What's Your Non-Equity Portfolio Look Like?

[aja8888]

At least he was honest about it. He offered to transfer me to the concierge desk to help me do the transfer of funds from my IRA to Pen Fed.

I transferred IRA funds to Penfed and opened an IRA. That took a week. Then I ordered 3% certificates on 1/2/14. They have not been issued yet due to the huge backlog of certificate applications in the Omaha office. Last I was told was I am 265th in line, but will be OK as they have committed the funds from my account.

 

[brewer12345]

I called the Vanguard Fixed Income desk this morning just to see if they could offer me a good argument for keeping my money in VG TBM rather than a PenFed 3% CD. He acknowledged that the 3% rate is an outlier relative to what other banks are offering, but as long as that rate is available, there is not much reason to choose TBM over the CD. I kept rephrasing the question to see if he could poke any holes in my logic, but he seemed content to acknowledge that I was looking at this the right way and that the CD at 3% is simply a better strategy than TBM. Given that TBM has interest rate risk, it should be paying a premium over the safety of a CD. Since it is not, it simply isn't the best choice for fixed income at this time.

At least he was honest about it. He offered to transfer me to the concierge desk to help me do the transfer of funds from my IRA to Pen Fed.

I am amazed that they were willing to concede the point and even help you move the money. They get a huge gold star just for that.

 

[Options]

With all the understandable angst about no good choices for fixed income or cash, despite lots of bits and pieces of info, I wonder what our non-equity portfolios all look like - percentages in various bond, funds, cash, etc

...

I have no "understandable angst" about any aspect of my PF as I have an ISP and have no plans to change it based on external noise. Others much smarter than me have stated that changing one's AA/composition based on noise is dating it, not marrying it. PF composition should change about once every 10 years, or as a result of major life changes. Still others smarter than me have stated that all predictions are, again, noise. No one is smarter than the market, ever.

I'm surprised not many people are listing a Total Bond fund among their holdings in this thread. It may not be optimal, especially in today's interest rate environment, but as a long term holding on autopilot it seems fine. My non-equity portion is 50% TBM and 50% TIPs fund. Their purpose is for diversification/non-correlation with equities - it's ok if they have some losses. I've held them for years and plan to just rebalance as necessary. Anyone see issues with this?

What I'm surprised at is all the postings on this forum where people thought they were smarter than the market, later turned out not to be, and then talk about "hindsight". Your thinking is spot on, if you look at the rationale behind the lazy portfolios.

Is the TIPs fund short-term? I heard that short-term is more appropriate if the prospect for higher inflation is likely. Futher, short-term is lower risk despite possible lower return than the longer-term TIPS in the long run.

If you hear something on the street, put it back. Better to buy a lotto ticket. Nothing should ever be short term, unless you intend to spend it in the next 1-3 years. Otherwise, you're speculating.

To me one of the problem of TBM is that it is composition has really changed since 2008 when the Fed went on it is buying spree. It is only 23% corporate and the rest is government (90% US) or agency debt. Fully 30% of the assets are in long bonds 20-30+ year issues. Anyway given the low current interest rates and the prospect of rising interest none of these seem like great assets to own.

The BND current yield is 2.5% and the average duration is 5.5 years so even a 50 basis point rise in interest rates will result in small loss. I think PenFed CD, stable value funds etc. all seem like better investments.

Threads on the BH site discuss this as well. Again, all predictions are noise. Beware confirmation bias, recency bias, and overconfidence. There's too much of it here for my comfort level. 2008 left lots of folks swimming naked, and no, BOGLE has not discounted the TBM fund.

 

[Spanky]

BOGLE has not discounted the TBM fund.

He did say that the TBM index should be changed.

 

[jazz4cash]

I called the Vanguard Fixed Income desk this morning just to see if they could offer me a good argument for keeping my money in VG TBM rather than a PenFed 3% CD. He acknowledged that the 3% rate is an outlier relative to what other banks are offering, but as long as that rate is available, there is not much reason to choose TBM over the CD. I kept rephrasing the question to see if he could poke any holes in my logic, but he seemed content to acknowledge that I was looking at this the right way and that the CD at 3% is simply a better strategy than TBM. Given that TBM has interest rate risk, it should be paying a premium over the safety of a CD. Since it is not, it simply isn't the best choice for fixed income at this time.

At least he was honest about it. He offered to transfer me to the concierge desk to help me do the transfer of funds from my IRA to Pen Fed.

That's good to hear but not surprising. I had a very similar experience with Fidelity when I moved funds last year to a credit union CD. This time they looked at my profile and said "I see you've done this before, so you probably understand what you're doing..and we can't match that rate <more or less>".

 

[jazz4cash]

Are you satisfied with these returns for the fixed-income of your portfolio? These returns are hardly keeping up with inflation.

Very satisfied.

 

[NW-Bound]

He did say that the TBM index should be changed.

People often forget that the idea of index investing is to get diversification. This middle-of-the-road method does not get one rich quick, but will not ruin one financially either. And there are many ways to get diversification. There is no single ultimate way.

Many also do not know that there are committees who design these indices, and decide what goes in or out. Take for example the S&P500 index. It often lags the total market, by adding stocks that have already peaked, or deleting downtrodden stocks that have reached bottom and are ready to rebound. There have been studies to show these effects.

So, the indexers simply delegate the asset picking to some faceless committees. These are people, not God.

 

[Options]

People often forget that the idea of index investing is to get diversification. This middle-of-the-road method does not get one rich quick, but will not ruin one financially either. And there are many ways to get diversification. There is no single ultimate way.

Many also do not know that there are committees who design these indices, and decide what goes in or out. Take for example the S&P500 index. It often lags the total market, by adding stocks that have already peaked, or deleting downtrodden stocks that have reached bottom and are ready to rebound. There have been studies to show these effects.

So, the indexers simply delegate the asset picking to some faceless committees. These are people, not God.

Too much of an attempt at market timing for my taste. Short term always equals volatility and every kind of gyration. Long term does not. TBM is the total bond market, and no sooner will you leave it because "it should be changed" than it will be, but you'll no longer be in it. Why? Because that's how the market works.

I saw yet another chart (somewhere) just this week that showed the very large difference between the market's return and that of the individual investor. Why? Because the individual investor is always chasing returns, thinking he knows better than...fill in the blank...because...fill in the blank...said so. This is not investing. It's speculating.

 

[NW-Bound]

About this TBM business, I have to read a bit more to see why Bogle wanted it changed.

Yes, chasing returns often leads to underperformance. So, don't!

In the tech mania of 2000, the S&P 500 was loaded with tech stocks. Crashed hard! In the mortgage bubble of 2003-2007, the S&P 500 was loaded with financial stocks. Crashed hard!

PS. In the years preceding the 2008-2009 financial crash, I read an article where Bogle sounded an alarm when he saw that financial stocks took too big a percentage in the S&P500. Well, if they were in the index, everybody had to buy them right? And we all got rich (temporarily!), because everybody was in the "Buy, buy, buy" mode.

 

[Spanky]

About this TBM business, I have to read a bit more to see why Bogle wanted it changed.

Here's Jack's Video on this topic:
Bogle: We Need to Fix the Bond Index

In a nut shell, he thinks that the index is too heavily weighted on U.S. Treasuries and government agencies.

 

[NW-Bound]

Yes, I saw that video earlier. I wanted to dig deeper though. Perhaps Bogle sensed that Treasuries would have bad days ahead, and wanted to protect US investors.

As Bogle said,

"this answer may surprise you from a dyed-in-the-wool indexer and the creator of the first index bond fund. I think we have to fix the index. And the fact of the matter is in that $16 trillion or so just of Treasuries alone here, what we are dealing with is huge amounts that are held not by U.S. investors, but foreign investors. And if you look at the data, you see that about $5.5 trillion of that $16 trillion is held by China and Japan and a couple of other countries, that's irrelevant to the U.S. investor in my opinion."

 

[NW-Bound]

Perhaps I did not convey my thoughts clearly in my earlier posts. So, let me try again.

While Bogle's idea of index investing is sound, in that it keeps the investor diversified and prevents him from chasing past performance which is often not fruitful, Bogle does not control these indices. Not the Barclay bond index, not even the S&P 500 index that his pioneered fund was based on.

I am not an indexer, but let me ask this. Should an indexing investor allow himself to question if an index is sound? Remember that these indices are created by committees, who often "buy high/sell low". This is often the case with the S&P, as they vote in recent high-flying companies and throw out trailing companies. Is that not an example of performance chasing? Many investors think of these indices as god-sent, and do not know that they are created by committees, who are picking stocks for all indexing investors to buy or sell in lock steps. Good thing not everybody is an indexer, because that lock-step investing would lead to bubbles and crashes far worse than any that we have seen.

In the case of Bogle's opinion of the bond index, perhaps the index has been "wrong" all along, as he said. That's what I like to know.

 

[karluk]

Measured as a percentage of my total portfolio, not as a percentage of non-equities only, I have about 34% in non-volatile investments (mostly in the stable value fund in my retirement account), 12% in total bond market, and 10% in VWETX.

 

[Lsbcal]

Yes, I saw that video earlier. I wanted to dig deeper though. Perhaps Bogle sensed that Treasuries would have bad days ahead, and wanted to protect US investors.
...

Morningstar had an article a year or two back with some decent historical data on this issue. Sorry, I don't have the link or title.

 

[NW-Bound]

Here's a chart showing that the yield of 30-yr Treasury had been on a decline from 14% in 1980 down to below 2% recently, until it rebounded to near 4% presently. That steady yield drop propelled the price gain on long Treasuries for 3 decades. So, how is that going to continue, I wonder? Yield going negative?

Treasury Yield 30 Years Index Chart - Yahoo! Finance

 

[Lsbcal]

Morningstar had an article a year or two back with some decent historical data on this issue. Sorry, I don't have the link or title.

What I meant in this post was that the M* article specifically addressed Total Bond Mkt (maybe in the form of the Barclay US Agg Bond Index) evolution and possible concerns. Since I don't own TBM, I just remembered there was something not quite right about its current makeup.

 

[jon-nyc]

Yes, I saw that video earlier. I wanted to dig deeper though. Perhaps Bogle sensed that Treasuries would have bad days ahead, and wanted to protect US investors.

If treasuries have bad days ahead corporates/munis/asset backed won't fare very well either.

 

[Options]

Perhaps I did not convey my thoughts clearly in my earlier posts. So, let me try again.

While Bogle's idea of index investing is sound, in that it keeps the investor diversified and prevents him from chasing past performance which is often not fruitful, Bogle does not control these indices. Not the Barclay bond index, not even the S&P 500 index that his pioneered fund was based on.

I am not an indexer, but let me ask this. Should an indexing investor allow himself to question if an index is sound? Remember that these indices are created by committees, who often "buy high/sell low". This is often the case with the S&P, as they vote in recent high-flying companies and throw out trailing companies. Is that not an example of performance chasing? Many investors think of these indices as god-sent, and do not know that they are created by committees, who are picking stocks for all indexing investors to buy or sell in lock steps. Good thing not everybody is an indexer, because that lock-step investing would lead to bubbles and crashes far worse than any that we have seen.

In the case of Bogle's opinion of the bond index, perhaps the index has been "wrong" all along, as he said. That's what I like to know.

Again, IMO, this kind of minutia can be dangerous. Studies bear this out again and again and again. Yes, TBM tracks to the Barclays U.S. Aggregate Bond Index. Is the index "wrong?" Sure, fund compositions change, but no sooner are individual investors chasing returns for whatever reason than the fund composition changes back again and the investor who changed doesn't own the new composition. A total bond market fund is always a wise long-term PF choice, as opined by endless people much smarter than me.

The time to choose one's AA/fund composition is at the beginning of creating their financial plan, not in the middle of it, and certainly not due to noise coming from the street.

I'm personally glad people ignore the endless studies on individual investor behavioral biases that cause their "active" investing performance to lag the market virtually 100% of the time. It means more for people like me who don't. Although it does flabbergast me that people think they can outsmart the market, given history.

How many more studies does it take dating back to the 1930's showing the majority of investment advisory letters got it wrong for the individual investor to wise up? If these people, with so much data and financial industry information at their disposal can't get it right, what makes individual investors--aka the little guy--think they can?

 

[brewer12345]

I have a different problem with bond indexing. By definition, the index must buy in proportion to the size of an issue vs. the market. Especially when dealing with corporate credit, this means that the index funds have to buy the most of the "biggest bums" even as they pound out more and more paper and make their situation less and less attractive to creditors (perhaps one could stretch this to cover treasures). I think bond indexing is fundamentally flawed and so I am unwilling to have more than a small amount of my fixed income position in bond index funds.