Thanks for the reference. The article seems to draw the conclusion that credit neither improves nor degrades portfolio efficiency when added to a portfolio of equities and treasuries. This suggests that the main issue is establishing the asset allocation to be reflective of one’s desired risk level.McQ wrote: ↑Mon May 16, 2022 4:15 pmTo your point about correlations, Northern Flicker, here is a paper by Kizer et al. that backs up your concerns: https://papers.ssrn.com/sol3/papers.cfm ... id=3147005Northern Flicker wrote: ↑Mon May 16, 2022 1:03 am I still consider the lower correlation of treasuries with equities relative to the correlation of corporate bonds with equities to be a key issue.
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That has been my view in the past, but various backtests I’ve looked at more recently suggests to me that the portfolio exclusively with treasuries is very slightly more efficient. This is from the observation that over different periods a treasury-only bond portfolio packaged with equities may slightly overperform or slightly underperform the same portfolio with a more diversified bond index that includes credit. But in all scenarios, the treasury-only portfolio seems to provide superior downside protection.
Generally, I don’t think it is an error to use a total bond index portfolio, but don’t see any reason why any boglehead proponents should be troubled by the idea of using an intermediate treasury index fund like FUAMX or VGIT as the bond index fund in a 3-fund portfolio recommendation. I consider the available evidence to suggest that the treasury-only bond index fund leads to a portfolio that is slightly superior to using a total bond index fund.
I would hesitate to use nominal bond funds exclusively for portfolios with low equity allocations, but that is a separate discussion.