Can you do better than BND, Part 2: Test across bear and bull markets

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mfFrom35k
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by mfFrom35k »

McQ wrote: Wed Mar 27, 2024 10:50 pm
Also, a reminder: after 1992 the “intermediate Treasury” is a fund holding bonds from 3 – 10 years of maturity, consistent with the modern understanding of “intermediate.” Before 1992, and thus throughout the bear market case, it is a 5-year Treasury held for one year and then rolled into a new 5-year Treasury, per the SBBI; thus, rather less duration than the post-1992 fund.
This thread is fantastic and very thought provoking. We have a portion of our portfolio where we could switch from BND (in a 403(b)) to IT thru Fidelity's Brokerage Link feature. We would buy either VSIGX (VGIT as a mutual fund) or FUAMX (fidelity IT fund). Brokerage link only allows mutual funds.

VSIGX has an annual expense ratio of 7 basis points but it costs $75 to buy each time (but could probably limit that to once every couple of years to rebalance if needed and is on $400k total - so maybe 2 more basis points).
FUAMX has an annual expense ratio of 3 basis points.

My main question is the VSIGX has a duration of 6.17 years and appears to me to exactly fit the 3 - 10 year maturity referenced above while VSIGX has a duration of 5.6 years (for some reason a little more than Vanguard shows for VGIT of 5 years but is supposed to be the same fund).

Any thoughts as to what's a better fit with intermediate Treasury as analyzed in this thread?

If Vanguard is a better fit does it overcome the extra cost in the Brokerage link account?
jaMichael
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by jaMichael »

mfFrom35k wrote: Sat Mar 30, 2024 9:38 am
McQ wrote: Wed Mar 27, 2024 10:50 pm
Also, a reminder: after 1992 the “intermediate Treasury” is a fund holding bonds from 3 – 10 years of maturity, consistent with the modern understanding of “intermediate.” Before 1992, and thus throughout the bear market case, it is a 5-year Treasury held for one year and then rolled into a new 5-year Treasury, per the SBBI; thus, rather less duration than the post-1992 fund.
This thread is fantastic and very thought provoking. We have a portion of our portfolio where we could switch from BND (in a 403(b)) to IT thru Fidelity's Brokerage Link feature. We would buy either VSIGX (VGIT as a mutual fund) or FUAMX (fidelity IT fund). Brokerage link only allows mutual funds.

VSIGX has an annual expense ratio of 7 basis points but it costs $75 to buy each time (but could probably limit that to once every couple of years to rebalance if needed and is on $400k total - so maybe 2 more basis points).
FUAMX has an annual expense ratio of 3 basis points.

My main question is the VSIGX has a duration of 6.17 years and appears to me to exactly fit the 3 - 10 year maturity referenced above while VSIGX has a duration of 5.6 years (for some reason a little more than Vanguard shows for VGIT of 5 years but is supposed to be the same fund).

Any thoughts as to what's a better fit with intermediate Treasury as analyzed in this thread?

If Vanguard is a better fit does it overcome the extra cost in the Brokerage link account?
I think VSIGX and VGIT are the same fund with the same duration — currently 5 years. If at Fidelity, why not buy the ETF version of the fund and avoid the $75 fee?
sycamore
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by sycamore »

jaMichael wrote: Sat Mar 30, 2024 9:55 am
mfFrom35k wrote: Sat Mar 30, 2024 9:38 am ...
My main question is the VSIGX has a duration of 6.17 years and appears to me to exactly fit the 3 - 10 year maturity referenced above while VSIGX has a duration of 5.6 years (for some reason a little more than Vanguard shows for VGIT of 5 years but is supposed to be the same fund).

Any thoughts as to what's a better fit with intermediate Treasury as analyzed in this thread?

If Vanguard is a better fit does it overcome the extra cost in the Brokerage link account?
I think VSIGX and VGIT are the same fund with the same duration — currently 5 years. If at Fidelity, why not buy the ETF version of the fund and avoid the $75 fee?
Yep, same fund, same duration. 5.6 is the average effective maturity, 5.0 is the average duration.

jaMichael, you can see both maturity and duration for each fund here:
https://investor.vanguard.com/investmen ... omposition
https://investor.vanguard.com/investmen ... omposition
mfFrom35k
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by mfFrom35k »

jaMichael wrote: Sat Mar 30, 2024 9:55 am
mfFrom35k wrote: Sat Mar 30, 2024 9:38 am
McQ wrote: Wed Mar 27, 2024 10:50 pm
Also, a reminder: after 1992 the “intermediate Treasury” is a fund holding bonds from 3 – 10 years of maturity, consistent with the modern understanding of “intermediate.” Before 1992, and thus throughout the bear market case, it is a 5-year Treasury held for one year and then rolled into a new 5-year Treasury, per the SBBI; thus, rather less duration than the post-1992 fund.
This thread is fantastic and very thought provoking. We have a portion of our portfolio where we could switch from BND (in a 403(b)) to IT thru Fidelity's Brokerage Link feature. We would buy either VSIGX (VGIT as a mutual fund) or FUAMX (fidelity IT fund). Brokerage link only allows mutual funds.

VSIGX has an annual expense ratio of 7 basis points but it costs $75 to buy each time (but could probably limit that to once every couple of years to rebalance if needed and is on $400k total - so maybe 2 more basis points).
FUAMX has an annual expense ratio of 3 basis points.

My main question is the VSIGX has a duration of 6.17 years and appears to me to exactly fit the 3 - 10 year maturity referenced above while VSIGX has a duration of 5.6 years (for some reason a little more than Vanguard shows for VGIT of 5 years but is supposed to be the same fund).

Any thoughts as to what's a better fit with intermediate Treasury as analyzed in this thread?

If Vanguard is a better fit does it overcome the extra cost in the Brokerage link account?
I think VSIGX and VGIT are the same fund with the same duration — currently 5 years. If at Fidelity, why not buy the ETF version of the fund and avoid the $75 fee?
The accounts we are looking to convert from BND (really VBLTX) to an IT fund is a 403(b) with Fidelity's Brokerage Link feature. The Brokerage Link feature for this account does not allow purchase of ETFs, Stocks or individual Bonds. Only mutual funds are allowed and Vanguard funds cost an extra $75 every time one buys outside of dividend reinvestment..
mfFrom35k
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by mfFrom35k »

sycamore wrote: Sat Mar 30, 2024 10:28 am
jaMichael wrote: Sat Mar 30, 2024 9:55 am
mfFrom35k wrote: Sat Mar 30, 2024 9:38 am ...
My main question is the VSIGX has a duration of 6.17 years and appears to me to exactly fit the 3 - 10 year maturity referenced above while VSIGX has a duration of 5.6 years (for some reason a little more than Vanguard shows for VGIT of 5 years but is supposed to be the same fund).

Any thoughts as to what's a better fit with intermediate Treasury as analyzed in this thread?

If Vanguard is a better fit does it overcome the extra cost in the Brokerage link account?
I think VSIGX and VGIT are the same fund with the same duration — currently 5 years. If at Fidelity, why not buy the ETF version of the fund and avoid the $75 fee?
Yep, same fund, same duration. 5.6 is the average effective maturity, 5.0 is the average duration.

jaMichael, you can see both maturity and duration for each fund here:
https://investor.vanguard.com/investmen ... omposition
https://investor.vanguard.com/investmen ... omposition
Yes, I see you are right. I didn't scroll far enough. Glad its the same. Now I just need to figure out if the Fidelity comparable is good enough for the lower cost or if the extra cost is worth it.
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nedsaid
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by nedsaid »

Kenkat wrote: Thu Mar 28, 2024 8:36 pm The evidence presented is convincing - IT treasuries have been superior to total bond over a long period of time and under different conditions. Depending on how you want to look at things, the superiority is either huge or it is not huge at all.

Using two competing portfolios: https://www.portfoliovisualizer.com/bac ... UI1jMfaAZl, one 50% IT treasuries / 50% total stock market index and the other 50% total bond / 50% total stock market index, beginning in 1993 with an initial $10,000, rebalanced annually and with no addition contributions, we can make the following observations:
  • The IT treasury portfolio has a final value of $103,209; the Total Bond portfolio $98,622, a difference of $4,587. Almost half the original investment in additional gain. That’s huge.
  • However, from a different perspective - the final value of the IT treasury portfolio is only 4.7% higher than the Total Bond portfolio after over 30 years. It’s not nothin’, but it’s not a life changing difference either. Both investors are probably driving similar cars, living in similar houses, and taking similar vacations.
  • The IT treasury portfolio is better diversified and less volatile. I see a lot that people want that effect from their bonds, the “safe” part of their portfolio. In 2022, the IT treasury portfolio declined 15.02%; the Total Bond portfolio declined 16.43%. That’s a difference of 1.41%. On a million dollar portfolio balance, that’s $14,100. It’s a lot.
  • However, from a different perspective - in 2022, the million dollar IT treasury portfolio would have an ending balance of $849,800; the million dollar Total Bond portfolio balance would have an ending balance of $835,700. IT treasuries are “safer”, but not exactly safe. Neither investor likely walked away feeling their safe bond investment offered the safety they expected. The overall impact to their lifestyle is similar in either scenario.
I am not saying all of this to just be the forum gadfly. The data presented is convincing. My initial reaction upon reading this thread was that maybe I should switch my holding in Total Bond to the IT Treasury fund. Maybe I should do it today.

I will note that I also hold TIPS, short term treasuries, a stable value fund, a money market fund and even a little high yield, so I don’t hold the 3 fund portfolio anyway. But Total Bond is still 7% of my total portfolio and 14% of my fixed income allocation, so it’s not insignificant. It is pretty convincing that IT treasuries are a better portfolio building block than Total Bond. But I also thought through all of my bullet points (above) as well. How much will it actually matter in the end? Will past history continue? Government debt is higher than it historically has been. Corporations seem to be more influential than perhaps they were in the past. So - I just don’t know.

I’m gonna have to think about this one a little more.
I have to say that I am both pleased and disappointed with this thread. Pleased in that McQ has presented compelling evidence that Intermediate Treasuries are the superior investment to Total Bond. He now sounds a lot like Vineviz and NiceUnparticularMan who I debated rather unsuccessfully over my point that while Intermediate Treasuries were the better investment that Total Bond was plenty well good enough. The differences in performance were not great. In previous threads, McQ addressed this because I asked him to and he mostly agreed with my conclusions.

So it seems that Professor McQ has had a bit of a Damascus road conversion here. He now states that Intermediate Treasuries are a better investment than Total Bond and not by a little. It seems that he has morphed into a version of the former forum participant Vineviz. He sounds like he went to University of Chicago and studied finance. So not sure what happened, perhaps the evidence he found was that compelling. Perhaps he saw a vision and later on his sight was miraculously recovered. The good professor has not gone the full Vineviz however in recommending Long Term US Treasuries as a starting point for the fixed income portion of the portfolio and he isn't (yet) recommending that investors extend their bond durations to match their expected lifespan. I suspect that might be coming.

I do find that the correlation argument convincing particularly when the higher yields from Total Bond over time did not overcome the increased
correlation with the stock market mainly because of owning Corporate Bonds. Holding Mortgage Backed Securities is not ideal in a rising interest rate environment because homeowners are loathe to refinance their mortgages at higher interest rates! In other words, the duration of MBS rises as interest rates rise for this reason. I did sell my GNMA fund because of this. Total Bond has good portions of both Corporates and MBS.

So part of me is pleased to see a good explanation of this issue which has been very clearly laid out by the way. The other part of me is asking what the heck happened? The academic who mostly agreed with me has had a change of heart and now I feel like I am left holding the Total Bond Market bag. Not a great feeling by the way.

I feel a bit like the Fonz who couldn't quite say that he was wrong. I was w-w-w. Let me try again. I was w-w-w-w-w. Still can't get it out. Try one more time. I was w-w-w-w-w-w-w. Just couldn't do it. Anyhow, I have warned people here that I am only right about anything here at Bogleheads only about once every six months or so. At least it seems that way.
A fool and his money are good for business.
GAAP
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by GAAP »

nedsaid wrote: Sat Mar 30, 2024 12:58 pm I have to say that I am both pleased and disappointed with this thread. Pleased in that McQ has presented compelling evidence that Intermediate Treasuries are the superior investment to Total Bond. He now sounds a lot like Vineviz and NiceUnparticularMan who I debated rather unsuccessfully over my point that while Intermediate Treasuries were the better investment that Total Bond was plenty well good enough. The differences in performance were not great. In previous threads, McQ addressed this because I asked him to and he mostly agreed with my conclusions.

So it seems that Professor McQ has had a bit of a Damascus road conversion here. He now states that Intermediate Treasuries are a better investment than Total Bond and not by a little. It seems that he has morphed into a version of the former forum participant Vineviz. He sounds like he went to University of Chicago and studied finance. So not sure what happened, perhaps the evidence he found was that compelling. Perhaps he saw a vision and later on his sight was miraculously recovered. The good professor has not gone the full Vineviz however in recommending Long Term US Treasuries as a starting point for the fixed income portion of the portfolio and he isn't (yet) recommending that investors extend their bond durations to match their expected lifespan. I suspect that might be coming.

I do find that the correlation argument convincing particularly when the higher yields from Total Bond over time did not overcome the increased
correlation with the stock market mainly because of owning Corporate Bonds. Holding Mortgage Backed Securities is not ideal in a rising interest rate environment because homeowners are loathe to refinance their mortgages at higher interest rates! I did sell my GNMA fund because of this.

So part of me is pleased to see a good explanation of this issue which has been very clearly laid out by the way. The other part of me is asking what the heck happened?
From memory, Vineviz advocated that the first 20% of bonds should be LTT. If you look at McQ's chart for an 80/20 allocation, the performance range from bear to bull has a negative slope (increasing reward/risk ratio) and a greater upside return potential than the other options. It looks to me like the actual performance differences are more significant in the bull than in the bear. So, somewhere in the midrange they are equivalent while the upper end is actually better for LTT. That advantage decreases as the bond allocation increases -- perhaps McQ can comment on the breakeven point since he has the data. The volatility is obviously greater -- so investors thinking less-risky and less-volatile are synonymous won't like it.

Vineviz also liked duration-matching the bond portfolio, and I beleived that he preferred to decrease equity exposure over time also. Combine all that, and you end up with a portfolio that is 100/0 changing to 80/20 (with the 20 being LTT), and then adding ITT or BND as time progresses. It's a rational, internally-consistent view that can seem less rational when split into individual components.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee
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nedsaid
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by nedsaid »

GAAP wrote: Sat Mar 30, 2024 1:21 pm
nedsaid wrote: Sat Mar 30, 2024 12:58 pm I have to say that I am both pleased and disappointed with this thread. Pleased in that McQ has presented compelling evidence that Intermediate Treasuries are the superior investment to Total Bond. He now sounds a lot like Vineviz and NiceUnparticularMan who I debated rather unsuccessfully over my point that while Intermediate Treasuries were the better investment that Total Bond was plenty well good enough. The differences in performance were not great. In previous threads, McQ addressed this because I asked him to and he mostly agreed with my conclusions.

So it seems that Professor McQ has had a bit of a Damascus road conversion here. He now states that Intermediate Treasuries are a better investment than Total Bond and not by a little. It seems that he has morphed into a version of the former forum participant Vineviz. He sounds like he went to University of Chicago and studied finance. So not sure what happened, perhaps the evidence he found was that compelling. Perhaps he saw a vision and later on his sight was miraculously recovered. The good professor has not gone the full Vineviz however in recommending Long Term US Treasuries as a starting point for the fixed income portion of the portfolio and he isn't (yet) recommending that investors extend their bond durations to match their expected lifespan. I suspect that might be coming.

I do find that the correlation argument convincing particularly when the higher yields from Total Bond over time did not overcome the increased
correlation with the stock market mainly because of owning Corporate Bonds. Holding Mortgage Backed Securities is not ideal in a rising interest rate environment because homeowners are loathe to refinance their mortgages at higher interest rates! I did sell my GNMA fund because of this.

So part of me is pleased to see a good explanation of this issue which has been very clearly laid out by the way. The other part of me is asking what the heck happened?
From memory, Vineviz advocated that the first 20% of bonds should be LTT. If you look at McQ's chart for an 80/20 allocation, the performance range from bear to bull has a negative slope (increasing reward/risk ratio) and a greater upside return potential than the other options. It looks to me like the actual performance differences are more significant in the bull than in the bear. So, somewhere in the midrange they are equivalent while the upper end is actually better for LTT. That advantage decreases as the bond allocation increases -- perhaps McQ can comment on the breakeven point since he has the data. The volatility is obviously greater -- so investors thinking less-risky and less-volatile are synonymous won't like it.

Vineviz also liked duration-matching the bond portfolio, and I beleived that he preferred to decrease equity exposure over time also. Combine all that, and you end up with a portfolio that is 100/0 changing to 80/20 (with the 20 being LTT), and then adding ITT or BND as time progresses. It's a rational, internally-consistent view that can seem less rational when split into individual components.
I do miss Vineviz, he was a great contributor and his posts sometime had a certain punch to them, I know I got zinged a few times. Hence my Groucho nickname for him. Just as you won't do well matching wits with Groucho, one would have a similar experience with Vineviz. I felt like the dumb contestant on "You Bet Your Life." Somehow, he always got the better end of the argument. He was and is very well versed in the academic research regarding investing and studied under Gene Fama.

I suspect that McQ will get a laugh out of my comments but I don't expect to get zinged! He is a kinder, gentler version. I will get my paper graded a "C" instead.
A fool and his money are good for business.
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McQ
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by McQ »

jaMichael wrote: Thu Mar 28, 2024 10:55 pm What an interesting discussion! Would the TSP G Fund do as well as (or better than) IT, or should TSPers be moving from G to IT?
Great question. I was motivated to address it, but first let me explain the obstacles.

1. The G fund only dates to April 1987. It is not available for even the full bull market case, much less the bear market case back to 1946.

2. The G fund is available to Federal employees. The government pays the average yield on Treasuries maturing more than four years in the future. The precise mix/count of shorter, intermediate, long, and very long Treasuries at any time will vary, making it difficult to simulate the missing years 1982 – 1987.

So I will only be able to examine the outcomes for using the G fund in the bull case—precisely the circumstances where it is likely to be an imperfect or inferior diversifier. (I note Svensk Anga's reply to you.)

To simulate what the G fund yield would have been 1982 – 1987, I obtained the yields at the end of each prior year, e.g., 1981, for:
1. 5-year Treasury (SBBI)
2. 10-year constant maturity (FRED)
3. 20-year Treasury (SBBI)
4. 30-year constant maturity (FRED)

Equal-weighted, that gives an average maturity of about 16 years, where a portfolio consisting of the 4-year Treasury and the 30-year Treasury (the G fund range) would have a maturity of 17 years.

Close enough for government work.

Also eyeballing the G fund returns for 1988 – 1993, this simulated G fund was reasonably close to the return on the actual G fund when extended to those years.

So with all those limitations acknowledged, here goes.

Image

The G fund emerges as decisively inferior to either BND or IT as a stock diversifier, for stock allocations greater than 40% (given the bull case, I'll ignore the LT blend).

Under conditions of falling interest rates.

Conversely, the G fund is clearly superior to T-bills, at every stock allocation. And the G fund, like T-bills, at very low stock allocations, reduces portfolio risk considerably below what can be obtained from any of the other bond types. SD is hundreds of basis points lower than anything you can get from intermediate Treasuries or BND at low stock allocations.

I speculate that had something like the G fund been available 1946-1981, a period of climbing interest rates, it probably would have been superior to T-bills then as well; and as we saw earlier, in the bear market case T-bills would have been just a bit better than intermediate Treasuries.

If you are a Federal employee who is very fearful—someone who can’t imagine putting even 40% into stocks, despite Civil Service protections, the generous pension accruals, the retiree health care benefits, yada yada;

And if you are also one of those obsessives who looks at the portfolio value each afternoon, and suffers agonies whenever today’s value has dropped below yesterday’s value;

Then I can endorse use of the G fund in place of the other fixed income options in a 30/70 or 20/80 portfolio.

If instead your risk tolerance allows a 60/40 or 75/25 portfolio, and you are not that sensitive to day-to-day fluctuations occurring decades before retirement, and you are not convinced that the next decades will see an extended bear market in bonds, then you can typically do better than the G fund with one of the other options.

OTOH, I would certainly replace any T-bills in your mix with the G fund.

Last, it may be useful to quantify the wealth loss from being overly conservative—too little in stocks, too much in G fund or T-bill like investments.

A 20/80 blend with the G fund returned 7.2% annualized over the 36 years of the bull case. A 60/40 blend with intermediate Treasuries returned 10.5%.

The fearful G fund investor turned $10,000 into $122,000. The confident IT blend investor turned $10,000 into $360,000—three times the wealth.

The G fund *IS* very low risk. But, which part of “return is a function of risk” do G fund investors not understand?
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.
jaMichael
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by jaMichael »

McQ wrote: Sat Mar 30, 2024 1:38 pm
jaMichael wrote: Thu Mar 28, 2024 10:55 pm What an interesting discussion! Would the TSP G Fund do as well as (or better than) IT, or should TSPers be moving from G to IT?
Great question. I was motivated to address it, but first let me explain the obstacles.

1. The G fund only dates to April 1987. It is not available for even the full bull market case, much less the bear market case back to 1946.

2. The G fund is available to Federal employees. The government pays the average yield on Treasuries maturing more than four years in the future. The precise mix/count of shorter, intermediate, long, and very long Treasuries at any time will vary, making it difficult to simulate the missing years 1982 – 1987.

So I will only be able to examine the outcomes for using the G fund in the bull case—precisely the circumstances where it is likely to be an imperfect or inferior diversifier. (I note Svensk Anga's reply to you.)

To simulate what the G fund yield would have been 1982 – 1987, I obtained the yields at the end of each prior year, e.g., 1981, for:
1. 5-year Treasury (SBBI)
2. 10-year constant maturity (FRED)
3. 20-year Treasury (SBBI)
4. 30-year constant maturity (FRED)

Equal-weighted, that gives an average maturity of about 16 years, where a portfolio consisting of the 4-year Treasury and the 30-year Treasury (the G fund range) would have a maturity of 17 years.

Close enough for government work.

Also eyeballing the G fund returns for 1988 – 1993, this simulated G fund was reasonably close to the return on the actual G fund when extended to those years.

So with all those limitations acknowledged, here goes.

Image

The G fund emerges as decisively inferior to either BND or IT as a stock diversifier, for stock allocations greater than 40% (given the bull case, I'll ignore the LT blend).

Under conditions of falling interest rates.

Conversely, the G fund is clearly superior to T-bills, at every stock allocation. And the G fund, like T-bills, at very low stock allocations, reduces portfolio risk considerably below what can be obtained from any of the other bond types. SD is hundreds of basis points lower than anything you can get from intermediate Treasuries or BND at low stock allocations.

I speculate that had something like the G fund been available 1946-1981, a period of climbing interest rates, it probably would have been superior to T-bills then as well; and as we saw earlier, in the bear market case T-bills would have been just a bit better than intermediate Treasuries.

If you are a Federal employee who is very fearful—someone who can’t imagine putting even 40% into stocks, despite Civil Service protections, the generous pension accruals, the retiree health care benefits, yada yada;

And if you are also one of those obsessives who looks at the portfolio value each afternoon, and suffers agonies whenever today’s value has dropped below yesterday’s value;

Then I can endorse use of the G fund in place of the other fixed income options in a 30/70 or 20/80 portfolio.

If instead your risk tolerance allows a 60/40 or 75/25 portfolio, and you are not that sensitive to day-to-day fluctuations occurring decades before retirement, and you are not convinced that the next decades will see an extended bear market in bonds, then you can typically do better than the G fund with one of the other options.

OTOH, I would certainly replace any T-bills in your mix with the G fund.

Last, it may be useful to quantify the wealth loss from being overly conservative—too little in stocks, too much in G fund or T-bill like investments.

A 20/80 blend with the G fund returned 7.2% annualized over the 36 years of the bull case. A 60/40 blend with intermediate Treasuries returned 10.5%.

The fearful G fund investor turned $10,000 into $122,000. The confident IT blend investor turned $10,000 into $360,000—three times the wealth.

The G fund *IS* very low risk. But, which part of “return is a function of risk” do G fund investors not understand?
Gosh thank you much for taking this on, Professor. It seems that many ppl view G Fund as superior because it has zero duration risk, which pays off in a rising interest rate environment (2022). But it will underperform in a falling interest rate environment and has often done a worse job of limiting portfolio losses during stock downturns (as in 2000 and 2007-09). So, I guess it is both a very good diversifier (in rising interest rate environments) and a mediocre diversifier (during flight-to-safety downturns)? Not sure where that nets out. I’m 65/35, with the 35 gradually moving from total bond to G Fund and I’m a few years from retirement. I read with interest your advice that there is no (non-psychological) reason not to move from total bond to IT now.
Logan Roy
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by Logan Roy »

"While default-free, noncallable, full-faith-and-credit obligations of the U.S. government play a basic, valuable, differentiable role in investor portfolios, investment-grade corporate bonds, high-yield bonds, foreign bonds, and asset-backed securities contain unattractive characteristics that argue against inclusion in well-constructed portfolios." – David Swenson (Unconventional Success, p. 92)

The question I've struggled to answer (because of course we have to simulate the data, and we certainly need pre-1981) is what percentage in TIPS vs Treasuries?

Swensen uses 15% intermediate Treasuries, 15% intermediate TIPS in his model portfolio .. I'm not sure it wouldn't be entirely TIPS .. And then is there an argument for a percentage in foreign IL bonds?
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nedsaid
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by nedsaid »

This thread is a good reminder that rational people should not ignore evidence and be prepared to change their mind on certain topics. It appears that Professor McQ did just that, took a good look at the evidence and changed his opinion. There has been increasing criticism of Total Bond Market Index, the reasons being exposure to equity risk through ownership of Corporate bonds and the exposure to extension risk through Mortgage Backed Securities. I can see why folks say that Total Bond is a less than optimal fixed income investment. It is interesting that John Bogle criticized Total Bond because it had too few Corporate Bonds and not because it owned Corporates at all. Bogle was more interested in boosting yield than in reducing correlation to the stock market.

Another good reminder is that we should recheck our assumptions. I started my investment career just as interest rates were starting to come down from a generational peak and saw the gale force tail winds from declining interest rates and disinflation. This was truly a golden era for bond investors, most of us don't know anything different. Starting in 2022, this all changed and thus we must reassess our approach towards bonds.

In response to certain threads, I did increase my allocation to TIPS, sold my GNMA fund, and with a portion of my portfolio extended the duration of my TIPS bonds. I am thinking about whether or not I want to extend the duration of the remainder of my bonds to match my expected lifespan, I have individual TIPS maturing in July and I will make a decision then. This would imply a duration of 13.5 or so at age 65, which means reaching for a lifespan out to 92. That just seems like too much duration and volatility within my bonds but I might extend the duration of my TIPS holdings a bit.

Sometimes we have to think what might have before seemed unthinkable. The trinity of Total Stock, Total Bond, Total International Stock seemed so simple, so elegant, and beautiful in a way. It seemed like it came from Holy writ. A three fund portfolio without Total Bond just seems like something is missing. Things have changed. As they say, denial ain't a river in Egypt.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by JamesSFO »

Always love a McQ thread. Thanks for the detailed analysis.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by GAAP »

Logan Roy wrote: Sat Mar 30, 2024 3:31 pm "While default-free, noncallable, full-faith-and-credit obligations of the U.S. government play a basic, valuable, differentiable role in investor portfolios, investment-grade corporate bonds, high-yield bonds, foreign bonds, and asset-backed securities contain unattractive characteristics that argue against inclusion in well-constructed portfolios." – David Swenson (Unconventional Success, p. 92)

The question I've struggled to answer (because of course we have to simulate the data, and we certainly need pre-1981) is what percentage in TIPS vs Treasuries?

Swensen uses 15% intermediate Treasuries, 15% intermediate TIPS in his model portfolio .. I'm not sure it wouldn't be entirely TIPS .. And then is there an argument for a percentage in foreign IL bonds?
Considering current yields, he might very well have chosen entirely TIPS. With another 20 years of history, I wonder if he would have changed his mind about the importance of deflation protection vs. return of principal.

As you noted, he didn't like foreign bonds:
"Foreign-currency-denominated bonds share domestic bonds' burden of low expected returns without the benefit of domestic fixed-income's special diversifying power." – David Swenson (Unconventional Success, p. 124).

It's difficult to see the benefit of inflation linked foreign bonds, since they would tie to inflation outside the USA. However, the core assumption underlying the entire book is that of a USA-based investor. Depending upon the economy, he might have approved of foreign government bonds for investors living in the country of issue.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by retiredjg »

McQ wrote: Tue Mar 26, 2024 10:24 pm Sticking with an intermediate duration is good; but best to do that using only Treasuries.
Let's assume this conclusion is correct and talk about where and how the rubber actually meets the road.

Any "which is better" question only applies to a situation where all other things are equal and you have a choice between two things. Regarding Total Bond vs Intermediate Treasuries, this conclusion may be the case for many retirees, but is much less likely to apply to many people who are still working.

People who are working are encouraged to use tax-deferred accounts when possible. Tax-deferral is a good thing because most people can pay taxes later on at a lower rate. The result is they end up with more money. :happy

The unfortunate truth is that many work plans (I'm guessing most) do not offer an intermediate term treasury fund or any treasury fund at all. Thus, they run into a dead end on this question.

In the era of backdoor Roth, many working people do not have a traditional IRA to hold their intermediate term treasury fund. Another dead end.

Some will read the conclusions of this thread and decide to hold intermediate term treasuries in taxable instead of using their available tax-deferred space. They will pay extra taxes during accumulation and get less benefit from tax-deferral on the back in. I hope nobody sees that as a step in the right direction.

I'm not trying to argue that this is not an important discussion or that the conclusion is wrong. I'm trying to point out that such discussions need to be taken in the context of where the conclusions are appropriate. And realize that all this "good news" does not apply to everyone, specifically a lot of working folks.

Let's keep things in perspective.
Last edited by retiredjg on Sun Mar 31, 2024 8:07 am, edited 1 time in total.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by Alpha4 »

McQ wrote: Sat Mar 30, 2024 1:38 pm
jaMichael wrote: Thu Mar 28, 2024 10:55 pm What an interesting discussion! Would the TSP G Fund do as well as (or better than) IT, or should TSPers be moving from G to IT?
Great question. I was motivated to address it, but first let me explain the obstacles.

1. The G fund only dates to April 1987. It is not available for even the full bull market case, much less the bear market case back to 1946.

A few years ago I did some quick (and admittedly very crude) backtests to the early 1960s against what a simulated G-Fund before 1987 would have probably yielded; IIRC it came pretty close to what simply using a blend of Treasury CMT interest rates at between 9 and 10 years (with the exact number most years being a bit closer to the ten than the nine) would've been. Also, Social Security publishes a similar series back to the late 1930s for its special issue non-marketable non-tradable government securities it holds in the SSTF (I am not sure if the SSTF even existed before the 1983 reform but in any event--and for what possible reason I have no idea--Social Security ran the data for what such securities would've yielded all the way back to the 1930s). I will, however, add that Social Security's data for roughly the 1937 to early 1950s era seems to hew closer toward what a roughly 7-30 year ladder CMT index would've yielded rather than a 4-30 year one like the G-Fund uses to create its crediting yield; maybe subtract 10-15 basis points from the SS data for the years to make up for this since the yield curve was normally sloping during this time and thus shorter securities yielded less than longer ones....either that, or use some blend of the Social Security data, the "Yield on Long-Term United States Bonds for United States 1919-1944" from NBER, the 10-year yield from CRSP or Shiller, and the 5-year yield from SBBI. Granted, neither my simulation nor Social Security's went back close to the earliest arguably "modern" Treasury bond era (the late 1910s Liberty Bonds) but your "BND vs 5-year Treasury" comparison only goes back to 1946 so it would not need data back any farther than that.

As for TBM/BND (and why it underperformed 5-year Treasuries in this test) there are plenty of reasons (many dealing with the structure and operation of the corporate bond market from the 1940s to the early 1970s) but this post is not related to that so unless anyone wants to hear about these potential reasons I will refrain from posting them.
Last edited by Alpha4 on Sat Mar 30, 2024 6:27 pm, edited 2 times in total.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by GAAP »

nedsaid wrote: Sat Mar 30, 2024 3:44 pm This thread is a good reminder that rational people should not ignore evidence and be prepared to change their mind on certain topics. It appears that Professor McQ did just that, took a good look at the evidence and changed his opinion. There has been increasing criticism of Total Bond Market Index, the reasons being exposure to equity risk through ownership of Corporate bonds and the exposure to extension risk through Mortgage Backed Securities. I can see why folks say that Total Bond is a less than optimal fixed income investment. It is interesting that John Bogle criticized Total Bond because it had too few Corporate Bonds and not because it owned Corporates at all. Bogle was more interested in boosting yield than in reducing correlation to the stock market.

Another good reminder is that we should recheck our assumptions. I started my investment career just as interest rates were starting to come down from a generational peak and saw the gale force tail winds from declining interest rates and disinflation. This was truly a golden era for bond investors, most of us don't know anything different. Starting in 2022, this all changed and thus we must reassess our approach towards bonds.

In response to certain threads, I did increase my allocation to TIPS, sold my GNMA fund, and with a portion of my portfolio extended the duration of my TIPS bonds. I am thinking about whether or not I want to extend the duration of the remainder of my bonds to match my expected lifespan, I have individual TIPS maturing in July and I will make a decision then. This would imply a duration of 13.5 or so at age 65, which means reaching for a lifespan out to 92. That just seems like too much duration and volatility within my bonds but I might extend the duration of my TIPS holdings a bit.

Sometimes we have to think what might have before seemed unthinkable. The trinity of Total Stock, Total Bond, Total International Stock seemed so simple, so elegant, and beautiful in a way. It seemed like it came from Holy writ. A three fund portfolio without Total Bond just seems like something is missing. Things have changed. As they say, denial ain't a river in Egypt.
Different objectives mean different choices. This topic is explicitly about "a Markowitzian definition of diversification". Someone worried about Black Swans might not be comfortable with the combined sole-issuer (US Treasury) risk from bonds (in all forms), Social Security, Pension insurance, etc. and choose to completely avoid any of the funds described here. Others more interested in Sharpe's approach would go global.

I am quite willing to determine the functional needs from my portfolio, subdivide it as necessary, and invest for each need specifically. That wasn't always true, but I find it makes it easier to make choices like those discussed in this topic.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by JohnSlackIV »

McQ wrote: Mon Mar 25, 2024 10:35 pm In the first phase of this thread, I compared the performance of the Total Bond fund, as a component of the 60/40 portfolio, to various alternative bond funds.
McQ, thank you for this wonderful analysis. It’s so good it motivated me to come back to this board (Bogleheads, I just can’t quit you) to say thanks, and to ask a question.

For a while a big chunk of my bond portfolio has been in VCIT (Vanguard Intermediate-Term Corporate Bond Index Fund).

I expect a lack of data will prevent you from running your analysis on intermediate term corporate bonds, to contrast with intermediate term treasuries. However I expect that analysis, if possible, would show that intermediate corporates would boost return at the expense of increase volatility from significantly greater correlation to stocks, and that intermediate treasuries would probably remain the best overall choice.

Are there any flaws in that logic?
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by watchnerd »

nedsaid wrote: Sat Mar 30, 2024 12:58 pm I feel like I am left holding the Total Bond Market bag. Not a great feeling by the way.
There is a saying amongst traders:

"Never marry your bags"
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by nedsaid »

watchnerd wrote: Sun Mar 31, 2024 8:23 am
nedsaid wrote: Sat Mar 30, 2024 12:58 pm I feel like I am left holding the Total Bond Market bag. Not a great feeling by the way.
There is a saying amongst traders:

"Never marry your bags"
Not married to Total Bond but I like to have a relatively stable portfolio, what I mean by that is that I desire a low turnover portfolio. It takes a lot for me to make a portfolio change, I don't make changes whenever I read a compelling article or a book or a YouTube video. It seems whenever I do make a change, the results aren't what I expected. Quite often the best investments are the ones that you already own. Indeed, my portfolio looks a lot like it did 20 years ago. I have done some account consolidation, branched out somewhat with my investments, but the basic approach isn't much different.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by bmstrong »

McQ wrote: Mon Mar 25, 2024 10:35 pm
If you’ve read Sydney Homer’s History of Interest Rates, you’ll be aware that the bond market tends to proceed through long waves of bull and bear moves. That’s another way of saying that interest rates, when they go up, tend to rise (irregularly) for a long, long time; and when interest rates fall, they can drift down and down for decades.
What did you think of the recent The Price of Time: The Real Story of Interest by Edward Chancellor?
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by Tib »

bmstrong wrote: Sun Mar 31, 2024 1:27 pm
McQ wrote: Mon Mar 25, 2024 10:35 pm
If you’ve read Sydney Homer’s History of Interest Rates, you’ll be aware that the bond market tends to proceed through long waves of bull and bear moves. That’s another way of saying that interest rates, when they go up, tend to rise (irregularly) for a long, long time; and when interest rates fall, they can drift down and down for decades.
What did you think of the recent The Price of Time: The Real Story of Interest by Edward Chancellor?
Given that we recently saw the apparent end of a 40-year bull market in bonds, doesn't McQ's remark, quoted above, argue for now overweighting likely bear-market performance when choosing a form of fixed-income investment? McQ's graphs provide provide very helpful data regarding the nominal choices. Anything that could provide some guidance on the likely bear-market performance of TIPs would be a very helpful addition.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by watchnerd »

Tib wrote: Sun Mar 31, 2024 2:43 pm
bmstrong wrote: Sun Mar 31, 2024 1:27 pm
McQ wrote: Mon Mar 25, 2024 10:35 pm
If you’ve read Sydney Homer’s History of Interest Rates, you’ll be aware that the bond market tends to proceed through long waves of bull and bear moves. That’s another way of saying that interest rates, when they go up, tend to rise (irregularly) for a long, long time; and when interest rates fall, they can drift down and down for decades.
What did you think of the recent The Price of Time: The Real Story of Interest by Edward Chancellor?
Given that we recently saw the apparent end of a 40-year bull market in bonds, doesn't McQ's remark, quoted above, argue for now overweighting likely bear-market performance when choosing a form of fixed-income investment? McQ's graphs provide provide very helpful data regarding the nominal choices. Anything that could provide some guidance on the likely bear-market performance of TIPs would be a very helpful addition.
I think it does.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by McQ »

nedsaid wrote: Sat Mar 30, 2024 3:44 pm This thread is a good reminder that rational people should not ignore evidence and be prepared to change their mind on certain topics. It appears that Professor McQ did just that, took a good look at the evidence and changed his opinion. There has been increasing criticism of Total Bond Market Index, the reasons being exposure to equity risk through ownership of Corporate bonds and the exposure to extension risk through Mortgage Backed Securities. I can see why folks say that Total Bond is a less than optimal fixed income investment. It is interesting that John Bogle criticized Total Bond because it had too few Corporate Bonds and not because it owned Corporates at all. Bogle was more interested in boosting yield than in reducing correlation to the stock market.

Another good reminder is that we should recheck our assumptions. I started my investment career just as interest rates were starting to come down from a generational peak and saw the gale force tail winds from declining interest rates and disinflation. This was truly a golden era for bond investors, most of us don't know anything different. Starting in 2022, this all changed and thus we must reassess our approach towards bonds.

In response to certain threads, I did increase my allocation to TIPS, sold my GNMA fund, and with a portion of my portfolio extended the duration of my TIPS bonds. I am thinking about whether or not I want to extend the duration of the remainder of my bonds to match my expected lifespan, I have individual TIPS maturing in July and I will make a decision then. This would imply a duration of 13.5 or so at age 65, which means reaching for a lifespan out to 92. That just seems like too much duration and volatility within my bonds but I might extend the duration of my TIPS holdings a bit.

Sometimes we have to think what might have before seemed unthinkable. The trinity of Total Stock, Total Bond, Total International Stock seemed so simple, so elegant, and beautiful in a way. It seemed like it came from Holy writ. A three fund portfolio without Total Bond just seems like something is missing. Things have changed. As they say, denial ain't a river in Egypt.
I'm not sure I've changed my mind, nedsaid. If you look at my Markowitz part 2 thread, intermediate Treasuries emerged as superior to total bond there as well. But in that case, I was using stylized facts and /or a 50-year span not keyed to movements in interest rates. So I soft-pedaled the recommendation for IT.

Here the use of a matched bear / bull pair provides, I think, stronger evidence, hence the more full-throated endorsement of IT. But the superiority of IT, although real, remains fairly small at most allocations. It would not be irrational for a long-time holder of Total Bond to go, "ehh, good to know, wish I'd known then, but no reason to change now."

See also my next reply to retiredjg.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by McQ »

retiredjg wrote: Sat Mar 30, 2024 4:52 pm
McQ wrote: Tue Mar 26, 2024 10:24 pm Sticking with an intermediate duration is good; but best to do that using only Treasuries.
Let's assume this conclusion is correct and talk about where and how the rubber actually meets the road.

Any "which is better" question only applies to a situation where all other things are equal and you have a choice between two things. Regarding Total Bond vs Intermediate Treasuries, this conclusion may be the case for many retirees, but is much less likely to apply to many people who are still working.

People who are working are encouraged to use tax-deferred accounts when possible. Tax-deferral is a good thing because most people can pay taxes later on at a lower rate. The result is they end up with more money. :happy

The unfortunate truth is that many work plans (I'm guessing most) do not offer an intermediate term treasury fund or any treasury fund at all. Thus, they run into a dead end on this question.

In the era of backdoor Roth, many working people do not have a traditional IRA to hold their intermediate term treasury fund. Another dead end.

Some will read the conclusions of this thread and decide to hold intermediate term treasuries in taxable instead of using their available tax-deferred space. They will pay extra taxes during accumulation and get less benefit from tax-deferral on the back in. I hope nobody sees that as a step in the right direction.

I'm not trying to argue that this is not an important discussion or that the conclusion is wrong. I'm trying to point out that such discussions need to be taken in the context of where the conclusions are appropriate. And realize that all this "good news" does not apply to everyone, specifically a lot of working folks.

Let's keep things in perspective.
Thanks for those reflections, retiredjg. I grant you that many (most?) 401(k) plans don't offer an IT option. Under the sway of MPTOS (Modern Portfolio Theory On Steroids), they DO offer Total Bond. Change is slow, but each thread like this has the potential to move the needle. I don't kid myself that little ole me has that kind of influence, but every journey begins with a single step. Perhaps, in five to ten years, we'll see a larger number of IT funds in 401(k)s, or at least, the spread of the brokerage option.

More generally, your post lets me develop the following point, which has been kicking around in my head for a few days.

I can imagine at least two audiences for a thread like this:

1. Someone who is expanding their fixed income allocation, or has a maturing CD or other asset which they intend to place in bonds; either way, no prior commitment to BND.

2. A devoted follower of the 3-Fund Way, who has built a large position in BND over many years.

The thread makes the most sense for audience #1. If I were in audience #2, I would worry about regret if I switched out of BND just before the long end of the curve rallied, temporarily propelling BND above IT for the look-back period. Ouch.

I personally am all in TIPS for my fixed income allocation, leaving aside the even larger amounts in TIAA waiting to be annuitized some day. So for me, this is more an intellectual exercise, or more positively, a search for the truth of the matter.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by McQ »

JohnSlackIV wrote: Sun Mar 31, 2024 8:00 am
McQ wrote: Mon Mar 25, 2024 10:35 pm In the first phase of this thread, I compared the performance of the Total Bond fund, as a component of the 60/40 portfolio, to various alternative bond funds.
McQ, thank you for this wonderful analysis. It’s so good it motivated me to come back to this board (Bogleheads, I just can’t quit you) to say thanks, and to ask a question.

For a while a big chunk of my bond portfolio has been in VCIT (Vanguard Intermediate-Term Corporate Bond Index Fund).

I expect a lack of data will prevent you from running your analysis on intermediate term corporate bonds, to contrast with intermediate term treasuries. However I expect that analysis, if possible, would show that intermediate corporates would boost return at the expense of increase volatility from significantly greater correlation to stocks, and that intermediate treasuries would probably remain the best overall choice.

Are there any flaws in that logic?
Welcome back, and thanks for those kind words. Your logic makes sense to me. The knock against corporate bonds, any maturity, goes back at least to David Swensen, per posts upthread, and it is always a matter of "too much correlation" with stocks.

Although VCIT doesn't go back far enough to be interesting, Vanguard has an intermediate Investment Grade fund that goes back to 1993, not quite the entire bull market but something that gives us 30 years. Stay tuned, I'll have a look after I deliver the inflation-adjusted returns I promised Indyhou.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by GAAP »

McQ wrote: Sun Mar 31, 2024 4:34 pm I can imagine at least two audiences for a thread like this:

1. Someone who is expanding their fixed income allocation, or has a maturing CD or other asset which they intend to place in bonds; either way, no prior commitment to BND.

2. A devoted follower of the 3-Fund Way, who has built a large position in BND over many years.

The thread makes the most sense for audience #1. If I were in audience #2, I would worry about regret if I switched out of BND just before the long end of the curve rallied, temporarily propelling BND above IT for the look-back period. Ouch.

I personally am all in TIPS for my fixed income allocation, leaving aside the even larger amounts in TIAA waiting to be annuitized some day. So for me, this is more an intellectual exercise, or more positively, a search for the truth of the matter.
3. Not tied to BND (or even using it), not a fan of the 3-Fund, just interested in learning.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by McQ »

bmstrong wrote: Sun Mar 31, 2024 1:27 pm
McQ wrote: Mon Mar 25, 2024 10:35 pm
If you’ve read Sydney Homer’s History of Interest Rates, you’ll be aware that the bond market tends to proceed through long waves of bull and bear moves. That’s another way of saying that interest rates, when they go up, tend to rise (irregularly) for a long, long time; and when interest rates fall, they can drift down and down for decades.
What did you think of the recent The Price of Time: The Real Story of Interest by Edward Chancellor?
I enjoyed it, and would recommend to anyone who enjoyed Homer. Assiduously researched, and effectively supports his point: low interest rates may be as much poison as remedy.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by folkher0 »

This is a fantastic thread. Thanks McQ.

I don't know if its possible, but would there be any utility in doing a similar analysis with other assets with low correlation such as gold?
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by nedsaid »

McQ wrote: Sun Mar 31, 2024 4:21 pm
nedsaid wrote: Sat Mar 30, 2024 3:44 pm This thread is a good reminder that rational people should not ignore evidence and be prepared to change their mind on certain topics. It appears that Professor McQ did just that, took a good look at the evidence and changed his opinion. There has been increasing criticism of Total Bond Market Index, the reasons being exposure to equity risk through ownership of Corporate bonds and the exposure to extension risk through Mortgage Backed Securities. I can see why folks say that Total Bond is a less than optimal fixed income investment. It is interesting that John Bogle criticized Total Bond because it had too few Corporate Bonds and not because it owned Corporates at all. Bogle was more interested in boosting yield than in reducing correlation to the stock market.

Another good reminder is that we should recheck our assumptions. I started my investment career just as interest rates were starting to come down from a generational peak and saw the gale force tail winds from declining interest rates and disinflation. This was truly a golden era for bond investors, most of us don't know anything different. Starting in 2022, this all changed and thus we must reassess our approach towards bonds.

In response to certain threads, I did increase my allocation to TIPS, sold my GNMA fund, and with a portion of my portfolio extended the duration of my TIPS bonds. I am thinking about whether or not I want to extend the duration of the remainder of my bonds to match my expected lifespan, I have individual TIPS maturing in July and I will make a decision then. This would imply a duration of 13.5 or so at age 65, which means reaching for a lifespan out to 92. That just seems like too much duration and volatility within my bonds but I might extend the duration of my TIPS holdings a bit.

Sometimes we have to think what might have before seemed unthinkable. The trinity of Total Stock, Total Bond, Total International Stock seemed so simple, so elegant, and beautiful in a way. It seemed like it came from Holy writ. A three fund portfolio without Total Bond just seems like something is missing. Things have changed. As they say, denial ain't a river in Egypt.
I'm not sure I've changed my mind, nedsaid. If you look at my Markowitz part 2 thread, intermediate Treasuries emerged as superior to total bond there as well. But in that case, I was using stylized facts and /or a 50-year span not keyed to movements in interest rates. So I soft-pedaled the recommendation for IT.

Here the use of a matched bear / bull pair provides, I think, stronger evidence, hence the more full-throated endorsement of IT. But the superiority of IT, although real, remains fairly small at most allocations. It would not be irrational for a long-time holder of Total Bond to go, "ehh, good to know, wish I'd known then, but no reason to change now."

See also my next reply to retiredjg.
Thanks for your comments. Even in my sparring with Vineviz and NiceUnparticularMan, I compared Intermediate Treasury and Total Bond in
Portfolio Visualizer as far back as the data went and agreed with them that IT was the better investment but not by much. Here is what I found
back in 2022.
by nedsaid » Thu Dec 01, 2022 5:16 pm

I went to Portfolio Visualizer and compared Vanguard Total Bond Market Index Investor shares with Vanguard Intermediate Term Treasury Fund Investor Shares. The data goes back from January 1992 through November 2022. Almost 30 years of data. Edit: I added the Vanguard Long Term Treasury fund Investor Shares.

. . . . . . . . . . . . . . . . . Total Bond Index. . . . .Intermediate Treasury. . . .Long Term Treasury
Initial Balance. . . . . . . .$10,000. . . . . . . . . . .$10,000. . . . . . . . . . . . .$10,000
Final Balance. . . . . . . . $38,961 . . . . . . . . . . .$41,092. . . . . . . . . . . . .$56,246
CAGR. . . . . . . . . . . . . 4.50%. . . . . . . . . . . . 4.68%. . . . . . . . . . . . . . 5.75%
Standard Deviation. . . . .3.89%. . . . . . . . . . . . 4.75%. . . . . . . . . . . . . .10.54
Best Year. . . . . . . . . . . .18.18%. . . . . . . . . . .20.44%. . . . . . . . . . . . . .30.09%
Worst Year. . . . . . . . . . .(12.72%). . . . . . . . . .(9.73%). . . . . . . . . . . . . .(28.01%)
Maximum Drawdown. . . .(17.57%). . . . . . . . . . (14.24%). . . . . . . . . . . . .(40.02%)
Sharpe Ratio. . . . . . . . . 0.57 . . . . . . . . . . . . 0.51. . . . . . . . . . . . . . . .0.37
Sortino Ratio . . . . . . . . 0.86 . . . . . . . . . . . . 0.81. . . . . . . . . . . . . . . .0.58
Market Correlation. . . . 0.09 . . . . . . . . . . . .(0.12). . . . . . . . . . . . . . .(0.14)

Note that Total Bond has fared worse in 2022 than Intermediate Treasury. As of 12/31/2021 Total Bond had Growth of $10,000 of $44,638 and Intermediate Treasuries was $45,523.

The two funds closely tracked each other through May 2002 and then Intermediate Treasury started to show an advantage. In July 2007 Intermediate Treasury started to pull away. The two funds almost converged again January 31, 2020 but after that Intermediate Treasury started showing its advantage again.

Intermediate Treasury was the clear winner. Total Bond Index was not far off but it is clear what the better investment is. Note that Intermediate Treasuries has a slightly negative correlation to the Stock Market which is exactly what you want.

Also, Intermediate Treasury would be the more tax efficient investment. 100% of the interest is not taxed in the States. Total Bond has Corporates and US Agency Bonds in it so only the interest that comes from US Treasuries is State tax exempt.

Edit: Just for fun, I added a comparison for Vanguard Long Term Treasury Investor shares. Vineviz was correct here as well, but I did not want this kind of volatility on the fixed income side of my portfolio. Hence, my choice to stick with Intermediate Term Investment Grade bonds. But you can see why he recommends them.
The reason that I didn't get super excited about IT was that while it had a Market Correlation of (0.12), Total Bond had a very mild correlation of
0.09. But this was using real life funds and a time period of January 1992 through November 2022.

You were able to compare these asset classes from 1946-1981 and you showed a much higher market correlation for a US Bond Index of 0.36 and a lower market correlation for IT of (0.21). When I saw this, I raised an eyebrow.

Anyhow, thank you for your response. I appreciate your comments.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by JohnSlackIV »

McQ wrote: Sun Mar 31, 2024 4:39 pm
JohnSlackIV wrote: Sun Mar 31, 2024 8:00 am
McQ wrote: Mon Mar 25, 2024 10:35 pm In the first phase of this thread, I compared the performance of the Total Bond fund, as a component of the 60/40 portfolio, to various alternative bond funds.
McQ, thank you for this wonderful analysis. It’s so good it motivated me to come back to this board (Bogleheads, I just can’t quit you) to say thanks, and to ask a question.

For a while a big chunk of my bond portfolio has been in VCIT (Vanguard Intermediate-Term Corporate Bond Index Fund).

I expect a lack of data will prevent you from running your analysis on intermediate term corporate bonds, to contrast with intermediate term treasuries. However I expect that analysis, if possible, would show that intermediate corporates would boost return at the expense of increase volatility from significantly greater correlation to stocks, and that intermediate treasuries would probably remain the best overall choice.

Are there any flaws in that logic?
Welcome back, and thanks for those kind words. Your logic makes sense to me. The knock against corporate bonds, any maturity, goes back at least to David Swensen, per posts upthread, and it is always a matter of "too much correlation" with stocks.

Although VCIT doesn't go back far enough to be interesting, Vanguard has an intermediate Investment Grade fund that goes back to 1993, not quite the entire bull market but something that gives us 30 years. Stay tuned, I'll have a look after I deliver the inflation-adjusted returns I promised Indyhou.
Can’t wait - thank you!
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by bmstrong »

McQ wrote: Sun Mar 31, 2024 4:42 pm
bmstrong wrote: Sun Mar 31, 2024 1:27 pm
McQ wrote: Mon Mar 25, 2024 10:35 pm
If you’ve read Sydney Homer’s History of Interest Rates, you’ll be aware that the bond market tends to proceed through long waves of bull and bear moves. That’s another way of saying that interest rates, when they go up, tend to rise (irregularly) for a long, long time; and when interest rates fall, they can drift down and down for decades.
What did you think of the recent The Price of Time: The Real Story of Interest by Edward Chancellor?
I enjoyed it, and would recommend to anyone who enjoyed Homer. Assiduously researched, and effectively supports his point: low interest rates may be as much poison as remedy.
Yes. Thanks for this thread. Chancellor has done a rather lengthy public relations tour than might work for the more time crunched Bogleheads. From very recently:

https://youtu.be/H50JUxxxtnk?si=470Dn-LsDRBkk-mn

and

https://youtu.be/DrZiLLkvIL8?si=k4GuBjQFPGKal4IG

At the end of the McAlvany interview (45 minutes in -ish.) Chancellor is asked how he allocates his personal portfolio given his background in economics and history. Fascinating reply, no specifics are given, on diversification, it's benefits, and how he thinks about portfolio construction.
Last edited by bmstrong on Tue Apr 02, 2024 3:10 pm, edited 1 time in total.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by Admiral Fun »

McQ wrote: Sun Mar 31, 2024 4:39 pm
Although VCIT doesn't go back far enough to be interesting, Vanguard has an intermediate Investment Grade fund that goes back to 1993, not quite the entire bull market but something that gives us 30 years. Stay tuned, I'll have a look after I deliver the inflation-adjusted returns I promised Indyhou.
McQ, is there any way to compare BND to TIAA Trad? I know that this is tricky due to the different vintages and crediting rates, but many people choose between these for fixed income in their retirement accounts (and have no access to intermediate treasuries).

-Admiral Fun
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by McQ »

Admiral Fun wrote: Sun Mar 31, 2024 7:21 pm ...

McQ, is there any way to compare BND to TIAA Trad? I know that this is tricky due to the different vintages and crediting rates, but many people choose between these for fixed income in their retirement accounts (and have no access to intermediate treasuries).

-Admiral Fun
Oh how I would love to make that comparison! But unless you have a secret stash of data sheets, or a direct line to their research department, I don't see how it is possible. I do know that they have published white papers indicating that TIAA returns about the same as the 10-year Treasury--but presumably with less volatility.

I would guesstimate that TIAA is probably somewhat superior to the intermediate Treasury returns tracked here, but I can't have much confidence in that guess.

I'm happy with my own very large investment in TIAA Traditional because I expect to annuitize it and harvest the loyalty bonus.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by folkher0 »

McQ wrote: Mon Apr 01, 2024 5:54 pm
Admiral Fun wrote: Sun Mar 31, 2024 7:21 pm ...

McQ, is there any way to compare BND to TIAA Trad? I know that this is tricky due to the different vintages and crediting rates, but many people choose between these for fixed income in their retirement accounts (and have no access to intermediate treasuries).

-Admiral Fun
Oh how I would love to make that comparison! But unless you have a secret stash of data sheets, or a direct line to their research department, I don't see how it is possible. I do know that they have published white papers indicating that TIAA returns about the same as the 10-year Treasury--but presumably with less volatility.

I would guesstimate that TIAA is probably somewhat superior to the intermediate Treasury returns tracked here, but I can't have much confidence in that guess.

I'm happy with my own very large investment in TIAA Traditional because I expect to annuitize it and harvest the loyalty bonus.
Can you explain why you think TIAA TRAD might be better than intermediate treasuries? I love the product as a low volatility alternative to bonds, but it doesn’t benefit from price appreciation during declining rate environments and doesn’t get the “zig” during flights to safety when equity markets “zag.” My instinct is that it would generally behave similar to the TSP G fund.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by Random Musings »

McQ, thank you for analyzing the portfolio impact on what type of nominal bonds one chooses. I'll continue to stick with short and intermediate treasuries for the nominal portion of my bond portfolio.

RM
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by grabiner »

folkher0 wrote: Mon Apr 01, 2024 9:12 pm Can you explain why you think TIAA TRAD might be better than intermediate treasuries? I love the product as a low volatility alternative to bonds, but it doesn’t benefit from price appreciation during declining rate environments and doesn’t get the “zig” during flights to safety when equity markets “zag.” My instinct is that it would generally behave similar to the TSP G fund.
TIAA Traditional tends to yield more than Treasuries, which gives it an advantage over the TSP G fund.

But I prefer even the TSP G fund over a conventional Treasury fund, as this appears to reduce the portfolio risk. In both periods studied, a portfolio of X% T-Bills and 100-X% stock had lower risk than a portfolio of X% intermediate Treasuries and 100-X% stock. Replacing the T-Bills with the G fund should barely change the risk, but increases the return since the G fund has the same yield as intermediate-to-long Treasuries.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by folkher0 »

grabiner wrote: Mon Apr 01, 2024 10:22 pm
folkher0 wrote: Mon Apr 01, 2024 9:12 pm Can you explain why you think TIAA TRAD might be better than intermediate treasuries? I love the product as a low volatility alternative to bonds, but it doesn’t benefit from price appreciation during declining rate environments and doesn’t get the “zig” during flights to safety when equity markets “zag.” My instinct is that it would generally behave similar to the TSP G fund.
TIAA Traditional tends to yield more than Treasuries, which gives it an advantage over the TSP G fund.

But I prefer even the TSP G fund over a conventional Treasury fund, as this appears to reduce the portfolio risk. In both periods studied, a portfolio of X% T-Bills and 100-X% stock had lower risk than a portfolio of X% intermediate Treasuries and 100-X% stock. Replacing the T-Bills with the G fund should barely change the risk, but increases the return since the G fund has the same yield as intermediate-to-long Treasuries.
Thanks for your reply. I would assume a small increase in returns for TIAA compare to the G fund due to the high floor (account dependent) and institutional risk relying on TIAA instead of the US treasury, as well as the liquidity limitations for many accounts. Its probably impossible to know how it has performed in retrospect as a diversifier in comparison to the different types of bonds McQ has looked at in this thread, unless TIAA decided to run the data themselves.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by Admiral Fun »

McQ wrote: Mon Apr 01, 2024 5:54 pm Oh how I would love to make that comparison! But unless you have a secret stash of data sheets, or a direct line to their research department, I don't see how it is possible. I do know that they have published white papers indicating that TIAA returns about the same as the 10-year Treasury--but presumably with less volatility.

I would guesstimate that TIAA is probably somewhat superior to the intermediate Treasury returns tracked here, but I can't have much confidence in that guess.
These may be the white papers you were referring to. They seem to demonstrate that the returns of TIAA Trad have been consistently higher than intermediate term treasuries over most time periods going back to the early 1970s. No secret stash of data sheets, unfortunately.

THE PERFORMANCE OF TIAA’S TRADITIONAL RETIREMENT ANNUITY FOR SELECTED INVESTMENT COHORTS, 1970 – 2005 THROUGH 2013
https://www.tiaa.org/content/dam/tiaa/i ... bel-06.pdf

TIAA Traditional Annuity: Adding safety and stability to retirement portfolios
https://www.tiaa.org/public/pdf/complia ... -paper.pdf
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by cyclist »

McQ wrote: Tue Mar 26, 2024 10:24 pm I can imagine at least two audiences for a thread like this:

1. Someone who is expanding their fixed income allocation, or has a maturing CD or other asset which they intend to place in bonds; either way, no prior commitment to BND.

2. A devoted follower of the 3-Fund Way, who has built a large position in BND over many years.

The thread makes the most sense for audience #1. If I were in audience #2, I would worry about regret if I switched out of BND just before the long end of the curve rallied, temporarily propelling BND above IT for the look-back period. Ouch.
I'm in audience #2 (though I hedged my bets by also holding intermediate treasury and TIPS funds). All of those funds are in tax-deferred accounts. I have no idea when the long end of the curve would be likely to rally.

I could certainly keep my BND shares indefinitely, though I'm now convinced that intermediate treasury shares are likely preferable for me. Any reason why I shouldn't plan a program of regular modest transfers over a few years to consolidate those shares into my intermediate treasury fund?

Thanks so much for your insights here and in your book!

Cyclist
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by mfFrom35k »

Pulled the trigger on switch from BND (i.e. VBTLX) to IT (FUAMX) in DW’s 403(b) account that had an option thru brokerage link.
Struggled a bit about FUAMX or VIGSX (i.e. VGIT as mutual fund) given MCQ's data was five year duration but eventually decided it was a good match with VBTLX duration and not worth the extra expense for one less year of duration.

We are 50/50 overall between stocks and bonds.

The 50% in bonds is now allocated as follows:

56% TIPS/ibonds Ladder for 33 years until age 95 (purchased extra at end) Approx 75% in taxable which hurts right now in the 32% bracket plus 3.85 Net Investment Income tax. Expecting to retire in 2 years and will drop to 24% or whatever it is then without the extra 3.85% until RMDs kick in about 10 years later.
8% in BND in my 401k with no option for IT or brokerage link. Prefer to stay in 401k for now.
9% in IT in DW's 403b (per above)
17% in TIAA traditional (will annuitize at some point; maybe when RMD’s kick in at the latest to help with that)
8% in VUIWX (i.e. Vanguard Intermediate Municipal Mutual Fund) We need some tax relief here but contemplating moving this to IT. Will probably just wait until I retire though as the tax effect of the TIPS is significant.
2% in CASH or equivalents.
Will likely do some Roth conversions too after retirement but don't expect to go nuts on these.

Bottom line is that this thread rigoursly proved that IT has been better than BND over both bull and bear bond markets and over many decades.

I took action because it made good sense to me as likely to continue and will move more to IT over time as it makes sense.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by McQ »

folkher0 wrote: Sun Mar 31, 2024 4:47 pm This is a fantastic thread. Thanks McQ.

I don't know if its possible, but would there be any utility in doing a similar analysis with other assets with low correlation such as gold?
oops, sorry for the delayed reply. I gave gold a look through the Markowitz lens over here: viewtopic.php?t=399877

Short answer: there have been such extreme regime changes since the dollar went off gold in 1971 that there is no clean contrast case like the bond bear and bull markets examined here.

But that thread is worth a look given your interests.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by McQ »

cyclist wrote: Wed Apr 03, 2024 9:24 am
McQ wrote: Tue Mar 26, 2024 10:24 pm I can imagine at least two audiences for a thread like this:

1. Someone who is expanding their fixed income allocation, or has a maturing CD or other asset which they intend to place in bonds; either way, no prior commitment to BND.

2. A devoted follower of the 3-Fund Way, who has built a large position in BND over many years.

The thread makes the most sense for audience #1. If I were in audience #2, I would worry about regret if I switched out of BND just before the long end of the curve rallied, temporarily propelling BND above IT for the look-back period. Ouch.
I'm in audience #2 (though I hedged my bets by also holding intermediate treasury and TIPS funds). All of those funds are in tax-deferred accounts. I have no idea when the long end of the curve would be likely to rally.

I could certainly keep my BND shares indefinitely, though I'm now convinced that intermediate treasury shares are likely preferable for me. Any reason why I shouldn't plan a program of regular modest transfers over a few years to consolidate those shares into my intermediate treasury fund?

Thanks so much for your insights here and in your book!

Cyclist
Your plan makes sense to me, as a strategy for minimizing regret while taking advantage of new knowledge.

Best.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by McQ »

mfFrom35k wrote: Wed Apr 03, 2024 12:01 pm Pulled the trigger on switch from BND (i.e. VBTLX) to IT (FUAMX) in DW’s 403(b) account that had an option thru brokerage link.
Struggled a bit about FUAMX or VIGSX (i.e. VGIT as mutual fund) given MCQ's data was five year duration but eventually decided it was a good match with VBTLX duration and not worth the extra expense for one less year of duration.

We are 50/50 overall between stocks and bonds.

The 50% in bonds is now allocated as follows:

56% TIPS/ibonds Ladder for 33 years until age 95 (purchased extra at end) Approx 75% in taxable which hurts right now in the 32% bracket plus 3.85 Net Investment Income tax. Expecting to retire in 2 years and will drop to 24% or whatever it is then without the extra 3.85% until RMDs kick in about 10 years later.
8% in BND in my 401k with no option for IT or brokerage link. Prefer to stay in 401k for now.
9% in IT in DW's 403b (per above)
17% in TIAA traditional (will annuitize at some point; maybe when RMD’s kick in at the latest to help with that)
8% in VUIWX (i.e. Vanguard Intermediate Municipal Mutual Fund) We need some tax relief here but contemplating moving this to IT. Will probably just wait until I retire though as the tax effect of the TIPS is significant.
2% in CASH or equivalents.
Will likely do some Roth conversions too after retirement but don't expect to go nuts on these.

Bottom line is that this thread rigoursly proved that IT has been better than BND over both bull and bear bond markets and over many decades.

I took action because it made good sense to me as likely to continue and will move more to IT over time as it makes sense.
That's a good reminder to me of the complexity of the bond portfolios some of us maintain. Slow but steady shifts always minimize regret. My question to you is whether a total TIPS fund might serve you any better than an intermediate Treasury as a replacement for the BND funds. I don't have a data-based answer, but the TIPS fund would have an intermediate duration, and be Treasuries, so ...? Worth a ponder.
Also, see this other thread for what SECURE 2.0 enables you to do with regard to TIAA annuitization and RMDs: viewtopic.php?t=403662
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by Random Musings »

mfFrom35k wrote: Wed Apr 03, 2024 12:01 pm Pulled the trigger on switch from BND (i.e. VBTLX) to IT (FUAMX) in DW’s 403(b) account that had an option thru brokerage link.
Struggled a bit about FUAMX or VIGSX (i.e. VGIT as mutual fund) given MCQ's data was five year duration but eventually decided it was a good match with VBTLX duration and not worth the extra expense for one less year of duration.

We are 50/50 overall between stocks and bonds.

The 50% in bonds is now allocated as follows:

56% TIPS/ibonds Ladder for 33 years until age 95 (purchased extra at end) Approx 75% in taxable which hurts right now in the 32% bracket plus 3.85 Net Investment Income tax. Expecting to retire in 2 years and will drop to 24% or whatever it is then without the extra 3.85% until RMDs kick in about 10 years later.
8% in BND in my 401k with no option for IT or brokerage link. Prefer to stay in 401k for now.
9% in IT in DW's 403b (per above)
17% in TIAA traditional (will annuitize at some point; maybe when RMD’s kick in at the latest to help with that)
8% in VUIWX (i.e. Vanguard Intermediate Municipal Mutual Fund) We need some tax relief here but contemplating moving this to IT. Will probably just wait until I retire though as the tax effect of the TIPS is significant.
2% in CASH or equivalents.
Will likely do some Roth conversions too after retirement but don't expect to go nuts on these.

Bottom line is that this thread rigoursly proved that IT has been better than BND over both bull and bear bond markets and over many decades.

I took action because it made good sense to me as likely to continue and will move more to IT over time as it makes sense.
With respect to the 401k and TBM, are you over 59 1/2 and does your plan allow an in-kind transfer to a rollover IRA? Perhaps there are reasons, even if you qualify, to not make this move (even just for the TBM portion) at this point of time, but these transfers typically provide more flexibility in investment options and perhaps lower ER costs in many cases.

RM
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by mfFrom35k »

Random Musings wrote: Wed Apr 03, 2024 10:24 pm
mfFrom35k wrote: Wed Apr 03, 2024 12:01 pm Pulled the trigger on switch from BND (i.e. VBTLX) to IT (FUAMX) in DW’s 403(b) account that had an option thru brokerage link.
Struggled a bit about FUAMX or VIGSX (i.e. VGIT as mutual fund) given MCQ's data was five year duration but eventually decided it was a good match with VBTLX duration and not worth the extra expense for one less year of duration.

We are 50/50 overall between stocks and bonds.

The 50% in bonds is now allocated as follows:

56% TIPS/ibonds Ladder for 33 years until age 95 (purchased extra at end) Approx 75% in taxable which hurts right now in the 32% bracket plus 3.85 Net Investment Income tax. Expecting to retire in 2 years and will drop to 24% or whatever it is then without the extra 3.85% until RMDs kick in about 10 years later.
8% in BND in my 401k with no option for IT or brokerage link. Prefer to stay in 401k for now.
9% in IT in DW's 403b (per above)
17% in TIAA traditional (will annuitize at some point; maybe when RMD’s kick in at the latest to help with that)
8% in VUIWX (i.e. Vanguard Intermediate Municipal Mutual Fund) We need some tax relief here but contemplating moving this to IT. Will probably just wait until I retire though as the tax effect of the TIPS is significant.
2% in CASH or equivalents.
Will likely do some Roth conversions too after retirement but don't expect to go nuts on these.

Bottom line is that this thread rigoursly proved that IT has been better than BND over both bull and bear bond markets and over many decades.

I took action because it made good sense to me as likely to continue and will move more to IT over time as it makes sense.
With respect to the 401k and TBM, are you over 59 1/2 and does your plan allow an in-kind transfer to a rollover IRA? Perhaps there are reasons, even if you qualify, to not make this move (even just for the TBM portion) at this point of time, but these transfers typically provide more flexibility in investment options and perhaps lower ER costs in many cases.

RM
I definitely could do a partial rollover of my 401k. The lawyer in me (not practicing but still) likes the national ERISA protections but I might do another look at my state again and any state I would consider moving to check on protections. I also like MCQ's point of being a bit easier to transition over time. I think I will make a suggestion to my large corporate HR department pointing to this thread to consider adding IT as an alternative to Total Bond in the 401k but I doubt that will happen anytime soon.

I am not quite sure about his other suggestion of an intermediate TIPS fund. It makes sense but I have a lot of TIPS right now. Might make sense to have some of my bonds as nominal in the event inflation ends up less than current expectations and at least the duration is intermediate which I could certainly wait out if necessary for the likely higher nominal rates implied by higher inflation. Some folks seem to suggest going 50/50 between Nominals and TIPS and I am bit over the 50% on TIPS right now but I will think more about this point.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by McQ »

Inflation-adjusted Markowitz curves

Per Indyhou's request, here are the inflation-adjusted results for the bear market case 1946-1981.

Image

And here are the nominal results presented earlier, to facilitate comparisons.

Image

There are a couple of notable differences in the first, inflation-adjusted chart.

1. Returns—the position of curves on the vertical axis—are depressed by about 470 basis points, the annualized inflation for the period. Doh.

2. More interestingly, risk is uniformly higher: the curves are shifted 100 – 150 bp to the right. Put in English, real returns prove to be riskier, more volatile, more variable.

3. Intermediate Treasuries maintain their superiority over BND, but the bulge up and to the left at lower stock allocations is not as pronounced. Diversification in real terms is thus somewhat less.

4. All the 100% bond portfolios deliver negative real returns. Hey, what part of “bond bear market triggered by rising inflation” did you not understand?

5. The negative real returns are substantial: over 36 years, minus 2% annualized equals a 50% haircut in terms of final wealth.

6. The small advantage of the LT / T-bill mix, in nominal terms, at higher stock allocations, essentially disappears in real terms.

Explanation

Real returns are computed as (1 + nominal return %) / (1 + inflation %).

Division is a form of multiplication.

Multiplying two series seems likely to inflate variance, depending on correlation, as in fact occurred.

In turn, differing correlations of the bond components with inflation, the multiplier, will shift the positions of different curves relative to one another.
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by mfFrom35k »

Looks like the real return of 50/50 with IT provided about the 2.5% real return as was available with TIPS last October. I did buy a significant TIPS holding then and planed to buy more in tax deferred if we saw 3% although it would require rollover from ERISA plans to IRAs. Might have to rethink if we see 2.5% again given I am 50/50. Maybe that's enough to convert stock to TIPS (at least in tax deferred accounts). I can't see converting taxable and taking the tax hit or Roth as both of these would be needed if one of us makes it past the 33 years planned for TIPS to age 95.

I know the data wasn't TIPS and it might not hold but this is still very interesting and thought provoking.

MCQ: Thanks for all your effort on this thread and others.
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Indyhou
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by Indyhou »

McQ- Thanks for doing this.

This data indicates that an Intermediate Treasury Bond fund is superior to BND (ie more return for a given standard deviation or less standard deviation for a given return).

I wonder if there is any way to see how TIPS might fit in. This is difficult due to the lack of historical data.

Here’s an approach I’ve thought of:

With current TIPS rates it is possible create a ladder with an IRR of 2% real for any term up to 30 years (ignoring the “TIPS gap years”).

Assume the Intermediate Treasury Bond fund is replaced with a TIPS ladder with an IRR of 2%.

As the TIPS ladder generates real cashflow and depletes, its value will be reduced to the percentage of the term remaining. As this happens you need to introduce additional Intermediate Treasure Bond funds into the portfolio to maintain the Equity/Bond asset allocation since the TIPS ladder is going down in value.

If the TIPS ladder was held to depletion, it would have a completely known real cashflow and value over time. In other words, a known return with zero standard deviation.

Based on these assumptions, the mean/standard deviation graph of the Equity/TIPS ladder is the thick green line below.

Note that it is a straight line since the standard deviation of the TIPS ladder is assumed to be zero.

The blue dot on the green line is the initial 60% equity 40% TIPS ladder portfolio.

As the TIPS ladder depletes more Intermediate Treasury Bond fund will be included and the mean/standard deviation line of the total portfolio will approximately follow the thick orange line.

When the TIPS ladder is exhausted the portfolio will be back to 60% stock/40% Intermediate Bond Fund.

Based on this, it seems that adding a TIPS ladder at the current rates would improve the portfolio performance during the period shown. It probably wouldn’t be the same with data from 1982 to 2023.

The main issue I have with this analysis is assuming the value of the TIPS ladder depreciates linearly as it distributes cashflow. On the surface this seems reasonable; if all bonds are held to maturity then there is no reason to mark them to market prices. The TIPS ladder has a known initial price, and known real cashflow, and an known final value (zero).

I’d be interested if anyone else has ideas on how to handle TIPS in this type of analysis.


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Elysium
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Re: Can you do better than BND, Part 2: Test across bear and bull markets

Post by Elysium »

nedsaid wrote: Sat Mar 30, 2024 1:31 pm I do miss Vineviz, he was a great contributor and his posts sometime had a certain punch to them, I know I got zinged a few times. Hence my Groucho nickname for him. Just as you won't do well matching wits with Groucho, one would have a similar experience with Vineviz. I felt like the dumb contestant on "You Bet Your Life." Somehow, he always got the better end of the argument. He was and is very well versed in the academic research regarding investing and studied under Gene Fama.
Unfortunately though, he just like another well regarded contributor of the past Larry Swedroe, lead investors down the wrong road at the wrong time, with his compulsive arguments to push folks towards LTT at a time when they were at their worst possible. His arguments that one should be blind towards the actual state of the investment at that specific point in time and instead the nature of the investment only reminds me of same compulsive arguments Swedroe used to make in favor of Commodity futures and Alternatives. These have been disasters for investors. In that regard, both Vineviz and Swedroe while having a lot to contribute took the high road of their own convictions, and it was very costly for investors who followed it. There is a certain element of higher wisdom in Boglehead principles, which never takes such high road, instead directs investors towards an approach that has the best chance of success without being wrong place at the wrong time, and even if you did you are not wrong with following the time tested principles of market allocation. I am reminded as always when you disagree with Bogle you risk ending up being very wrong.
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