
2003-------1.9-----------4.1
2004-------3.3-----------4.3
2005-------3.4-----------2.4 (Inflation increased 1.8% -- TBM average return 5.9%)

2006-------2.5-----------4.3
2007-------4.1-----------7.0

2008-------0.1-----------5.2
2009-------2.7-----------5.9
2010-------1.5-----------6.5
2011-------3.0-----------7.7 (Inflation increased 2.9% -- TBM average return 6.3%)

2012-------1.7-----------4.3
2013-------1.5---------(-2.0)
2014-------0.8-----------6.0
2015-------0.7-----------0.5
2016-------2.1-----------2.5

Observations:

* During ALL four periods of rising inflation since 1986, Total Bond Market enjoyed positive returns.

* During the 2008 bear market when the Vanguard S&P 500 index fund plunged -37%, Vanguard Total Bond Market gained +5%. Investors were VERY happy to hold Total Bond Market Index Fund. I know. It is my only bond fund.

It is easy to be dazzled and misled by complexity.

Best wishes.
Taylor
Taylor, do have similar data for TSM? Would be nice to have for my two fund portfolio. :)

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Two fund portfolio !!

Post by Taylor Larimore » Sat Sep 02, 2017 11:38 am

Taylor, do have similar data for TSM? Would be nice to have for my two fund portfolio.
Ricola:

Owning only two good funds, I'll guess your avatar is a picture of your yacht.

I do not have similar data for Total Stock Market. It should not matter. The 500 Index fund has similar returns as TSM.

Best wishes
Taylor
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Re: Two fund portfolio !!

Post by Ricola » Sat Sep 02, 2017 12:10 pm

Taylor Larimore wrote:
Sat Sep 02, 2017 11:38 am
Taylor, do have similar data for TSM? Would be nice to have for my two fund portfolio.
Ricola:

Owning only two good funds, I'll guess your avatar is a picture of your yacht.

I do not have similar data for Total Stock Market. It should not matter. The 500 Index fund has similar returns as TSM.

Best wishes
Taylor
Ha Ha, less number of funds equal bigger yacht. No, wish it were my yacht. The name on the dinghy is Original Contract, and the name on the Yacht is Change Order. Kind of an inside joke.

Thanks, and always appreciate your posts...keep them comming. :D

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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by siamond » Sat Sep 02, 2017 12:40 pm

Ricola wrote:
Sat Sep 02, 2017 11:20 am
do [you] have similar data for TSM? Would be nice to have for my two fund portfolio. :)
You can find a TSM data series (and much more) in the Simba backtesting spreadsheet. And then you can compare a two fund portfolio with other types of portfolios, and see what happened in various time periods. I would strongly urge you to look at data over a longer time period than the past 30 years though, otherwise it is all too easy to experience recency bias (notably when it comes to bonds)... One can never know enough about history.

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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by siamond » Sat Sep 02, 2017 1:04 pm

lazyday wrote:
Sat Sep 02, 2017 10:30 am
Is today's yield high enough to compensate for longer term risks? Haven’t EM bonds suffered some permanent loss every few decades? On top of the volatility.

I haven’t tried researching this, but it seems you’d need quite high yield to make up for the occasional hyperinflation, renegotiation/default, and confiscation. Even if all those are less likely than in the past.
There is no doubt that EM bonds are a risky and unpredictable investment as a single asset class. But then regular bonds, as we've seem earlier in this thread, displayed really big risks as well, when assessed in real terms. When you free yourself from this flawed 'safe asset' perception, and you think of bonds instead as a pretty good diversifier (that they are) at the PORTFOLIO level, then EM bonds seem to be a pretty good candidate. Besides gold (which comes with all sorts of issues of its own), this is the ONLY asset class I know which displayed fairly low correlation with both stocks and (US) bonds. And it did display pretty solid returns(~9% nominal).

Now, this might be recency bias at work, as all I have is 20 years of monthly history with the JP-Morgan EMBI index. If you're aware of longer data series, I'd love to see that. This being said, it seems to me that the very nature of EM Bonds is to have a mind of its own (hence low correlation), and due to its risky profile, to reward investors with solid returns. Still... I'd love to see more facts.

PS. oh, and to answer your question, the SEC Yield of VGOVX (Vanguard Emerging Markets Government Bond) is currently around 4%. And the Yield-To-Maturity is 5.4%.
Last edited by siamond on Sat Sep 02, 2017 1:05 pm, edited 1 time in total.

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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by AlohaJoe » Sat Sep 02, 2017 1:05 pm

lazyday wrote:
Sat Sep 02, 2017 10:30 am
Is today's yield high enough to compensate for longer term risks? Haven’t EM bonds suffered some permanent loss every few decades? On top of the volatility.
I'm not sure what you mean by permanent loss? You mean like when GM had a permanent loss for everyone who owned the S&P 500? Aren't we all total return investors here, anyway? :)

As I suggested above, I think the performance on an asset class in isolation is not necessarily the most important thing. I think how it affects your overall portfolio is more important. I also think that in the past ~20 years or so new asset classes have emerged that offer opportunities for portfolio diversification but require a few leaps of faith about how they fit into a portfolio and will perform over the next 20 years. We're not talking about things with 100+ years of history like US equities. I totally understand if others come to a totally different conclusion about EM debt and I'm not going to try to evangelise it on Bogleheads!

Is today's yield high enough? I dunno. We'll find out in a few years! But I'm reminded of all the forecasts from very smart people like Bill Bernstein or Larry Swedroe about how e.g. REIT yields mean X, Y, Z and then they turned out to be wrong. I don't believe markets are perfect but I think they're smarter than me and everyone who writes about markets on the internet. So I default to assuming that markets have priced the yield for the risks.
I haven’t tried researching this, but it seems you’d need quite high yield to make up for the occasional hyperinflation, renegotiation/default, and confiscation. Even if all those are less likely than in the past.
Most Americans overestimate how often those things happen and their impact on a diversified basket of EM debt. I'm not trying to convince you that EM debt is remotely as safe as US Treasuries since that is clearly not the case. But since the JP Morgan EM debt indexes were created, they've had positive returns so I guess the yield is priced high enough to make up for all those things. I mean, it would be kind of weird if, after 20 something years, the markets hadn't figured out how to price that kind of thing.

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spdoublebass
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by spdoublebass » Sat Sep 02, 2017 1:16 pm

Taylor Larimore wrote:
Sat Sep 02, 2017 10:48 am

If you look at my last post showing inflation and year by year returns for Total Bond Market, you can easily figure each year's real return by subtracting the inflation figure from annual return return figure. The result is "real" return.

For example, in 1986, the first year Mr. Bogle introduced the fund, inflation was 1.1% and TBMs total return was 15.2%. The real return was therefore 14.1%.

Best wishes.
Taylor
Mr. Larimore,

Thank you for your reply. When I read your first post, I had thought that this could be the case (annual return-inflation= "real" return), but I did not want to assume anything.

This is still all new to me so I like to read as much as possible and go on portfolio visualizer and see how different funds perform. One thing I'm always amazed at is how well TBM has done overall. Yes, one year a short term fund might do a little better, or an intermediate treasury might, but what's sometimes overlooked is that TBM has performed well those same years as well.

I'm no authority on anything regarding investing, but I can for sure sleep well at night with my money in TBM while I read up on bonds in general and learn how they work. I may or may not tweak it a little down the road, who knows, but I definitely do not feel pressured to.
Resist much, obey little.

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spdoublebass
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by spdoublebass » Sat Sep 02, 2017 1:29 pm

longinvest wrote:
Sat Sep 02, 2017 7:15 am

This would give 13 months return. To get 12 months return:
-Select September 2016 to August 2017 as a time frame
Thank you for this information. I should have caught that, but I honestly didn't.
Resist much, obey little.

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Ricola
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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by Ricola » Sat Sep 02, 2017 1:32 pm

siamond wrote:
Sat Sep 02, 2017 12:40 pm
Ricola wrote:
Sat Sep 02, 2017 11:20 am
do [you] have similar data for TSM? Would be nice to have for my two fund portfolio. :)
You can find a TSM data series (and much more) in the Simba backtesting spreadsheet. And then you can compare a two fund portfolio with other types of portfolios, and see what happened in various time periods. I would strongly urge you to look at data over a longer time period than the past 30 years though, otherwise it is all too easy to experience recency bias (notably when it comes to bonds)... One can never know enough about history.
Siamond,

I can appreciate history but it can also lead to a false belief the one can see into future, the proof has been that no one can consistently, which means if they ever did it was just luck. So I stopped trying. I like what Longinvest said above regarding bond history, and of course, hindsight is 20/20. Bonds to me are like rents with properties. Not very speculative. I am not planning on selling large amounts anytime soon. I am concerned with the cash flow vice what the banks can deliver. For the more speculative side, I consider stock funds with the hope of doing better overall than bond funds. The benchmark for all investors has been the S&P 500, which few if any can beat in the long run. Buffett proved this with his bet to the best traders in the hedge fund industry.

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Re: Do you know your bond portfolio's REAL 12 month total return?

Post by trueblueky » Sat Sep 02, 2017 2:49 pm

longinvest wrote:
Sat Sep 02, 2017 9:45 am
Bonds aren't cash investments. Unlike bank CDs and savings accounts, bonds have a fluctuating value. Sometimes, this value goes up, other times it goes down.

A non-defaulting nominal bond is guaranteed to mature at par. But, its value fluctuates before maturity. These fluctuations are usually bigger when the bond is far from maturity, and much smaller when near maturity.

A non-defaulting zero-coupon nominal bond is vulnerable to inflation. When it's bought, we know its exact nominal yield to maturity (YTM) which is its future nominal return over the specific period spanning from the buy transaction to maturity. Inflation might be higher or lower than YTM over that period. If inflation is higher, an investor holding the bond to maturity will experience an inflation-adjusted loss over that period.

A bond fund held perpetually works differently; though. It might be easier to illustrate this using a rolling bond ladder. Every year, one rung of the ladder matures, and a bunch of coupons are paid. These coupons and maturing principal are reinvested into a new longer-maturity rung. As long as the yield on this new rung is as high as the current (one-year trailing?) inflation rate, the bond ladder will keep up with inflation over the long term, but (potentially) with a few years lag.

The problem is that this isn't always the case. In the 1940s and 1950s, for example, long-term yields were 15% to 20% below the current inflation rate, due to interest-rate controls by government. This had a terrible effect on the return of bonds over the next 30 years! Just to make things worse, at the end of these 30 years, in the 1970s, there was a huge run up in inflation. In the 1970s, nominal interest rates went up with inflation; this had the normal immediate impact on the market value of bonds, and lead to increasing the length of the inflation-adjusted bond drawdown (started in the 1940s) to 40 years.

It's interesting to note, though, that the returns of bonds since the 1960s have kept up with inflation, but with a lag, as our mental experiment with a bond ladder implies when long-term yields adjust to current inflation.

So, what a current nominal bond fund holder, interested in metrics, should be more concerned with isn't the last year's nominal or real return, nor the current YTM of his bond fund (assuming the fund holds bonds to maturity, or near maturity). He should be concerned with the yield to maturity on the long-end of his fund relative to current inflation.

But, even then, this might not be of much help, unless he's able to find a safer place (from an inflation risk point of view) to put his money. If cash investments have even lower yields (like in the 1940s), he might not have much choice but to accept that his bond investments are likely to lose relative to inflation.

One could hope that stocks, which are certificates of ownership of companies, might fare better, but there's no such guarantee. In the mid-1970s, stocks actually lost up to 50% of their value in inflation-adjusted terms (30% lost to market, 20% lost to inflation), while bonds lost less. They recovered quickly, but over the 1970s-early-1980s period, bonds and stocks had relatively similar cumulative returns, stocks exhibiting significantly more volatility.

There now exist inflation-indexed bonds (TIPS), which aren't vulnerable to inflation. But, they can still lose relative to inflation. A zero-coupon 5-year TIPS with a real YTM of -0.50% will have a negative real return over the 5 years spanning from the buy transaction to its maturity. And, TIPS aren't cash; they have a fluctuating market value, and they are currently less liquid than nominal Treasuries, leading to higher bid/ask spreads.

All financial securities are exposed to a variety of risks. Some are more exposed to some risks than others. A good defense we can take is to diversify our portfolio across different types of securities. Note how my emphasis isn't on maximizing potential returns; it's about averting being fully invested into the worst performing asset.

I've structured my own portfolio accordingly, diversifying it across domestic stocks, international stocks, nominal bonds, and inflation-indexed bonds. I wouldn't feel safe investing 100% of my money into any of these 4 assets. I can't even say that having it invested across all four assets is perfectly safe, as it isn't. I've accepted that there is no such thing as a perfectly safe portfolio. What's important is that I am able to sleep well at night, and that I am confident I will be able to stay the course in bull, bear, and sideways markets.
Outstanding advice in bold.
A separate discussion of percentage in nominal vs. percentage in inflation-indexed might be profitable.

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