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Old 04-05-2008, 11:13 PM   #21
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So, just curious, for those of you that do use a foreign bond fund, what % of your bond allocation is the foreign fund? I think I'm going with the following plan for my bond allocation in my 401(k):

15% ESICX, ER 0.74%
35% PTTRX, ER 0.43%
50% VBTLX proxy, ER 0.10%

ESICX is the Evergreen International Bond Fund Institutional Class
PTTRX is PIMCO Total Return Institutional Class
VBTLX proxy is BGI US Debt Index Fund

So my bond allocation is:
50% indexed at rock-bottom cost (keeps Bogle happy)
35% invested by the "superstar" (Bill Gross) for a reasonable fee
15% world bond exposure for not too outlandish a cost

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Old 04-06-2008, 09:37 AM   #22
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Before you do this be sure you understand and are comfortable with the role of bonds in your portfolio. I'm of the school of thought that bonds serve as an 'anchor' to the portfolio to reduce volatility and to provide rebalancing opportunities.

When I view foreign bonds through that lens, I see risk more similar to equities without the substantial reward, at higher cost. As a previous poster suggested, you may do better investing in foreign equities for that portion at lower cost and keeping your bond allocation safer.

For me, I believe in coupling safe bonds with risky stocks - so my bond allocation consists entirely of Intermediate US treas bonds and TIPS. I arrived at that decision by looking at correlations data - when equities are at their worst, I want bonds to be propping up the portfolio.
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Old 04-06-2008, 08:15 PM   #23
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Thanks for the reply, all good points.
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Old 04-07-2008, 03:00 PM   #24
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Quote:
Originally Posted by Dude View Post
So, just curious, for those of you that do use a foreign bond fund, what % of your bond allocation is the foreign fund? I think I'm going with the following plan for my bond allocation in my 401(k):

15% ESICX, ER 0.74%
35% PTTRX, ER 0.43%
50% VBTLX proxy, ER 0.10%

ESICX is the Evergreen International Bond Fund Institutional Class
PTTRX is PIMCO Total Return Institutional Class
VBTLX proxy is BGI US Debt Index Fund

So my bond allocation is:
50% indexed at rock-bottom cost (keeps Bogle happy)
35% invested by the "superstar" (Bill Gross) for a reasonable fee
15% world bond exposure for not too outlandish a cost

15% of my bond position is foreign. This is because my fund of choice is 15% foreign bonds.

I have one bond fund- RPSIX- which is T Rowe Price Spectrum Income. it yields 4%+, has a long term return of 7.5% (over last 5 years) and is a diversified bond fund (fund of funds). About 15% equity and 85% bonds, so asset allocation purists might need to adjust somewhat to get the diversification desired.

15% of fund is in dividend paying stocks
15% of fund is in foreign bonds (12% int'l bond and 3% in emerging markets bond)
57% is domestic bonds and money markets (mix of about 5 different bond funds ranging from 5% to 16% positions)
13% is in RE bonds
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Old 04-07-2008, 06:46 PM   #25
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For me, I believe in coupling safe bonds with risky stocks - so my bond allocation consists entirely of Intermediate US treas bonds and TIPS. I arrived at that decision by looking at correlations data - when equities are at their worst, I want bonds to be propping up the portfolio.
I wouldn't suggest that unhedged foreign bonds should replace the low-risk US bonds that are a critical part of your portfolio - int'l bonds are definitely more risky. But you also have to consider the fact that currencies are relatively uncorrelated with either US stocks or US bonds. So yes, they bring some risk to the party, but adding non-correlated risky assets to the portfolio brings down the overall level of risk, often without reducing your return much, if at all.
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Old 04-07-2008, 07:46 PM   #26
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But you also have to consider the fact that currencies are relatively uncorrelated with either US stocks or US bonds. So yes, they bring some risk to the party, but adding non-correlated risky assets to the portfolio brings down the overall level of risk, often without reducing your return much, if at all.
Thats a good point, and one I overlooked. However, most academics would argue that currencies themselves (and thus the currency-derived portion of a foreign bond's return) has no expected return over the long term.

Swedroe argues that foreign bonds give equity-like risk, and that risk tends to show up at the worst time.. when equities are blowing up. That forms the basis of my point about holding bonds for safety and negative correlation - but your point is taken.
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Old 04-08-2008, 03:18 AM   #27
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If anyone wants to lend me a million or two to stick into a New Zealand 10% 5 year CD just give me a yell.

'Investment fees' of only 0.5%, plus tax of 30% on the interest
Only risk is that the NZD might fluctuate and the chance that I may run off with the millions
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Old 04-08-2008, 09:36 AM   #28
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Thats a good point, and one I overlooked. However, most academics would argue that currencies themselves (and thus the currency-derived portion of a foreign bond's return) has no expected return over the long term.
Agreed that FX is a zero sum gain in the long run. Of course, the same could be said for commodities (your real return should be zero).
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