Vanguard PAS - Long Term Bonds?
Vanguard PAS - Long Term Bonds?
Hi all,
I met with a Vanguard advisor to possibly manage one of my taxable accounts. the account is 70% stock, 30% bond.
the 30% bond portion was broken out into:
1/3 - CA intermediate bond fund
1/3 - Total intermediate muni bond fund
1/3 - CA long term bond fund
I'm a bit confused as to why they'd recommend putting money into a long term bond fund since interest rates will only go up and isn't that more risky? i've never been very wise about bonds, so I just don't understand the reasoning.
Any thoughts?
I met with a Vanguard advisor to possibly manage one of my taxable accounts. the account is 70% stock, 30% bond.
the 30% bond portion was broken out into:
1/3 - CA intermediate bond fund
1/3 - Total intermediate muni bond fund
1/3 - CA long term bond fund
I'm a bit confused as to why they'd recommend putting money into a long term bond fund since interest rates will only go up and isn't that more risky? i've never been very wise about bonds, so I just don't understand the reasoning.
Any thoughts?
Re: Vanguard PAS - Long Term Bonds?
The advisor is telling you to use mainly tax-free bonds (I imagine you are a CA resident) and, in order to provide yield, to go towards medium-long maturities. Half medium + half long ≈ All medium-long.
He doesn't advise all tax free to reduce concentration risk form a single (or thereabout) issuer.
Is this the optimal strategy for you ? I doubt it. The total bond fund is probably not the best choice for most.
Probably I would look into a suitable combination of very short maturities and high-yield bonds. Depending on your tax brackets, more or less CA bonds might be warranted.
He doesn't advise all tax free to reduce concentration risk form a single (or thereabout) issuer.
Is this the optimal strategy for you ? I doubt it. The total bond fund is probably not the best choice for most.
Probably I would look into a suitable combination of very short maturities and high-yield bonds. Depending on your tax brackets, more or less CA bonds might be warranted.
Re: Vanguard PAS - Long Term Bonds?
Sorry I don't understand why the PAS advisor did not explain the proposed asset allocation to you to your satisfaction and answer this question for you. I recommend you speak with him again and discuss your concerns and have him come up with an asset allocation you understand and can live with.
- typical.investor
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Re: Vanguard PAS - Long Term Bonds?
Well depending on the timeframe, they might be less risky?
Let me ask you this, if a 3 yr muni was yielding 0.62% and a 15 year yielding 2.25% (these are current rates on A rated bonds), you really had no plans to spend the money for 20 years, why is a 3 yr bond better?
Sure I get it, short maturities will be less scary in the even of a rate hike. Still, I don't see the point in accepting less yield if you are not going to use the money, and can wait for the bond fund to recover from a rate hike (which it will do in its duration).
Personally, I would want some treasuries in taxable. They are State tax fee, and at some point I think you will have to rebalance into your 70% stock portion. Munis in a crash are not the best for that.
Re: Vanguard PAS - Long Term Bonds?
You should look at the portfolio as a whole, not just individual components.Timon0201 wrote: ↑Fri May 07, 2021 12:03 am Hi all,
I met with a Vanguard advisor to possibly manage one of my taxable accounts. the account is 70% stock, 30% bond.
the 30% bond portion was broken out into:
1/3 - CA intermediate bond fund
1/3 - Total intermediate muni bond fund
1/3 - CA long term bond fund
I'm a bit confused as to why they'd recommend putting money into a long term bond fund since interest rates will only go up and isn't that more risky? i've never been very wise about bonds, so I just don't understand the reasoning.
Any thoughts?
Interest rates going up are good for bonds if you're a long-term holder (longer than the average duration of the relevant bonds). The increased yield from a rate increase more than makes up for the initial drop in value.
If you are good at consistently predicting rate movements, then wait until the optimum moment to invest, but if not (and essentially no one is), invest now.
People have been saying "interest rates will only go up" for decades.
Re: Vanguard PAS - Long Term Bonds?
interesting question. remember the 15 year bond would have call risk though. so the extra yield is not a free lunchtypical.investor wrote: ↑Fri May 07, 2021 5:50 amWell depending on the timeframe, they might be less risky?
Let me ask you this, if a 3 yr muni was yielding 0.62% and a 15 year yielding 2.25% (these are current rates on A rated bonds), you really had no plans to spend the money for 20 years, why is a 3 yr bond better?
RIP Mr. Bogle.
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Re: Vanguard PAS - Long Term Bonds?
You don't know that interest rates will "only go up". If you have a long timeframe, long bonds would be expected to have higher return than short bonds and would be expected to go up more when interest rates drop, such as during a stock market crash.
It is true that short term rates are at zero, but yields at the farther end have rebounded significantly from the bottom. The current yield at the farther end of the curve reflects the market's expectation of interest rates going up versus current economic conditions and Fed policies.
You should also understand that the duration of "long term" muni bonds is much shorter than what is referred to as Long Term Treasuries.
It is true that short term rates are at zero, but yields at the farther end have rebounded significantly from the bottom. The current yield at the farther end of the curve reflects the market's expectation of interest rates going up versus current economic conditions and Fed policies.
You should also understand that the duration of "long term" muni bonds is much shorter than what is referred to as Long Term Treasuries.
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Re: Vanguard PAS - Long Term Bonds?
This ^^^jocdoc wrote: ↑Fri May 07, 2021 5:38 am Sorry I don't understand why the PAS advisor did not explain the proposed asset allocation to you to your satisfaction and answer this question for you. I recommend you speak with him again and discuss your concerns and have him come up with an asset allocation you understand and can live with.
What was the advisor's answer when after proposing this the OP asked the question that is being asked here?
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Re: Vanguard PAS - Long Term Bonds?
Sure. By the way, do you or does anyone know what the tax change in 2017 which forces municipal bonds to refinance only via taxable bonds (ie muni —> taxable muni) means? It would seem to raise the cost of refinancing and lower call risk but I don’t really know.grok87 wrote: ↑Fri May 07, 2021 5:54 aminteresting question. remember the 15 year bond would have call risk though. so the extra yield is not a free lunchtypical.investor wrote: ↑Fri May 07, 2021 5:50 amWell depending on the timeframe, they might be less risky?
Let me ask you this, if a 3 yr muni was yielding 0.62% and a 15 year yielding 2.25% (these are current rates on A rated bonds), you really had no plans to spend the money for 20 years, why is a 3 yr bond better?
Re: Vanguard PAS - Long Term Bonds?
That duration in bonds might be appropriate, but I am in the camp with those that expect that part of advising is explanation of the reasons for the fund choices. There have been posts before where VPAS has seemed to be less than helpful on that. But this is also on the investor for not insisting on an answer. Is it a problem that VPAS is hard to reach, that they don't come up with good explanations, or that they did explain and the investor didn't recognize the reasoning for what it was at the time? Likely the explanation is not written out anywhere.
PS This concept that interest rates are going to go up and all bond holders are going to go down the tubes needs to be corrected. For the long term investor we want interest rates to go up to at least a moderate, normal level, if there is such a thing as normal for interest rates. Short term investors would not be in bonds.
PS This concept that interest rates are going to go up and all bond holders are going to go down the tubes needs to be corrected. For the long term investor we want interest rates to go up to at least a moderate, normal level, if there is such a thing as normal for interest rates. Short term investors would not be in bonds.
Re: Vanguard PAS - Long Term Bonds?
I think this article is what you are looking fortypical.investor wrote: ↑Fri May 07, 2021 7:09 amSure. By the way, do you or does anyone know what the tax change in 2017 which forces municipal bonds to refinance only via taxable bonds (ie muni —> taxable muni) means? It would seem to raise the cost of refinancing and lower call risk but I don’t really know.grok87 wrote: ↑Fri May 07, 2021 5:54 aminteresting question. remember the 15 year bond would have call risk though. so the extra yield is not a free lunchtypical.investor wrote: ↑Fri May 07, 2021 5:50 amWell depending on the timeframe, they might be less risky?
Let me ask you this, if a 3 yr muni was yielding 0.62% and a 15 year yielding 2.25% (these are current rates on A rated bonds), you really had no plans to spend the money for 20 years, why is a 3 yr bond better?
https://www.brookings.edu/blog/up-front ... pal-bonds/
hope that helpswrote: Why the surge now?
One big reason is a provision of the 2017 Tax Cuts and Jobs Act, which prohibited the use of tax-exempt bonds for advanced refunding transactions, a refinancing maneuver we describe below. Previously, when interest rates declined, issuers of tax-exempt municipal bonds could issue a second tax-exempt bond to refinance their debt. Now, entities that want to use advanced refunding must issue taxable bonds.
Here’s how it works: Say a city issues a tax-exempt bond at a 4% interest rate. A few years later, interest rates drop, and now investors will accept 1.5% on a tax-exempt bond. Before 2017, the city would have issued a second tax-exempt bond, and essentially redeemed the outstanding portion of the initial bond, similar to a homeowner refinancing a mortgage. In practice, the city takes the proceeds from the second bond, and invests the funds in an escrow account. The interest earned on those funds pays the debt service on the first bond issued, and the city’s total borrowing costs fall.
With the 2017 Tax Cuts and Jobs Act, the city can only issue these refinancing bonds if they are taxable. However, current interest rates on taxable muni bonds are so low that the advanced funding maneuver is still attractive. In the second half of 2019,
nearly 80% of taxable bonds were used at least partly for this type of refinancing.
cheers,
grok
RIP Mr. Bogle.
Re: Vanguard PAS - Long Term Bonds?
Here's my guess. The CA long term bond is not that "long". The average duration is only 6.1 years.Timon0201 wrote: ↑Fri May 07, 2021 12:03 am Hi all,
I met with a Vanguard advisor to possibly manage one of my taxable accounts. the account is 70% stock, 30% bond.
the 30% bond portion was broken out into:
1/3 - CA intermediate bond fund
1/3 - Total intermediate muni bond fund
1/3 - CA long term bond fund
I'm a bit confused as to why they'd recommend putting money into a long term bond fund since interest rates will only go up and isn't that more risky? i've never been very wise about bonds, so I just don't understand the reasoning.
Any thoughts?
The CA intermediate term fund has an average duration of 4.8. The national intermediate fund is 4.5.
The fund in question is riskier than the other two, but it is not unreasonable in my opinion. However, if you are uncomfortable with it, ask for using the other two funds half and half.
It is not unusual for a "long term" tax exempt fund to have a lower average duration than one might expect compared to nominal bond funds. Many intermediate term funds that are not tax-exempt would be in the same range. For example, Vanguard's Total Bond Index (classified as an intermediate term bond fund) average duration is 6.6 years.
There is more to risk than average duration, but duration is a significant factor when interest rates go up.
Link to Asking Portfolio Questions
Re: Vanguard PAS - Long Term Bonds?
But you can also make the case that anyone who will always live in a no-income-tax state should avoid any treasuries, since - at least in theory - they require paying for a benefit that person can't use.typical.investor wrote: ↑Fri May 07, 2021 5:50 am Personally, I would want some treasuries in taxable. They are State tax fee, and at some point I think you will have to rebalance into your 70% stock portion. Munis in a crash are not the best for that.
Re: Vanguard PAS - Long Term Bonds?
Some of the confusion might be a result of a false premise: it is absolutely not knowable that " interest rates will only go up", and even it that WAS knowable it wouldn't be enough information to conclude that long-term bonds are a bad investment.
Another portion of the confusion might be a result of bonds being poorly explained by the investment industry generally. The LEAST risky bond for you is one that most closely matches your investment goals and time horizon. If your investment horizon extends past the next five years or so, the portfolio should hold at least some long-term bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Re: Vanguard PAS - Long Term Bonds?
Vineviz,
Can you explain if ones long term investment horizon is 20 years plus. Why wouldn’t you buy EE savings bonds until the 20 year treasury passes 3.5%. If the premise is we hold to maturity and eliminate risk.
Can you explain if ones long term investment horizon is 20 years plus. Why wouldn’t you buy EE savings bonds until the 20 year treasury passes 3.5%. If the premise is we hold to maturity and eliminate risk.
Re: Vanguard PAS - Long Term Bonds?
I'm not entirely sure what you're asking me to explain, so I'll address the second part of the question.
A simple definition of investment horizon is "the average amount of time until your future portfolio withdrawals". Series EE savings bonds are certainly an excellent choice for funding future portfolio withdrawals which are at least 20 years away, which would basically mean an investment horizon of between 20 and 40 years.
However, not everyone can purchase enough savings bonds to meet their goals.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Re: Vanguard PAS - Long Term Bonds?
i'm a fan of EE bonds these days given how low interest rates are. for comparison 20 year treasury yield is around 2% vs EE bonds at 3.53% and treasuries don't have the tax advantages of EE bonds: tax sheltered, no state income tax (while treasuries have this if you hold in IRA you may lose it), and possible tax free for education purposes.vineviz wrote: ↑Fri May 07, 2021 9:15 amI'm not entirely sure what you're asking me to explain, so I'll address the second part of the question.
A simple definition of investment horizon is "the average amount of time until your future portfolio withdrawals". Series EE savings bonds are certainly an excellent choice for funding future portfolio withdrawals which are at least 20 years away, which would basically mean an investment horizon of between 20 and 40 years.
However, not everyone can purchase enough savings bonds to meet their goals.
that being said EE bonds are subject to "execution risk"- have to be able to hold for 20 years and remember to cash in then.
so at some point i will stop buying them
cheers,
grok
RIP Mr. Bogle.
Re: Vanguard PAS - Long Term Bonds?
Yes. You answered my question that EE savings bond are a great investment for a long investment horizon. So if one is buying long term treasuries should they buy EE savings bonds (20 year) at 3.5% before a 30 year treasury at let’s say 2.2%
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Re: Vanguard PAS - Long Term Bonds?
well. if you have to get out of the investment at 19 years.. more then likely the long term treasury will have had a better return then the EE bond..
So you need enough other liquid options to know for a fact, there is no way you will cash the EE bond early.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
Re: Vanguard PAS - Long Term Bonds?
Long-term funds do have more risk, but bond traders know this, so they buy and sell the bonds at prices which give them higher yields. Thus you get fair compensation for the risk, as long as you are investing for the long term.
The current difference between CA Long-Term and CA Intermediate-Term Tax-Exempt yields is only 0.39%, but that is because the long-term fund doesn't have that long a duration. (It does have more risk than the 6.1-year duration indicates; if rates rise, callable bonds won't be called, so the duration will increase.)
Re: Vanguard PAS - Long Term Bonds?
We had a talk and we discussed some adjustments and he gave me a new plan which had this new bond fund allocation. I have a call with him next week and will definitely be asking, but wanted the opinion of those not trying to sell me something!jocdoc wrote: ↑Fri May 07, 2021 5:38 am Sorry I don't understand why the PAS advisor did not explain the proposed asset allocation to you to your satisfaction and answer this question for you. I recommend you speak with him again and discuss your concerns and have him come up with an asset allocation you understand and can live with.
Re: Vanguard PAS - Long Term Bonds?
VPAS is not trying to sell something. Whether you hold one bond fund or another at Vanguard does not earn anyone anything. I would be astonished if Vanguard advisors are suggesting one fund over another because Vanguard somehow wants money directed into certain funds and not other ones. It is true that at some brokerages brokers really are given investments they are supposed to "move" but that would not happen here.Timon0201 wrote: ↑Sat May 08, 2021 1:59 amWe had a talk and we discussed some adjustments and he gave me a new plan which had this new bond fund allocation. I have a call with him next week and will definitely be asking, but wanted the opinion of those not trying to sell me something!jocdoc wrote: ↑Fri May 07, 2021 5:38 am Sorry I don't understand why the PAS advisor did not explain the proposed asset allocation to you to your satisfaction and answer this question for you. I recommend you speak with him again and discuss your concerns and have him come up with an asset allocation you understand and can live with.
Re: Vanguard PAS - Long Term Bonds?
My guess is that the advisor is considering your whole portfolio. You've asked them to manage only a portion of your assets. One of your taxable accounts. Perhaps you're holding cash or short-term bonds elsewhere? If so, maybe the advisor is suggesting longer duration TE bonds to balance your other holdings.
Just a guess.
Just a guess.
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Re: Vanguard PAS - Long Term Bonds?
I think a big part of this can be written off as "a matter of opinion." You and the advisor don't agree on the value of bonds. I wouldn't pay for advice I disagreed with. Or, I'd try to figure out why we disagree while keeping an open mind. Also, all Vanguard advisors will base their opinions on the same Vanguard research.
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Re: Vanguard PAS - Long Term Bonds?
Did they show you any historical performance numbers?
If so, long bonds likely made the number look better. After all, the advisors probably get a bonus for bringing in AUM and they probably want to put their best foot forward.
If you express concerns about rates going forward, no doubt they will shorten duration.
Re: Vanguard PAS - Long Term Bonds?
typical.investor wrote: ↑Sat May 08, 2021 10:09 amWhen you talk to them, they generally give you an overall performance of portfolio of diff stock/bond allocation.Timon0201 wrote: ↑Fri May 07, 2021 12:03 am Did they show you any historical performance numbers?
If so, long bonds likely made the number look better. After all, the advisors probably get a bonus for bringing in AUM and they probably want to put their best foot forward.
If you express concerns about rates going forward, no doubt they will shorten duration.
I think after a lot of thought, I'm going to go with Rick Ferri 2nd opinion vs VPAS. I can't get myself to pay for VPAS to manage ALL my funds, but that is how he would provide the best value vs just one account
Re: Vanguard PAS - Long Term Bonds?
If you ask someone else to manage your portfolio there are always going to be differences in opinion. I would pay for advice if I disagreed with it if the Advisor could provide abundant evidence and a good rationale behind his advice. Presumably, I know less than an organization that I am asking to manage my portfolio. Broadly, you DO have to be in philosophical agreement with the one providing advice so I am okay with disagreements on secondary issues. Managing the portfolio myself, it is just me as my own portfolio manager, my own securities analyst, my own market strategist, and my own chief economist. Someone working as an Advisor for Vanguard has the backing of an entire organization.bertilak wrote: ↑Sat May 08, 2021 10:00 am I think a big part of this can be written off as "a matter of opinion." You and the advisor don't agree on the value of bonds. I wouldn't pay for advice I disagreed with. Or, I'd try to figure out why we disagree while keeping an open mind. Also, all Vanguard advisors will base their opinions on the same Vanguard research.
I want an Advisor to disagree with me from time to time and to tell me things that I might not want to hear. That is the whole point of getting advice in the first place.
There is such a thing as fit. Vanguard Personal Advisory Service isn't for everyone. You go there if you believe in indexing and using simpler portfolios. If you want individual stocks, Vanguard isn't your place.
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Re: Vanguard PAS - Long Term Bonds?
This would be my advice as well.jocdoc wrote: ↑Fri May 07, 2021 5:38 am Sorry I don't understand why the PAS advisor did not explain the proposed asset allocation to you to your satisfaction and answer this question for you. I recommend you speak with him again and discuss your concerns and have him come up with an asset allocation you understand and can live with.
I am unsure why he would recommend long term bonds. I would follow up with him for sure.
Tony
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Re: Vanguard PAS - Long Term Bonds?
In my IPS (basically instructions to my wife) I saynedsaid wrote: ↑Sat May 08, 2021 11:30 amIf you ask someone else to manage your portfolio there are always going to be differences in opinion.bertilak wrote: ↑Sat May 08, 2021 10:00 am I think a big part of this can be written off as "a matter of opinion." You and the advisor don't agree on the value of bonds. I wouldn't pay for advice I disagreed with. Or, I'd try to figure out why we disagree while keeping an open mind. Also, all Vanguard advisors will base their opinions on the same Vanguard research.
- You can either manage the portfolio by yourself or enroll in Vanguard’s Personal Advisory Service.
...
PAS may not invest exactly as described here but will be close enough. There is reasonable room for variations on a theme.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
Re: Vanguard PAS - Long Term Bonds?
To be clear, if I couldn't agree very much with an Advisor, I would not invest with him or her, there has to be broad agreement on most of the important things. But on the other hand, I don't want someone who will tells me everything that I want to hear.bertilak wrote: ↑Sat May 08, 2021 12:21 pmIn my IPS (basically instructions to my wife) I saynedsaid wrote: ↑Sat May 08, 2021 11:30 amIf you ask someone else to manage your portfolio there are always going to be differences in opinion.bertilak wrote: ↑Sat May 08, 2021 10:00 am I think a big part of this can be written off as "a matter of opinion." You and the advisor don't agree on the value of bonds. I wouldn't pay for advice I disagreed with. Or, I'd try to figure out why we disagree while keeping an open mind. Also, all Vanguard advisors will base their opinions on the same Vanguard research.
- You can either manage the portfolio by yourself or enroll in Vanguard’s Personal Advisory Service.
...
PAS may not invest exactly as described here but will be close enough. There is reasonable room for variations on a theme.
A fool and his money are good for business.
Re: Vanguard PAS - Long Term Bonds?
That's a simplistic way to look at the choice: The 30-year T-bond pays, let's say, 2.2% every year starting on year 1. The EE Series pays 0.1% per year and at year 20 pays a large bonus (98%) provided one did not redeem earlier.
If interest rates jump up along the way, one would be caught between two undesirable choices: redeem earlier to take advantage of the new higher rates (but basically collecting almost no interest until that time, which could be 10-15 years in the future), or hold until year 20 and collect 3.5%/year, which at that point could be a meh! rate.
All those posts celebrating the "3.5% yield" of the EE Series suggest that there those bonds do not suffer the interest rate risk characteristic of longer dated maturities, but they certainly do.
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Re: Vanguard PAS - Long Term Bonds?
I definitely agree.vineviz wrote: ↑Fri May 07, 2021 8:42 am Another portion of the confusion might be a result of bonds being poorly explained by the investment industry generally. The LEAST risky bond for you is one that most closely matches your investment goals and time horizon. If your investment horizon extends past the next five years or so, the portfolio should hold at least some long-term bonds.
Many people hold BND exclusively because they do not want to market time or believe the market knows what it is doing; they are likely right about the principle, but they are missing something: their individual needs. The optimal bond portfolio is not what the market suggests. If one were to look, for example, 20 years into the future, the one that is the least varying of future principal plus returns is a 20 year zero-coupon bond.
As one would want their a cash allocation not to lose the bought principal at any given moment, a bond allocation should be expected to not lose the bought principal and returns after a given timeframe. As a result, the stock/bond allocation should really be a stock/long term bond/cash allocation since not only is it appropriate to reduce stocks over time but also reduce the effective bond durations for most retirement accounts. Every bond is a combination of long term bonds and cash; so, it only makes sense that we factor for that.
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