Simplicity on Bond Funds

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
bikechuck
Posts: 815
Joined: Sun Aug 16, 2015 9:22 pm

Re: Simplicity on Bond Funds

Post by bikechuck »

abuss368 wrote: Sat Oct 10, 2020 10:35 pm Keeping on topic, I am not so sure more than one bond fund is really needed in a portfolio.
Abuss368, I only want to hold one bond fund but reading this thread has my head spinning and I am entirely uncertain which fund to choose.

I am leaning towards Vanguard's total bond fund or an intermediate term treasury fund but I have zero confidence in my ability to say which of the two would be the better choice.

Adding that I am leaning towards the treasury fund and comments are welcome.
User avatar
Steve Reading
Posts: 2460
Joined: Fri Nov 16, 2018 10:20 pm

Re: Simplicity on Bond Funds

Post by Steve Reading »

000 wrote: Tue Oct 13, 2020 8:28 pm
Steve Reading wrote: Tue Oct 13, 2020 8:20 pm
000 wrote: Tue Oct 13, 2020 7:53 pm
Steve Reading wrote: Tue Oct 13, 2020 7:28 pm Just my opinion but even if corporate bonds performed very similarly to a 20/80 portfolio of Japanese stocks/sovereign bonds historically, I probably would still use them.
I agree with your view.

I can find all kinds of things that performed very similarly to other things historically, but don't invest in them.

Compare US Total Stock Market, S&P 500, and DOW 30.
That said, I would read carefully what Uncorrelated has to say. His arguments are very carefully-constructed and they tend to be both empirically and theoretically based. He's one of the few people in the forum who I really listen to and if he's saying to avoid corporate bonds, like I said before, I know he's got a good reason.

I suspect Uncorrelated is fine with them (after all, he recommends BND just fine over, say, VGIT). I suspect his stance might be "I wouldn't go out of my way to add them via additional funds, but they're just fine if they come in your bond funds already". We'll see.
Uncorrelated has already responded a few times in this thread.
Yes, but everything I saw was about why corporate bonds wouldn't be that helpful (low premia, factor is very correlated to the market). My question to him is whether they're actually detrimental. Whether they will exist in the future efficient frontier. I don't need a good reason about them being in the frontier in order to hold them; I need a good reason as to why they wouldn't be in the frontier, in order to avoid them. Hope that makes sense :mrgreen:
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
000
Posts: 2805
Joined: Thu Jul 23, 2020 12:04 am

Re: Simplicity on Bond Funds

Post by 000 »

bikechuck wrote: Tue Oct 13, 2020 8:35 pm
abuss368 wrote: Sat Oct 10, 2020 10:35 pm Keeping on topic, I am not so sure more than one bond fund is really needed in a portfolio.
Abuss368, I only want to hold one bond fund but reading this thread has my head spinning and I am entirely uncertain which fund to choose.

I am leaning towards Vanguard's total bond fund or an intermediate term treasury fund but I have zero confidence in my ability to say which of the two would be the better choice.

Adding that I am leaning towards the treasury fund and comments are welcome.
In a non-taxable account, I personally would prefer total bond. I think the difference in risk is low compared to the difference in yield. YMMV.

Of course, for a long term investment, long term bonds might be better than intermediate or average intermediate term bonds. The same is true for a short term investment or cash-equivalent.

Then there's the question if one wants inflation protection in one's bonds.
000
Posts: 2805
Joined: Thu Jul 23, 2020 12:04 am

Re: Simplicity on Bond Funds

Post by 000 »

Steve Reading wrote: Tue Oct 13, 2020 8:39 pm Yes, but everything I saw was about why corporate bonds wouldn't be that helpful (low premia, factor is very correlated to the market). My question to him is whether they're actually detrimental. Whether they will exist in the future efficient frontier. I don't need a good reason about them being in the frontier in order to hold them; I need a good reason as to why they wouldn't be in the frontier, in order to avoid them. Hope that makes sense :mrgreen:
I see.

BTW, I am liking your idea (from some other thread) about 50% TIPS + 50% global unhedged corporates more and more. :D
User avatar
vineviz
Posts: 7839
Joined: Tue May 15, 2018 1:55 pm

Re: Simplicity on Bond Funds

Post by vineviz »

Steve Reading wrote: Tue Oct 13, 2020 8:11 pm Maybe, but nothing of what you've posted remotely makes me re-think my position.
That's your right, but a reluctance to consider the evidence has nothing to do with any flaws in what I posted.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
Topic Author
abuss368
Posts: 21618
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Simplicity on Bond Funds

Post by abuss368 »

bikechuck wrote: Tue Oct 13, 2020 8:35 pm
abuss368 wrote: Sat Oct 10, 2020 10:35 pm Keeping on topic, I am not so sure more than one bond fund is really needed in a portfolio.
Abuss368, I only want to hold one bond fund but reading this thread has my head spinning and I am entirely uncertain which fund to choose.

I am leaning towards Vanguard's total bond fund or an intermediate term treasury fund but I have zero confidence in my ability to say which of the two would be the better choice.

Adding that I am leaning towards the treasury fund and comments are welcome.
In my opinion any short or intermediate term investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio. I have a preference for Vanguard Total Bond and have invested in this fund for a long time. It does the job and I sleep well at night. The fund also includes the market weight in Treasury bonds.

There is a good reason this is the largest bond fund on the PLANET!
John C. Bogle: “Simplicity is the master key to financial success."
bikechuck
Posts: 815
Joined: Sun Aug 16, 2015 9:22 pm

Re: Simplicity on Bond Funds

Post by bikechuck »

abuss368 wrote: Tue Oct 13, 2020 9:29 pm
bikechuck wrote: Tue Oct 13, 2020 8:35 pm
abuss368 wrote: Sat Oct 10, 2020 10:35 pm Keeping on topic, I am not so sure more than one bond fund is really needed in a portfolio.
Abuss368, I only want to hold one bond fund but reading this thread has my head spinning and I am entirely uncertain which fund to choose.

I am leaning towards Vanguard's total bond fund or an intermediate term treasury fund but I have zero confidence in my ability to say which of the two would be the better choice.

Adding that I am leaning towards the treasury fund and comments are welcome.
In my opinion any short or intermediate term investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio. I have a preference for Vanguard Total Bond and have invested in this fund for a long time. It does the job and I sleep well at night. The fund also includes the market weight in Treasury bonds.

There is a good reason this is the largest bond fund on the PLANET!
Thanks, that has been my approach in the past. However being in retirement with near zero to negative real interest rates does make me wonder if I would be better off hunkering down with two funds 1) Intermediate Treasuries and 2) Short term treasuries. I think that I read that Johnathan Clements recently chose this approach for his portfolio.

So far though I have stayed the course with the VG Total Bond Fund.
Northern Flicker
Posts: 6517
Joined: Fri Apr 10, 2015 12:29 am

Re: Simplicity on Bond Funds

Post by Northern Flicker »

abuss368 wrote: In my opinion any short or intermediate term investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio.
Am I correct then that you consider a bond fund that has been down 13-14% during the last two equity bear markets as having provided safety and income to equity portfolios at those times if held with them for that purpose?
Risk is not a guarantor of return.
Northern Flicker
Posts: 6517
Joined: Fri Apr 10, 2015 12:29 am

Re: Simplicity on Bond Funds

Post by Northern Flicker »

bikechuck wrote: Tue Oct 13, 2020 9:50 pm Thanks, that has been my approach in the past. However being in retirement with near zero to negative real interest rates does make me wonder if I would be better off hunkering down with two funds 1) Intermediate Treasuries and 2) Short term treasuries. I think that I read that Johnathan Clements recently chose this approach for his portfolio.

So far though I have stayed the course with the VG Total Bond Fund.
That is a fine choice. I think the best Vanguard funds for a retiree for a single fund bond portfolio at present, in no particular order, are:

Total Bond Market Index Fund - vbtlx
Intermedate-Term Bond Index Fund - vbilx
Intermediate-term Treasury Index Fund - vsigx
Short-term Federal Bond Fund - vsgdx
Short-term treasury index fund - vsbsx
Short-term Bond index fund - vbirx

I would not pay the higher ER for VSGBX (investor class shares of VSGDX-- use a bond index fund if not meeting the minimum for VSGDX). ETFs for the index funds have a lower ER but are less desirable if taking say monthly withdrawals.

I would also be fine with: GNMA fund - vfijx, but it causes a lot of controversy on here, so I'll leave that out.
Last edited by Northern Flicker on Wed Oct 14, 2020 12:00 am, edited 1 time in total.
Risk is not a guarantor of return.
User avatar
Topic Author
abuss368
Posts: 21618
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Simplicity on Bond Funds

Post by abuss368 »

bikechuck wrote: Tue Oct 13, 2020 9:50 pm
abuss368 wrote: Tue Oct 13, 2020 9:29 pm
bikechuck wrote: Tue Oct 13, 2020 8:35 pm
abuss368 wrote: Sat Oct 10, 2020 10:35 pm Keeping on topic, I am not so sure more than one bond fund is really needed in a portfolio.
Abuss368, I only want to hold one bond fund but reading this thread has my head spinning and I am entirely uncertain which fund to choose.

I am leaning towards Vanguard's total bond fund or an intermediate term treasury fund but I have zero confidence in my ability to say which of the two would be the better choice.

Adding that I am leaning towards the treasury fund and comments are welcome.
In my opinion any short or intermediate term investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio. I have a preference for Vanguard Total Bond and have invested in this fund for a long time. It does the job and I sleep well at night. The fund also includes the market weight in Treasury bonds.

There is a good reason this is the largest bond fund on the PLANET!
Thanks, that has been my approach in the past. However being in retirement with near zero to negative real interest rates does make me wonder if I would be better off hunkering down with two funds 1) Intermediate Treasuries and 2) Short term treasuries. I think that I read that Johnathan Clements recently chose this approach for his portfolio.

So far though I have stayed the course with the VG Total Bond Fund.
So has Vanguard investment experts!
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
Uncorrelated
Posts: 1054
Joined: Sun Oct 13, 2019 3:16 pm

Re: Simplicity on Bond Funds

Post by Uncorrelated »

000 wrote: Tue Oct 13, 2020 6:33 pm
Uncorrelated wrote: Tue Oct 13, 2020 1:54 am
000 wrote: Mon Oct 12, 2020 5:10 pm
Uncorrelated wrote: Mon Oct 12, 2020 3:48 am This may or may not be true, but concretely none of it matters unless you can show that said risk differences are either under or over-priced by the efficient market. Academics who have tried to show such things have failed.
Northern Flicker wrote: Mon Oct 12, 2020 1:29 pm These are easily refuted. First, business underperformance reduces the available revenue to make bond payments. This makes the bond riskier. The market will price in a larger risk premium for the bond in the form of a higher yield demanded to own the bond, which will depress the bond's price.

Second, the market will price a stock by discounting projected future revenue back to a present value using a prevailing interest rate as a discount rate. Rising interest rates increase the discount rate, which depresses a stocks price, all else equal.
What you are talking about seems to involve speculation on bond movements, not buy and hold to maturity.
Mathematically, it makes no difference whether you hold to maturity or not. In an efficient market you are compensated for bearing risk, if you hold a bond for even one second, you are bearing risk. Nothing magical happens at maturity.
Then, please tell me the constant chosen-in-advance mix of treasuries and equities that is guaranteed to meet or exceed the performance of corporates over every period of ten or more years contained within the next thirty years.
Would you also like me to tell you the constant mix of equities and treasuries that is guaranteed to meet or exceed the performance of apple or a night in the casino?

What you want to know if whether the optimal (forward-looking) portfolio contains corporate bonds. The standard way to start showing that is to prove the given asset class has independent positive risk factors (i.e. the credit or default premium). The credit premium is not statistically significantly different from zero, so that avenue doesn't work.

If corporate bonds are affected by different risks than stocks/treasuries, why doesn't the market demand a premium for those risks?
Your model is missing many things:
  • Stocks move continuously with business performance relative to stock market expectations, corporate bonds have a cliff.
  • A corporation can perform worse than expected without getting remotely close to the possibility of default.
  • The possibility of corporate defaults does not increase when equity markets retreat from euphoria.
  • Treasuries have lower but different credit risk from corporate bonds.
  • Optimizing the expected (average) risk-adjusted return is not the goal of portfolio construction.
  • Past correlations are not predictive.
  • It is impossible to measure with certainty the future risk of various asset classes.
  • And much more...
Most of those things are not true or not relevant, but this is the most important falsehood:
[*] Optimizing the expected (average) risk-adjusted return is not the goal of portfolio construction.
The goal of every investor is to maximize the expected utility. To do this, a perfectly rational investor should collect his or her market assumptions, calculate the probability distribution of expected outcomes, and then pick the portfolio that has the best distribution for his or her personal goals. You can call the one with the best distribution the one with the best risk-adjusted returns (in this context, the term certainty equivalent return is slightly less confusing).

The key point of the discussion -for me- is to determine whether we can say with any confidence that the optimal portfolio contains corporate bonds. One avenue is showing that there are independent positive risk factors, that failed (not statistically significant). Another approach is to show that corporate bonds provide diversification benefits, I don't think that has been shown with any statistical significance either. This is different than -for example- REIT's, where it has actually been shown that over-weighting them results in higher risk.

One can construct an option portfolio with similar payout structure as a corporate bond, do you think that provides alpha? Do you think that provides any diversification benefit? If corporate bonds are valuable for diversification, why does that not appear to be priced in? If you want to make a good case for an active on decision corporate bonds, these are the questions that need to be answered.

Steve Reading wrote: Tue Oct 13, 2020 7:16 pm
Uncorrelated wrote: Tue Oct 13, 2020 1:54 am What you want to know if whether the optimal (forward-looking) portfolio contains corporate bonds. The standard way to start showing that is to prove the given asset class has independent positive risk factors (i.e. the credit or default premium). The credit premium is not statistically significantly different from zero, so that avenue doesn't work.
I don't know what you mean by the "optimal" portfolio. The "optimal portfolio" depends on the individual. What we can say is that corporate bonds are part of the market portfolio and Fama believes the market portfolio is efficient *shrugs*.

Also, I wasn't aware the credit premium was not statistically significantly different than zero. I knew it was small (about 35 bps) but I thought it was statistically significant. Either way, the bonds themselves actually performed with a decent premium overall (closer to 70 bps). The reason the credit premium is less than half of the actual corporate bond excess returns is because of the bonds that lose IG status (so-called Fallen Angels), which then proceed to perform well in aggregate. Because the credit premium is specifically rebalanced with IG bonds, it receives all of the losses from the bond spreads widening on the way to non-IG status, while missing the returns from the bonds then recovering back to IG status.
Uncorrelated wrote: Tue Oct 13, 2020 1:54 am If corporate bonds are affected by different risks than stocks/treasuries, why doesn't the market demand a premium for those risks?
Even if you ignore the historical premias outlined above, we do know the risks are slightly different. They're not identical. Spread some times widen when beta does just fine and vice-versa.

I disagree with your framework for portfolio design ("only allowing IN positive risk factors"). I would argue the investor should start with the market portfolio (which includes corporate bonds), and THEN you have to argue why you should underweight or eliminate certain investments. Even if the credit premia of IG is small, and even if it's highly correlated to beta, why wouldn't I just keep it? Are you claiming there's some negative alpha and hence, I'm better off avoiding them?
IIRC the latest academic paper on the credit premium claims a premium of -0.02 per month, not statistically significant (HmL is around 0.3). Standard deviation was around half that of HmL.

Having a positive alpha is not the only way something can end up in the optimal portfolio. There are many things that have an alpha of zero yet are nice to have in your portfolio because of diversification benefits.

Corporate bonds are included in the market portfolio, that is one very convincing argument to hold corporate bonds. And indeed, I hold corporate bonds (global aggregate bonds, to be precise) for that reason. There does not appear to be any evidence that an active decision on corporate bonds is warranted. I believe under-weighting corporate bonds is unlikely to be harmful, and over-weighting is likely to be harmful, but we don't really know. I have not yet seen any empirical analysis that is capable of answering this question.


(also please stop using portfolio visualizer to show assets have positive/negative alpha or are on the efficient frontier. If academics can't determine if the credit premium is positive or negative, then portfolio visualizer certainly can't produce any figures that are statistically significant).
User avatar
Steve Reading
Posts: 2460
Joined: Fri Nov 16, 2018 10:20 pm

Re: Simplicity on Bond Funds

Post by Steve Reading »

Uncorrelated wrote: Wed Oct 14, 2020 3:56 am
000 wrote: Tue Oct 13, 2020 6:33 pm
Uncorrelated wrote: Tue Oct 13, 2020 1:54 am
000 wrote: Mon Oct 12, 2020 5:10 pm
Uncorrelated wrote: Mon Oct 12, 2020 3:48 am This may or may not be true, but concretely none of it matters unless you can show that said risk differences are either under or over-priced by the efficient market. Academics who have tried to show such things have failed.
Northern Flicker wrote: Mon Oct 12, 2020 1:29 pm These are easily refuted. First, business underperformance reduces the available revenue to make bond payments. This makes the bond riskier. The market will price in a larger risk premium for the bond in the form of a higher yield demanded to own the bond, which will depress the bond's price.

Second, the market will price a stock by discounting projected future revenue back to a present value using a prevailing interest rate as a discount rate. Rising interest rates increase the discount rate, which depresses a stocks price, all else equal.
What you are talking about seems to involve speculation on bond movements, not buy and hold to maturity.
Mathematically, it makes no difference whether you hold to maturity or not. In an efficient market you are compensated for bearing risk, if you hold a bond for even one second, you are bearing risk. Nothing magical happens at maturity.
Then, please tell me the constant chosen-in-advance mix of treasuries and equities that is guaranteed to meet or exceed the performance of corporates over every period of ten or more years contained within the next thirty years.
Would you also like me to tell you the constant mix of equities and treasuries that is guaranteed to meet or exceed the performance of apple or a night in the casino?

What you want to know if whether the optimal (forward-looking) portfolio contains corporate bonds. The standard way to start showing that is to prove the given asset class has independent positive risk factors (i.e. the credit or default premium). The credit premium is not statistically significantly different from zero, so that avenue doesn't work.

If corporate bonds are affected by different risks than stocks/treasuries, why doesn't the market demand a premium for those risks?
Your model is missing many things:
  • Stocks move continuously with business performance relative to stock market expectations, corporate bonds have a cliff.
  • A corporation can perform worse than expected without getting remotely close to the possibility of default.
  • The possibility of corporate defaults does not increase when equity markets retreat from euphoria.
  • Treasuries have lower but different credit risk from corporate bonds.
  • Optimizing the expected (average) risk-adjusted return is not the goal of portfolio construction.
  • Past correlations are not predictive.
  • It is impossible to measure with certainty the future risk of various asset classes.
  • And much more...
Most of those things are not true or not relevant, but this is the most important falsehood:
[*] Optimizing the expected (average) risk-adjusted return is not the goal of portfolio construction.
The goal of every investor is to maximize the expected utility. To do this, a perfectly rational investor should collect his or her market assumptions, calculate the probability distribution of expected outcomes, and then pick the portfolio that has the best distribution for his or her personal goals. You can call the one with the best distribution the one with the best risk-adjusted returns (in this context, the term certainty equivalent return is slightly less confusing).

The key point of the discussion -for me- is to determine whether we can say with any confidence that the optimal portfolio contains corporate bonds. One avenue is showing that there are independent positive risk factors, that failed (not statistically significant). Another approach is to show that corporate bonds provide diversification benefits, I don't think that has been shown with any statistical significance either. This is different than -for example- REIT's, where it has actually been shown that over-weighting them results in higher risk.

One can construct an option portfolio with similar payout structure as a corporate bond, do you think that provides alpha? Do you think that provides any diversification benefit? If corporate bonds are valuable for diversification, why does that not appear to be priced in? If you want to make a good case for an active on decision corporate bonds, these are the questions that need to be answered.

Steve Reading wrote: Tue Oct 13, 2020 7:16 pm
Uncorrelated wrote: Tue Oct 13, 2020 1:54 am What you want to know if whether the optimal (forward-looking) portfolio contains corporate bonds. The standard way to start showing that is to prove the given asset class has independent positive risk factors (i.e. the credit or default premium). The credit premium is not statistically significantly different from zero, so that avenue doesn't work.
I don't know what you mean by the "optimal" portfolio. The "optimal portfolio" depends on the individual. What we can say is that corporate bonds are part of the market portfolio and Fama believes the market portfolio is efficient *shrugs*.

Also, I wasn't aware the credit premium was not statistically significantly different than zero. I knew it was small (about 35 bps) but I thought it was statistically significant. Either way, the bonds themselves actually performed with a decent premium overall (closer to 70 bps). The reason the credit premium is less than half of the actual corporate bond excess returns is because of the bonds that lose IG status (so-called Fallen Angels), which then proceed to perform well in aggregate. Because the credit premium is specifically rebalanced with IG bonds, it receives all of the losses from the bond spreads widening on the way to non-IG status, while missing the returns from the bonds then recovering back to IG status.
Uncorrelated wrote: Tue Oct 13, 2020 1:54 am If corporate bonds are affected by different risks than stocks/treasuries, why doesn't the market demand a premium for those risks?
Even if you ignore the historical premias outlined above, we do know the risks are slightly different. They're not identical. Spread some times widen when beta does just fine and vice-versa.

I disagree with your framework for portfolio design ("only allowing IN positive risk factors"). I would argue the investor should start with the market portfolio (which includes corporate bonds), and THEN you have to argue why you should underweight or eliminate certain investments. Even if the credit premia of IG is small, and even if it's highly correlated to beta, why wouldn't I just keep it? Are you claiming there's some negative alpha and hence, I'm better off avoiding them?
IIRC the latest academic paper on the credit premium claims a premium of -0.02 per month, not statistically significant (HmL is around 0.3). Standard deviation was around half that of HmL.

Having a positive alpha is not the only way something can end up in the optimal portfolio. There are many things that have an alpha of zero yet are nice to have in your portfolio because of diversification benefits.

Corporate bonds are included in the market portfolio, that is one very convincing argument to hold corporate bonds. And indeed, I hold corporate bonds (global aggregate bonds, to be precise) for that reason. There does not appear to be any evidence that an active decision on corporate bonds is warranted. I believe under-weighting corporate bonds is unlikely to be harmful, and over-weighting is likely to be harmful, but we don't really know. I have not yet seen any empirical analysis that is capable of answering this question.


(also please stop using portfolio visualizer to show assets have positive/negative alpha or are on the efficient frontier. If academics can't determine if the credit premium is positive or negative, then portfolio visualizer certainly can't produce any figures that are statistically significant).
Thanks for the thoughts. Could you link me to the credit research paper you’re referring to in terms of a negative(basically zero) credit premium? I’m going off of Antti’s book Expected Returns, where he has the credit premium from mid 1900s to 2009 at 30-50 bps. And since Corp. bonds have outperformed since then, I thought it was positive. Certainly smaller than something like HmL, but probably in line with things like SmB. Most importantly, Corp bonds are in the market portfolio. I demand as much evidence for HmL as I demand against Corp. bonds (since they’re both the same active choice... tilting away from the market).

Also, agreed with the PV comment. For the record, not sure if your comment referred to me but at no point did I mean to use PV to advance my argument. I was shown PV links and I merely pointed to how useless they were, as well as why they didn’t even show that Corp. bonds should be eliminated.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
User avatar
Uncorrelated
Posts: 1054
Joined: Sun Oct 13, 2019 3:16 pm

Re: Simplicity on Bond Funds

Post by Uncorrelated »

Steve Reading wrote: Wed Oct 14, 2020 7:27 am
Thanks for the thoughts. Could you link me to the credit research paper you’re referring to in terms of a negative(basically zero) credit premium? I’m going off of Antti’s book Expected Returns, where he has the credit premium from mid 1900s to 2009 at 30-50 bps. And since Corp. bonds have outperformed since then, I thought it was positive. Certainly smaller than something like HmL, but probably in line with things like SmB. Most importantly, Corp bonds are in the market portfolio. I demand as much evidence for HmL as I demand against Corp. bonds (since they’re both the same active choice... tilting away from the market).

Also, agreed with the PV comment. For the record, not sure if your comment referred to me but at no point did I mean to use PV to advance my argument. I was shown PV links and I merely pointed to how useless they were, as well as why they didn’t even show that Corp. bonds should be eliminated.
Demanding strong evidence is always a good idea.

A short literature overview, the credit premium story starts with Fama & French 1993 Common risk factors in the return of stocks and bonds. Here the authors calculate the DEF premium at +0.02 monthly (i.e. 0.24% annually), not statistically significant.

Then in 2011 the paper "Ibbotson’s Default Premium: Risky Data" was published. Basically, the authors argue that the data source used by Fama/French is highly suspect and should not be trusted.

I can't find the paper that arrived at the -0.02 figure, but the paper Re-Examining the Credit Premium is a fine substitute. In table 11, they estimate the credit alpha as -0.011 monthly when regressed against market returns, and -0.045 when regressed against mkt, smb, hml, umd returns. None of the results being statistically significant. Furthermore, the authors use a mean-variance analysis to show the impact of corporate bonds in portfolio construction, and note:
The second major contribution of this study is a more robust evaluation of the credit premium
in the context of other established premia. Neither the Ibbotson/Bloomberg nor the Bloomberg
series exhibits statistically significant alpha after adjusting for equity market factors. This result is
reflected in a mean-variance optimization framework similar to that of Asvanunt and Richardson
[2017]: there is little statistical evidence that corporate bonds improve the efficiency of a portfolio
that already owns stocks and government bonds. Further, in the context of a portfolio replication
exercise, the risk and return characteristics of a portfolio of stocks and government bonds dominates
corporate bonds.
This conclusion is identical to the one in Are REITs a Distinct Asset Class? by the same author. There is no evidence straying away from market weight does anything useful. If anything, the impact will be small.
User avatar
Steve Reading
Posts: 2460
Joined: Fri Nov 16, 2018 10:20 pm

Re: Simplicity on Bond Funds

Post by Steve Reading »

Uncorrelated wrote: Wed Oct 14, 2020 11:22 am
Steve Reading wrote: Wed Oct 14, 2020 7:27 am
Thanks for the thoughts. Could you link me to the credit research paper you’re referring to in terms of a negative(basically zero) credit premium? I’m going off of Antti’s book Expected Returns, where he has the credit premium from mid 1900s to 2009 at 30-50 bps. And since Corp. bonds have outperformed since then, I thought it was positive. Certainly smaller than something like HmL, but probably in line with things like SmB. Most importantly, Corp bonds are in the market portfolio. I demand as much evidence for HmL as I demand against Corp. bonds (since they’re both the same active choice... tilting away from the market).

Also, agreed with the PV comment. For the record, not sure if your comment referred to me but at no point did I mean to use PV to advance my argument. I was shown PV links and I merely pointed to how useless they were, as well as why they didn’t even show that Corp. bonds should be eliminated.
Demanding strong evidence is always a good idea.

A short literature overview, the credit premium story starts with Fama & French 1993 Common risk factors in the return of stocks and bonds. Here the authors calculate the DEF premium at +0.02 monthly (i.e. 0.24% annually), not statistically significant.

Then in 2011 the paper "Ibbotson’s Default Premium: Risky Data" was published. Basically, the authors argue that the data source used by Fama/French is highly suspect and should not be trusted.

I can't find the paper that arrived at the -0.02 figure, but the paper Re-Examining the Credit Premium is a fine substitute. In table 11, they estimate the credit alpha as -0.011 monthly when regressed against market returns, and -0.045 when regressed against mkt, smb, hml, umd returns. None of the results being statistically significant. Furthermore, the authors use a mean-variance analysis to show the impact of corporate bonds in portfolio construction, and note:
The second major contribution of this study is a more robust evaluation of the credit premium
in the context of other established premia. Neither the Ibbotson/Bloomberg nor the Bloomberg
series exhibits statistically significant alpha after adjusting for equity market factors. This result is
reflected in a mean-variance optimization framework similar to that of Asvanunt and Richardson
[2017]: there is little statistical evidence that corporate bonds improve the efficiency of a portfolio
that already owns stocks and government bonds. Further, in the context of a portfolio replication
exercise, the risk and return characteristics of a portfolio of stocks and government bonds dominates
corporate bonds.
This conclusion is identical to the one in Are REITs a Distinct Asset Class? by the same author. There is no evidence straying away from market weight does anything useful. If anything, the impact will be small.
Very helpful Uncorrelated, this is exactly what I was looking for. Will take some time to digest it.

Cheers mate.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
Tom_T
Posts: 1509
Joined: Wed Aug 29, 2007 2:33 pm

Re: Simplicity on Bond Funds

Post by Tom_T »

bikechuck wrote: Tue Oct 13, 2020 8:35 pm
abuss368 wrote: Sat Oct 10, 2020 10:35 pm Keeping on topic, I am not so sure more than one bond fund is really needed in a portfolio.
Abuss368, I only want to hold one bond fund but reading this thread has my head spinning and I am entirely uncertain which fund to choose.

I am leaning towards Vanguard's total bond fund or an intermediate term treasury fund but I have zero confidence in my ability to say which of the two would be the better choice.

Adding that I am leaning towards the treasury fund and comments are welcome.
There is nobody on the planet who can tell you which one is the better choice because there is no right answer. Nobody can know the future. We'll only know the right answer down the road (and five years down the road might give a different answer than ten years.) There are intelligent arguments to be made for each; there are different types of risk in each. I like TBM because I like the idea of it having a mix, but that's just my preference. You are not going to lose your shirt over this decision.
Northern Flicker
Posts: 6517
Joined: Fri Apr 10, 2015 12:29 am

Re: Simplicity on Bond Funds

Post by Northern Flicker »

I don't know if this is the plan Jonathan Clemens has in mind by holding short and intermediate treasuries, but one idea of holding that mix in the current yield climate is to have a mild but safe hedge against interest rate movements. If rates rise significantly, the short treasuries can be reallocated to intermediate treasuries, taking advantage of the price of intermediates falling more. If rates fall further with the yield curve flattening, reallocate intermediates to short, locking in the appreciation when the yields for both are similar and there is not much ceiling left for intermediates; then reallocate both to intermediates if and when rates rise.

This would be classified as actively managing duration, not market timing, in that the strategy does not try to predict future rates.

Most likely it will not have much of an impact on portfolio return.
Risk is not a guarantor of return.
bikechuck
Posts: 815
Joined: Sun Aug 16, 2015 9:22 pm

Re: Simplicity on Bond Funds

Post by bikechuck »

Northern Flicker wrote: Wed Oct 14, 2020 4:05 pm I don't know if this is the plan Jonathan Clemens has in mind by holding short and intermediate treasuries, but one idea of holding that mix in the current yield climate is to have a mild but safe hedge against interest rate movements. If rates rise significantly, the short treasuries can be reallocated to intermediate treasuries, taking advantage of the price of intermediates falling more. If rates fall further with the yield curve flattening, reallocate intermediates to short, locking in the appreciation when the yields for both are similar and there is not much ceiling left for intermediates; then reallocate both to intermediates if and when rates rise.

This would be classified as actively managing duration, not market timing, in that the strategy does not try to predict future rates.

Most likely it will not have much of an impact on portfolio return.
This afternoon I re-read several of Mr. Clemment's columns and he recently moved his bond holdings to two funds 1) Short term treasuries 2) Short term tips

I cannot make myself buy a tips fund with a negative yield before the inflation adjustment.

These are strange times with near zero interest rates which is the only thing that is making me question my stubborn adherence to my total bond fund up until now. For now I have not done anything other than just standing there. However I might move to short term treasuries to mitigate the risk of a rise in interest rates should that occur.
Northern Flicker
Posts: 6517
Joined: Fri Apr 10, 2015 12:29 am

Re: Simplicity on Bond Funds

Post by Northern Flicker »

short-term treasuries and short-term TIPS both have a negative expected real yield.
Risk is not a guarantor of return.
User avatar
Uncorrelated
Posts: 1054
Joined: Sun Oct 13, 2019 3:16 pm

Re: Simplicity on Bond Funds

Post by Uncorrelated »

bikechuck wrote: Wed Oct 14, 2020 5:35 pm
This afternoon I re-read several of Mr. Clemment's columns and he recently moved his bond holdings to two funds 1) Short term treasuries 2) Short term tips

I cannot make myself buy a tips fund with a negative yield before the inflation adjustment.

These are strange times with near zero interest rates which is the only thing that is making me question my stubborn adherence to my total bond fund up until now. For now I have not done anything other than just standing there. However I might move to short term treasuries to mitigate the risk of a rise in interest rates should that occur.
The Japanese have been waiting for 20 years.

Don't try to time the market. The market still believes that the additional volatility of intermediate term is worth the risk over short term. So should you.
S_Track
Posts: 369
Joined: Sat Feb 18, 2017 12:33 pm

Re: Simplicity on Bond Funds

Post by S_Track »

Northern Flicker wrote: Tue Oct 13, 2020 6:43 pm Max drawdowns of two portfolios over 26 years, including 2 retreats from euphoria:

https://www.portfoliovisualizer.com/bac ... tion3_2=72

Draw your own conclusions.
Trying to understand this. I added a third portfolio where I used 28% stock and 72% corporate bonds to compare with your 2nd portfolio with treasures. Comparing these two I see the corporate bond portfolio had the greater final value where as the one with treasuries had a lower draw down. So what is the proper conclusion here? It seems the portfolio with the lower draw down would be beneficial to the person is the withdrawal phase but the use of corporates with the greater volatility is better during the accumulation phase. Am I correct here, Thanks

https://www.portfoliovisualizer.com/bac ... tion3_2=72
User avatar
Uncorrelated
Posts: 1054
Joined: Sun Oct 13, 2019 3:16 pm

Re: Simplicity on Bond Funds

Post by Uncorrelated »

S_Track wrote: Thu Oct 15, 2020 7:16 am
Northern Flicker wrote: Tue Oct 13, 2020 6:43 pm Max drawdowns of two portfolios over 26 years, including 2 retreats from euphoria:

https://www.portfoliovisualizer.com/bac ... tion3_2=72

Draw your own conclusions.
Trying to understand this. I added a third portfolio where I used 28% stock and 72% corporate bonds to compare with your 2nd portfolio with treasures. Comparing these two I see the corporate bond portfolio had the greater final value where as the one with treasuries had a lower draw down. So what is the proper conclusion here? It seems the portfolio with the lower draw down would be beneficial to the person is the withdrawal phase but the use of corporates with the greater volatility is better during the accumulation phase. Am I correct here, Thanks

https://www.portfoliovisualizer.com/bac ... tion3_2=72
The proper conclusion is the one drawn in the paper Re-Examining the Credit Premium. They attempted to replicate the characteristics of corporate bonds with a mean-variance optimizer, and found that the replicated portfolio dominated the risk-return characteristics of corporate bonds. Performing this analysis by yourself is complicated...
User avatar
vineviz
Posts: 7839
Joined: Tue May 15, 2018 1:55 pm

Re: Simplicity on Bond Funds

Post by vineviz »

S_Track wrote: Thu Oct 15, 2020 7:16 am
Northern Flicker wrote: Tue Oct 13, 2020 6:43 pm Max drawdowns of two portfolios over 26 years, including 2 retreats from euphoria:

https://www.portfoliovisualizer.com/bac ... tion3_2=72

Draw your own conclusions.
Trying to understand this. I added a third portfolio where I used 28% stock and 72% corporate bonds to compare with your 2nd portfolio with treasures. Comparing these two I see the corporate bond portfolio had the greater final value where as the one with treasuries had a lower draw down. So what is the proper conclusion here? It seems the portfolio with the lower draw down would be beneficial to the person is the withdrawal phase but the use of corporates with the greater volatility is better during the accumulation phase. Am I correct here, Thanks

https://www.portfoliovisualizer.com/bac ... tion3_2=72
Your comparison effectively showed that taking more market risk results in higher expected returns.

But your conclusion isn’t correct.

For any given amount of portfolio risk, the accumulator is still better off with a mix of stocks and Treasury bonds than with a mix of stocks and corporate bonds. With similar amounts of expected volatility, the Treasury portfolio has greater diversification and higher expected return than the corporate portfolio.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
bikechuck
Posts: 815
Joined: Sun Aug 16, 2015 9:22 pm

Re: Simplicity on Bond Funds

Post by bikechuck »

Uncorrelated wrote: Thu Oct 15, 2020 4:01 am
bikechuck wrote: Wed Oct 14, 2020 5:35 pm
This afternoon I re-read several of Mr. Clemment's columns and he recently moved his bond holdings to two funds 1) Short term treasuries 2) Short term tips

I cannot make myself buy a tips fund with a negative yield before the inflation adjustment.

These are strange times with near zero interest rates which is the only thing that is making me question my stubborn adherence to my total bond fund up until now. For now I have not done anything other than just standing there. However I might move to short term treasuries to mitigate the risk of a rise in interest rates should that occur.
The Japanese have been waiting for 20 years.

Don't try to time the market. The market still believes that the additional volatility of intermediate term is worth the risk over short term. So should you.
Thank you for sharing your point of view. I cannot remember experiencing negative "real" interest rates before in my lifetime and being in the deaccumulation phase I feel the need to protect myself should interest rates begin to rise. If I make a change it will be going from a single bond fund to two bond funds and once that move is made I will likely leave things stand for decades as that has been my past practice.

Note also that I do not consider that to be market timing. I see it as a strategic shift somewhat along the lines of adopting a declining or rising glide path.
User avatar
Topic Author
abuss368
Posts: 21618
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Simplicity on Bond Funds

Post by abuss368 »

Northern Flicker wrote: Wed Oct 14, 2020 11:35 pm short-term treasuries and short-term TIPS both have a negative expected real yield.
How is it possible that Short Term TIPS actually have negative expected real yield? I thoughts TIPS adjusted the principle for changes in inflation.
John C. Bogle: “Simplicity is the master key to financial success."
luckyducky99
Posts: 101
Joined: Sun Dec 15, 2019 7:47 pm

Re: Simplicity on Bond Funds

Post by luckyducky99 »

abuss368 wrote: Thu Oct 15, 2020 10:19 am
Northern Flicker wrote: Wed Oct 14, 2020 11:35 pm short-term treasuries and short-term TIPS both have a negative expected real yield.
How is it possible that Short Term TIPS actually have negative expected real yield? I thoughts TIPS adjusted the principle for changes in inflation.
TIPS prices are greater than their par value + expected inflation adjustment. So, e.g. to get today's equivalent of $100 dollars in 2021, you might have to pay $102 now. The inflation adjustment only applies to the par value, so if expected inflation is 1%, you'd expect to get back $101 at maturity, which would mean about -1% real yield on that TIPS if you buy it today.
User avatar
Topic Author
abuss368
Posts: 21618
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Simplicity on Bond Funds

Post by abuss368 »

luckyducky99 wrote: Thu Oct 15, 2020 11:54 am
abuss368 wrote: Thu Oct 15, 2020 10:19 am
Northern Flicker wrote: Wed Oct 14, 2020 11:35 pm short-term treasuries and short-term TIPS both have a negative expected real yield.
How is it possible that Short Term TIPS actually have negative expected real yield? I thoughts TIPS adjusted the principle for changes in inflation.
TIPS prices are greater than their par value + expected inflation adjustment. So, e.g. to get today's equivalent of $100 dollars in 2021, you might have to pay $102 now. The inflation adjustment only applies to the par value, so if expected inflation is 1%, you'd expect to get back $101 at maturity, which would mean about -1% real yield on that TIPS if you buy it today.
That makes sense and thank you for sharing. Would that only apply to mutual funds or individual TIPS (or does not matter)?
John C. Bogle: “Simplicity is the master key to financial success."
S_Track
Posts: 369
Joined: Sat Feb 18, 2017 12:33 pm

Re: Simplicity on Bond Funds

Post by S_Track »

vineviz wrote: Thu Oct 15, 2020 9:33 am
S_Track wrote: Thu Oct 15, 2020 7:16 am
Northern Flicker wrote: Tue Oct 13, 2020 6:43 pm Max drawdowns of two portfolios over 26 years, including 2 retreats from euphoria:

https://www.portfoliovisualizer.com/bac ... tion3_2=72

Draw your own conclusions.
Trying to understand this. I added a third portfolio where I used 28% stock and 72% corporate bonds to compare with your 2nd portfolio with treasures. Comparing these two I see the corporate bond portfolio had the greater final value where as the one with treasuries had a lower draw down. So what is the proper conclusion here? It seems the portfolio with the lower draw down would be beneficial to the person is the withdrawal phase but the use of corporates with the greater volatility is better during the accumulation phase. Am I correct here, Thanks

https://www.portfoliovisualizer.com/bac ... tion3_2=72
Your comparison effectively showed that taking more market risk results in higher expected returns.

But your conclusion isn’t correct.

For any given amount of portfolio risk, the accumulator is still better off with a mix of stocks and Treasury bonds than with a mix of stocks and corporate bonds. With similar amounts of expected volatility, the Treasury portfolio has greater diversification and higher expected return than the corporate portfolio.
Ok so any back test of two portfolios, one with corporates and the other treasuries, that have the same AA, we can expect the Corporate one to have the higher expected return since it has greater risk? This does seem to be the case when I try different back tests with Portfolio visualizer. Now in Northern Flicker's example, a 100% corporates portfolio was compared to a 72/28 Treasuries to stock portfolio. Since the max drawdown from the Treasury portfolio was less than the other, can we conclude less risk and volitivity? If yes, how do we explain the greater return? thanks
User avatar
vineviz
Posts: 7839
Joined: Tue May 15, 2018 1:55 pm

Re: Simplicity on Bond Funds

Post by vineviz »

S_Track wrote: Thu Oct 15, 2020 4:59 pm Ok so any back test of two portfolios, one with corporates and the other treasuries, that have the same AA, we can expect the Corporate one to have the higher expected return since it has greater risk? This does seem to be the case when I try different back tests with Portfolio visualizer. Now in Northern Flicker's example, a 100% corporates portfolio was compared to a 72/28 Treasuries to stock portfolio. Since the max drawdown from the Treasury portfolio was less than the other, can we conclude less risk and volitivity? If yes, how do we explain the greater return? thanks
I'm not sure there is a full explanation, and if there were it'd probably be pretty technical. That said, I think the key is to focus on an important limitation in traditional models of risk and return which is the assumption that investors are homogenous. In other words, the assumptions that all investors have the same preferences and risk tolerances underpins many textbook explanations of asset pricing even though we know that assumption isn't correct.

I think this matters in this example because the implicit assumption in the previous discussion is that investors care only about risk and return in a single period of time. Typical mean-variance analysis exists within a single period model of the world and, worse, that period is usually VERY short. In such a world, risk is fungible in the way we have been discussing it.

If all investors are identical, then a "representative" investor will find themselves indifferent between a portfolio which is 100% corporate bonds and a portfolio that includes some mix of Treasury bonds and stocks.

However, in the real world investors aren't homogenous and they don't have the same investment horizons. An investor with an defined investment horizon of five years doesn't face the same risks as an investor with an indefinite (or even very long time horizon). If I'm planning to buy a house in October 2023, a portfolio which is 100% in 3-year AA rated corporate bonds presents a very different risk profile than a portfolio with the same expected return and volatility that is 30% stocks and 70% Treasury bonds. The stocks have no maturity date, no real par value, etc. A risk-averse investor will prefer the corporate bond to the equivalent portfolio of stocks + Treasuries, effectively bidding the corporate bonds up to the point that they produce a lower return than the alternate portfolio.

An investor who does NOT have a liability in October 2023 will rationally prefer to avoid holding those corporate bonds because of their lower return since this investor doesn't face the particular risks that the 3-year corporate bond counteracts.

The book "Competitive Advantage in Investing: Building Winning Professional Portfolios" by Steven Abrahams covers topics related to this under the rubric of a "Local CAPM" approach.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
S_Track
Posts: 369
Joined: Sat Feb 18, 2017 12:33 pm

Re: Simplicity on Bond Funds

Post by S_Track »

vineviz wrote: Fri Oct 16, 2020 11:23 am
S_Track wrote: Thu Oct 15, 2020 4:59 pm Ok so any back test of two portfolios, one with corporates and the other treasuries, that have the same AA, we can expect the Corporate one to have the higher expected return since it has greater risk? This does seem to be the case when I try different back tests with Portfolio visualizer. Now in Northern Flicker's example, a 100% corporates portfolio was compared to a 72/28 Treasuries to stock portfolio. Since the max drawdown from the Treasury portfolio was less than the other, can we conclude less risk and volitivity? If yes, how do we explain the greater return? thanks
I'm not sure there is a full explanation, and if there were it'd probably be pretty technical. That said, I think the key is to focus on an important limitation in traditional models of risk and return which is the assumption that investors are homogenous. In other words, the assumptions that all investors have the same preferences and risk tolerances underpins many textbook explanations of asset pricing even though we know that assumption isn't correct.

I think this matters in this example because the implicit assumption in the previous discussion is that investors care only about risk and return in a single period of time. Typical mean-variance analysis exists within a single period model of the world and, worse, that period is usually VERY short. In such a world, risk is fungible in the way we have been discussing it.

If all investors are identical, then a "representative" investor will find themselves indifferent between a portfolio which is 100% corporate bonds and a portfolio that includes some mix of Treasury bonds and stocks.

However, in the real world investors aren't homogenous and they don't have the same investment horizons. An investor with an defined investment horizon of five years doesn't face the same risks as an investor with an indefinite (or even very long time horizon). If I'm planning to buy a house in October 2023, a portfolio which is 100% in 3-year AA rated corporate bonds presents a very different risk profile than a portfolio with the same expected return and volatility that is 30% stocks and 70% Treasury bonds. The stocks have no maturity date, no real par value, etc. A risk-averse investor will prefer the corporate bond to the equivalent portfolio of stocks + Treasuries, effectively bidding the corporate bonds up to the point that they produce a lower return than the alternate portfolio.

An investor who does NOT have a liability in October 2023 will rationally prefer to avoid holding those corporate bonds because of their lower return since this investor doesn't face the particular risks that the 3-year corporate bond counteracts.

The book "Competitive Advantage in Investing: Building Winning Professional Portfolios" by Steven Abrahams covers topics related to this under the rubric of a "Local CAPM" approach.
Thanks much for this detailed answer. Much easier for me to following the conversation above now.
Northern Flicker
Posts: 6517
Joined: Fri Apr 10, 2015 12:29 am

Re: Simplicity on Bond Funds

Post by Northern Flicker »

S_Track wrote: Ok so any back test of two portfolios, one with corporates and the other treasuries, that have the same AA, we can expect the Corporate one to have the higher expected return since it has greater risk? This does seem to be the case when I try different back tests with Portfolio visualizer. Now in Northern Flicker's example, a 100% corporates portfolio was compared to a 72/28 Treasuries to stock portfolio. Since the max drawdown from the Treasury portfolio was less than the other, can we conclude less risk and volitivity? If yes, how do we explain the greater return? thanks
I don't know the answer, but a few ideas. Corporate bonds are less liquid, so the market for any particular bond may be less efficient, and mispricings may be possible. Liquidity risk and call risk may be mispriced in corporate bonds. It may just be the particular outcome of the backtest, the point of which was not to show the superiority of replacing corporate credit with a mix of stocks and treasuries, but to show their similarities-- that there is correlation between the credit risk premium and equity risk premium, making corporate bonds a flawed diversifier of equity risk.

A similar result is observable with TIPS being simulated with non-US stocks and treasuries, but TIPS haven't been around long enough to get a comprehensive look. TIPS have had a high correlation with corporate bonds and this may be related to the correlation of US and non-US equities:

https://www.portfoliovisualizer.com/bac ... tion3_2=80
Risk is not a guarantor of return.
User avatar
Ralph Furley
Posts: 78
Joined: Fri Nov 29, 2019 10:42 am

Re: Simplicity on Bond Funds

Post by Ralph Furley »

Tom_T wrote: Tue Oct 13, 2020 9:00 am I already sleep well because we're all going to leave this life one day, so I don't see the point of stressing out over which bond fund to use. I have money in the bank, and an appropriate asset allocation, and an IPS. That is all I can do -- the rest is beyond my control. Whether I use one bond fund, or two, or none, doesn't affect my sleep one iota.
+1

Marcus Aurelius couldn't have said it better himself.
luckyducky99
Posts: 101
Joined: Sun Dec 15, 2019 7:47 pm

Re: Simplicity on Bond Funds

Post by luckyducky99 »

abuss368 wrote: Thu Oct 15, 2020 1:46 pm
luckyducky99 wrote: Thu Oct 15, 2020 11:54 am
abuss368 wrote: Thu Oct 15, 2020 10:19 am
Northern Flicker wrote: Wed Oct 14, 2020 11:35 pm short-term treasuries and short-term TIPS both have a negative expected real yield.
How is it possible that Short Term TIPS actually have negative expected real yield? I thoughts TIPS adjusted the principle for changes in inflation.
TIPS prices are greater than their par value + expected inflation adjustment. So, e.g. to get today's equivalent of $100 dollars in 2021, you might have to pay $102 now. The inflation adjustment only applies to the par value, so if expected inflation is 1%, you'd expect to get back $101 at maturity, which would mean about -1% real yield on that TIPS if you buy it today.
That makes sense and thank you for sharing. Would that only apply to mutual funds or individual TIPS (or does not matter)?
It applies both to individual TIPS and to a TIPS fund, since the price and yield of the fund derive from the prices and yields of the TIPS it holds.
Post Reply