Question about US vs. International Bonds

[ER Eddie]

Quick question about US vs. International Bond mix. I've got mine set at 80/20 in Vanguard. Is that about right?

Also, do you know of any good Fidelity international bond index funds? I am currently 100% in US bonds in my Fidelity account, and I think I should diversify a bit. However, last time I looked, I couldn't find any low-cost Fidelity international bond index funds. Know of any?

Thanks.

 

[RunningBum]

AAs and US/Intl mixes need to be looked across all of your investments, not in the context of a single account.

 

[kevink]

Vanguard's target date and LifeStrategy funds allocate 40% to international in both stocks and bonds - and many Bogleheads (starting with Jack Bogle himself) vehemently-to-mildly disagree that such a large allocation to international (or any at all - especially in the case of bonds) is advisable, necessary and/or meaningful.

 

[ER Eddie]

AAs and US/Intl mixes need to be looked across all of your investments, not in the context of a single account.

Yeah, I know. That's why I asked about a Fidelity account; I want to get it to 20%, too, assuming 80/20 is the right (or good enough) ratio.

Vanguard's target date and LifeStrategy funds allocate 40% to international in both stocks and bonds - and many Bogleheads (starting with Jack Bogle himself) vehemently-to-mildly disagree that such a large allocation to international (or any at all - especially in the case of bonds) is advisable, necessary and/or meaningful.

Well, 20% is halfway between nothing and 40%, so maybe that's good. ¯\_(ツ)_/¯

 

[RunningBum]

Yeah, I know. That's why I asked about a Fidelity account; I want to get it to 20%, too, assuming 80/20 is the right (or good enough) ratio.

Just buy more international bonds at Vanguard until you have 20% overall.

 

[ER Eddie]

Just buy more international bonds at Vanguard until you have 20% overall.

Yeah, I guess that's an option.

What's your opinion on the 20% international ratio? That's really my main question.

 

[RunningBum]

Yeah, I guess that's an option.

What's your opinion on the 20% international ratio? That's really my main question.

I don't have international bonds. Maybe it would be a good idea, but I don't. I remember reading somewhere that they aren't really needed. I don't recall the source and can't tell you if it was one I really trust, or if I liked it because it matched what I do. Not really helpful, sorry.

 

[ER Eddie]

I don't have international bonds. Maybe it would be a good idea, but I don't. I remember reading somewhere that they aren't really needed. I don't recall the source and can't tell you if it was one I really trust, or if I liked it because it matched what I do. Not really helpful, sorry.

No problem. I have a feeling this isn't a very sexy question, because bonds are sort of boring. And who cares about international bonds? Snooze.


But wait -- did someone say international bonds weren't sexy?

 

[steelyman]

I don’t have any international bonds in my portfolio. I used to, but they’re gone. I’m following the advice of a book about bonds which advised that bonds (of any type) aren’t there for growth, rather ballast.

I don’t have any target date funds but Vanguard’s have an international bond component last I checked.

 

[mrfeh]

I don't have international bonds. Maybe it would be a good idea, but I don't. I remember reading somewhere that they aren't really needed. I don't recall the source and can't tell you if it was one I really trust, or if I liked it because it matched what I do. Not really helpful, sorry.

+1

We have ex-US exposure in equities, but not bonds.

 

[ER Eddie]

So, that's 3 out of 3 people saying they have no international bonds at all, and they don't see the value in owning them. Interesting. I thought there might be some benefit in terms of reducing volatility (e.g., if the US bond market tanked, maybe the international bond market would fare better). But I guess not.

Maybe I'll just stick to what I've got (20% in Vanguard, none in Fidelity) and not worry about it.

 

[Markola]

Vanguard recommends 40% international stock exposure and 30% international bond exposure. See:

https://investornews.vanguard/get-global-diversification-with-international-etfs/

 

[ER Eddie]

Vanguard recommends 40% international stock exposure and 30% international bond exposure. See:

https://investornews.vanguard/get-global-diversification-with-international-etfs/

Yeah, I think it was from Vanguard's auto-advice robot that I got the original idea of a 20% allocation to international bonds.

People here (at least the three expressing an opinion) seem to believe that's not necessary. I'd be curious as to why, if anyone cares to explain the rationale.

 

[mrfeh]

Yeah, I think it was from Vanguard's auto-advice robot that I got the original idea of a 20% allocation to international bonds.

People here (at least the three expressing an opinion) seem to believe that's not necessary. I'd be curious as to why, if anyone cares to explain the rationale.

I'm just not aware of any potential benefit. I don't view bonds as a money-maker, but rather a ballast. If they do a little better than inflation, I'll be happy.

I'm also not saying there's anything wrong w/ ex-US bonds. If you think allocating 20-30% is a good idea, go for it.

ETA: if you do purchase ex-US bonds, I suggest some kind of low cost index, not something managed.

 

[Markola]

Yeah, I think it was from Vanguard's auto-advice robot that I got the original idea of a 20% allocation to international bonds.



People here (at least the three expressing an opinion) seem to believe that's not necessary. I'd be curious as to why, if anyone cares to explain the rationale.

To pursuade me toward home bias, they’d also need to explain away Vanguard’s research. That’s been easy to do in hindsight over the last ten years but what about the next ten? Historically, the domestic vs. international performance pendulum reverses about every five years, which brings up the principle of reversion to mean. YMMV.

 

[steelyman]

I referred to the book about bonds and its comment about international bonds. Here’s the quote from it:

The argument against investing in these is that they don’t offer anything beyond the rich choices that already exist in the U.S. bond markets. Worse, investors are not compensated for the currency rate risks which are introduced. The argument in favor of these is that they help investors diversify by spreading interest rate and economic risk across the globe. I’m not an expert about this, but I am not even tempted.

I’m even less of an expert (much less!) but it makes sense to me given what I think the role that bonds play is in my retirement portfolio.

The book is Why Bother With Bonds? by Rick Van Ness.

 

[RunningBum]

I'm not trying to persuade anyone, but I do appreciate when my choices are challenged, because I might learn I should be doing something different. I am not an expert on bonds by any means. In fact, I have a lot more of my non-equity holdings in TIPS right now than bonds.

Comparing VBATX (Total Intl Bond Index) with VBTLX (Total US Bond index), VBTLX has lower expenses (0.05% to 0.11%) and a higher 30 day yield (1.11% to 0,18%). Clear favor of the US fund. Maybe the yield difference is just a temporary thing, but the expenses are not.

Do Intl bonds get taxed by their countries as Total Intl Stock (VTIAX) does? You can get this back with a Foreign Tax credit, but I'm about $3000 behind on that so far. I keep bonds in my tIRA, and you can't take FTC in an IRA, so the foreign taxes are an additional drag on an intl bond fund.

That's my reasoning. Tell me where it falls short.

btw, I'm not a fan of Bond Index funds either. With stock index funds, you hold the most shares in the most successful companies. With bond index funds, it seems like you would hold more bonds from companies that need to borrow money. That doesn't seem like a good idea. That may be an oversimplified view that doesn't hold up, and again this is not a strong area for me. I'd like to hear contrasting views on bond index funds as well.

 

[sengsational]

If you search "Marotta Gone Fishing", you can enter your age and portfolio size, and get a recommended AA with specific fund choices depending on whether you choose Schwab, Fidelity or Vanguard. Not saying that the AA is perfect for anyone (probably fine, but that's a different discussion). The point is that this guy takes expense ratios very seriously, so when he puts a specific fund in there, you'd probably be hard pressed to find a cheaper alternative.


I've not looked there in a while, but I think his ratio is 50/50 domestic/int'l bonds.

 

[audreyh1]

I don't have international bonds. Maybe it would be a good idea, but I don't. I remember reading somewhere that they aren't really needed. I don't recall the source and can't tell you if it was one I really trust, or if I liked it because it matched what I do. Not really helpful, sorry.

I don’t have international bonds either. If someone was trying to diversify away from the US govt/economy it would make sense to hold international stocks and bonds. I just have a small allocation to international equities. I’m OK for being aligned with US $ for my fixed income.

 

[OldShooter]

We have no international bonds though we are firm believers in diversifying equities internationally. Without studying the market in detail, my sense is that although currency risk is priced into various countries' bond yields there is not a compelling reason to hold them. If the pricing is accurate, then the residual interest rate will be closer to US bonds. If it is hedged, then the yields might even be losers due to the cost of hedging. If the pricing of the currency risk is, well, risky then why would I hold them in the supposedly-conservative side of my AA?

I could be wrong on this. I would be interested in books or links that argue against US home country bias in bond holdings.

 

[RunningBum]

If you search "Marotta Gone Fishing", you can enter your age and portfolio size, and get a recommended AA with specific fund choices depending on whether you choose Schwab, Fidelity or Vanguard. Not saying that the AA is perfect for anyone (probably fine, but that's a different discussion). The point is that this guy takes expense ratios very seriously, so when he puts a specific fund in there, you'd probably be hard pressed to find a cheaper alternative.


I've not looked there in a while, but I think his ratio is 50/50 domestic/int'l bonds.

For Vanguard, at various ages, portfolio size, and stock/bond split that I tried, he always put 42% of bonds in Vanguard Emerging Markets Government Bond fund. Over 70% of its holdings are rated Baa or less. No way do I put that much in such a fund. The expense ratio is 0.25%, with a purchase fee of 0.75%. That's crazy.

Oh, and the stock part is split 7 ways, so you're probably going to be doing a lot of rebalancing to keep those ratios rather going fishing. 20% of the stock component is an energy fund. Why?

I'll take a hard pass at this guy's recommendations.

 

[ER Eddie]

Ok, I'm hearing a lot of people say there's no clear benefit to holding international bonds, and I'm not hearing anyone putting forth a counterargument. I assume Vanguard have some rationale for suggesting 20 or 30% in international bonds, but apparently it's not strong enough to convince anyone here.

Guess I'll just let things ride and not worry about it. Thanks for the input.

 

[RunningBum]

Sometimes a good approach is what you have now, a little bit in so you are more likely to follow it, and maybe after going through a long cycle (over a few years) you'll see the + and - of it, and can add more or dump it then.

 

[ER Eddie]

I looked at their performance in Vanguard over the last decade.

Intermediate bond index fund (US): 4.6%
International bond index fund: 4.4%

So the US fund is performing a bit better overall.

If there's no good rationale for holding international bonds, maybe I'll just move it all back stateside.

 

[Markola]

See https://personal.vanguard.com/pdf/ISGGLBD.pdf

I think if you are the type of index fund investor who likes buying the biggest casino possible, then having exposure to a currency hedged international bond index fund, like Vanguard’s, will be appealing. Our portfolio owns something like 25,000+ securities and the only way to get to that level is to include international. YMMV.