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Old 05-01-2016, 10:11 AM   #41
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You may find this helpful (particularly posts by Taylor Larimore and nisiprius):

https://www.bogleheads.org/forum/viewtopic.php?t=137424

Nisiprius on Total Bond Market:

Quote:
As for whether it's a good choice, well, there are always some shrill voices saying Treasuries are icky poo and nobody should touch them (notably Bill Gross in 2011!), others saying they're great, some saying Corporates are way better, some saying they aren't--so it seems reasonable to hold both. That does seem like the obvious, agnostic, "diversified" choice. And I think it proved itself in 2008-2009 in the sense that corporate hit a 10% pothole, fairly unpleasant for the "safe" part of a portfolio; Treasuries actually went up briefly, had their moment of "flight to safety;" and the Aggregate index and Total Bond pretty much sailed straight through. Straight through is what I want in troubled times--let someone else try for the "win."

Also: I am still trying (not very hard to be sure) to understand what the textbooks actually say about the special properties of "the market portfolio." In the case of the bond market, I am not sure whether or not it resembles an single integrated market well enough for "the market portfolio" to have the special status it does for the stock market. If it does, and if Lehman Brothers did a decent job of defining the composition of that market, then Total Bond has the special characteristics of the textbook "market portfolio"--whatever that means.
Emphasis added

FWIW, I'm in Total Bond Market. Anymore, I'm all about simplicity and have been become bored with the debates about which approach/tactic/strategy is "better/best". This author discusses stocks but he may as well have been discussing bonds:

180 Years of Market Drawdowns

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No one can predict what the future returns will be in the market. No one knows what the future holds for economic growth.
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Old 05-01-2016, 10:17 AM   #42
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Thanks Gone4Good, could you explain how a Vanguard brokered CD be different from a regular CD.

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http://blogs.wsj.com/totalreturn/201...he-best-deals/

IIRC brokered CD's cannot be withdrawn before maturity... you can sell them on the open market but if interest rates have changed then the value may be higher or lower than what you paid.... so the have interest rate risk similar to a bond but no credit risk if you stay within the FDIC limits. Essentially very similar to a bond but FDIC insured.
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Old 05-01-2016, 10:28 AM   #43
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Thanks Gone4Good, could you explain how a Vanguard brokered CD be different from a regular CD.
A brokered CD acts like a bond. You can not generally redeem them prior to maturity at par. Instead you buy and sell them on the secondary market. And like bonds their price will rise and fall inversely with interest rates.

CDs opened directly at a bank are not marked to market so they're stated price never fluctuates in value. They also typically have early withdrawal provisions. That means you can get your money back at face value less a penalty. The size of the penalty differs from bank to bank so it's important to read all of the fine print.

CDs at Ally Bank, for example, charge 180 days interest to withdraw principal from a 5-year CD. Currently that's a penalty of 1%.

So if you bought both a brokered CD and opened an Ally CD at equal yields and rates spiked, the price of your brokered CD would fall but you could redeem your ordinary CD with only a 1% penalty. That would give you the opportunity to reinvest at higher rates which is something you couldn't do with your brokered CD.

If rates fall the brokered CD would rise in value whereas the quoted price of your CD would not. But if both are held to maturity, you'll end up with exactly the same amount of money in both accounts.
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Old 05-01-2016, 10:55 AM   #44
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Originally Posted by Options View Post
You may find this helpful (particularly posts by Taylor Larimore and nisiprius):

https://www.bogleheads.org/forum/viewtopic.php?t=137424

Nisiprius on Total Bond Market:



Emphasis added

FWIW, I'm in Total Bond Market. Anymore, I'm all about simplicity and have been become bored with the debates about which approach/tactic/strategy is "better/best". This author discusses stocks but he may as well have been discussing bonds:

180 Years of Market Drawdowns
Are you exclusively in Total Bond Market or do you have additional funds in your fixed income portfolio? That is my current conundrum; should I move exclusively to Total Bond.

thanks,

Marc
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Old 05-01-2016, 11:11 AM   #45
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Are you exclusively in Total Bond Market or do you have additional funds in your fixed income portfolio? That is my current conundrum; should I move exclusively to Total Bond.

thanks,

Marc
FI is 80% TB and 20% VIPSX, and that's only because I didn't know what I was doing when I invested in the tips fund several years ago. When I rebalance at end of this year, I plan to get rid of the tips fund and move it into TB. At that time, I'll have your basic 3-fund PF of total stock, total int'l stock, and total bond.

The more I read the more the advantages of simplicity become clear to me, and I'm not looking to swing for the fences and "go for the win". IMO, one of the best benefits of simplicity in investing is the avoidance of behavioral bias and tripping over one's own feet due to tunnel vision and/or blind spots in thinking.
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Old 05-01-2016, 07:27 PM   #46
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To further complicate things one might also ask "why do you want to own high quality bonds at their current price and yield?"

As mentioned above, one reason to own high quality bonds is because they provide stability. The second reason is because they tend to rise when stocks fall. But at current prices their ability to rise any further is severely limited. So that second reason doesn't apply to the same degree as it historically has.

Take, for example, the Vanguard Intermediate Term Treasury fund. It has a yield of 1.24% and a duration of 5.3 years.

If the stock market tanks we'd expect interest rates to fall. But how much can they fall from 1.24%? 100bp? That would translate into a 5% principal gain on the fund. That's not bad but it's about the limit of their ability to offset stock declines.

And how much can rates rise form 1.24%? 200bp, 300bp or more? That would translate into principal losses of 10%, 15%, or more, respectively.

That asymmetry of risk where upside is limited while the downside is not makes bonds a whole lot less valuable in a portfolio than they've been historically. Therefore one of the two reasons we own bonds is no longer very persuasive.

That leaves stability as the main reason to own bonds today. But I can get more stability from bank CDs and at higher yields too.

So maybe the best fixed income choice today isn't a class of bonds at all.
VBTLX is yielding 2.08% at the moment in spite of having a large government debt component. I don't think anyone is arguing to go only intermediate treasuries in the bond portfolio.

Practically speaking, looking at the 10 year treasury yield history, rates tend to drift up gradually as the equity markets go great guns. Current rate is around 1.83%. Over the past few years, the 10 year treasury seems to drift up to 2.5% or higher, then something spooks the equity markets and boom, rates drop suddenly again.

So while equities are partying, bond funds lag, maybe even drop a little more on interest rate rise fears. But then comes time to rebalance, so you trim from partying equities and buy some bonds.

Agreed for short-term bond exposure you definitely want to compare against cash and CD rates. For intermediate, I stick with bond funds, unless some extraordinary CD offer comes along. I also don't move to short-term bonds in anticipation of interest rate rises - I think the short term end of the curve tends to get overcrowded during this scenario, and under some conditions under performs when rate rises finally occur. And while you're waiting for the "big event" you usually receive a much lower yield.

People have been expecting big increases in rates for a long time now, but no one knows when or how. I think moves over the long term will be gradual and that sharp short term moves will be temporary followed by a recovery. It helps to look at how rates have moved since say 2000, and the actual bond fund performance during those periods.

Looking at what happened early this year, during the "taper tantrum" of mid 2013, during 2012, 2007-2009, 2004-2006 can be very instructive. 2004-2006 in particular because of the very sharp rise in Fed rates (400 bps), and intermediate funds actually did pretty well under this scenario. These blips tend to look pretty small on a fund multi-year total return graph, especially when compared to say the S&P 500 TR graph. AGG is the total bond index and has a long history.

I'm sure part of my point of view is because the bulk of my intermediate bond position dates from late 1990s/2000. And I plan (hope) to hold for decades more. When they take a hit, I'll be buying more in anticipation of when equities take a hit and bonds hold steady or gain (i.e. rebalancing).
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Old 05-01-2016, 07:30 PM   #47
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Originally Posted by Options View Post
FI is 80% TB and 20% VIPSX, and that's only because I didn't know what I was doing when I invested in the tips fund several years ago. When I rebalance at end of this year, I plan to get rid of the tips fund and move it into TB. At that time, I'll have your basic 3-fund PF of total stock, total int'l stock, and total bond.

The more I read the more the advantages of simplicity become clear to me, and I'm not looking to swing for the fences and "go for the win". IMO, one of the best benefits of simplicity in investing is the avoidance of behavioral bias and tripping over one's own feet due to tunnel vision and/or blind spots in thinking.
Yes - I think simplicity is a huge key.

I plan to simplify as I can. I have to deal with taxable investments, so I can make only incremental changes without increasing my tax bill.
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Old 05-01-2016, 08:10 PM   #48
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Looking at what happened early this year, during the "taper tantrum" of mid 2013, during 2012, 2007-2009, 2004-2006 can be very instructive. 2004-2006 in particular because of the very sharp rise in Fed rates (400 bps), and intermediate funds actually did pretty well under this scenario. These blips tend to look pretty small on a fund multi-year total return graph, especially when compared to say the S&P 500 TR graph. AGG is the total bond index and has a long history.
I think that history is probably a bit deceptive for a number of reasons. Take 2004-2006 as an example.

Starting intermediate treasury yields were around 3% so you have a good amount of cushion. A 50bp increase in rates doesn't send your total return negative for the year. But that's not true when you're starting yield is 1.3% like today.

Also the yield curve was much steeper in 2004, over 300bp out to 7 years. When the fed started raising rates those first 300bp didn't impact the belly of the curve, it was all flattening. From 2004 to the early part of '06 the 7yr rate only went up about 40bp even though the Fed had tightened 350bp. It wasn't until the last 100bp of Fed tightening at the end of 2006 that you got any intermediate yield hit at all.

Today the yield curve is more like 150bp so there's much less room to flatten. A similar 450 bp Fed rate hike today would be much much worse for intermediate term bonds.

Either way, the test of whether an investment is doing pretty well is always "compared with what?" And with 5 year treasury bonds yielding 1.3% it's hard to see how they perform better than 5-yr CDs yielding 2%.
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Old 05-01-2016, 09:30 PM   #49
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You can still look to mid 2013 and aftermath for a more recent example closer to current rates (a spike which subsequently dropped again after the tantrum).

I don't see a very large rate increase anytime soon, although I could be wrong. And as for flattening, some countries have gone negative with their interest rates. You just never know how it might work out. It depends on whether there is global economic expansion over the next five years, or global malaise and flirting with deflation again.

Five year CDs look favorable compared to treasuries. I tend to look at AGG as the benchmark to compare against CDs. I'm not trying to invest in something with no-risk credit quality like a treasury, rather just high enough to counter equity movements.

I just don't try to second guess performance of asset classes held over the long-term. Short-term investments held outside of my portfolio AA I take a different approach.
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Old 05-02-2016, 04:47 AM   #50
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while low inflation and low bond rates appear to be the only thing on the horizon it is never the stuff we see on the radar that gets us .

like those in 1965/1966 who saw low inflation and low bond yields jump to double digits out of no where it can happen to us from left field .


once investors get a whiff of inflation bond yields can soar in a heartbeat . except for some bumps in the road for over 40 years bond rates have basically only went down .

you can see the trend has been pretty much down so far with any up tick pretty much just a speed bump , not a trend .

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Bond allocation?
Old 05-02-2016, 05:53 AM   #51
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Bond allocation?

100% in bonds? 100% in anything scare me...
As not to repeat it my post an "alternative to straight allocation."


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Old 05-02-2016, 07:10 AM   #52
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You can still look to mid 2013 and aftermath for a more recent example closer to current rates (a spike which subsequently dropped again after the tantrum).
Yup. From May to September, 2013, 7 year rates went up about 130bp. AGG declined about 5% over that time frame which is pretty close to what you'd expect for a fund with a 5 year duration like AGG.

I'm not trying to second guess performance either. But with AGG yielding 1.9% it just seems like I'm taking on a bunch more risk holding bonds versus owning 2% CDs.
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Old 05-02-2016, 07:21 AM   #53
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while low inflation and low bond rates appear to be the only thing on the horizon it is never the stuff we see on the radar that gets us .

like those in 1965/1966 who saw low inflation and low bond yields jump to double digits out of no where it can happen to us from left field .
It's that asymmetry of risk again.

The possibility of the Fed falling behind the curve on inflation (perhaps deliberately so) carries much more risk to longer duration bonds than another recession carries upside potential given where rates are today.

And if I own a fund with a 5-year average maturity (like the index) it's not clear to me I even end up earning more in 5 years if rates fall than I would by just owning a simple CD.

Sure, initially my bond fund NAV is marked higher as rates fall. But each bond in the portfolio gives back those gains as they near maturity. Ultimately I earn my starting yield, more or less.

The same is true for interest rate spikes. I'll lose NAV out of the gate but eventually all of the bonds I owned at 2% in the fund will return 2% if held to maturity.

So if rates decline I expect I'll earn roughly the same between a 2% CD and a ~2% fund with a 5 year maturity. But if rates rise sharply, I have the option of getting out of the CD at par and reinvesting at higher rates.

That said, none of this is going to make or break a portfolio.
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Old 05-02-2016, 10:21 AM   #54
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This thread caused me to go ahead and collapse the tips fund with the bond and be done with it. So basically it's just a simple 3-fund PF now.

More on behavioral bias in all of these "who-is-right debates" (this time regarding so-called experts):

Behavioral Finance and Investing: Are you Trying Too Hard? - Alpha ArchitectAlpha Architect

Quote:
We assume that experts, with years of experience in their particular fields, are better equipped and incentivized to make unbiased decisions. But is this assumption valid? A surprisingly robust, but neglected branch of academic literature, has studied, for more than 60 years, the assumption that experts make unbiased decisions. The evidence tells a decidedly one-sided story: systematic decision-making, through the use of simple quantitative models with limited inputs, outperforms discretionary decisions made by experts. This essay summarizes research related to the “models versus experts” debate and highlights its application in the context of investment decision-making. Based on the evidence, investors should de-emphasize their reliance on discretionary experts, and should instead approach investment decisions with systematic models.
IOW, pick an approach you're comfortable with among the many, many (at times conflicting) approaches you'll find out there (regardless of who is louder advocating their method is best), and stick with it. BTW, this advice is not new, it's just that this paper demonstrates "experts" in all field--including finance--are just as prone to bias as the rest of us. Follow their lead with care.
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