Bond slice

[tuixiu]

Comrades, I need to know what to put the generic bond portion of my portfolio in, you know the part where the slice of the pie says "bonds" in a different color. Right now it's in Vanguard total bond index, is this best? I've been considering the TIPS fund they have as well, given current (and seemingly forever) low inflation environment does it have any advantage of the big bond fund?

Note: I'm not going to buy individual bonds or TIPS at auction, I'm not denying it has merit I'm just far more likely to open a beer than deal with it.

Input appreciated as always, you guys know your shitake and I always appreciate the advice. In return I offer a really cool picture of a leopard fleeing a lion that manged to get up it's tree branch in Africa:

 

[jwkde]

"I'm just far more likely to open a beer than deal with it"

Domestic or Imported ? That may impact your asset allocation

 

[brewer12345]

I think the tot bond index is hard to beat as a default choice. I reach a bit for return with alternatives, but you won't go far wrong with the tot index.

 

[tuixiu]

Likely domestic, although I saw at the local Asian market they had Singha on sale. That's a problem in itself though for some reason Singha never tastes as good in my living room as when coming from a big bottle over some green chicken curry in Thailand. It's like some feeble attempt to capture being there when I ain't. Maybe I'll put on a red shirt and light some tires on fire to feel more legit.

But I digress.

Thanks for the wisdom brewer, that's what I expected. Would there be any advantage to the TIPS fund in certain situations or certain people's financial profiles? I'm definitely not one of those people with 16 asset classes where they are reallocating their energry ETF because it went over 2.5% of net worth during annual rebalance but I'd be willing to have two funds in the bond slice especially if they could both be had in Vanguard.

Thanks again.

 

[DblDoc]

I second brewers advice. You could add TIPS...or not.

DD

 

[brewer12345]

Thanks for the wisdom brewer, that's what I expected. Would there be any advantage to the TIPS fund in certain situations or certain people's financial profiles? I'm definitely not one of those people with 16 asset classes where they are reallocating their energry ETF because it went over 2.5% of net worth during annual rebalance but I'd be willing to have two funds in the bond slice especially if they could both be had in Vanguard.

Thanks again.

I think TIPS an be a nice diversifier, but they are mostly a way to mitigate inflation risk which you can do other ways as well. So thus far I have used commodities/commodity producer equities, but if TIPS yields became more attractive I might buy some.

 

[HFWR]

Using a model from the internets, I calculated the correlation of my portfolio back in January '10. The only holding, besides cash, with a negative correlation was the total bond market fund in my 401k.

 

[walkinwood]

Some, like Larry Swedroe, suggest sticking to Treasuries (including those from other governments) for the bond portion and staying at intermediate or shorter terms. The idea is that the bond portion of your portfolio is supposed to minimize risk and have as little correlation to the equity position as possible. Read one of his books - you should be able to find it in the library.

Ellis may have a similar take, but I can't recall with certainty.

Having said that, my portfolio doesn't mirror Larry's suggestions. Most of my bond portion is in ST Corp (VFSUX) though I'm dollar cost averaging about 10% into the intermediate treasury (VFITX). I also have 5% in TIPS (VAIPX)

 

[tsturbo]

I like Pimco total return bond fund. Had the Vanguard total bond index and switched over to Pimco. Pimco returns beat the crap out of vg even though the ER is higher.

 

[REWahoo]

Pimco returns beat the crap out of vg even though the ER is higher.

You left out this part:

Past performance is not a guarantee of future results. Investment returns and principal value will fluctuate, so that investors' shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than performance going forward.

 

[clifp]

I like Pimco total return bond fund. Had the Vanguard total bond index and switched over to Pimco. Pimco returns beat the crap out of vg even though the ER is higher.

There seems to be fair performance difference from the institutional PIMCO Total Return fund and the PIMCO Total Return for individual investor. I am not sure if it is the higher expenses or slightly different managers. I think if you have the option for PIMCO in 401K I take that one based on Bill Gross's long and successful track record otherwise Vanguard Total Bond is hard to beat.

In the past, I'd have recommended the Vanguard GNMA but with so much uncertainty in the market I am not sure that make sense. It is my main bond found though.

 

[Free To Canoe]

Comrades, I need to know what to put the generic bond portion of my portfolio in, you know the part where the slice of the pie says "bonds" in a different color. Right now it's in Vanguard total bond index, is this best? I've been considering the TIPS fund they have as well, given current (and seemingly forever) low inflation environment does it have any advantage of the big bond fund?

Note: I'm not going to buy individual bonds or TIPS at auction, I'm not denying it has merit I'm just far more likely to open a beer than deal with it.

Input appreciated as always, you guys know your shitake and I always appreciate the advice. In return I offer a really cool picture of a leopard fleeing a lion that manged to get up it's tree branch in Africa:

It is a really cool pic!
Thanks for the bond info, too.

Free to canoe

 

[tsturbo]

You left out this part:

Whatever. I love vanguard, but when I have the option to choose between the two in my company 401 and pimco is about 2x the return than vg, who wouldn't do pimco?

Well, you probably wouldn't.

 

[REWahoo]

I love vanguard, but when I have the option to choose between the two in my company 401 and pimco is about 2x the return than vg, who wouldn't do pimco?

Well, you probably wouldn't.

Actually I'd probably split my bond allocation between the two in order to spread my risk. That's only because past performance doesn't guarantee future results.

 

[golfnut]

Actually I'd probably split my bond allocation between the two in order to spread my risk. That's only because past performance doesn't guarantee future results.

That's exactly what we do in my 401k and for the same reason.

 

[HFWR]

My bond portion - 40% - is split between:

TIP - 10% (TIP fund)
LQD - 10% (corporate)
HYG - 10% (junk, er, uh, high-yield)
IEI - 5% (in-house equivalent to IEI total bond market)
SHV - 5% (short-term treasuries)

 

[DblDoc]

Whatever. I love vanguard, but when I have the option to choose between the two in my company 401 and pimco is about 2x the return than vg, who wouldn't do pimco?

Well, you probably wouldn't.

First you are comparing apples to oranges - they have very different investing strategies - and second I don't see where PIMCO has double the return. Over the last ten years VBMFX has returned 6.25% and PTTAX has returned 7.37% - and that ignores the big difference in the ER's of the two funds.

DD

 

[tsturbo]

First you are comparing apples to oranges - they have very different investing strategies - and second I don't see where PIMCO has double the return. Over the last ten years VBMFX has returned 6.25% and PTTAX has returned 7.37% - and that ignores the big difference in the ER's of the two funds.

DD

Yes, you are correct, I was looking at the 1, 3 & 5 year returns. Through my Company 401k I am fortunate enough to have both the Pimco total Return and the Vanguard total bond index fund. The VG expense ratio is very low, .20 or less, while the Pimco is .65, based upon this, do you feel the slightly lower returns of the VG fund is a better choice because of the lower expense ratio?

 

[Rich_by_the_Bay]

I think the tot bond index is hard to beat as a default choice. I reach a bit for return with alternatives, but you won't go far wrong with the tot index.

No expert here, but I agree that total bond index is a fine place.

However, be aware that it is 35% in GNMA and similar, and you may not like that. That was the reason I switched to Vgd intermediate bond index. I'll keep my RE exposure in the REIT fund.

Just something to consider.

 

[DblDoc]

Yes, you are correct, I was looking at the 1, 3 & 5 year returns. Through my Company 401k I am fortunate enough to have both the Pimco total Return and the Vanguard total bond index fund. The VG expense ratio is very low, .20 or less, while the Pimco is .65, based upon this, do you feel the slightly lower returns of the VG fund is a better choice because of the lower expense ratio?

The ER is one factor - it is much more critical in a bond fund than a stock fund given the (usually) lower returns. More importantly is the active management and what they are investing in. VBMTX is an index fund only invested in domestic bonds, PTTAX is actively managed (albeit by Bill Gross who some feel is a bond guru) and contains foreign bonds as well. I follow Larry Swedroe's advice about taking risk in the equity portion of my portfolio and emphasize short/intermediate term gov't securities (and TIPs) in the bond portion. It served me well 2008-2009 as they were the only asset class that remained negatively correlated to equities with the worldwide "flight to quality". Now if my 40x plan had only PTTAX as a choice I wouldn't lose too much sleep over it - there are many far worse bond funds out there one could be stuck with.

DD

 

[brewer12345]

No expert here, but I agree that total bond index is a fine place.

However, be aware that it is 35% in GNMA and similar, and you may not like that. That was the reason I switched to Vgd intermediate bond index. I'll keep my RE exposure in the REIT fund.

Just something to consider.

Uhh, help me out here: what exactly is the problem with an allocation to agency MBS?

 

[DblDoc]

Uhh, help me out here: what exactly is the problem with an allocation to agency MBS?

There have been numerous threads over at bogleheads about this issue for VBMFX. As I understand it there is ~38% in MBS, a mixture of Fannie, Freddie and Ginnie and no way to tease out how much of each. There has been criticism there about the amount of MBS and how they performed during the crisis and risks going forward which may be what Rich is referring to. As they are all essentially backed by the full faith of the gubm't at this point default risk seems minimal. Interest rate risks still apply but the team at VBMFX seems to try and keep the durations relatively short.

DD

 

[WilliamG]

There have been numerous threads over at bogleheads about this issue for VBMFX. As I understand it there is ~38% in MBS, a mixture of Fannie, Freddie and Ginnie and no way to tease out how much of each. There has been criticism there about the amount of MBS and how they performed during the crisis and risks going forward which may be what Rich is referring to. As they are all essentially backed by the full faith of the gubm't at this point default risk seems minimal. Interest rate risks still apply but the team at VBMFX seems to try and keep the durations relatively short.

DD

Perhaps, but within the realm of an index fund. We hold our MBS directly in Vanguard GNMA which IS managed quite well.

 

[DblDoc]

Perhaps, but within the realm of an index fund. We hold our MBS directly in Vanguard GNMA which IS managed quite well.

If you have access to it and want that slice that is a good choice, but for someone who wants to keep it simple or lack choice in their tax deferred account VBMFX is a reasonable fund to hold.

DD

 

[brewer12345]

There have been numerous threads over at bogleheads about this issue for VBMFX. As I understand it there is ~38% in MBS, a mixture of Fannie, Freddie and Ginnie and no way to tease out how much of each. There has been criticism there about the amount of MBS and how they performed during the crisis and risks going forward which may be what Rich is referring to. As they are all essentially backed by the full faith of the gubm't at this point default risk seems minimal. Interest rate risks still apply but the team at VBMFX seems to try and keep the durations relatively short.

DD

I have no interest in bogleheads, since I a, not in the market for a new religion.

Uh, I still do not see a cogent or even coherent reason why one would get up in arms about agency MBS exposure in an index fund. Anyone else want to take a crack?