How to respond when your index fund drifts?

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restingonmylaurels
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How to respond when your index fund drifts?

Post by restingonmylaurels » Tue Sep 11, 2018 8:11 am

I was just emailed the following article from Morningstar reviewing the VG short-term bond index. https://www.morningstar.com/articles/88 ... goals.html

It made the following interesting point I had not considered before: "Treasury securities take up more than half of the portfolio. Before the financial crisis, Treasury securities were a smaller part of the fund’s benchmark. However, postcrisis the Treasury market more than doubled to $14 trillion as of 2017, according to Securities Industry and Financial Markets Association data. Accordingly, market-cap-weighting steers the fund toward Treasury bonds."

If one's TSM fund over time became highly concentrated in small caps, for example, I imagine people would search for a way to get back to the portfolio allocation they had originally invested in, perhaps by changing to a different fund.

For all of the long-time BHs who originally invested in bond index funds like this or TBM back in the day, what were the original government to credit allocations and have you taken any action to get back to the portfolio allocation you originally invested in?
Last edited by restingonmylaurels on Wed Sep 12, 2018 8:10 am, edited 1 time in total.

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Doc
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Re: How to respond when your fund changes?

Post by Doc » Tue Sep 11, 2018 8:50 am

I don't invest in omnibus type funds like TBM or TSM. And for the most part even things like a gov/credit fund like the one you linked to.

Hence I don't have the problem.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

restingonmylaurels
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Re: How to respond when your index fund drifts?

Post by restingonmylaurels » Wed Sep 12, 2018 7:37 am

The point I was trying to understand is the potential drift in a bond index fund when something like the financial crisis happens, based on what the Morningstar article indicated by the increased debt issuance by the government.

I checked the TBM portfolio composition from the BH wiki https://www.bogleheads.org/wiki/Bloombe ... Bond_Index, which shows that in 2007 before the financial crisis the portfolio of the index it follows was comprised of:

Government: 35.4%
Corporate 19.6%
Mortgage-backed 38.6%
Asset backed 6.5%

As of July 2018, the fund was comprised of:

Government: 42.7%
Corporate 35.2%
Mortgage-backed 21.6%
Asset backed 0.5%

Not sure what this would look like if it was not float adjusted but has gone from a fund that was 74% government before the financial crisis to one that is 64% government now.

Which seems like the opposite of Morningstar's point, which was that at least in the short-term debt markets, the increased government debt issuance had altered the short-term bond index funds portfolio.

Does anyone know where I can access the historical fact sheets for the Bloomberg Barclays U.S. 1–5 Year Government/Credit Bond Index, so that the composition of that index before the financial crisis can be ascertained?
Last edited by restingonmylaurels on Wed Sep 12, 2018 8:10 am, edited 1 time in total.

zuma
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Re: How to respond when your fund changes?

Post by zuma » Wed Sep 12, 2018 7:49 am

restingonmylaurels wrote:
Tue Sep 11, 2018 8:11 am
For all of the long-time BHs who originally invested in bond index funds like this or TBM back in the day, what were the original government to credit allocations and have you taken any action to get back to the portfolio allocation you originally invested in?
I'm not a long-time Boglehead, but I can say that I invest in TBM because of the simplicity and diversification it offers, not because I'm targeting a particular allocation of different bond types.

tibbitts
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Re: How to respond when your fund changes?

Post by tibbitts » Wed Sep 12, 2018 7:50 am

Doc wrote:
Tue Sep 11, 2018 8:50 am
I don't invest in omnibus type funds like TBM or TSM. And for the most part even things like a gov/credit fund like the one you linked to.

Hence I don't have the problem.
Well you would have the same problem if for example you invest in an emerging markets fund and either:

1. a country that makes up a huge percentage of the index is determined to have "emerged" and its securities are sold off, probably at the worst possible time due to some political event or other external factor;

2. the fund changes to an index that doesn't include a country comprising much of the previous index, again undoubtedly at the worst possible time.

I actually think this thread is not a particularly good example of "fund changes."

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Doc
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Re: How to respond when your fund changes?

Post by Doc » Wed Sep 12, 2018 8:04 am

tibbitts wrote:
Wed Sep 12, 2018 7:50 am
Doc wrote:
Tue Sep 11, 2018 8:50 am
I don't invest in omnibus type funds like TBM or TSM. And for the most part even things like a gov/credit fund like the one you linked to.

Hence I don't have the problem.
Well you would have the same problem if for example you invest in an emerging markets fund and either:

1. a country that makes up a huge percentage of the index is determined to have "emerged" and its securities are sold off, probably at the worst possible time due to some political event or other external factor;

2. the fund changes to an index that doesn't include a country comprising much of the previous index, again undoubtedly at the worst possible time.

I actually think this thread is not a particularly good example of "fund changes."
I agree. That's why I don't invest in EM either. :D
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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