How do I allocate my bonds?

[muel87]

BACKGROUND INFO
Emergency Fund: 6 mo in high yield savings (3.75%) ~ $40k
Debt: mortgage loan (rental property), 30 yr fixed (4.5%) - $137k
Tax Filing Status: Married Filing Jointly
Tax Rate: Fed: 24% marginal; State (MD): 5.5% marginal
Age: 41

Desired Asset allocation: 80% stocks / 20% bonds

Wife and I chose an aggressive approach (our age -20%) b/c neither of us would be particularly bothered by big swings, we dont need the money for at least 20 years, neither of us plan to ever stop working, and we're both very comfortable cutting back expenses.

We have more than enough space in tax-advantaged accounts to fill the necessary amounts for our bond allocation. Comfortable taking relatively more risk with the bond portion of the portfolio (dont need it soon).

• I have the ability to move up to 24% of our bonds (~5% of our total portfolio) into the TSP G fund (I cant contribute much more, and also cant move it out as I'm a Reservist).

• Due to fund costs, I will probably use my employer 401k space to fund the State Street U.S. Bond Index Non-Lending Series Fund, which currently takes up 4.5% of our bond portion.

• I'd like to have a portion of our bond holdings in inflation protected securities.

• I've also been reading that I-bonds are a good purchase, although not an automatic one like they once were.

Any suggestions on how to think about diversifying my bond allocation given these considerations?

EDIT: What's the benefit of international bond exposure? Everyone states the need to diversify geographically w/ stocks, but dont hear that as often with bonds, typically hear that the US bond index is enough. Or am I wrong?

Thank you for the time!

[Varsh]

If you have access to the Federal TSP fund, use it. I am told many Federal employees do and doing so enhances their overall portfolio. Otherwise, based upon your entire financial situation, and AA, round it off with the available S&P option, small cap option and international option. Possibly, using your 80/20… 20 % G fund, 48 % S&P - Large Cap Blend, 12% SmallCap and 12% International. If you want to be more aggressive, increase both Small Cap and International, and reduce S&P - Large Cap Blend.

[Navillus1968]

BACKGROUND INFO
Emergency Fund: 6 mo in high yield savings (3.75%) ~ $40k
Debt: mortgage loan (rental property), 30 yr fixed (4.5%) - $137k
Tax Filing Status: Married Filing Jointly
Tax Rate: Fed: 24% marginal; State (MD): 5.5% marginal
Age: 41

Desired Asset allocation: 80% stocks / 20% bonds

Wife and I chose an aggressive approach (our age -20%) b/c neither of us would be particularly bothered by big swings, we dont need the money for at least 20 years, neither of us plan to ever stop working, and we're both very comfortable cutting back expenses.

We have more than enough space in tax-advantaged accounts to fill the necessary amounts for our bond allocation. Comfortable taking relatively more risk with the bond portion of the portfolio (dont need it soon).

• I have the ability to move up to 24% of our bonds (~5% of our total portfolio) into the TSP G fund (I cant contribute much more, and also cant move it out as I'm a Reservist).

There's nothing aggressive about the G Fund. You are giving up returns to avoid loss of capital.

G Fund description- "Ensure preservation of capital and generate returns above those of short-term U.S. Treasury securities."
The G Fund is appropriate for a retiree/near-retiree seeking to avoid market swings & preserve the value of his investment.
I would say it's overly conservative for 41 yo with an 80/20 AA and a 20 year time horizon. Over its lifetime, the TSP F Fund has higher returns than the G Fund, albeit with no guarantee of capital preservation!

I'm bad at math, so I'm having a hard time following the percentages mentioned above- your TSP represent 5% of your portfolio, yes? So you need tax-deferred 401k/Trad IRA space for the other 15% of bonds to make 20% overall.
Are you contributing enough Reserve pay to get the full 5% government match?

• Due to fund costs, I will probably use my employer 401k space to fund the State Street U.S. Bond Index Non-Lending Series Fund, which currently takes up 4.5% of our bond portion.

• I'd like to have a portion of our bond holdings in inflation protected securities.

Assuming your 401k offers a TIPS-based mutual fund/ETF, you are good to go. You can buy TIPS through Treasury Direct, but that's a taxable account, so you'd have OI taxation of interest.
https://www.investopedia.com/terms/t/tips.asp
https://www.investopedia.com/articles/i ... y-tips.asp

• I've also been reading that I-bonds are a good purchase, although not an automatic one like they once were.

Article- https://tipswatch.com/2023/01/03/i-bond ... -for-2023/
I-Bonds have a $10k per person annual limit, so you'd have to do the math as to how that works as part of your 20% bond AA. You can also buy another $5k by using your IRS tax refund each year.

Any suggestions on how to think about diversifying my bond allocation given these considerations?

Thank you for the time!

[Beensabu]

Any suggestions on how to think about diversifying my bond allocation given these considerations?

If you have access to the G fund, use it.

I bonds can only be purchased either through Treasury Direct (electronic) or via tax refund in $50 increments (paper). Limit $10k electronic and $5k paper per person per year.

Everyone is TIPS crazy these days, but you don't need TIPS at a 80/20 AA with at least 20 years to retirement. Those are for adding closer to anticipated retirement, when your fixed income allocation is larger and you're about to rely on your investments for income.

Really, a total/aggregate US bond index fund is fine for the rest of it. Especially at 80/20 with no strong opinions as to why this or that type of bonds for your individual portfolio. But if you want some TIPS and have access to them in your retirement accounts, and it doesn't cost too much, then go for it.

[renegade06]

I use the TSP G fund for about 95% of my bond allocation (I am also at 80/20). The only reason why it's 95% is that I don't have enough room, but I'd make it 100% if I could. I take the risk on the equity side with VTI/VXUS/AVUV. You'll see a number of past threads about the TSP G fund here and many who wish they had access to the fund.

[muel87]

There's nothing aggressive about the G Fund. You are giving up returns to avoid loss of capital.

I do understand that, but are you saying it has no place in my portfolio given my situation? That Im better off buying another bond index fund and avoiding the G fund entirely?

I'm bad at math, so I'm having a hard time following the percentages mentioned above- your TSP represent 5% of your portfolio, yes? So you need tax-deferred 401k/Trad IRA space for the other 15% of bonds to make 20% overall.
Are you contributing enough Reserve pay to get the full 5% government match?

Yes that's right, and I dont get matching. Im on a different retirement system.

[muel87]

[/quote]

If you have access to the G fund, use it.

Why? Why doesnt same logic about TIPS and the Aggregate Bond index apply here?

[muel87]

If you have access to the Federal TSP fund, use it.

Why?

[Beensabu]

If you have access to the G fund, use it.

Why? Why doesnt same logic about TIPS and the Aggregate Bond index apply here?

It's a good fund. It's like a stable value fund. And it actually provides a bit of inflation protection.

It's "a very good thing" that you have access to it.

Do a search for "G fund" here in the forum.

Wiki:

https://www.bogleheads.org/wiki/G_Fund

https://www.bogleheads.org/wiki/Thrift_Savings_Plan

Some threads:

G Fund in the current [rising rate] environment - viewtopic.php?t=386009

Buy TIPS if you have access to the TSP G fund? - viewtopic.php?t=387363

BND vs TSP G Fund - viewtopic.php?t=378874

[Navillus1968]

I'm no bond guru, but your situation as a 41 year old is (or should be, IMHO) quite different from a 61 year old with respect to the G Fund.
G Fund is awesome for protecting capital while offering some inflation protection. The G Fund is good for people with an extremely low tolerance for risk and who want safety. You described yourself as a 'aggressive' 80/20 investor, the G Fund offers safety & preservation of your funds, the priority is not capital growth.

Here's a quote, which investor are you? - "If you are nearing retirement, and you want to protect your retirement savings from loss, the G-fund is an ideal investment option. However, if you are interested in long-term growth and not to preserve your capital, and you have a long time before you reach retirement age, a G-fund may not be an ideal option for you. You can consider other TSP funds like the C-fund or F-fund, which carry a higher risk but have the potential to earn a higher annual rate of return."
https://meetbeagle.com/resources/post/w ... lan-g-fund

Chances are, where you put your 20% bond/fixed income AA won't matter too much, since the growth of the 80% invested in stocks will dwarf your bond return anyway. I wouldn't sweat it too much. If the G Fund appeals to you, use it.
You'll likely be giving up some return in your bond AA over the long term compared to the F Fund, but if it helps you sleep at night, it's the right call.

PS- To complicate things: over the last 1, 3, and 5 years, the G Fund has beaten the F Fund. It's only over >10 years that F Fund has an advantage. They say 'don't chase recent returns' but it's definitely tempting...

[grabiner]

I'm no bond guru, but your situation as a 41 year old is (or should be, IMHO) quite different from a 61 year old with respect to the G Fund.
G Fund is awesome for protecting capital while offering some inflation protection. The G Fund is good for people with an extremely low tolerance for risk and who want safety. You described yourself as a 'aggressive' 80/20 investor, the G Fund offers safety & preservation of your funds, the priority is not capital growth.

Here's a quote, which investor are you? - "If you are nearing retirement, and you want to protect your retirement savings from loss, the G-fund is an ideal investment option. However, if you are interested in long-term growth and not to preserve your capital, and you have a long time before you reach retirement age, a G-fund may not be an ideal option for you. You can consider other TSP funds like the C-fund or F-fund, which carry a higher risk but have the potential to earn a higher annual rate of return."
https://meetbeagle.com/resources/post/w ... lan-g-fund

Chances are, where you put your 20% bond/fixed income AA won't matter too much, since the growth of the 80% invested in stocks will dwarf your bond return anyway. I wouldn't sweat it too much. If the G Fund appeals to you, use it.
You'll likely be giving up some return in your bond AA over the long term compared to the F Fund, but if it helps you sleep at night, it's the right call.

PS- To complicate things: over the last 1, 3, and 5 years, the G Fund has beaten the F Fund. It's only over >10 years that F Fund has an advantage. They say 'don't chase recent returns' but it's definitely tempting...

The F fund may outperform or underperform the G fund, but it has additional risk, so you need less of the G fund to get the same risk reduction. It may be that a portfolio of 80% stock and 20% G fund has the same risk as a portfolio of 75% stock and 25% F fund. If that is the case, then the G fund is clearly better, as it doesn't give up very much in expected returns.

The advantage of the G fund is that it is non-marketable, and offers a better trade-off between risk and return than a marketable fund would. A retail portfolio of 80% stock and 20% money-market funds would have the same risk as a TSP portfolio of 80% stock and 20% G fund, but the G fund normally yields much more than money-market funds. (There is a current exception because the yield curve is inverted; short-term Treasuries yield less than the long-term Treasuries which set the G fund rate.)

[muel87]

If you have access to the G fund, use it.

Why? Why doesnt same logic about TIPS and the Aggregate Bond index apply here?

It's a good fund. It's like a stable value fund. And it actually provides a bit of inflation protection.

It's "a very good thing" that you have access to it.

Do a search for "G fund" here in the forum.

Wiki:

https://www.bogleheads.org/wiki/G_Fund

https://www.bogleheads.org/wiki/Thrift_Savings_Plan

Some threads:

G Fund in the current [rising rate] environment - viewtopic.php?t=386009

Buy TIPS if you have access to the TSP G fund? - viewtopic.php?t=387363

BND vs TSP G Fund - viewtopic.php?t=378874

All of those thread messages seem to be written by people who can withdraw the funds (59.5) and/or are at or nearing retirement. I'm 41... After reading them, it seems like a great place to move some money in 10 years, but I dont see why I need money in cash right now, despite its benefits.

[muel87]

. A retail portfolio of 80% stock and 20% money-market funds would have the same risk as a TSP portfolio of 80% stock and 20% G fund, but the G fund normally yields much more than money-market funds. (There is a current exception because the yield curve is inverted; short-term Treasuries yield less than the long-term Treasuries which set the G fund rate.)

But in my situation, it doesnt seem to make sense to have any holdings in a money market fund, or the G fund. I wont even be able to touch it for 20 years...

[grabiner]

. A retail portfolio of 80% stock and 20% money-market funds would have the same risk as a TSP portfolio of 80% stock and 20% G fund, but the G fund normally yields much more than money-market funds. (There is a current exception because the yield curve is inverted; short-term Treasuries yield less than the long-term Treasuries which set the G fund rate.)

But in my situation, it doesnt seem to make sense to have any holdings in a money market fund, or the G fund. I wont even be able to touch it for 20 years...

If 100% stock is right for you, then you don't need the G fund. (This is not just financial; it depends on your emotional risk tolerance. What did you do with your TSP/IRA/401(k) in March 2020, and in 2008-2009 if you were invested back then?) The TSP agrees that this is reasonable; the long-dated TSP lifecycle (L) funds are 99% stock.

But if you do hold any bonds, then it makes sense to use the G fund for those bonds.

[Kookaburra]

Can those of us in a regular 401k (not a federal plan) buy into the G-string fund?

[grabiner]

Can those of us in a regular 401k (not a federal plan) buy into the G-string fund?

No. The G fund is non-marketable; its securities are used only for intragovernmental transactions. (The Social Security trust fund holds the same securities; this prevents it from reporting a loss on holdings when interest rates rise.)

However, some retirement plans have their own non-marketable "stable value funds". These may be good or not, depending on the yield and the fund restrictions. TIAA, in particular, has an unusually good Traditional Annuity.

[Valuethinker]

. A retail portfolio of 80% stock and 20% money-market funds would have the same risk as a TSP portfolio of 80% stock and 20% G fund, but the G fund normally yields much more than money-market funds. (There is a current exception because the yield curve is inverted; short-term Treasuries yield less than the long-term Treasuries which set the G fund rate.)

But in my situation, it doesnt seem to make sense to have any holdings in a money market fund, or the G fund. I wont even be able to touch it for 20 years...

The combination of high average interest rate but capital protection from loss is a very good one.

As we learned this past year, it is possible to have "the Perfect Storm" where stock funds and bond funds go down together. That would not be the case for the G Fund.

The G Fund offers greater portfolio diversification in combination with a high equity weighting, than do other fixed income funds.

To the maximum you are able I would use the G Fund. 20 years is a very short time - it goes quick.

[muel87]

If 100% stock is right for you, then you don't need the G fund. (This is not just financial; it depends on your emotional risk tolerance. What did you do with your TSP/IRA/401(k) in March 2020, and in 2008-2009 if you were invested back then?) The TSP agrees that this is reasonable; the long-dated TSP lifecycle (L) funds are 99% stock.

But if you do hold any bonds, then it makes sense to use the G fund for those bonds.

We're going w/ 80% stock for now. I'm not sure why holding a bond index fund wouldnt be the better play than the G fund, for the same reasons you stated I could potentially go with 100% stock if I - if I can afford and stomach the extra volatility, my returns will likely be greater over that timeframe.

[muel87]

The combination of high average interest rate but capital protection from loss is a very good one.

As we learned this past year, it is possible to have "the Perfect Storm" where stock funds and bond funds go down together. That would not be the case for the G Fund.

The G Fund offers greater portfolio diversification in combination with a high equity weighting, than do other fixed income funds.

To the maximum you are able I would use the G Fund. 20 years is a very short time - it goes quick.

Other stable value funds are available - if I follow your line of reasoning, it seems no one should be investing in bond funds... Just equity and stable value funds. Have you seen any conversations or articles where there is some math behind this kind of decision? The TSP F fund (total bond index) has outperformed the G fund over 10 years or more by about 1%.

[grabiner]

If 100% stock is right for you, then you don't need the G fund. (This is not just financial; it depends on your emotional risk tolerance. What did you do with your TSP/IRA/401(k) in March 2020, and in 2008-2009 if you were invested back then?) The TSP agrees that this is reasonable; the long-dated TSP lifecycle (L) funds are 99% stock.

But if you do hold any bonds, then it makes sense to use the G fund for those bonds.

We're going w/ 80% stock for now. I'm not sure why holding a bond index fund wouldnt be the better play than the G fund, for the same reasons you stated I could potentially go with 100% stock if I - if I can afford and stomach the extra volatility, my returns will likely be greater over that timeframe.

The issue is that 80% stock is not quite the right number. You want a portfolio with a particular risk level, and one such portfolio is 80% broad-market stock indexes (C/S/I funds), 20% broad-market bond indexes (F fund).

But you can get the same risk level and hold slightly more stock if you hold your bonds in the G fund. Alternatively, you can get the same risk level with the same bond percentage by holding the G fund to decrease risk, and holding riskier stock funds (emerging markets, small-cap value) for part of your stock holding in your IRA or in the TSP mutual fund window. Either of these should give slightly better expected returns than the portfolio with the F fund, because the G fund gives a better trade-off between risk and return.

[muel87]

The issue is that 80% stock is not quite the right number. You want a portfolio with a particular risk level, and one such portfolio is 80% broad-market stock indexes (C/S/I funds), 20% broad-market bond indexes (F fund).

But you can get the same risk level and hold slightly more stock if you hold your bonds in the G fund. Alternatively, you can get the same risk level with the same bond percentage by holding the G fund to decrease risk, and holding riskier stock funds (emerging markets, small-cap value) for part of your stock holding in your IRA or in the TSP mutual fund window. Either of these should give slightly better expected returns than the portfolio with the F fund, because the G fund gives a better trade-off between risk and return.

I think I see... but I'd also lose some returns in G. Have you seen a comparison of how much more stock I could hold (and therefore how much greater overall returns), and an equivalent allocation using broad market indexes?

Also, my TSP is only about 5% of the portfolio (25% of the bonds). So I will need to round out my bonds w/ something else - TIPS, global bond index, US bond index, I -bonds, etc.

[Beensabu]

All of those thread messages seem to be written by people who can withdraw the funds (59.5) and/or are at or nearing retirement. I'm 41... After reading them, it seems like a great place to move some money in 10 years, but I dont see why I need money in cash right now, despite its benefits.

Well. If you look at it as cash-like with a pretty much guaranteed long-term ~3% rate of return, you currently get to lock in the same rates as long-term treasuries without the risk of losing principal in the short-term. It's getting the long-term rate without the duration risk. And it's a rate that's expected to keep up with inflation over the long-term.

If you don't see the point of that with a high stock allocation and 20+ years to retirement, then I wonder why you see the point of inflation-protection (TIPS, I bonds) at the moment. With a high stock allocation and a long time to go, it's the stocks that are providing you with inflation protection (not in the short-term, but the long-term).

But if you're concerned about short-term inflation protection for 20% or less of your port, then you actually are concerned about preserving value for part of your portfolio. And if you're concerned about that, then taking advantage of access to the G fund as much as you're able is a no brainer.

So my question to you is: Why do you want bonds? What do you expect them to do for you?

[muel87]

If you don't see the point of that with a high stock allocation and 20+ years to retirement, then I wonder why you see the point of inflation-protection (TIPS, I bonds) at the moment. With a high stock allocation and a long time to go, it's the stocks that are providing you with inflation protection (not in the short-term, but the long-term).

quote=Beensabu post_id=7106871 time=1675790432 user_id=111957]
But if you're concerned about short-term inflation protection for 20% or less of your port, then you actually are concerned about preserving value for part of your portfolio. And if you're concerned about that, then taking advantage of access to the G fund as much as you're able is a no brainer.

So my question to you is: Why do you want bonds? What do you expect them to do for you?

To improve risk-adjusted returns of the portfolio? I guess Im not concerned about the short-term inflation protection, so I guess I dont really need G/TIPS/I bonds until closer to retirement time? I'm using question marks b/c I'm still uncertain.

[Beensabu]

So my question to you is: Why do you want bonds? What do you expect them to do for you?

To improve risk-adjusted returns of the portfolio? I guess Im not concerned about the short-term inflation protection, so I guess I dont really need G/TIPS/I bonds until closer to retirement time? I'm using question marks b/c I'm still uncertain.

Question marks are good! I should use them more often.

Okay. If you want bonds in your portfolio in order to improve risk-adjusted returns, then you want whatever has the highest expected return with lowest standard deviation such that when you pair it with equities, you're giving up some of the expected return of equities in exchange for lowered volatility of the overall portfolio. And you want whatever will lower volatility as much as possible while giving up as little total return for the portfolio as possible.

So I'm going to continue to try to convince you that the G fund is indeed "a very good thing" for you even at this point, and even if it's only 5% of your portfolio. Because it is, if you want bonds in order to improve risk-adjusted returns.

It's 1-year return is ~3% (and it's had a ~4% rate of return since 1990). So that's a 3-4% rate of return with a standard deviation of zero, right? No default risk, no term risk, no interest rate risk. The total return is entirely dependent on the yield.

Versus a total bond fund like VBTLX, with a trailing twelve month (ttm) yield of 2.5% and standard deviation of 4% if you look back to 1987. The total return of a bond fund like this is a combination of the yield and price changes (which depend on interest rate changes).

Versus a long-term treasury fund like VUSTX, with a trailing twelve month (ttm) yield of 2.8% and standard deviation of ~10% if you look back to 1987. Now, this is weird, but if you paired stocks with uncorrelated bonds like this that have also had a high total return, it actually ended up producing better risk-adjusted returns than the other two options because the standard deviation of the overall portfolio was about the same, but CAGR was higher.

If you are going to forego having even just 5% of your portfolio in the G fund, then you better have a better option that is expected to have enough of a higher expected return over your investment horizon that it will balance out the likely higher volatility. And whatever you choose should have very little (or no) correlation to US/global stocks.

Also, as far as bond funds are concerned, it is reasonable to expect a rate of return that approximately equals the starting yield over the average duration of the fund. Whether you get less or more over that exact period will depend on what interest rates do (and we don't know - we can speculate, but we don't know).

So, starting yields:

1. G fund - 3-4% (for as long as matters, most likely, unless they seriously change the rules)
2. VBTLX - 4-4.5% (6.5 year duration)
3. VUSTX - 3.5-4% (16 year duration)

When you see that, what do you think would be most likely to deliver the best risk-adjusted returns when paired with equities over 20+ years? Remember that you have no clue what VBTLX will be yielding in 7 years.

I'm pretty sure I've made sense up there ^. But if I didn't, just let me know.

[lakpr]

Superb write up, @Beensabu!

Speaking for myself and I am more than a decade older than the OP, I want bonds to provide a ballast to my investment ship. Meaning I want a portion of my portfolio to be in such an investment that would not lose principal. I thought VBTIX ( institutional version of bond index fund) would provide that safety, but it spectacularly failed at that basic job, and erased 8 years worth of steady gains in one single year.

So I am firing VBTIX.

Chastened, I am now looking for steady investments that do not lose value. I am loading up on I bonds for this reason, full $20k per year plus $5k in paper returns, for their tax deferral as well as guarantee that it would never go down in value from the last rate reset (every six months). I would continue on this path even if the composite rate on I bonds drops down to 1.8% as some are predicting would happen in May. Safety of the principal first.

If I have access to G fund, I would be all over it.

[UpperNwGuy]

So I am firing VBTIX.

I hope you are not selling your VBTLX at the bottom and locking in the losses just as VBTLX is starting to head up again.

[lakpr]

So I am firing VBTIX.

I hope you are not selling your VBTLX at the bottom and locking in the losses just as VBTLX is starting to head up again.

Sold half of VBTIX already in December, invested in TIPS index fund in my 401(k). Let the other half remain in VBTIX. All future contributions in 401(k) to equities only, and $25k per year in I-bonds.

So may be not exactly “firing” but a serious demotion for failing to do the basic job given.

[muel87]

Okay. If you want bonds in your portfolio in order to improve risk-adjusted returns, then you want whatever has the highest expected return with lowest standard deviation such that when you pair it with equities, you're giving up some of the expected return of equities in exchange for lowered volatility of the overall portfolio. And you want whatever will lower volatility as much as possible while giving up as little total return for the portfolio as possible.

Im following

Versus a long-term treasury fund like VUSTX, with a trailing twelve month (ttm) yield of 2.8% and standard deviation of ~10% if you look back to 1987. Now, this is weird, but if you paired stocks with uncorrelated bonds like this that have also had a high total return, it actually ended up producing better risk-adjusted returns than the other two options because the standard deviation of the overall portfolio was about the same, but CAGR was higher.

You lost me, are you saying if I paired stocks with a bond fund like VUSTX, it gives me a better-producing risk-adjusted return due to lower overall std dev and higher CAGR than either VBTLX or G fund w/ stocks?

1. G fund - 3-4% (for as long as matters, most likely, unless they seriously change the rules)
2. VBTLX - 4-4.5% (6.5 year duration)
3. VUSTX - 3.5-4% (16 year duration)

When you see that, what do you think would be most likely to deliver the best risk-adjusted returns when paired with equities over 20+ years? Remember that you have no clue what VBTLX will be yielding in 7 years.

G fund, but above i thought you said in terms of overall portfolio, pairing stocks w/ VUSTX would be better?

Also, for the same reasons G fund is great, after I max that out, would it be smart to max out i bonds, including paper ones? (side question, why do they issue paper bonds and what happens if you lose them?) And TIPS next, before something like BND or BNDX/BND?

[lakpr]

Also, for the same reasons G fund is great, after I max that out, would it be smart to max out i bonds, including paper ones? (side question, why do they issue paper bonds and what happens if you lose them?) And TIPS next, before something like BND or BNDX/BND?

Answering that particular question in bold:
https://treasurydirect.gov/savings-bond ... r-i-bonds/

Make sure you take a PDF or photograph of the paper bonds as soon as they arrive and store that image, since the information that Treasury Direct asks is directly from the face of that paper bond.

TreasuryDirect also offers a way to mail the paper bond in and convert to Electronic Bond linked to your TreasuryDirect account.

[muel87]

Answering that particular question in bold:
https://treasurydirect.gov/savings-bond ... r-i-bonds/

But why???

[lakpr]

Answering that particular question in bold:
https://treasurydirect.gov/savings-bond ... r-i-bonds/

But why???

I can't answer the "Why" part, I can only answer the "What happens IF" part

After some googling, found this 2013 article in Forbes from our own Mel Lindauer:
https://www.forbes.com/sites/theboglehe ... f3cc2e17a7

[Beensabu]

Versus a long-term treasury fund like VUSTX, with a trailing twelve month (ttm) yield of 2.8% and standard deviation of ~10% if you look back to 1987. Now, this is weird, but if you paired stocks with uncorrelated bonds like this that have also had a high total return, it actually ended up producing better risk-adjusted returns than the other two options because the standard deviation of the overall portfolio was about the same, but CAGR was higher.

You lost me, are you saying if I paired stocks with a bond fund like VUSTX, it gives me a better-producing risk-adjusted return due to lower overall std dev and higher CAGR than either VBTLX or G fund w/ stocks?

The thing about this part is it's if you had done that over the period that long-term treasuries had a high total return.

Check out this Portfolio Visualizer asset class backtest from 1978. You'll see that the all US stock and the all LTT portfolios both had higher standard deviation than the 50/50 combination of the two asset classes, and the return of the 50/50 portfolio was in between the returns of the individual asset classes. That did happen, in the past, because LTTs had a high return over that period. If you combine high returning, highly volatile, uncorrelated things, you can reduce overall volatility without sacrificing too much return.

The problem is that while it's pretty easy to identify volatile things, and long-term past correlation of asset classes is good enough for figuring out if the correlation was near enough to zero, you don't necessarily know what's going to be high returning in the future. But it probably won't be LTTs from this starting point.

That backtest starts in Jan 1978. PV shows 7.44% CAGR for long-term treasuries from that date. Do you know what the 30-year treasury yield was in Jan 1978? 8%. And right now, it's 3.5-4%, right? It's not going to be the same as it was. But perhaps equities won't either, who knows.

1. G fund - 3-4% (for as long as matters, most likely, unless they seriously change the rules)
2. VBTLX - 4-4.5% (6.5 year duration)
3. VUSTX - 3.5-4% (16 year duration)

When you see that, what do you think would be most likely to deliver the best risk-adjusted returns when paired with equities over 20+ years? Remember that you have no clue what VBTLX will be yielding in 7 years.

G fund, but above i thought you said in terms of overall portfolio, pairing stocks w/ VUSTX would be better?

You are correct. Because it's going to give you the same expected return as VUSTX, with lower volatility, and is still going to be uncorrelated with equities.

Again, pairing stocks w/ long-term treasuries would have been better. But you have to go by the starting yield when it comes to expected returns for bonds. And 3.5-4% is a lot lower than 8%.

Also, for the same reasons G fund is great, after I max that out, would it be smart to max out i bonds, including paper ones?

Sure. You can only buy so many I bonds per year, so if you have the money, then go for it.

And TIPS next, before something like BND or BNDX/BND?

That's a personal decision. It normally depends on what options you have available to you in your employer-sponsored plan, or how much room you have in your IRAs.

[muel87]

And TIPS next, before something like BND or BNDX/BND?

That's a personal decision. It normally depends on what options you have available to you in your employer-sponsored plan, or how much room you have in your IRAs.

Thanks for that. I do have plenty of room in my IRAs to accommodate my entire bond allocation. My employer plan has no TIPS, the only reasonably priced funds it has are a Bloomberg US Aggregate Bond Index fund at .03%, an S&P 500 at .013% and an International stock Index Fund at .055%. I'd plan to put that space in the Bond index fund, but now I am questioning (from this convo and others) that I would be better served looking at TIPS and/or other stable value funds for that money.

I'm convinced about the G fund and I bonds, but can fit only 5% of my portfolio in G, and not even 1% if I max I bonds (not sure if I can use my solo 401k to buy another $10k), so I still need to figure out how to allocate the other 15% of my bonds. Or reduce my overall bond allocation. I had settled on 20% with a very non-scientific decision making process of "it seems aggressive but not too aggressive" (fear of selling early is a non-factor).

[Beensabu]

I'm convinced about the G fund and I bonds, but can fit only 5% of my portfolio in G, and not even 1% if I max I bonds (not sure if I can use my solo 401k to buy another $10k), so I still need to figure out how to allocate the other 15% of my bonds.

If you don't feel strongly about it one way or the other, you could always split the difference for the rest and go half nominal aggregate bond fund and half TIPS. There are plenty of people here who have done that for a long time. And then you just need to figure out what duration you want for your TIPS - and if you're not sure about that, then just go intermediate-term.

[muel87]

If you don't feel strongly about it one way or the other, you could always split the difference for the rest and go half nominal aggregate bond fund and half TIPS. There are plenty of people here who have done that for a long time. And then you just need to figure out what duration you want for your TIPS - and if you're not sure about that, then just go intermediate-term.

I dont feel strongly, but that's possibly just due to my ignorance. In terms of the TIPS duration, is it that the longer duration, the more volatile and theoretically the higher returns? I want the duration shorter as I get closer to retirement age?

[Beensabu]

If you don't feel strongly about it one way or the other, you could always split the difference for the rest and go half nominal aggregate bond fund and half TIPS. There are plenty of people here who have done that for a long time. And then you just need to figure out what duration you want for your TIPS - and if you're not sure about that, then just go intermediate-term.

I dont feel strongly, but that's possibly just due to my ignorance. In terms of the TIPS duration, is it that the longer duration, the more volatile and theoretically the higher returns? I want the duration shorter as I get closer to retirement age?

It's not that returns are expected to be higher because of higher volatility. It's that you know what your rate of return is going to be over the entire duration. As opposed to going with a shorter and less volatile duration but having to take whatever the new rate is later on (without knowing if it'll be lower or not).

That's the whole concept behind duration-matching the fixed income allocation: match the duration to when you'll need the money and at least you know the rate you'll get the whole way there and about what you'll have available around when you need it.

Long-term TIPS are just as volatile as long-term nominal treasuries as far as "pricing in the mean time" is concerned. The difference is that with one (TIPS), you know the real rate of return; with the other (nominal treasuries), you know the nominal rate of return. So if you have future liabilities that you can match in nominal terms (like a fixed-rate mortgage) then nominals are fine. But if you have future liabilities that you'd rather match in real terms (like the expenses that increase over time with inflation), then you'd prefer TIPS.

If inflation is higher than expected over whatever time period, then TIPS with that duration will do better than nominal bonds. If inflation is lower than expected over the time period, then nominal bonds with that duration will do better than TIPS.

People desire inflation protection in case inflation is higher than expected, especially if it's a lot higher than expected. And as a retail investor, you can actually achieve that for your entire fixed income allocation if you want to.

The thing is that while you're in accumulation, with a high stock allocation, your income and equities are doing the heavy lifting as far as keeping up with inflation. People tend to get more worried about matching future real liabilities as they get closer to retirement, have less personal capital to rely on, and have a heavier fixed income allocation (and thus lighter equity allocation).

The only reason I personally can think of for a person nowhere near retirement to have TIPS would be to retain purchasing power in the short-term in case of unexpected inflation (for a known upcoming real liability, like a house down payment). And for something like that, you'd want short-term TIPS and you'd want them in a place where you can access them in the near future (not in a tax-advantaged account).

[muel87]

People desire inflation protection in case inflation is higher than expected, especially if it's a lot higher than expected. And as a retail investor, you can actually achieve that for your entire fixed income allocation if you want to.

The thing is that while you're in accumulation, with a high stock allocation, your income and equities are doing the heavy lifting as far as keeping up with inflation. People tend to get more worried about matching future real liabilities as they get closer to retirement, have less personal capital to rely on, and have a heavier fixed income allocation (and thus lighter equity allocation).

The only reason I personally can think of for a person nowhere near retirement to have TIPS would be to retain purchasing power in the short-term in case of unexpected inflation (for a known upcoming real liability, like a house down payment). And for something like that, you'd want short-term TIPS and you'd want them in a place where you can access them in the near future (not in a tax-advantaged account).

Got it. But couldnt I apply that reasoning to bonds in general and just not buy bonds at all when I'm 20 years from needing the money? And, if I am holding a % of bonds now to improve the risk-adjusted returns of the portfolio (since they are inversely correlated usually), then wouldnt it make sense to have part of bonds in TIPS and part nominal, since we dont know how often inflation would be greater than expected vs lower than expected?

[Beensabu]

Got it. But couldnt I apply that reasoning to bonds in general and just not buy bonds at all when I'm 20 years from needing the money? And, if I am holding a % of bonds now to improve the risk-adjusted returns of the portfolio (since they are inversely correlated usually), then wouldnt it make sense to have part of bonds in TIPS and part nominal, since we dont know how often inflation would be greater than expected vs lower than expected?

Sure. I just don't know if I might need it earlier than I hope to need it, and I don't think I'd be able to make up a really big loss with new contributions, but that's me. You're you. Everyone has their own circumstances, so you make the most reasonable decisions for your own situation.

Uncorrelated (close to zero correlation) usually. Not really inversely correlated.

And sure. That seems to be why people go 50/50 TIPS/nominal, as far as I can tell.