Intermediate-Term bond vs Total Bond

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fortyofforty
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Re: Intermediate-Term bond vs Total Bond

Post by fortyofforty » Sun Jan 12, 2020 2:52 pm

Taylor Larimore wrote:
Sun Jan 01, 2012 6:02 pm
Prof. Burton Malkiel, author of Random Walk Down Wall Street: "I recommend a total-market index fund--one that follows the entire U.S. stock market. And I recommend the same approach for the U.S. bond market and international stocks."
Again, I'd say the closest thing to the "I don't know" portfolio includes the Total Bond Market index fund.
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Re: Intermediate-Term bond vs Total Bond

Post by fortyofforty » Sun Jan 12, 2020 2:53 pm

:sharebeer
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Re: Intermediate-Term bond vs Total Bond

Post by danielc » Sun Jan 12, 2020 6:04 pm

longinvest wrote:
Sun Jan 12, 2020 7:39 am
I concede that I should have written, instead, "to emit stocks (and sometimes buy back stocks or pay dividends)" because both dividends and buy backs subtract from company value due to cash outlay. Anyway, the idea is that the market weight of stocks is mostly determined by company decisions.
I think you might be splitting hairs here. Yes, paying a dividend reduces cash on hand, and the stock price drops accordingly, but deciding whether or not to pay a dividend is not what mostly determines the market value of a company. A company cannot make itself have twice the market cap by choosing a different dividend strategy, but Italy did choose to have twice the debt-to-GDP ratio of Germany.

longinvest wrote:
Sun Jan 12, 2020 7:39 am
danielc wrote:
Sun Jan 12, 2020 3:15 am
Lastly, I would honestly like to know whether your stock/bond allocation is roughly equal to that of the global portfolio, and I would honestly like to know whether you own gold or junk bonds in proportion to the global portfolio. I ask because I suspect that the answer to both questions will be "no", so my follow up question would be whether this means that you think you know better than the market.
I have provided detailed answers in this post and in the first post and other posts of the thread it links to.

I've chosen to only invest into investment-grade assets.
I remember that post. Do you feel that your decision to not invest in junk bonds means that you have decided that the market has mispriced junk bonds? I suspect that you don't feel that way, and I certainly don't feel that way. You decided to stick to investment grade assets for decisions other than perceived mispricing. Just like you prefer investment grade, someone could prefer AAA debt (e.g. Germany) over BBB debt (e.g. Italy), all without claiming that the market yields are wrong. You don't buy junk bonds. Italy is a borderline junk bond.
longinvest wrote:
Sun Jan 12, 2020 7:39 am
I index each of the four markets, but I don't weight the four markets into my portfolio according to their respective global weight. While the stock/bond ratio in my portfolio is close to global stock/bond proportions, I maintain a moderate amount of home bias (28/72 domestic/world for stocks, 59/41 domestic/world for bonds)*. The reasons for all this are explained in various posts of the linked thread,

* Here's a post where I explain Siamond's domestic/world approach to describe home bias.
That is one of my favourite threads in this forum. But I wasn't talking about home bias (US vs ex-US) but the stock/bond allocation. For example, in the post you linked to you used a 60/40 stock/bond allocation. But a global portfolio would be closer to 33/67 stock/bond I believe. I don't think that people who pick 60/40 stock/bonds do so because they think stocks are underpriced and bonds are overpriced. I believe they do so because of a personal risk/return preference. That's the point you've tried to address in the rest of your post:
longinvest wrote:
Sun Jan 12, 2020 7:39 am
It's a typical argument of indexing detractors to claim that the only way to be an indexer would be to hold the utopian All Assets Of The Galaxy portfolio and then claim that no investor is really an indexer. But, fortunately, William Sharpe anticipated such ridiculous claims when he wrote his theorem:
Of course, certain definitions of the key terms are necessary. First a market must be selected -- the stocks in the S&P 500, for example, or a set of "small" stocks.
It's fine for an indexer to choose which markets to index. It's also fine for an indexer not to hold index funds (one for each chosen market) at their relative global weight. William Sharpe even provided a "perfectly passive" approach for rebalancing a portfolio which holds distinct asset classes at a chosen ratio in Adaptive Asset Allocation Policies. I personally think that Vanguard does a good enough job with its LifeStrategy funds, as I explained in this post.
I agree with everything you and Sharpe have said here. But to justify, for example, a 60/40 stock/bond allocation you need to also say that you want to hold more of one market than another. I think that's fine. Just as you have chosen to allocate 0% to junk bonds, I think someone could prefer to down-weigh BBB-rated bonds like Italy relative to AAA-rated bonds like Germany.

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Re: Intermediate-Term bond vs Total Bond

Post by longinvest » Sun Jan 12, 2020 6:19 pm

danielc wrote:
Sun Jan 12, 2020 6:04 pm
longinvest wrote:
Sun Jan 12, 2020 7:39 am
I concede that I should have written, instead, "to emit stocks (and sometimes buy back stocks or pay dividends)" because both dividends and buy backs subtract from company value due to cash outlay. Anyway, the idea is that the market weight of stocks is mostly determined by company decisions.
I think you might be splitting hairs here. Yes, paying a dividend reduces cash on hand, and the stock price drops accordingly, but deciding whether or not to pay a dividend is not what mostly determines the market value of a company. A company cannot make itself have twice the market cap by choosing a different dividend strategy, but Italy did choose to have twice the debt-to-GDP ratio of Germany.
Danielc, you omitted my main argument, which is that it's a company decision to emit stocks. When Facebook made its initial public offering (IPO), it flooded the market with its shares. This is identical to Italy flooding the market with its bonds.
danielc wrote:
Sun Jan 12, 2020 6:04 pm
That is one of my favourite threads in this forum. But I wasn't talking about home bias (US vs ex-US) but the stock/bond allocation. For example, in the post you linked to you used a 60/40 stock/bond allocation. But a global portfolio would be closer to 33/67 stock/bond I believe.
I think that this is way off. The recent ratio is provided in the thread Bill Sharpe's preferred portfolio. It's 57/43 world-stocks/world-bonds (VT/BNDW). I think that 60/40 is close enough.
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Re: Intermediate-Term bond vs Total Bond

Post by danielc » Sun Jan 12, 2020 6:36 pm

longinvest wrote:
Sun Jan 12, 2020 6:19 pm
Danielc, you omitted my main argument, which is that it's a company decision to emit stocks. When Facebook made its initial public offering (IPO), it flooded the market with its shares. This is identical to Italy flooding the market with its bonds.
I misunderstood your argument. I thought that emitting stocks was somehow the opposite of a stock buy back, but in hindsight that was very stupid of me (never assume malice for that which can easily be explained by incompetence). So yes, emitting stocks is 100% the company's decision and is 100% analogous to Italy deciding to issue more bonds. So the stock market and bond market have more similarities than I first realized. I would still add that Italy can continue to issue bonds but Facebook cannot continue to issue stocks, but I admit that they're more similar than I thought.

longinvest wrote:
Sun Jan 12, 2020 6:19 pm
I think that this is way off. The recent ratio is provided in the thread Bill Sharpe's preferred portfolio. It's 57/43 world-stocks/world-bonds (VT/BNDW). I think that 60/40 is close enough.
But... the US bond market is larger than the US stock market. And internationally the difference is even larger.

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Re: Intermediate-Term bond vs Total Bond

Post by fortyofforty » Sun Jan 12, 2020 6:40 pm

longinvest wrote:
Sun Jan 12, 2020 6:19 pm
danielc wrote:
Sun Jan 12, 2020 6:04 pm
longinvest wrote:
Sun Jan 12, 2020 7:39 am
I concede that I should have written, instead, "to emit stocks (and sometimes buy back stocks or pay dividends)" because both dividends and buy backs subtract from company value due to cash outlay. Anyway, the idea is that the market weight of stocks is mostly determined by company decisions.
I think you might be splitting hairs here. Yes, paying a dividend reduces cash on hand, and the stock price drops accordingly, but deciding whether or not to pay a dividend is not what mostly determines the market value of a company. A company cannot make itself have twice the market cap by choosing a different dividend strategy, but Italy did choose to have twice the debt-to-GDP ratio of Germany.
Danielc, you omitted my main argument, which is that it's a company decision to emit stocks. When Facebook made its initial public offering (IPO), it flooded the market with its shares. This is identical to Italy flooding the market with its bonds.
danielc wrote:
Sun Jan 12, 2020 6:04 pm
That is one of my favourite threads in this forum. But I wasn't talking about home bias (US vs ex-US) but the stock/bond allocation. For example, in the post you linked to you used a 60/40 stock/bond allocation. But a global portfolio would be closer to 33/67 stock/bond I believe.
I think that this is way off. The recent ratio is provided in the thread Bill Sharpe's preferred portfolio. It's 57/43 world-stocks/world-bonds (VT/BNDW). I think that 60/40 is close enough.
There is nothing that says we have to "weight" all global markets according to market weight. For example, if we have a higher need for income than Mr. Global Average, we might weight income-producing products higher than average. That is not to say that any global asset or asset class is mispriced, only that we might personally value something higher or lower than average.
Indexing works, not because of magic, but because of math. | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

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Re: Intermediate-Term bond vs Total Bond

Post by longinvest » Sun Jan 12, 2020 6:54 pm

fortyofforty wrote:
Sun Jan 12, 2020 6:40 pm
longinvest wrote:
Sun Jan 12, 2020 6:19 pm
danielc wrote:
Sun Jan 12, 2020 6:04 pm
longinvest wrote:
Sun Jan 12, 2020 7:39 am
I concede that I should have written, instead, "to emit stocks (and sometimes buy back stocks or pay dividends)" because both dividends and buy backs subtract from company value due to cash outlay. Anyway, the idea is that the market weight of stocks is mostly determined by company decisions.
I think you might be splitting hairs here. Yes, paying a dividend reduces cash on hand, and the stock price drops accordingly, but deciding whether or not to pay a dividend is not what mostly determines the market value of a company. A company cannot make itself have twice the market cap by choosing a different dividend strategy, but Italy did choose to have twice the debt-to-GDP ratio of Germany.
Danielc, you omitted my main argument, which is that it's a company decision to emit stocks. When Facebook made its initial public offering (IPO), it flooded the market with its shares. This is identical to Italy flooding the market with its bonds.
danielc wrote:
Sun Jan 12, 2020 6:04 pm
That is one of my favourite threads in this forum. But I wasn't talking about home bias (US vs ex-US) but the stock/bond allocation. For example, in the post you linked to you used a 60/40 stock/bond allocation. But a global portfolio would be closer to 33/67 stock/bond I believe.
I think that this is way off. The recent ratio is provided in the thread Bill Sharpe's preferred portfolio. It's 57/43 world-stocks/world-bonds (VT/BNDW). I think that 60/40 is close enough.
There is nothing that says we have to "weight" all global markets according to market weight. For example, if we have a higher need for income than Mr. Global Average, we might weight income-producing products higher than average. That is not to say that any global asset or asset class is mispriced, only that we might personally value something higher or lower than average.
I agree. That's why, in my post The One-Fund Portfolio as a default suggestion I suggested (see the blue part):
longinvest wrote:
Mon Aug 12, 2019 8:10 am
I think that the following could be a good default portfolio suggested in answer to many queries about portfolio construction:
  • Portfolio 1: Vanguard LifeStrategy Moderate Growth Fund (VSMGX) -- a globally-diversified balanced index portfolio with a moderate home bias, appropriate for investors of all ages and all wealth levels, or
  • Portfolio 2: A carefully-chosen all-in-one index fund or ETF with a gliding or fixed asset allocation based on the investor's circumstances -- low-cost Target Retirement / Target Date index fund (various providers), LifeStrategy fund (Vanguard), or Core Allocation ETF (iShares)
... I think that portfolio 1 is a very good default portfolio for investors of all ages and all wealth levels. This includes experienced investors who have finally realized the importance simplicity as well as the futility of trying to engineer a better portfolio, accumulating investors who want to spend their life doing other things than worrying about their portfolio, and even new investors who don't know how to choose an asset allocation. It has a fixed 60/40 stocks/bonds allocation. It's very broadly-diversified, currently holding over 25,000 securities. It's actually a very good practical proxy for Bill Sharpe's ideal Market Portfolio adapted for a U.S. investor with a moderate home bias.

Investors who desire a specific gliding or fixed asset allocation can go with portfolio 2 and choose among the various available all-in-one index funds and ETFs. This is somewhat more complex than portfolio 1 as it requires making more assumptions about assets and about the investor's preferences.
...
There's an infinite number of additional reasonable portfolios (using more than a single fund). It's just a good idea to remain aware that stocks and bonds are marketable securities, and that they have a market capitalization. Investing one's wealth into market segments can sometimes expose, without being aware of it, the investor to risks which aren't obvious to see.
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Re: Intermediate-Term bond vs Total Bond

Post by Doc » Mon Jan 13, 2020 10:21 am

alluringreality wrote:
Sun Jan 12, 2020 2:06 pm
Doc wrote:
Sun Jan 12, 2020 1:01 pm
I'm basing my choice of avoiding MBS on Swedroe's whole chapter "The World of Mortgage-Backed Securities".
I get the impression that he also does not generally support buying corporate bonds, which are included in a higher percentage for the fund you're supporting. I don't really have a dog in the fight over including MBS/ABS or more corporates, since I'd probably consider a riskier option than either one with the understanding that I'd be essentially including some risk correlated with equities in my bond portfolio.
https://www.etf.com/sections/index-inve ... nopaging=1
I was aware of his corporate position from his bond book. But without looking it up I think the "avoid" recommendation was addressed at intermediate and long term. This is one of the reasons I mostly use an active fund for this part of my FI portfolio. Another option might be a 3-7 index fund if one exists. Any recommendations?
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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