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Reduce Foreign Bonds?
Old 02-23-2010, 06:20 PM   #1
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Reduce Foreign Bonds?

Brewer, do you expect GIM and foreign bonds to hold up OK going forward? GIM has been a gem in my portfolio but I wonder how Greek and other weak country bonds will affect foreign bonds.
I am in the process of reducing my bond holdings just a bit, dropping the total (US) bond fund which is part of my target retirement fund in favor of the Fed Govt G Fund (sort of a stable value fund) and cash in the credit union. DW still has her IRA in VG Wellesley & Star funds and don't expect to change that but I figure that bonds will be the next asset to take a beating and want to lower my bond holdings and in particular wondered if foreign bonds are as likely to be affected by inflation as US bonds. I can't come up with a particular stock or ETF as an alternative so any results of selling bonds and any free cash would probably go into VT as that seems like a safe/r long term prospect. Is there a particular equity sector that does well in times of inflation?

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Old 02-23-2010, 07:10 PM   #2
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I think that foreign bonds are a valuable diversifier in a broadly diversified portfolio. So I think an allocation to them adds something over time. I would be reluctant to sell entirely out of an asset class that is part of one's core portfolio allocation, regardless of what you think the short term direction of that asset class might be.

If you are over your intended allocation, by all means trim away to get back within your bounds. I find it a bit difficult to call the direction of a couple dozen currencies. I note that GIM is short the Euro, the Yen and the Kiwi vs. the AUD, non-Euro European currencies, and other Asian currencies. Are these the right positions to take? I would hazard a guess that they sound plausible, but I am happy to leave this one to the experts in the area who have a good, long term track record.

There are foreign bond ETFs. If memory serves, BWX is a nominal bond fund and WIP is an inflation-adjusted fund (foreign versions of TIPS).

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Old 02-23-2010, 08:33 PM   #3
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In Work Less, Live More there's a fairly detailed look at the long-ish-term effect of foreign bonds on a diversified portfolio. Might be worth checking out. It convinced me to add them as an asset class.
And if I claim to be a wise man, it surely means that I don't know.
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Old 02-23-2010, 10:03 PM   #4
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I've become convinced that inflation is not an imminent threat. Bond funds may be fully valued, but I don't think they are vulnerable to rising interest rates (or inflation) any time soon.

EM debt (and even Euro debt) on the other hand- does seem more vulnerable these days. However I always have some exposure through FSICX.

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