Vanguard Total Bond (VBTLX) at 1.11% yield seems high risk

[ivgrivchuck]

Your trapped in a loop of circular logic, albeit a common one.

If you to hold an asset that is most like to buffer against a stock market decline, then you want bonds which have as low a correlation with stocks as you can find and as much variance S possible. That’s long-term Treasury bonds. Definitely NOT cash.

But that might seem scary because someone convinced you that “bonds are safety” or that “you should take risk on the stock side” or something.

So you fly to cash, which does nothing but make you feel better about being less wealthy. Don’t do that.

Your investment horizon is determined by when you will spend your money, not from which fund the money is spent. If you’re a long-term investor, long-term bonds reduce your interest rate risk relative to shorter bonds or cash.

Long term treasuries are a great place to be during deflationary, low growth environments. A basket of broad market equities is a great place to be during inflationary high growth environments. It’s therefore been a great combo for almost 4 decades.

Neither of those assets is likely to do well in an inflationary, low growth environment (stagflation). No crystal ball but the concern is legitimate, and with real rates on below zero, it doesn’t take a lot of stagflation to wreak havoc on this combo.

That's why most model portfolios which include long term treasuries also include some asset class which does well in stagflation, like TIPs or gold.

If you are fully invested in only stocks and long term treasuries, inflationary recession is simply going to kill your portfolio.

[Marseille07]

If you are fully invested in only stocks and long term treasuries, inflationary recession is simply going to kill your portfolio.

It's not hard to dodge imo, *if* we run into one at all. Interest rates rising isn't exactly a secret.

[vineviz]

If you are fully invested in only stocks and long term treasuries, inflationary recession is simply going to kill your portfolio.

It's not hard to dodge imo, *if* we run into one at all. Interest rates rising isn't exactly a secret.

Until the day we wake up to find that Richard Nixon is President and Arthur Burns is heading the Fed, I’m confident that stagflation is something we don’t have to worry about.

[Ramjet]

Neither of those assets is likely to do well in an inflationary, low growth environment (stagflation). No crystal ball but the concern is legitimate...

How is this concern legitimate?

It has happened only one time in the U.S. (I think)

Plus Fed policy has changed since then to prevent such a scenario

[Tamarind]

So my problem is at this yield (1.11%) I no longer am even keeping up with inflation.

According to who?

CPI is up 1.2% over the past 12 months and the fund (VBTLX) returned over 7%

Inflation in the future is unknown.

Yes I received 7% on VBTLX last year which I am very happy about. But buried in that 7% is a little over 2% in yield and about 5% in share price increase caused by decreasing interest rates. To get another 7% next year IMO would require interest rates to turn negative. I do not see this possibility.

Why not? German bonds of quite long durations have had negative yields for some time. Several other European countries have negative short-term bond rates. It's not news anymore. What besides inflation would prevent that from happening with Treasury bonds? We are not guaranteed inflation or bond yield at any particular level as "normal".

I think it's important to remember that we make guesses about the right allocation, picking from a wide range of reasonable allocations...... And then you have to take what the market gives you. No amount of flopping about with different fixed asset options will change that what the market has on offer.

[Goldwater85]

Neither of those assets is likely to do well in an inflationary, low growth environment (stagflation). No crystal ball but the concern is legitimate...

How is this concern legitimate?

It has happened only one time in the U.S. (I think)

Plus Fed policy has changed since then to prevent such a scenario

Once in the U.S. and that was reasonably moderate. Stagflation generally requires each of the following: (i) rapid expansion of the money supply (check) and (ii) supply shocks (e.g. the oil crisis). The next supply shock almost certainly wouldn’t be oil production although green initiatives can be expected to put pressure on energy prices. While we don’t net import oil, we do import other commodities and many classes of manufactured goods—access could be reduced during a trade (or shooting) war—whether involving the U.S. or not. One can even see echoes in single family homes which surged even during the COVID recession as cheap credit chased scarce assets.

One can build a portfolio based solely on past, domestic experience. And it’ll do very well as long as the future imitates the past (e.f., I’d suggest heavy equity concentrations in technology and tobacco).

To me, the point of a portfolio is to hedge out potential risk where possible to the extent the hedging cost doesn’t bring expected returns below what you reasonably need.

[KlangFool]

000,


<<That fact is not indicative of the future behavior of asset classes.>>

Are you claiming that the stock market will not be volatile over the next 10 years? Aka, it is not possible for the stock market to drop 30+% over the next 10 years? If not, the proper statement would be the stock market could drop 30+% over the next 10 years. I just do not know how many times and whether it will recover.


And, if the stock market could drop 30+% and it recovers, the rebalancing will make money.


KlangFool

No, I'm claiming that your anecdotal rebalancing success is not useful information.

Rebalancing may make money (in a sideways market).

Rebalancing may lose money (stocks keep going down and stay down for a long time).

Rebalancing may reduce gains that would have happened (by cannibalizing stock momentum).

In conclusion, whether or not rebalancing is profitable depends on the specific sequence of returns encountered. It is not always profitable. Backtests over longer periods of time tend to indicate that rebalancing has been of very little importance. Asset allocation will likely be more important than rebalancing.

000,

<<Rebalancing may make money (in a sideways market).>>

If you believe that the interest rate will be rising and low expected equity return over the next 10 years, then, you would believe that we are having a sideways or slow rising market over the next 10 years.


<<In conclusion, whether or not rebalancing is profitable depends on the specific sequence of returns encountered.>>


Unless the person can predict the future, we would not know what we will be facing.

<<Backtests over longer periods of time tend to indicate that rebalancing has been of very little importance.>>

If you believe that a specific sequence of returns matters, then, backtests are useless. It is obvious that we will not face the exact sequence in the future.

In any case, it won't matter to me anyhow.


I pick a specific AA because of my financial circumstances. If I do not rebalance, I am not maintaining my AA. Hence, I am no longer within my RISK tolerance. In summary, I am "market timing".


IMHO, folks that choose something else other than the bond is "market timing". They are changing their asset class selection assuming that they can predict the future. I can only tell them I wish them the best of lucks. I know that I know nothing.

KlangFool

[vineviz]

Neither of those assets is likely to do well in an inflationary, low growth environment (stagflation). No crystal ball but the concern is legitimate...

How is this concern legitimate?

It has happened only one time in the U.S. (I think)

Plus Fed policy has changed since then to prevent such a scenario

Once in the U.S. and that was reasonably moderate. Stagflation generally requires each of the following: (i) rapid expansion of the money supply (check) and (ii) supply shocks (e.g. the oil crisis).

I would add that the single period of stagflation we've witnessed in the US was brief in addition to moderate, lasting really only roughly the duration of the 1973 to 1975 recession.

After the effect of Nixon's wage and price freezes had mostly dissipated (the controls were completely dismantled by May, 1974) the rest of the 1970s and very early 1980s would best be characterized as "plain" old inflation IMHO.

From 1975 to 1982, most equity categories - basically every style box except large cap growth - had positive real returns. Even during the stagnation period of 1973 to 1975, growth stocks had substantially worse returns than value stocks but it's hard to say whether this had a macroeconomic cause or whether it was simply a hangover from the Nifty Fifty bubble.

[Ramjet]

Neither of those assets is likely to do well in an inflationary, low growth environment (stagflation). No crystal ball but the concern is legitimate...

How is this concern legitimate?

It has happened only one time in the U.S. (I think)

Plus Fed policy has changed since then to prevent such a scenario

Once in the U.S. and that was reasonably moderate. Stagflation generally requires each of the following: (i) rapid expansion of the money supply (check) and (ii) supply shocks (e.g. the oil crisis)

Why was there not uncontrolled inflation after 2008? Most of the stimulus did not get into the real economy thru consumers. Same holds true with the pandemic money. Breakdown of the 900B stimulus deal is about 20% direct payment checks and 80% everything else. The everything else are things that won't get to the real economy or if they do will likely be spent immediately to survive by consumers. Things like: public health, transportation, rental assistance, SNAP, unemployment insurance, small business loans, and schools.

[Marseille07]

If you are fully invested in only stocks and long term treasuries, inflationary recession is simply going to kill your portfolio.

It's not hard to dodge imo, *if* we run into one at all. Interest rates rising isn't exactly a secret.

Until the day we wake up to find that Richard Nixon is President and Arthur Burns is heading the Fed, I’m confident that stagflation is something we don’t have to worry about.

I actually think stagflation is a possibility. The rates can only go up from here and the main street's hurting.

What I don't agree with the OP is the claim that stagflation kills your portfolio. Taking a look at the 70's, I see 90/10 doing 17.2% -12.5% -23.1% and 33.7% between 1972~1975. This is obviously not a great stretch, but well within what one has to expect of operating 90/10.

[Ramjet]

The rates can only go up from here...

Have heard this for about 15 years now

[Marseille07]

The rates can only go up from here...

Have heard this for about 15 years now

? The rates were rising since 2015.

[eye.surgeon]

But that might seem scary because someone convinced you that “bonds are safety” or that “you should take risk on the stock side” or something.

You put those statements in quotes as though they are questionable, when they are actually two fundamental tenants of Jack Bogle's investment philosophy. They are both absolutely true.

[vineviz]

But that might seem scary because someone convinced you that “bonds are safety” or that “you should take risk on the stock side” or something.

You put those statements in quotes as though they are questionable, when they are actually two fundamental tenants of Jack Bogle's investment philosophy. They are both absolutely true.

I put them in quotes because they are nonsensical statements that get repeated as if they were true.

[000]

But that might seem scary because someone convinced you that “bonds are safety” or that “you should take risk on the stock side” or something.

You put those statements in quotes as though they are questionable, when they are actually two fundamental tenants of Jack Bogle's investment philosophy. They are both absolutely true.

I put them in quotes because they are nonsensical statements that get repeated as if they were true.

lol now you're clearly just trolling.

You're the same person who said 100% Treasuries, no Corporates or Junk on the bond side

[vineviz]

But that might seem scary because someone convinced you that “bonds are safety” or that “you should take risk on the stock side” or something.

You put those statements in quotes as though they are questionable, when they are actually two fundamental tenants of Jack Bogle's investment philosophy. They are both absolutely true.

I put them in quotes because they are nonsensical statements that get repeated as if they were true.

lol now you're clearly just trolling.

You're the same person who said 100% Treasuries, no Corporates or Junk on the bond side

Don’t be silly. You’ve managed to both mischaracterize and misinterpret my views.

[Taylor Larimore]

Bogleheads:

Bonds are primarily for safety. For example: In the 2008 bear market when stocks plunged -37%, my total Bond Market Index Fund gained +5%. Vanguard Total Bond Market's worst annual return was -2.7% in 1994 (it gained 16% in 1995).

The Investopedia link below explains why bonds are for safety:

A Safe Haven For Your Money

Stocks let us eat well. Bonds let us sleep well.

Best wishes.
Taylor

Jack Bogle's Words of Wisdom: "As we age, we usually have (1) more wealth to protect, (2) less time to recoup sever losses, (3) greater need for investment income, and (4) perhaps an increased nervousness as markets jump around. All four of those factors clearly suggest more bonds as we age."

[Ramjet]

Neither of those assets is likely to do well in an inflationary, low growth environment (stagflation). No crystal ball but the concern is legitimate...

How is this concern legitimate?

It has happened only one time in the U.S. (I think)

Plus Fed policy has changed since then to prevent such a scenario

Once in the U.S. and that was reasonably moderate. Stagflation generally requires each of the following: (i) rapid expansion of the money supply (check) and (ii) supply shocks (e.g. the oil crisis)

Why was there not uncontrolled inflation after 2008? Most of the stimulus did not get into the real economy thru consumers. Same holds true with the pandemic money. Breakdown of the 900B stimulus deal is about 20% direct payment checks and 80% everything else. The everything else are things that won't get to the real economy or if they do will likely be spent immediately to survive by consumers. Things like: public health, transportation, rental assistance, SNAP, unemployment insurance, small business loans, and schools.

[000]

But that might seem scary because someone convinced you that “bonds are safety” or that “you should take risk on the stock side” or something.

You put those statements in quotes as though they are questionable, when they are actually two fundamental tenants of Jack Bogle's investment philosophy. They are both absolutely true.

I put them in quotes because they are nonsensical statements that get repeated as if they were true.

lol now you're clearly just trolling.

You're the same person who said 100% Treasuries, no Corporates or Junk on the bond side

Don’t be silly. You’ve managed to both mischaracterize and misinterpret my views.

Let's see...

You started a thread saying the first 20% of bonds should be in 100% Treasuries.

You said there is no need for Corporate bonds as they are equivalent to a predetermined mix of Stocks + Treasuries.

You said Treasuries are risk-free.

How can you possibly believe all of the above AND believe that "bonds are safety" is a nonsensical statement AND believe that "you should take risk on the stock side" is a nonsensical statement?

[ivgrivchuck]

Don’t be silly. You’ve managed to both mischaracterize and misinterpret my views.

Let's see...

You started a thread saying the first 20% of bonds should be in 100% Treasuries.

You said there is no need for Corporate bonds as they are equivalent to a predetermined mix of Stocks + Treasuries.

You said Treasuries are risk-free.

How can you possibly believe all of the above AND believe that "bonds are safety" is a nonsensical statement AND believe that "you should take risk on the stock side" is a nonsensical statement?

I think his views have been pretty consistent. There is no need to take credit risk by buying corporate bonds as that risk is strongly correlated with the equity risk.

He is however a strong supporter of the view that bonds should act as a counter force for the stock market which means taking as much duration risk as possible.

This is one a very reasonable way of building one's portfolio. Not suitable for a beginner though.

[000]

I think his views have been pretty consistent. There is no need to take credit risk by buying corporate bonds as that risk is strongly correlated with the equity risk.

He is however a strong supporter of the view that bonds should act as a counter force for the stock market which means taking as much duration risk as possible.

This is one a very reasonable way of building one's portfolio. Not suitable for a beginner though.

Sorry, nope. vineviz has claimed over and over that Treasuries are a risk-free asset.

[vineviz]

Sorry, nope. vineviz has claimed over and over that Treasuries are a risk-free asset.

They are, but that has nothing to do with anything we're discussing so I'm not sure why its being brought up.

[Northern Flicker]

If you are fully invested in only stocks and long term treasuries, inflationary recession is simply going to kill your portfolio.

It's not hard to dodge imo, *if* we run into one at all. Interest rates rising isn't exactly a secret.

Until the day we wake up to find that Richard Nixon is President and Arthur Burns is heading the Fed, I’m confident that stagflation is something we don’t have to worry about.

I tend to agree, but we also are in uncharted territory with the current Fed balance sheet, so I try to maintain a healthy level of humility concerning my actually having no clue where this will end up.

[Goldwater85]

Sorry, nope. vineviz has claimed over and over that Treasuries are a risk-free asset.

They are, but that has nothing to do with anything we're discussing so I'm not sure why its being brought up.

"Risk-free" is a term of art in this context indicating that there is no default risk on treasury obligations with respect to the payment of interest or principal. Things like duration risk for fixed treasury obligations (opportunity cost if interest rates rise) and inflation risk on nominal treasury obligations (you will receive the dollar amount specified as a sum certain but it may be have materially less purchasing power) need to be separated from "risk-free" (which refers only to credit risk).

[abuss368]

Stocks let us eat well. Bonds let us sleep well.

Best wishes.
Taylor

Bogleheads -

In my opinion, this quote is so powerful and we can learn a lot from it. We often debate “which bond fund” with the motivation being few points “extra” in the search for yield.

I look at our bonds as safety and dry powder. Total Bond does that. If I desire to take more risk is search for higher returns, I would simply increase the allocation to stocks.

Best.
Tony

[abuss368]

Sorry, nope. vineviz has claimed over and over that Treasuries are a risk-free asset.

They are, but that has nothing to do with anything we're discussing so I'm not sure why its being brought up.

I would suspect risk free in terms of default risk (historically) correct. Inflation is a risk the nominal treasuries are exposed too. An investor would consider an allocation to TIPS to address this correct?

Tony

[rhornback]

Not much room for post-task contributions these days though I do like Vanguard Primecap and Vanguard Capital Opportunity so if I have extra I generally put it there. I believe these are US Large Cap / Mid Cap actively managed.

What does post-task contributions mean?

Taxable account, Roth IRA, other?

ETA: if you're using Primecap and Capital Opportunity in a taxable account you may grow to regret it over time as the annual capital gains distributions will become an annoyance each December. These funds are best held in a Roth IRA or tax-deferred account.

Regards,

My mother-in-law one time said to me she likes to pay taxes on her investments. I said that's crazy. She said if I'm paying taxes on my investments that means I made money on them.

Now I recognize that a stock fund can be down and you can still pay taxes on that fund, but still an interesting commentary by my mother-in-law.

[Admiral]

Not much room for post-task contributions these days though I do like Vanguard Primecap and Vanguard Capital Opportunity so if I have extra I generally put it there. I believe these are US Large Cap / Mid Cap actively managed.

What does post-task contributions mean?

Taxable account, Roth IRA, other?

ETA: if you're using Primecap and Capital Opportunity in a taxable account you may grow to regret it over time as the annual capital gains distributions will become an annoyance each December. These funds are best held in a Roth IRA or tax-deferred account.

Regards,

My mother-in-law one time said to me she likes to pay taxes on her investments. I said that's crazy. She said if I'm paying taxes on my investments that means I made money on them.

Now I recognize that a stock fund can be down and you can still pay taxes on that fund, but still an interesting commentary by my mother-in-law.

I bet she'd prefer to make money on them and NOT pay taxes though. Right?

ETA: IMO, Vanguard Capital Opportunity is a really bad choice for a taxable account. And especially if you are not spending the money.