"Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

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"Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

Post by Jon Luskin »

The 8th episode of Bogleheads® Live is now available as a podcast.

The link for "Ep. 8: Dr. William J. Bernstein on investing simplicity" is below:

https://www.buzzsprout.com/1973223/episodes/10794697

You can find the full list of previous episodes below:

https://www.buzzsprout.com/1973223

You can also find it listed on Google, Spotify, Amazon Music, Stitcher, iHeartRadio, Podcast Addict, Podchaser, Pocket Casts, Deezer, Listen Notes, Player FM, and Podcast Index. We are still eagerly anticipating our approval to be listed on Apple podcasts.

If you’d like to volunteer to help turn live episodes into podcasts, we’re looking for podcast editors, transcribers, and help with proofing transcriptions. If you want to help spread the message of low-cost investing, shoot me a DM.

Bogleheads® Live is a weekly Twitter space where the Bogleheads® community asks questions to financial experts – live. For those that can't make the live events, they can check out previous episodes, now available as a podcast.

Enjoy!
Jon Luskin
Host
Bogleheads® Live

P.S. Check out this thread for next week's guest: https://bogleheads.org/forum/viewtopic.php?t=380245
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

Post by Dottie57 »

JonL wrote: Mon Jun 27, 2022 12:37 pm The 8th episode of Bogleheads® Live is now available as a podcast.

The link for "Ep. 8: Dr. William J. Bernstein on investing simplicity" is below:

https://www.buzzsprout.com/1973223/episodes/10794697

You can find the full list of previous episodes below:

https://www.buzzsprout.com/1973223

You can also find it listed on Google, Spotify, Amazon Music, Stitcher, iHeartRadio, Podcast Addict, Podchaser, Pocket Casts, Deezer, Listen Notes, Player FM, and Podcast Index. We are still eagerly anticipating our approval to be listed on Apple podcasts.

If you’d like to volunteer to help turn live episodes into podcasts, we’re looking for podcast editors, transcribers, and help with proofing transcriptions. If you want to help spread the message of low-cost investing, shoot me a DM.

Bogleheads® Live is a weekly Twitter space where the Bogleheads® community asks questions to financial experts – live. For those that can't make the live events, they can check out previous episodes, now available as a podcast.

Enjoy!
Jon Luskin
Host
Bogleheads® Live

P.S. Check out this thread for next week's guest: https://bogleheads.org/forum/viewtopic.php?t=380245
Thank you. Now I can listen at my leisure.
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

Post by Call_Me_Op »

Hi Jon,

The interview with Dr. Bernstein was superb! Thanks so much! I need to bookmark that one because he elucidates so many fundamentally-important points.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
BigDGB
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

Post by BigDGB »

I really enjoyed this Podcast and listened to it twice.

Dr. Bernstein’s wisdom, intelligence and experience are immediately apparent.

I was especially interested in his philosophy on bonds and bond duration. His philosophy reminds me of Buffet and Bogle.

He seems to be saying that treasuries only are the optimum exposure for fixed income and to avoid credit risk, while also also keeping your duration short,( 1-3 years ), instead of intermediate or in combo with long treasuries and that duration risk is more concerning than interest rate risk.

His main point is that the yield on the curve is so narrow moving out from 2 years, that it doesn’t logically pay to take the potential loss in NAV to go out further on the curve.

He seems to think TIPS are appropriate IF you are withdrawing 3-4% of your portfolio annually.

I find fixed income to be my biggest challenge in the construction of my portfolio and I try to weigh my decisions in this area very carefully, which can be be very difficult when highly intelligent people like Vineviz advocate a 180°different approach with long treasuries being the anchor.

At some point as a DIY investor, you have to process all the opposing views and make a decision, which could be unique to everyone.

In my case, I have approximately 15 years of living expenses in fixed income, consisting of a approximately 7-8 years in an HYSA, short term TIPS ( VTIP) and a MYGA and the remainder in VGIT ( intermediate treasuries).

Since the bond portion of my portfolio only represents 10% of the entire pie and I only need less 1% of the portfolio for withdrawals, I am still considering holding 3 years of short term TIPS and moving the rest of the bond portion from VGIT to VGSH ( short term treasuries).

My reasoning is that the yield spread is so tight between the 2 year and 5 year duration based on the reasoning of Dr. Bernstein and with less than 10% of the portfolio in nominal treasuries, the 5 year duration ETF would have a minuscule benefit over the 2 year duration ETF in a stock market crash.

Thoughts ?
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

Post by Jon Luskin »

Dottie57 wrote: Mon Jun 27, 2022 12:47 pm
JonL wrote: Mon Jun 27, 2022 12:37 pm The 8th episode of Bogleheads® Live is now available as a podcast.

The link for "Ep. 8: Dr. William J. Bernstein on investing simplicity" is below:

https://www.buzzsprout.com/1973223/episodes/10794697

You can find the full list of previous episodes below:

https://www.buzzsprout.com/1973223

You can also find it listed on Google, Spotify, Amazon Music, Stitcher, iHeartRadio, Podcast Addict, Podchaser, Pocket Casts, Deezer, Listen Notes, Player FM, and Podcast Index. We are still eagerly anticipating our approval to be listed on Apple podcasts.

If you’d like to volunteer to help turn live episodes into podcasts, we’re looking for podcast editors, transcribers, and help with proofing transcriptions. If you want to help spread the message of low-cost investing, shoot me a DM.

Bogleheads® Live is a weekly Twitter space where the Bogleheads® community asks questions to financial experts – live. For those that can't make the live events, they can check out previous episodes, now available as a podcast.

Enjoy!
Jon Luskin
Host
Bogleheads® Live

P.S. Check out this thread for next week's guest: https://bogleheads.org/forum/viewtopic.php?t=380245
Thank you. Now I can listen at my leisure.
You're welcome. :happy
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

Post by Dave55 »

Thanks Jon and Dr Bernstein, excellent interview!

Dave
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

Post by Jon Luskin »

Call_Me_Op wrote: Tue Jun 28, 2022 7:20 am Hi Jon,

The interview with Dr. Bernstein was superb! Thanks so much! I need to bookmark that one because he elucidates so many fundamentally-important points.
Thank you.

You're welcome.

:happy
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

Post by Jon Luskin »

BigDGB wrote: Tue Jun 28, 2022 10:15 am I really enjoyed this Podcast and listened to it twice.

Dr. Bernstein’s wisdom, intelligence and experience are immediately apparent.

I was especially interested in his philosophy on bonds and bond duration. His philosophy reminds me of Buffet and Bogle.

He seems to be saying that treasuries only are the optimum exposure for fixed income and to avoid credit risk, while also also keeping your duration short,( 1-3 years ), instead of intermediate or in combo with long treasuries and that duration risk is more concerning than interest rate risk.

His main point is that the yield on the curve is so narrow moving out from 2 years, that it doesn’t logically pay to take the potential loss in NAV to go out further on the curve.

He seems to think TIPS are appropriate IF you are withdrawing 3-4% of your portfolio annually.

I find fixed income to be my biggest challenge in the construction of my portfolio and I try to weigh my decisions in this area very carefully, which can be be very difficult when highly intelligent people like Vineviz advocate a 180°different approach with long treasuries being the anchor.

At some point as a DIY investor, you have to process all the opposing views and make a decision, which could be unique to everyone.

In my case, I have approximately 15 years of living expenses in fixed income, consisting of a approximately 7-8 years in an HYSA, short term TIPS ( VTIP) and a MYGA and the remainder in VGIT ( intermediate treasuries).

Since the bond portion of my portfolio only represents 10% of the entire pie and I only need less 1% of the portfolio for withdrawals, I am still considering holding 3 years of short term TIPS and moving the rest of the bond portion from VGIT to VGSH ( short term treasuries).

My reasoning is that the yield spread is so tight between the 2 year and 5 year duration based on the reasoning of Dr. Bernstein and with less than 10% of the portfolio in nominal treasuries, the 5 year duration ETF would have a minuscule benefit over the 2 year duration ETF in a stock market crash.

Thoughts ?
Thanks for listening!

Firstly, I - like Dr. Bernstein - am a huge proponent of skipping credit risk, opting for only the highest quality bonds: Treasuries.

Secondly, his point about going short-term is intriguing. For me, I'm biased towards staying the course. By staying intermediate-term, I will - eventually - make back any loss from decreasing rates, and then some!

I haven't yet - but I'd like to - look back on the research on sustainable distribution rates to see if I can gather any takeaways on maturity and sustainable distribution rates. (I believe it was Bengen - or perhaps the Trinity study - that noted that higher-quality bonds resulted in a higher distribution rate. Pfau mentions that in one of his books, if I recall correctly.) If not, that would be a fascinating topic for a future paper: exploring the relationship between credit and term of the bond portion of a diversified portfolio, and said portfolio’s maximum safe distribution rate over 30 years, 40 years, etc.

More good stuff is forthcoming! If you can catch tomorrow's live event, we'll be discussing capital gains distributions from mutual funds - and how they can show up even in bear markets. Below is the link for more info:

viewtopic.php?t=380245
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

Post by BigDGB »

JonL wrote: Wed Jun 29, 2022 11:59 pm
BigDGB wrote: Tue Jun 28, 2022 10:15 am I really enjoyed this Podcast and listened to it twice.

Dr. Bernstein’s wisdom, intelligence and experience are immediately apparent.

I was especially interested in his philosophy on bonds and bond duration. His philosophy reminds me of Buffet and Bogle.

He seems to be saying that treasuries only are the optimum exposure for fixed income and to avoid credit risk, while also also keeping your duration short,( 1-3 years ), instead of intermediate or in combo with long treasuries and that duration risk is more concerning than interest rate risk.

His main point is that the yield on the curve is so narrow moving out from 2 years, that it doesn’t logically pay to take the potential loss in NAV to go out further on the curve.

He seems to think TIPS are appropriate IF you are withdrawing 3-4% of your portfolio annually.

I find fixed income to be my biggest challenge in the construction of my portfolio and I try to weigh my decisions in this area very carefully, which can be be very difficult when highly intelligent people like Vineviz advocate a 180°different approach with long treasuries being the anchor.

At some point as a DIY investor, you have to process all the opposing views and make a decision, which could be unique to everyone.

In my case, I have approximately 15 years of living expenses in fixed income, consisting of a approximately 7-8 years in an HYSA, short term TIPS ( VTIP) and a MYGA and the remainder in VGIT ( intermediate treasuries).

Since the bond portion of my portfolio only represents 10% of the entire pie and I only need less 1% of the portfolio for withdrawals, I am still considering holding 3 years of short term TIPS and moving the rest of the bond portion from VGIT to VGSH ( short term treasuries).

My reasoning is that the yield spread is so tight between the 2 year and 5 year duration based on the reasoning of Dr. Bernstein and with less than 10% of the portfolio in nominal treasuries, the 5 year duration ETF would have a minuscule benefit over the 2 year duration ETF in a stock market crash.

Thoughts ?
Thanks for listening!

Firstly, I - like Dr. Bernstein - am a huge proponent of skipping credit risk, opting for only the highest quality bonds: Treasuries.

Secondly, his point about going short-term is intriguing. For me, I'm biased towards staying the course. By staying intermediate-term, I will - eventually - make back any loss from decreasing rates, and then some!

I haven't yet - but I'd like to - look back on the research on sustainable distribution rates to see if I can gather any takeaways on maturity and sustainable distribution rates. (I believe it was Bengen - or perhaps the Trinity study - that noted that higher-quality bonds resulted in a higher distribution rate. Pfau mentions that in one of his books, if I recall correctly.) If not, that would be a fascinating topic for a future paper: exploring the relationship between credit and term of the bond portion of a diversified portfolio, and said portfolio’s maximum safe distribution rate over 30 years, 40 years, etc.

More good stuff is forthcoming! If you can catch tomorrow's live event, we'll be discussing capital gains distributions from mutual funds - and how they can show up even in bear markets. Below is the link for more info:

viewtopic.php?t=380245
Thank You for the time Jon!

I appreciate your thoughts..

I would be interested in your findings on distribution rates.
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

Post by Cat Herder »

That was a very interesting conversation. Fixed income is definitely one of my (many) areas of ignorance.

While I had some appreciation of interest rate risk, I was quite shocked to see even a short term bond fund (VBIRX) that I use on the safe side of my HSA has lost over 5% this year. It's inconsequential given the fact that I'm decidedly in the accumulation phase with enough of a cushion to not stress about it, but the decline is eye-opening. It definitely makes me receptive to the advice to avoid unnecessary and uncompensated risk in the ostensibly most safe portion of my portfolio.

I look forward to future (and past!) episodes. Thank you for the fascinating listen.
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

Post by Jon Luskin »

Dave55 wrote: Wed Jun 29, 2022 8:14 am Thanks Jon and Dr Bernstein, excellent interview!

Dave
You're welcome. :happy

You can check out what we've got coming up for the next two weeks on these threads:

https://bogleheads.org/forum/viewtopic. ... 4#p6754074

https://bogleheads.org/forum/viewtopic.php?t=380809
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

Post by Jon Luskin »

BigDGB wrote: Thu Jun 30, 2022 8:45 am
Thank You for the time Jon!

I appreciate your thoughts..

I would be interested in your findings on distribution rates.
Of course! :happy

I'd be interested in the findings too. I just have to tackle every other project on my list first! 😬
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

Post by BigDGB »

JonL wrote: Thu Jun 30, 2022 8:00 pm
BigDGB wrote: Thu Jun 30, 2022 8:45 am
Thank You for the time Jon!

I appreciate your thoughts..

I would be interested in your findings on distribution rates.
Of course! :happy

I'd be interested in the findings too. I just have to tackle every other project on my list first! 😬
Thanks again Jon!

I’m going to stay the course for the bulk of my bonds in intermediate treasuries.

Your thoughts on the need for TIPS in a high equity portfolio ( 70% or greater ) for retirees with a small 1-2% annual distribution? I have a couple of years in VTIP short term TIPS to account for unexpected inflation and haven’t gone intermediate due to the larger loss in NAV during interest rate hikes and the fact that nominal should outperform if interest rates subside.
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

Post by dodecahedron »

JonL wrote: Wed Jun 29, 2022 11:59 pm Firstly, I - like Dr. Bernstein - am a huge proponent of skipping credit risk, opting for only the highest quality bonds: Treasuries.

Secondly, his point about going short-term is intriguing. For me, I'm biased towards staying the course. By staying intermediate-term, I will - eventually - make back any loss from decreasing rates, and then some!
I am sympathetic to the above-view and am therefore comfortable with staying intermediate-term Treasuries, BUT, my strongly preferred form of Treasury holdings are TIPS, not nominals!

I think intermediate term nominals are unacceptably risky right now. You might well eventually make back any nominal loss from holding intermediate nominal Treasuries but there is a big chance you will never recoup your real losses from such holdings. The very flat nominal yield curve simply does not compensate you for all the additional inflation risk to which intermediate nominal Treasuries expose you.
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

Post by Jon Luskin »

Cat Herder wrote: Thu Jun 30, 2022 9:21 am That was a very interesting conversation. Fixed income is definitely one of my (many) areas of ignorance.

While I had some appreciation of interest rate risk, I was quite shocked to see even a short term bond fund (VBIRX) that I use on the safe side of my HSA has lost over 5% this year. It's inconsequential given the fact that I'm decidedly in the accumulation phase with enough of a cushion to not stress about it, but the decline is eye-opening. It definitely makes me receptive to the advice to avoid unnecessary and uncompensated risk in the ostensibly most safe portion of my portfolio.

I look forward to future (and past!) episodes. Thank you for the fascinating listen.
Well, don't tell Mr. Bernstein that you're taking credit risk.

Moreover, it's undeniable that bonds have shown historically unprecedented losses of late. Of course, those losses are still less than stocks! So, yes, bonds have lost money. But, have you seen stocks?

In short, bonds are far from foolproof. Yet, they can manage risk differently from stocks - making them a valuable diversifier.

Lastly, if you want to get really nerdy: consider that your HSA is a tax-free account. Ideally, you want this account to get as big as possible, to take better advantage of the tax treatment. On a long timeline, that suggests short-term bonds aren’t the best use of a tax-free account.

Tax-efficient fund placement suggests holding only stock in HSA (and Roth) accounts, holding more bonds in other accounts instead. It’s certainly a more complicated approach – rebalancing across all your accounts. And that additional complexity isn’t right for everyone.

Rick Ferri talks about across-account investing in the second episode of Bogleheads Live, at ~34:36.

https://jonluskin.com/bogleheads-live-e ... llocation/

I hope that helps.

😊
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

Post by Jon Luskin »

dodecahedron wrote: Fri Jul 01, 2022 8:25 am
I am sympathetic to the above-view and am therefore comfortable with staying intermediate-term Treasuries, BUT, my strongly preferred form of Treasury holdings are TIPS, not nominals!

I think intermediate term nominals are unacceptably risky right now. You might well eventually make back any nominal loss from holding intermediate nominal Treasuries but there is a big chance you will never recoup your real losses from such holdings. The very flat nominal yield curve simply does not compensate you for all the additional inflation risk to which intermediate nominal Treasuries expose you.
I appreciate your point. :happy

Swensen argues to split it down the middle, for your bond portfolio: 50% nominal & 50% TIPS. He's written one of my favorite books on investing.

https://www.amazon.com/Unconventional-S ... 0743228383

As I understand it, both TIPS and nominals are priced (via demand) based on expectations of inflation. Said differently, the demands (and pricing) of bonds reflect some market assumption for inflation.

For example, (these numbers are rough approximates) iShares U.S. Treasury Bond ETF (GOVT) has a weighted avg coupon as of Jun 30, 2022 of 1.80%. The iShares TIPS Bond ETF (TIP) weighted avg coupon as of Jun 30, 2022 of 0.53%. That means that the market assumes future inflation will be roughly 1.27% - the difference between the coupon of nominals and TIPS. Again, this is rough - because I'm using funds and not comparing a 10-year individual nominal to a 10-year TIPS bond - and given the composition of the indices across different maturities, there may be differences. But, you get the idea, which is: the difference between the coupon of nominals and TIPS is the market's expectation of inflation.

Therefore, as Swensen explains: TIPS will underperform if inflation is lower than the expected 1.27% - in which case investors would have been better off buying nominals. Since we don't know if inflation will be higher or lower than expected, splitting across both types of bonds manages risk, says Swensen.

For simplicity, I stick to just one type of fund - which is nominals. After all, I see stocks as the real inflation hedge in the long term. (That's been the case historically.) Moreover, nominals generally do a bit better during stock market panics. (My understanding is that liquidity constraints causes TIPS to underperform nominals during panics. For example, we saw this during March of 2020, with TIPS losing value and nominals gaining value during that period.)

Of course, for those perennially concerned about inflation (and not just those panicking given recent events), using all TIPS isn't unreasonable. Whatsmore important than the TIPS vs. nominal decision is sticking with it forever. That is to say, once inflation cools (it looks like that might have started to happen), investors shouldn't be moving from TIPS to nominals. Sticking with a plan can help avoid taxes, transaction fees (including crossing the bid-ask spread), and performance-chasing (generally being unlucky with timing).

I hope that helps.

:happy
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

Post by dodecahedron »

JonL wrote: Fri Jul 01, 2022 6:04 pm
dodecahedron wrote: Fri Jul 01, 2022 8:25 am
I am sympathetic to the above-view and am therefore comfortable with staying intermediate-term Treasuries, BUT, my strongly preferred form of Treasury holdings are TIPS, not nominals!

I think intermediate term nominals are unacceptably risky right now. You might well eventually make back any nominal loss from holding intermediate nominal Treasuries but there is a big chance you will never recoup your real losses from such holdings. The very flat nominal yield curve simply does not compensate you for all the additional inflation risk to which intermediate nominal Treasuries expose you.
I appreciate your point. :happy

Swensen argues to split it down the middle, for your bond portfolio: 50% nominal & 50% TIPS. He's written one of my favorite books on investing.

https://www.amazon.com/Unconventional-S ... 0743228383

As I understand it, both TIPS and nominals are priced (via demand) based on expectations of inflation. Said differently, the demands (and pricing) of bonds reflect some market assumption for inflation.

For example, (these numbers are rough approximates) iShares U.S. Treasury Bond ETF (GOVT) has a weighted avg coupon as of Jun 30, 2022 of 1.80%. The iShares TIPS Bond ETF (TIP) weighted avg coupon as of Jun 30, 2022 of 0.53%. That means that the market assumes future inflation will be roughly 1.27% - the difference between the coupon of nominals and TIPS. Again, this is rough - because I'm using funds and not comparing a 10-year individual nominal to a 10-year TIPS bond - and given the composition of the indices across different maturities, there may be differences. But, you get the idea, which is: the difference between the coupon of nominals and TIPS is the market's expectation of inflation.

Therefore, as Swensen explains: TIPS will underperform if inflation is lower than the expected 1.27% - in which case investors would have been better off buying nominals. Since we don't know if inflation will be higher or lower than expected, splitting across both types of bonds manages risk, says Swensen.

For simplicity, I stick to just one type of fund - which is nominals. After all, I see stocks as the real inflation hedge in the long term. (That's been the case historically.) Moreover, nominals generally do a bit better during stock market panics. (My understanding is that liquidity constraints causes TIPS to underperform nominals during panics. For example, we saw this during March of 2020, with TIPS losing value and nominals gaining value during that period.)

Of course, for those perennially concerned about inflation (and not just those panicking given recent events), using all TIPS isn't unreasonable. Whatsmore important than the TIPS vs. nominal decision is sticking with it forever. That is to say, once inflation cools (it looks like that might have started to happen), investors shouldn't be moving from TIPS to nominals. Sticking with a plan can help avoid taxes, transaction fees (including crossing the bid-ask spread), and performance-chasing (generally being unlucky with timing).

I hope that helps.

:happy
I read Swensen's book when it came out--in 2005. I respect him and his book and I think what he said made sense at the time and for some years afterwards. He would have been a great guest for Bogleheads Live, if he only had lived long enough. I think he might not be as serene about bowing to the wisdom and reasonableness of the market consensus on future inflation now as he was during his lifetime.

Just as Bill Bernstein has acknowledged that his thinking has changed a good deal since he wrote his books years ago, I believe Swensen's thinking would have evolved as well.

We are in uncharted and unprecedented territory right now. Most of the folks who collectively constitute "the market" are too young to have any personal experience with extended periods of sustained inflation and stagnant economic growth. Even if their consensus prediction of the "expected value" of inflation is correct, I think the volatility/variance associated with that prediction is greater than it was decades ago. That increased volatility means that folks who choose intermediate or long term nominal Treasuries are taking on an awful lot of unnecessary and uncompensated risk around the current point estimates of inflation.
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

Post by dodecahedron »

JonL wrote: Fri Jul 01, 2022 6:04 pm Of course, for those perennially concerned about inflation (and not just those panicking given recent events), using all TIPS isn't unreasonable. Whatsmore important than the TIPS vs. nominal decision is sticking with it forever. That is to say, once inflation cools (it looks like that might have started to happen), investors shouldn't be moving from TIPS to nominals. Sticking with a plan can help avoid taxes, transaction fees (including crossing the bid-ask spread), and performance-chasing (generally being unlucky with timing).
I do agree with your notion of sticking with my decision to hold all my intermediate Treasuries as TIPS for the long term rather than switching back and forth. In my case, not so much because of taxes or transaction fees, because my TIPS holdings are all in tax-advantaged accounts and in mutual funds with no transaction fees nor spreads. Rather, in my case, it comes down to being at a point in life (turning 70 in a little over a year!) where I am more interested in simple, sustainable, and sleep-well-at-night approach of deciding that I can easily just live with the reasonable more or less zero real returns offered by TIPS. I don't want to spend my golden years vacillating over the issue.

My view, by the way, is highly informed by having read Zvi Bodie's books (Worry Free Investing(2003) and Risk Less & Prosper: Your Guide to Safer Investing(2011). I would suggest that Professor Bodie would make a great guest for an upcoming show.

That said (as far as switching back and forth goes), I will admit that from 2013 (when I took over managing the household's portfolio after the unexpected death of my husband) until late 2018, I eschewed TIPS in favor of a nominal fixed income holding, namely TIAA Trad (the liquid form with 3% minimum) for the lion's share of my fixed income.

In the past, I have not been "perennially" concerned about inflation as you put it. Inflation was running very close to zero back then and the Fed seemed to be finding it almost impossible to even achieve its goal of getting inflation up to its goal of 2%, and TIAA Trad was very highly rated (indeed at one point, briefly in 2011, when Treasury had seemed at risk for default, TIAA was briefly rated even higher than Treasury debt.) I wasn't the only one to do that. I later discovered that Zvi Bodie's friend Paul Solman had done the same thing in 2012 and Paul actually got Zvi's blessing for his decision to switch away from TIPS and into a nominal fixed income alternative that seemed to promise a safe higher return.

But now that high inflation is "out of the bottle" it is not at all obvious to me that the Fed can get the genie back in. (By the way, I have personally had the opportunity to meet several current and former board members, including the current Fed Chair and his predecessor, so I know them as flesh-and-blood human beings, not mythic superhuman folks on a pedestal like Paul Volcker. I certainly *hope* the Fed succeeds, but just because Volcker managed to pull off a seemingly impossible challenge once does not mean the feat can be easily repeated this time.)

All of which leads me to recommend that you invite Professor Bodie to be a guest on Bogleheads Live. I believe he would question your assertion that "After all, I see stocks as the real inflation hedge in the long term. (That's been the case historically.)" I suppose that is tautologically true if you define "long term" to be long enough for stock market returns to catch up to inflation, but there have certainly been countries and time periods for which this was not true over multiple decades. More to the point for my decisionmaking, "long term" for young-uns like you (and my daughters) is a lot longer than long term for me. I have not suggested that my daughters (in their 30s) bother with TIPS at this point in their life (though I bonds do make sense for pretty much everyone, as Bill Bernstein suggested on your podcast.)
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

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dodecahedron wrote: Fri Jul 01, 2022 8:25 am
JonL wrote: Wed Jun 29, 2022 11:59 pm Firstly, I - like Dr. Bernstein - am a huge proponent of skipping credit risk, opting for only the highest quality bonds: Treasuries.

Secondly, his point about going short-term is intriguing. For me, I'm biased towards staying the course. By staying intermediate-term, I will - eventually - make back any loss from decreasing rates, and then some!
I am sympathetic to the above-view and am therefore comfortable with staying intermediate-term Treasuries, BUT, my strongly preferred form of Treasury holdings are TIPS, not nominals!

I think intermediate term nominals are unacceptably risky right now. You might well eventually make back any nominal loss from holding intermediate nominal Treasuries but there is a big chance you will never recoup your real losses from such holdings. The very flat nominal yield curve simply does not compensate you for all the additional inflation risk to which intermediate nominal Treasuries expose you.
Why don't we think that the efficient market hypothesis is true and that the flat yield curve is a reflection of market expectations, maybe of a recession. The bear markets of 2008 and 2020 had periods of time where holding long never mind intermediate nominal treasuries meant you had a great negative correlation between stocks and that fixed income, giving you great rebalancing (not advocating for long, just not ditching intermediate). I don't know whether inflation will persist or be unexpectedly lower than assumed by current narratives and chip shortages and war.

Also, I am puzzled by why Dr. Bernstein doesn't want us in Treasury Bond ETF's which have much simpler accounting/hassles than ladders, worth 7 to 10 basis points with those who don't have $100 million and value time more than a few dollars. I can't throw a ladder into my investing spreadsheet the way it is set up.
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JonL wrote: Fri Jul 01, 2022 6:04 pm <snip>
As I understand it, both TIPS and nominals are priced (via demand) based on expectations of inflation. Said differently, the demands (and pricing) of bonds reflect some market assumption for inflation.
This is correct.
JonL wrote: Fri Jul 01, 2022 6:04 pm For example, (these numbers are rough approximates) iShares U.S. Treasury Bond ETF (GOVT) has a weighted avg coupon as of Jun 30, 2022 of 1.80%. The iShares TIPS Bond ETF (TIP) weighted avg coupon as of Jun 30, 2022 of 0.53%. That means that the market assumes future inflation will be roughly 1.27% - the difference between the coupon of nominals and TIPS. Again, this is rough - because I'm using funds and not comparing a 10-year individual nominal to a 10-year TIPS bond - and given the composition of the indices across different maturities, there may be differences. But, you get the idea, which is: the difference between the coupon of nominals and TIPS is the market's expectation of inflation.
This is not correct. What you are thinking of is the breakeven inflation rate (BEI), which conventionally is calculated as the nominal yield minus the real yield at a specific maturity; it is not calculated from the coupon rates of actual bonds (the Treasury yield curve shows hypothetical yields for hypothetical par bonds, where yield = coupon, but most bonds are not par bonds). You can see historical BEI for selected maturities at FRED. Here it is for the 10-year:

Image

The 10-year BEI for Friday, July 1 was 2.34%--much higher than 1.27%. the BEI for shorter maturities is higher. A 10-year TIPS will outperform if average 10-year inflation is higher than the BEI, and a nominal 10-year Treasury will outperform if inflation is lower than the BEI.

There are more accurate ways to calculate BEI, but conventional BEI makes the point.

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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

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Kevin M wrote: Sat Jul 02, 2022 1:52 pm
This is not correct. What you are thinking of is the breakeven inflation rate (BEI), which conventionally is calculated as the nominal yield minus the real yield at a specific maturity; it is not calculated from the coupon rates of actual bonds (the Treasury yield curve shows hypothetical yields for hypothetical par bonds, where yield = coupon, but most bonds are not par bonds).
Which part isn't correct: the numbers cited as examples, or that the BEI is the market's expectation of inflation?
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

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JonL wrote: Sat Jul 02, 2022 3:46 pm
Kevin M wrote: Sat Jul 02, 2022 1:52 pm This is not correct. What you are thinking of is the breakeven inflation rate (BEI), which conventionally is calculated as the nominal yield minus the real yield at a specific maturity; it is not calculated from the coupon rates of actual bonds (the Treasury yield curve shows hypothetical yields for hypothetical par bonds, where yield = coupon, but most bonds are not par bonds).
Which part isn't correct: the numbers cited as examples, or that the BEI is the market's expectation of inflation?
What is not correct is calculating BEI based on coupon rates. The BEI is a good approximation of the market's inflation expectations, but it is not calculated on coupon rates, but on yields. You cited average coupon rates for funds to get your BEI. It's easy enough to use nominal Treasuries and TIPS, which is what the Federal Reserve (and most everyone else) uses, and you don't use coupon rates.

For example, the 7/15/2023 TIPS has a coupon of 0.375%, but on Friday the yield was -1.46%. The 7/15/2023 nominal Treasury has a coupon rate of 0.125%, and had a yield of 2.91% on Friday. The conventional BEI for this maturity is 2.91% - (-1.46%) = 4.37%. It is not 0.125% - 0.375% = -0.25%.

Hope that helps.

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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

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Kevin M wrote: Sat Jul 02, 2022 5:32 pm
Hope that helps.

Kevin
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

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bogswenbern wrote: Fri Jul 01, 2022 11:15 pm
Why don't we think that the efficient market hypothesis is true and that the flat yield curve is a reflection of market expectations, maybe of a recession. The bear markets of 2008 and 2020 had periods of time where holding long never mind intermediate nominal treasuries meant you had a great negative correlation between stocks and that fixed income, giving you great rebalancing (not advocating for long, just not ditching intermediate). I don't know whether inflation will persist or be unexpectedly lower than assumed by current narratives and chip shortages and war.
Certainly, those *relatively* longer-term Treasuries have at times shown their value as a portfolio diversifier, increasing in value (rallying) during stock market panics. Shorter maturities don't provide as much as that rallying effect that we've often seen with Treasuries of longer maturity. At least, that’s what we’ve frequently seen in the past.

I know there are some folks on here advocating for long-term Treasuries. The trade-off is a lot of interest rate risk. Intermediate-term can represent a sweet spot between bearing some interest rate risk in exchange for the higher yield and increase in value (rallying) that we frequently see with Treasuries during panics.
bogswenbern wrote: Fri Jul 01, 2022 11:15 pm
Also, I am puzzled by why Dr. Bernstein doesn't want us in Treasury Bond ETF's which have much simpler accounting/hassles than ladders, worth 7 to 10 basis points with those who don't have $100 million and value time more than a few dollars. I can't throw a ladder into my investing spreadsheet the way it is set up.
My understanding of his point was cos. That is, it's less expensive to buy a ladder directly, avoiding the expense ratio of several basis points. Yet, there's a scale issue to be considered. For reference, his firm has an AUM minimum of $25MM. At that scale, it might be worth one's time to build a ladder yourself.

Yet, I'm sympathetic to your point. For simplicity, using an ultra-low-cost Treasury fund - paying for four basis points (0.04%) - is more than reasonable. Said differently, no one ever went to the poor house from paying four basis points to invest.
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

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A very enjoyable interview, thank you to everyone involved for putting this together.
bogswenbern wrote: Fri Jul 01, 2022 11:15 pm Also, I am puzzled by why Dr. Bernstein doesn't want us in Treasury Bond ETF's which have much simpler accounting/hassles than ladders, worth 7 to 10 basis points with those who don't have $100 million and value time more than a few dollars. I can't throw a ladder into my investing spreadsheet the way it is set up.
I know in the past he's expressed some concerns about liquidity mismatch between Bond ETF's and the underlying bonds during periods of extreme market volatility, that might have been part of the reasoning for his comment.

Here's a thread from last year in which Dr. Bernstein makes several posts discussing the topic.

viewtopic.php?p=5869954
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

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dertere wrote: Tue Jul 05, 2022 1:37 pm A very enjoyable interview, thank you to everyone involved for putting this together.
bogswenbern wrote: Fri Jul 01, 2022 11:15 pm Also, I am puzzled by why Dr. Bernstein doesn't want us in Treasury Bond ETF's which have much simpler accounting/hassles than ladders, worth 7 to 10 basis points with those who don't have $100 million and value time more than a few dollars. I can't throw a ladder into my investing spreadsheet the way it is set up.
I know in the past he's expressed some concerns about liquidity mismatch between Bond ETF's and the underlying bonds during periods of extreme market volatility, that might have been part of the reasoning for his comment.

Here's a thread from last year in which Dr. Bernstein makes several posts discussing the topic.

viewtopic.php?p=5869954
The important distinction in the quoted comment is Treasury ETFs. Liquidity isn't an issue with Treasuries - but it can be for the total bond fund, corporate bond funds, etc.

:happy
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

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JonL wrote: Wed Jul 06, 2022 1:02 am
dertere wrote: Tue Jul 05, 2022 1:37 pm A very enjoyable interview, thank you to everyone involved for putting this together.
bogswenbern wrote: Fri Jul 01, 2022 11:15 pm Also, I am puzzled by why Dr. Bernstein doesn't want us in Treasury Bond ETF's which have much simpler accounting/hassles than ladders, worth 7 to 10 basis points with those who don't have $100 million and value time more than a few dollars. I can't throw a ladder into my investing spreadsheet the way it is set up.
I know in the past he's expressed some concerns about liquidity mismatch between Bond ETF's and the underlying bonds during periods of extreme market volatility, that might have been part of the reasoning for his comment.

Here's a thread from last year in which Dr. Bernstein makes several posts discussing the topic.

viewtopic.php?p=5869954
The important distinction in the quoted comment is Treasury ETFs. Liquidity isn't an issue with Treasuries - but it can be for the total bond fund, corporate bond funds, etc.

:happy
Just because they are Treasury ETFs doesn't make them immune to price disconnects. TLT traded at a discount of 5 percent to NAV during the volatile period of March 2020.
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

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So what do people do for nominal treasuries? I would set up a ladder if I had auto-roll and could figure out a less time-consuming manner of keeping track of it than using a treasury fund or ETF. I use a Google Docs spreadsheet to maintain an asset allocation which suits me. A semiannual paying CD has already been purchased - just have to manually invest the interest twice/yr. This is subject to reinvestment risk, but I have a fixed rate mortgage so that's ok. I am leaning towards short VSBSX but haven't ruled out short VGSH. How much of a price disconnect did VGSH have in March 2020? Did the mid-day trading opportunity of TLT enable people to buy stocks at a fire sale/ return stocks to their rightful owners in March 2020?
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

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nps wrote: Wed Jul 06, 2022 5:52 am
Just because they are Treasury ETFs doesn't make them immune to price disconnects. TLT traded at a discount of 5 percent to NAV during the volatile period of March 2020.
That's fascinating. Thank you for sharing. Where can I learn more about that?

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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

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JonL wrote: Wed Jul 06, 2022 10:53 am
nps wrote: Wed Jul 06, 2022 5:52 am
Just because they are Treasury ETFs doesn't make them immune to price disconnects. TLT traded at a discount of 5 percent to NAV during the volatile period of March 2020.
That's fascinating. Thank you for sharing. Where can I learn more about that?

:happy
You can see it here (expand history beyond one year):

https://ycharts.com/companies/TLT/disco ... ium_to_nav
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

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nps wrote: Wed Jul 06, 2022 11:07 am
You can see it here (expand history beyond one year):

https://ycharts.com/companies/TLT/disco ... ium_to_nav
Fascinating. Thank you.

Add one more reason to why long-term Treasuries are such a unique play (although likely not a good fit for most): extreme interest rate risk, often providing a significant correlation benefit to equities during some market panics, and now liquidity considerations as well (at least when in ETF form).

It’s hard to make a case for long-term Treasuries. But, I can understand why some Bogleheads® advocate for them given the frequent (but not consistent) diversification benefit to stocks.
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

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bogswenbern wrote: Wed Jul 06, 2022 8:57 am So what do people do for nominal treasuries? I would set up a ladder if I had auto-roll and could figure out a less time-consuming manner of keeping track of it than using a treasury fund or ETF. I use a Google Docs spreadsheet to maintain an asset allocation which suits me. A semiannual paying CD has already been purchased - just have to manually invest the interest twice/yr. This is subject to reinvestment risk, but I have a fixed rate mortgage so that's ok. I am leaning towards short VSBSX but haven't ruled out short VGSH. How much of a price disconnect did VGSH have in March 2020? Did the mid-day trading opportunity of TLT enable people to buy stocks at a fire sale/ return stocks to their rightful owners in March 2020?
I'm grimacing at the anticipated responses this post will get. But, here goes:

Generally, intermediate-term Treasuries. That usually means Vanguard Intermediate-Term Treasury Fund (VSIGX/VGIT).

Do intermediate-term pose more interest risk than a short-term Treasury. Yes. Is there (currently) barely any additional yield available by going to 5+ year compared to ~1 year Treasuries? Also, yes.

Here's my considerations - not to say that it's right for everyone.

Frequently - not always - the maturity of a Treasury reflects it's average performance during market panics. This is why some Bogleheads® advocate for long-term Treasuries. Often, long-term Treasuries provide a significant diversification benefit to stocks during market panics. That diversification benefit (negative correlation) is much smaller for short-term Treasuries. Intermediate-term strike a balance between increased interest rate risk, higher yield, and greater average performance during stock market panics.

I can certainly appreciate the strategy of changing bond maturity based on yield. I believe it was Larry Swedroe who argues for not taking an additional year of maturity unless compensated by at least 20 BPS of additional yield. However, one downside of that approach is the maintenance. For simplicity, sticking with an intermediate-term - it can be argued - is not unreasonable.

Of course, for those who do want to regularly monitor the yield curve - updating the bond portfolio regularly - I understand the appeal. Downsides to that approach are increased transaction costs, possible taxes - and of course, complexity.

Lastly, this is not investment advice - nor a recommendation to buy or sell a security. Speak with your advisor before making any financial decisions.
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

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bogswenbern wrote: Wed Jul 06, 2022 8:57 am So what do people do for nominal treasuries?
Ladders with maturity out to two years. Rungs depend on the individual situation.
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JonL wrote: Wed Jul 06, 2022 12:07 pm Frequently - not always - the maturity of a Treasury reflects it's average performance during market panics. This is why some Bogleheads® advocate for long-term Treasuries. Often, long-term Treasuries provide a significant diversification benefit to stocks during market panics. That diversification benefit (negative correlation) is much smaller for short-term Treasuries. Intermediate-term strike a balance between increased interest rate risk, higher yield, and greater average performance during stock market panics.
That's not the only reason. There is a long-running mega thread on here that argues that long-term Treasuries also minimize interest rate risk for investors with longer time horizons.
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nps wrote: Wed Jul 06, 2022 3:15 pm
JonL wrote: Wed Jul 06, 2022 12:07 pm Frequently - not always - the maturity of a Treasury reflects it's average performance during market panics. This is why some Bogleheads® advocate for long-term Treasuries. Often, long-term Treasuries provide a significant diversification benefit to stocks during market panics. That diversification benefit (negative correlation) is much smaller for short-term Treasuries. Intermediate-term strike a balance between increased interest rate risk, higher yield, and greater average performance during stock market panics.
That's not the only reason. There is a long-running mega thread on here that argues that long-term Treasuries also minimize interest rate risk for investors with longer time horizons.
That is just fascinating.

Do you have a link to it?
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JonL wrote: Wed Jul 06, 2022 4:19 pm
nps wrote: Wed Jul 06, 2022 3:15 pm
JonL wrote: Wed Jul 06, 2022 12:07 pm Frequently - not always - the maturity of a Treasury reflects it's average performance during market panics. This is why some Bogleheads® advocate for long-term Treasuries. Often, long-term Treasuries provide a significant diversification benefit to stocks during market panics. That diversification benefit (negative correlation) is much smaller for short-term Treasuries. Intermediate-term strike a balance between increased interest rate risk, higher yield, and greater average performance during stock market panics.
That's not the only reason. There is a long-running mega thread on here that argues that long-term Treasuries also minimize interest rate risk for investors with longer time horizons.
That is just fascinating.

Do you have a link to it?
Sure: First 20% of bonds in long-term Treasuries
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Re: "Bogleheads® Live" Dr. Bill Bernstein ep. available as a podcast

Post by bogswenbern »

JonL wrote: Wed Jul 06, 2022 12:07 pm
bogswenbern wrote: Wed Jul 06, 2022 8:57 am So what do people do for nominal treasuries? I would set up a ladder if I had auto-roll and could figure out a less time-consuming manner of keeping track of it than using a treasury fund or ETF. I use a Google Docs spreadsheet to maintain an asset allocation which suits me. A semiannual paying CD has already been purchased - just have to manually invest the interest twice/yr. This is subject to reinvestment risk, but I have a fixed rate mortgage so that's ok. I am leaning towards short VSBSX but haven't ruled out short VGSH. How much of a price disconnect did VGSH have in March 2020? Did the mid-day trading opportunity of TLT enable people to buy stocks at a fire sale/ return stocks to their rightful owners in March 2020?
I'm grimacing at the anticipated responses this post will get. But, here goes:

Generally, intermediate-term Treasuries. That usually means Vanguard Intermediate-Term Treasury Fund (VSIGX/VGIT).

Do intermediate-term pose more interest risk than a short-term Treasury. Yes. Is there (currently) barely any additional yield available by going to 5+ year compared to ~1 year Treasuries? Also, yes.

Here's my considerations - not to say that it's right for everyone.

Frequently - not always - the maturity of a Treasury reflects it's average performance during market panics. This is why some Bogleheads® advocate for long-term Treasuries. Often, long-term Treasuries provide a significant diversification benefit to stocks during market panics. That diversification benefit (negative correlation) is much smaller for short-term Treasuries. Intermediate-term strike a balance between increased interest rate risk, higher yield, and greater average performance during stock market panics.

I can certainly appreciate the strategy of changing bond maturity based on yield. I believe it was Larry Swedroe who argues for not taking an additional year of maturity unless compensated by at least 20 BPS of additional yield. However, one downside of that approach is the maintenance. For simplicity, sticking with an intermediate-term - it can be argued - is not unreasonable.

Of course, for those who do want to regularly monitor the yield curve - updating the bond portfolio regularly - I understand the appeal. Downsides to that approach are increased transaction costs, possible taxes - and of course, complexity.

Lastly, this is not investment advice - nor a recommendation to buy or sell a security. Speak with your advisor before making any financial decisions.
Missing in the podcast and this post is talking about THE FED. How do we use forward guidance of what the Fed plans to do, not just with interest rates but also quantitative tightening, to make the decision between short and intermediate? What is priced in? Are the risks higher with intermediate, based on what the Fed has said? A significant cause of market panic would be more unexpected inflation, Fed raising rates more than expected, and intermediate not providing the diversity hoped for. But this may be the old narrative.
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