A Radical Question Regarding Total Bond Index

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Nowizard
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A Radical Question Regarding Total Bond Index

Post by Nowizard »

It is, of course, axiomatic that virtually everyone is recommended to hold bonds in their investment portfolio. Many(most?) of those posting here hold Vanguard Total Bond Index, though there are other ways to invest in bonds. For those with longer investment horizons and extreme focus on returns, why invest in the Vanguard Total Bond Index or a total bond index of other companies given the following returns for VBTLX?


YTD: 1.39% 1 year: (3.53%) 3 years: (3.99%) 5 years: .67% 10 years: 1.17% 15 years: 2.57%

There are many reasons for investing in bonds given by most everyone but little discussion of portfolios laser focused on returns. Buffett, of course, states 90/10 with belief most are best served with indexes.



Tim
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nedsaid
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Re: A Radical Question Regarding Total Bond Index

Post by nedsaid »

Total Bond Market Index is a good bond investment. An intermediate term US Treasury fund over long time periods might be a bit better, particularly during times of economic distress. Vineviz had a great thread on Long Term US Treasuries.
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Re: A Radical Question Regarding Total Bond Index

Post by Taylor Larimore »

Nowizard wrote: Fri May 26, 2023 2:49 pm It is, of course, axiomatic that virtually everyone is recommended to hold bonds in their investment portfolio. Many(most?) of those posting here hold Vanguard Total Bond Index, though there are other ways to invest in bonds. For those with longer investment horizons and extreme focus on returns, why invest in the Vanguard Total Bond Index or a total bond index of other companies given the following returns for VBTLX?


YTD: 1.39% 1 year: (3.53%) 3 years: (3.99%) 5 years: .67% 10 years: 1.17% 15 years: 2.57%

There are many reasons for investing in bonds given by most everyone but little discussion of portfolios laser focused on returns. Buffett, of course, states 90/10 with belief most are best served with indexes.

Tim
Tim:

Bonds are primarily for safety--not laser focused on returns. Bonds with the highest returns are nearly always the bonds with highest risk of default.

Last year Total Bond Market had the largest decline in its history but still declined less than most stocks.

Normally the annual return of bonds is greater after bond underperformance. This is because, unlike stocks, individual bonds have a guaranteed return. Stay the course with a Total Bond Market Index Fund and you should do just fine. You can see this in the Table of Returns below:

Past rate of inflation (CPU) and annual fund returns in The Three-Fund Portfolio:

YEAR--INFLATION--BOND INDEX--S&P 500 INDEX------MSCI EAFE INDEX
1976-------4.9%--------15.6%------------23.8%--------------------3.6%
1977-------6.7-----------3.0-------------(-7.2)-------------------17.5
1978-------9.0-----------1.4---------------6.6--------------------33.1
1979------13.3-----------1.9--------------18.4-------------------10.9 (Highest Annual Inflation Rate)
1980------12.5-----------2.7--------------32.4-------------------25.4
1981-------8.9-----------6.3-------------(-4.9)------------------(-2.5)
1982-------3.8----------32.6--------------21.6------------------(-0.3) (Highest Bond Index Return)
1983-------3.8-----------8.4--------------22.6-------------------24.8
1984-------3.9----------15.2---------------6.3--------------------3.5
1985-------3.8----------22.1--------------31.7-------------------51.4
1986-------1.1----------15.2--------------18.7-------------------65.8 (Highest Stock Return)
1987-------4.4-----------2.8----------------5.2-------------------24.6
1988-------4.4-----------7.9---------------16.6-------------------27.8
1989-------4.6----------14.5---------------31.7------------------11.4
1990-------6.1-----------8.9---------------(-3.1)---------------(-22.8)
1991-------3.1----------16.0---------------30.5------------------12.4
1992-------2.9-----------7.4-----------------7.6----------------(-11.9)
1993-------2.7-----------9.7----------------10.1------------------32.6
1994-------2.7---------(-2.9)----------------1.3--------------------7.6
1995-------2.5----------18.5---------------37.6-------------------11.8 (Highest S&P Index Return)
1996-------3.3-----------3.6----------------23.0--------------------7.2
1997-------1.7-----------9.7----------------33.4--------------------2.6
1998-------1.6-----------8.7----------------28.6-------------------19.1
1999-------2.7---------(-0.8)---------------21.0-------------------28.3
2000-------3.4----------11.6---------------(-9.1)----------------(-15.8)
2001-------1.6-----------8.4--------------(-11.9)----------------(-19.8)
2002-------2.4----------10.3-------------(-22.1)----------------(-15.3)
2003-------1.9-----------4.1----------------28.7-------------------40.4
2004-------3.3-----------4.3----------------10.9-------------------20.9
2005-------3.4-----------2.4-----------------4.9-------------------15.8
2006-------2.5-----------4.3----------------15.8------------------26.8
2007-------4.1-----------7.0-----------------5.5------------------11.6
2008-------0.1-----------5.2--------------(-37.0)---------------(-43.1) (Lowest U.S. and International Stock Returns)
2009-------2.7-----------5.9----------------26.5------------------32.5
2010-------1.5-----------6.5----------------15.1-------------------8.2
2011-------3.0-----------7.7-----------------2.1----------------(-11.7)
2012-------1.7-----------4.3----------------16.0------------------17.9
2013-------1.5---------(-2.0)---------------32.4------------------23.3
2014-------1.6-----------6.0----------------13.7-----------------(-4.5)
2015-------0.7-----------0.5-----------------1.4-----------------(-0.4)
2016-------2.1-----------2.6----------------12.0-------------------1.5
2017-------2.1-----------3.5----------------21.8------------------25.6
2018-------2.5---------(-0.1)--------------(-4.4)---------------(-13.4)
2019-------2.3-----------8.7----------------31.5------------------22.7
2020-------1.4-----------7.7----------------18.4------------------11.3
2021-------7.0---------(-1.7)---------------25.7-------------------8.6
2022-------6.5--------(-13.2)-------------(-19.4)--------------(-16.0) (Lowest Bond Index Return)

Sources: Vanguard, U.S. Labor Department (CPI-U), Standard & Poors, Bloomberg Barclays Aggregate Bond Index, and DFTurner

Past performance does not forecast future performance.

Best wishes
Taylor
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Re: A Radical Question Regarding Total Bond Index

Post by nisiprius »

Nowizard, what do you mean by "laser focused on returns?" You seem to be laser focused on past returns.

And you don't give any standard for what returns you think are adequate. You just say "given these returns." And you don't tell us what you see as the alternative.

Please spell out exactly what you mean by an investing strategy "laser focused on returns." For example, here is a strategy:

a) Look at a list of funds that include 1-3-5-10-15 year returns.
b) Find the fund with the biggest return number in the "15 year" column.
c) Invest everything in that fund.

If that's what you mean, please say so and then I can address the strategy.

I would love to be laser focused on future returns, but clouds of uncertainty get in the way between the laser and the future.
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Re: A Radical Question Regarding Total Bond Index

Post by Kenkat »

Nobody talked about any of this before last year. One historically bad year at the end of the sequence impacted returns greatly.
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Re: A Radical Question Regarding Total Bond Index

Post by MattB »

Nowizard wrote: Fri May 26, 2023 2:49 pm For those with longer investment horizons and extreme focus on returns, why invest in the Vanguard Total Bond Index or a total bond index of other companies given the following returns for VBTLX?


YTD: 1.39% 1 year: (3.53%) 3 years: (3.99%) 5 years: .67% 10 years: 1.17% 15 years: 2.57%
Not sure why you're putting weight on historic returns ending in one of the worst years in history for VBTLX. Do you think they are a valid representation of average returns going forward or do you know they are not but just want to start a conversation?

In either case bonds are for safety.

You're probably best served by looking to equities if you want the potential for higher returns over the long-term.
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Re: A Radical Question Regarding Total Bond Index

Post by Hacksawdave »

I have the Total Bond Institutional class VBTIX in my 401k. It is perfect as the other bond options are high expense and not as well rounded. It keeps my 401k simple with the S&P Institutional Index and a stable value fund to position annual withdrawals to periodically. When I make the annual distribution for the retirement spending cashflow process, I simply take out of the stable value fund.

Bonds in my taxable and Roth are managed. The Roth has the holdings from Wellington Admiral class. My taxable is CA Intermediate and Long-term tax exempts, and the VGSTX STAR fund that holds GNMA, Short-term, and Long-term Investment Grade funds. They produce the spendable income to the cashflow process.

As far as returns are concerned, I am not concerned about capital appreciation of the NAV for the bond funds but for the income produced. STAR fund has CGs reinvested to increase the number of income producing shares without making additional external purchases. I do that for inflation.
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Re: A Radical Question Regarding Total Bond Index

Post by ruralavalon »

Nowizard wrote: Fri May 26, 2023 2:49 pm It is, of course, axiomatic that virtually everyone is recommended to hold bonds in their investment portfolio. Many(most?) of those posting here hold Vanguard Total Bond Index, though there are other ways to invest in bonds. For those with longer investment horizons and extreme focus on returns, why invest in the Vanguard Total Bond Index or a total bond index of other companies given the following returns for VBTLX?


YTD: 1.39% 1 year: (3.53%) 3 years: (3.99%) 5 years: .67% 10 years: 1.17% 15 years: 2.57%

There are many reasons for investing in bonds given by most everyone but little discussion of portfolios laser focused on returns. Buffett, of course, states 90/10 with belief most are best served with indexes.



Tim
For a portfolio "laser focused on returns" you need an extreme stock allocation, not "other ways to invest in bonds".

I believe that most investors want some reasonable combination of higher returns and lower risk, which is the reason you see a focus on portfolios using intermediate-term, investment-grade bond funds.

There have of course been many threads discussing Mr. Buffett's idea of a portfolio using 90% in a S&P 500 index fund with 10% in short-term Treasuries.
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Re: A Radical Question Regarding Total Bond Index

Post by ebeb »

If you have shorter time frames for withdrawal like 3-5 years, then individual bonds or treasuries with fixed duration may be more suitable than bond/treasury funds. Due to their never-ending duration, you cannot predict what the bond fund price will be when it is time to sell due to interest rate changes unless it is real short-term funds like 1-2 years duration. :wink:
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Re: A Radical Question Regarding Total Bond Index

Post by gavinsiu »

The focus would be on asset allocation. If you want high long term return and can stomach the volatility, then go with 90% total stock market + 10% total bonds market. People increase bond to return short term volatility.

But my bond portfolio tanked last years? The other lesson is that there are no protections from everything portfolios. Bond did work well in 2008 stock market crash, it just didn’t work in 2022.

When comparing funds you should compare it to its peers. Total bonds return sucks when compare to stock fund but is better than its peers.
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Re: A Radical Question Regarding Total Bond Index

Post by grabiner »

Investing is a trade-off between risk and return, and this applies to bonds as well; you can increase your portfolio risk by holding riskier bonds, or by moving money from bonds to riskier investments such as stocks.

If you invest in high-yield bonds, then your bonds will have higher expected return than Total Bond Market Index, but will lose value when the stock market declines. If you view a high-yield bond fund as half stock and half bonds (since you need twice as much to get the same diversification benefit), then the return advantage disappears.

Conversely, if you invest in short-term bonds, your bonds will have less risk than Total Bond Market Index, but also lower expected return. This may be appropriate if it is consistent with your risk tolerance; for example, money to be spent in less than five years should be in short-term bonds.
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Re: A Radical Question Regarding Total Bond Index

Post by Nowizard »

The question is rhetorical, and the focus is on returns. As for choosing funds with the greatest returns over time, the focus in this question would be the exact opposite of not choosing those with longer term returns that were low. The issue of posting now is coincidental to the question which is why 15-year return averages rather than only one year were posted. This is not a recommendation or what is followed, just a question of whether it is sometimes wise to question what is considered to be almost sacrosanct. For example, the comment that past returns do not reflect future is valid, but only within context. If there is no expectation that future, overall returns will not reflect a positive, then we are foolish to place money in the markets.

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Re: A Radical Question Regarding Total Bond Index

Post by Boglenaut »

Nowizard wrote: Fri May 26, 2023 2:49 pm It is, of course, axiomatic that virtually everyone is recommended to hold bonds in their investment portfolio.
I would not say that. I have my 16 and my 18 year olds' Roth IRAs 100% in stock index funds, and I will feel comfortable there until they are at least 30 years old (if that is what they want when old enough to decide).

My wife and I are currently at 27% bonds, simply because we are not willing to have 100% in stock. However, given we have enough "safer" (used loosely) investments, no new funds go into bonds. Any new money is on the heirs' time scale.
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Re: A Radical Question Regarding Total Bond Index

Post by gavinsiu »

There is a general recommendation to hold bonds, but no consensus on how much. You are essentially asking why you would hold bonds at all if the long term return of stock is higher. There are a few reasons why someone will hold bonds even if your time horizon is long.

I think the most common reason is that you cannot stomach the loss. I have had tons of people go aggressive like 100% stock, then freak out when we hit a bear market, then they spend the rest of their life in cash because they are too afraid to go back into the market.

There are also periods of time (I believe up to 30 years) when bonds might out perform stocks. Those who hold those bonds are hoping to weatherize against those situations.

There are also followers of the efficient frontier that adjust stock/bond ratio to get the highest return for the risk taken. They hold bonds if stocks aren't generating more return for the risk.

Finally, your financial situation may limit your flexibility. Buffet can recommend a 90/10 portfolio, but he has a lot of money. If he loses 99% of his wealth and still lives well. A 40% loss isn't going to keep him up at night. A person at the lower end of the income range with a much smaller portfolio may be uncomfortable taking those risks.

The fact that Buffet recommends a 90% and not a 100% stock portfolio means that he also thinks bonds have some value.

Note: I had a 100% stock portfolio for a quarter of a century, but I don't generally suggest people take the same approach because I have seen too many people freak out when the market drops sharply.
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Re: A Radical Question Regarding Total Bond Index

Post by Beensabu »

Nowizard wrote: Fri May 26, 2023 2:49 pm For those with longer investment horizons and extreme focus on returns, why invest in the Vanguard Total Bond Index or a total bond index of other companies given the following returns for VBTLX?
Because it's the best bond option in my 401k. If the other types of bond funds I hold were available in my 401k, I would invest in those there instead.
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Re: A Radical Question Regarding Total Bond Index

Post by Marseille07 »

Nowizard wrote: Fri May 26, 2023 2:49 pm It is, of course, axiomatic that virtually everyone is recommended to hold bonds in their investment portfolio. Many(most?) of those posting here hold Vanguard Total Bond Index, though there are other ways to invest in bonds. For those with longer investment horizons and extreme focus on returns, why invest in the Vanguard Total Bond Index or a total bond index of other companies given the following returns for VBTLX?


YTD: 1.39% 1 year: (3.53%) 3 years: (3.99%) 5 years: .67% 10 years: 1.17% 15 years: 2.57%

There are many reasons for investing in bonds given by most everyone but little discussion of portfolios laser focused on returns. Buffett, of course, states 90/10 with belief most are best served with indexes.



Tim
I don't think it's a radical question. Some people only hold equities and short-term instruments. The idea is really simple, if we all believe that equities return higher, why not have more equities? And you hold short-term instruments to pay day-to-day.
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Re: A Radical Question Regarding Total Bond Index

Post by ScubaHogg »

Kenkat wrote: Fri May 26, 2023 3:43 pm Nobody talked about any of this before last year. One historically bad year at the end of the sequence impacted returns greatly.
People were talking about inflation jumps and rising interest rates all the time. They were just generally ignored.
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Re: A Radical Question Regarding Total Bond Index

Post by nisiprius »

gavinsiu wrote: Fri May 26, 2023 11:21 pm...if the long term return of stock is higher...
What does it even mean to say "the long term return of stock is higher?" All we know about stocks is what the return has been and we only know that for specific time periods. We don't know what the return will be in the future, and, no, we don't know the probabilities or what any kind of statistics will be.
There are a few reasons why someone will hold bonds even if your time horizon is long.
This echoes the title of Paul Samuelson's paper, "Why we should not make mean log of wealth big though years to act are long." This was a kind of joke in which he literally used words of only one syllable. In part:
He who acts in N plays to make his mean log of wealth as big as it can be made will, with odds that go to one as N soars, beat me who acts to meet my own tastes for risk.

Who doubts that? What we do doubt is that it should make us change our views on gains and losses - should taint our tastes for risk.

To be clear is to be found out. Know that life is not a game with net stake of one when you beat your twin, and with net stake of nought when you do not. A win of ten is not the same as a win of two. Nor is a loss of two the same as a loss of three. How much you win by counts. How much you lose by counts.

As soon as we see this clear truth, we are back to our own tastes for risk. Mean log of wealth then bores those of us with tastes for risk not real near to one odd (thin!) point on the line of all the tastes for risk -and this holds for each N, with N as big as you like.

Why then do some still think they should want to make mean log of wealth big? They nod. They feel 'That way I must end up with more. More sure beats less'. But they err. What they do not see is this:

When you lose - and you sure can lose - with N large, you can lose real big. Q.E.D.

Long since, in Samuelson (1963, p. 4), I had to prove what is not hard to grasp:
If it does not pay to do an act once, it will not pay to do it twice, thrice,..., or at all.
Or, Paul A. Samuelson (1971), 'The "Fallacy" of Maximizing the Geometric Mean in Long Sequences of Investing or Gambling,' Proceedings of the National Academy of Sciences of the United States of America , Oct., 1971, Vol. 68, No. 10 (Oct., 1971), pp. 2493-2496, https://www.jstor.org/stable/61075[quote]Because the outcomes of repeated investments or gambles involve products of variables, authorities have repeatedly been tempted to the belief that, in a long sequence, maximization of the expected value of terminal utility can be achieved or well-approximated by a strategy of maximizing at each stage the geometric mean of outcome (or its equivalent, the expected value of the logarithm of principal plus return). The law of large numbers or of the central limit theorem as applied to the logs can validate the conclusion that a maximum-geometric-mean strategy does indeed make it "virtually certain" that, in a "long" sequence, one will end with a higher terminal wealth and utility. However, this does not imply the false corollary that the geometric-mean strategy is optimal for any finite number of periods, however long, or that it becomes asymptotically a good approximation.[/quote]Unfortunately, nowizard's question is stated so vaguely and ambiguously that you can't answer it without guessing at one of many things they might have meant, but I'd make some observations.

First, it's irrelevant what a robot might or might not do in some financial situation, because we cannot avoid behavioral errors just by deciding not to make them. In experiments, people made behavioral errors even when they were informed in advance of the specific kind of error that was going to be tested and asked to avoid it.

Second, a rational analysis depends on information about the future statistics--not only of the investments but also of future events--information which is unobtainable. A robot who knew for certain that a bill for $12,345 was coming due on 5/4/32, absolutely had to be met, and had no other resources to meet it but a choice between an investment A which was 100% sure to pay out $12,346 on 5/3/32 and an investment B with 50% probability of paying out $12,344 on 5/3/32 and a 50% probability of paying out $100,000 on 5/5/32 would chose A, because it has a 100% chance of success while B only has a 50% chance. In real life of course all those assumptions are impossible and the probabilities are unknown and so are the probabilities of other things--the probability of getting a loan, for example. For most of these stock-versus-bond debates, assumptions are being smuggled in about future probabilities and future requirements. An obvious one is first saying "never would have" and then drawing conclusions as if that meant "never will," without explicitly stating the step in between.

Third, you have the problem of utility functions, because you probably want to maximize your happiness, not your wealth. Unfortunately happiness is hard to measure, hard to predict as a function of anything measurable, and then you get into the question of the meta-happiness of the time course of happiness. Which is better, a steady contentment, or being happier on the average with fluctuations?
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Re: A Radical Question Regarding Total Bond Index

Post by ruralavalon »

Nowizard wrote: Fri May 26, 2023 9:42 pm The question is rhetorical, and the focus is on returns. As for choosing funds with the greatest returns over time, the focus in this question would be the exact opposite of not choosing those with longer term returns that were low. The issue of posting now is coincidental to the question which is why 15-year return averages rather than only one year were posted. This is not a recommendation or what is followed, just a question of whether it is sometimes wise to question what is considered to be almost sacrosanct. For example, the comment that past returns do not reflect future is valid, but only within context. If there is no expectation that future, overall returns will not reflect a positive, then we are foolish to place money in the markets.

Tim
Do you have a question about personal investments?
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Re: A Radical Question Regarding Total Bond Index

Post by Nowizard »

No, the post states it is rhetorical for discussion, as often happens.

Tim
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Re: A Radical Question Regarding Total Bond Index

Post by jimkinny »

Depending on one's situation and willingness to take risk, I can easily see why one would not want to own bonds. There is a risk associated with doing that and the bet may not pay off the way you think it will.
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Re: A Radical Question Regarding Total Bond Index

Post by ApeAttack »

Read Benjamin Roth's diary about living through the Great Depression. He constantly laments not having loaded up on bonds as they were a solid investment when stocks plummeted and oscillated wildly for years.

If WWII never happened and the other great powers' industrial base didn't get destroyed, who knows how long the Great Depression would've lasted.

Bonds help protect against some types of risk. You pay a premium for that protection.
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Re: A Radical Question Regarding Total Bond Index

Post by HawkeyePierce »

I don't think Buffet is a terribly useful source for advice on this. He and his heirs do not face any sequence of returns risk. At his level of wealth, it wouldn't matter if the stock portion of a 90/10 portfolio dropped by 50% and stayed there for years.
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Re: A Radical Question Regarding Total Bond Index

Post by ruralavalon »

Nowizard wrote: Sat May 27, 2023 10:59 am No, the post states it is rhetorical for discussion, as often happens.

Tim
Asset allocation and fund selection depend on personal circumstances and the particular goal(s) for investing. In other words this is very fact-dependent.
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Re: A Radical Question Regarding Total Bond Index

Post by Jimbo Moneybags »

I chose a TIPS fund several decades ago over a total bond index fund. It has had a higher overall return, higher best year, lower worst year, and lower maximum drawdown.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
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Re: A Radical Question Regarding Total Bond Index

Post by gavinsiu »

I think that it is a reasonable assumption that return in the long run is likely to be higher than bonds, but I know that it is not a given.

As for happiness. I would say that most people are unhappy if they don't have enough money for basic needs. If you are foregoing drugs because you need food, well that can't be good. However, once your regular needs are met, larger amounts of money might not equate to greater happiness.

If you have more money than you actually need, then I think how you invest your portfolio does not matter. Suppose it ends up that your pension + SS means your need, then you can invest your money super agressively or not at all.
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Re: A Radical Question Regarding Total Bond Index

Post by secondopinion »

ruralavalon wrote: Fri May 26, 2023 4:55 pm
Nowizard wrote: Fri May 26, 2023 2:49 pm It is, of course, axiomatic that virtually everyone is recommended to hold bonds in their investment portfolio. Many(most?) of those posting here hold Vanguard Total Bond Index, though there are other ways to invest in bonds. For those with longer investment horizons and extreme focus on returns, why invest in the Vanguard Total Bond Index or a total bond index of other companies given the following returns for VBTLX?


YTD: 1.39% 1 year: (3.53%) 3 years: (3.99%) 5 years: .67% 10 years: 1.17% 15 years: 2.57%

There are many reasons for investing in bonds given by most everyone but little discussion of portfolios laser focused on returns. Buffett, of course, states 90/10 with belief most are best served with indexes.



Tim
For a portfolio "laser focused on returns" you need an extreme stock allocation, not "other ways to invest in bonds".

I believe that most investors want some reasonable combination of higher returns and lower risk, which is the reason you see a focus on portfolios using intermediate-term, investment-grade bond funds.

There have of course been many threads discussing Mr. Buffett's idea of a portfolio using 90% in a S&P 500 index fund with 10% in short-term Treasuries.
The only real option is to use leverage on bonds. However, it is a rough way to make stock-like returns. The risk taken is generally much higher.
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Re: A Radical Question Regarding Total Bond Index

Post by edge »

I use short term bonds. Long duration has too much risk and less diversification.
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Re: A Radical Question Regarding Total Bond Index

Post by Beensabu »

edge wrote: Sat May 27, 2023 2:05 pm I use short term bonds. Long duration has too much risk and less diversification.
Now that's interesting. Duration diversification. Short for fixed income, because the implied duration of equities is quite long. That's the best argument for short-term bonds I've heard as far as "whole portfolio" perspective is concerned.
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Re: A Radical Question Regarding Total Bond Index

Post by Kenkat »

ScubaHogg wrote: Sat May 27, 2023 4:26 am
Kenkat wrote: Fri May 26, 2023 3:43 pm Nobody talked about any of this before last year. One historically bad year at the end of the sequence impacted returns greatly.
People were talking about inflation jumps and rising interest rates all the time. They were just generally ignored.
Right. People have talked about inflation jumps and rising interest rates for years. YEARS. I’ve been here reading them. It finally happened and now you see all of the “I told you so” posts.

The general consensus for a long time was that Total Bond Index is a reasonable bond choice. My opinion is that the general consensus was correct and is still correct for long term investors.
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Re: A Radical Question Regarding Total Bond Index

Post by ScubaHogg »

Kenkat wrote: Sat May 27, 2023 7:23 pm
ScubaHogg wrote: Sat May 27, 2023 4:26 am
Kenkat wrote: Fri May 26, 2023 3:43 pm Nobody talked about any of this before last year. One historically bad year at the end of the sequence impacted returns greatly.
People were talking about inflation jumps and rising interest rates all the time. They were just generally ignored.
Right. People have talked about inflation jumps and rising interest rates for years. YEARS. I’ve been here reading them. It finally happened and now you see all of the “I told you so” posts.

The general consensus for a long time was that Total Bond Index is a reasonable bond choice. My opinion is that the general consensus was correct and is still correct for long term investors.
Not saying it’s not. But that’s a big leap from “nobody talked about any of this before last year.”

There’s a stream of people who were advocating duration matching and/or guarding against inflation jumps. Neither of which TBM accomplishes for the majority of people on here holding bonds.
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Re: A Radical Question Regarding Total Bond Index

Post by Marseille07 »

ScubaHogg wrote: Sat May 27, 2023 10:39 pm Not saying it’s not. But that’s a big leap from “nobody talked about any of this before last year.”

There’s a stream of people who were advocating duration matching and/or guarding against inflation jumps. Neither of which TBM accomplishes for the majority of people on here holding bonds.
I'm lukewarm on TBM personally because it's nominal and the constant exposure to ITT might not be what I want. Plus, some backtests showed that TIPS would perform better all around.
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Re: A Radical Question Regarding Total Bond Index

Post by Pops1860 »

This thread has been moved to the “Investing - Theory, News & General” forum. Moderator Pops1860
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Re: A Radical Question Regarding Total Bond Index

Post by ebeb »

ScubaHogg wrote: Sat May 27, 2023 10:39 pm
There’s a stream of people who were advocating duration matching and/or guarding against inflation jumps. Neither of which TBM accomplishes for the majority of people on here holding bonds.
Agreed, duration matching not possible with TBM, which is one reason I am slowly selling off TBM to buy individual bonds :annoyed
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Re: A Radical Question Regarding Total Bond Index

Post by jcjc »

As a retiree the performance of Total Bond this last year made me realize the duration of that fund was too long for my "safe money". I still have VBILX in an IRA which I'm keeping and reinvesting the coupon. In Total Bond I was spending the monthly coupon. So the loss is basically permanent and it was a lot. I sold it some time ago and replacing with 1 - 5 year CD's and a VGIT. Total Bond is still quite a bit lower than when I sold it. My goal is monthly income with little loss to principal. Also I'm letting stocks go from 55% to 60% . Not sure any of these changes will make much difference in the long run. There is an emotional component. Somehow I can handle losing sometime in stocks because the rewards can be high. Bonds not so much.
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Re: A Radical Question Regarding Total Bond Index

Post by Beensabu »

jcjc wrote: Sun May 28, 2023 11:30 am In Total Bond I was spending the monthly coupon. So the loss is basically permanent and it was a lot.
But if you're just spending the monthly coupon, then the amount you're getting goes up when yield rise / NAV drops, and you can reinvest the extra if you want to. Bond fund NAVs go up when rates drop - reinvestment of dividends is not the only way to recover. If you're only spending the monthly coupon, you would have the time to wait.
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Re: A Radical Question Regarding Total Bond Index

Post by jcjc »

I have thought about buying back in as the fed indicates rate increases are over. I know Bogleheads say you can't time the bond market but it is tempting. Honestly I wish I had sold earlier in the cycle.

You may be correct, but it seems it would take a very long time to make up the monies lost. I don't regret selling that fund when I did. Wish I would have done it sooner. I've been earning much more out of it and not losing principal either. I realize that may become more difficult as rates drop. To me that side of the portfolio is to be able to stay the course in stocks. So I'm sticking with shorter duration funds, individual treasuries or C.D.'s moving forward. My VGIT may have been a mistake too. It does have a slightly lower duration. Albeit not much.
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Re: A Radical Question Regarding Total Bond Index

Post by Kenkat »

In the long run, cash will yield less than short term bonds, which will yield less than intermediate term bonds, which will yield less than long term bonds.

If you are in retirement, you still may have a 20-30 year time horizon. If you are accumulating, it could be a 50 year time horizon. But because bonds took a big drop, everyone’s talking about shortening maturities, or avoiding bonds or Total Bond Index - now, after the damage has been done. Could there be more damage? Perhaps, but I gave up predicting the future awhile ago.

The most likely result of going short on maturities is lower returns. If you have a 5 year time horizon, then maybe a duration such as Total Bond (intermediate) is not the right choice, but otherwise it is important not to make the behavioral mistake of reacting after the fact.
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Re: A Radical Question Regarding Total Bond Index

Post by Marseille07 »

Kenkat wrote: Sun May 28, 2023 2:30 pm In the long run, cash will yield less than short term bonds, which will yield less than intermediate term bonds, which will yield less than long term bonds.

If you are in retirement, you still may have a 20-30 year time horizon. If you are accumulating, it could be a 50 year time horizon. But because bonds took a big drop, everyone’s talking about shortening maturities, or avoiding bonds or Total Bond Index - now, after the damage has been done. Could there be more damage? Perhaps, but I gave up predicting the future awhile ago.

The most likely result of going short on maturities is lower returns. If you have a 5 year time horizon, then maybe a duration such as Total Bond (intermediate) is not the right choice, but otherwise it is important not to make the behavioral mistake of reacting after the fact.
Some folks don't buy the idea of duration matching. Unless you know some lumpy expenses down the line (house, kids' college fund etc etc), what are we duration matching for? Most of our expenses are day-to-day such as paying for food, gas, mortgage / rent which do not require duration-matching.

I know one's investment horizon is being talked about a lot, but what's missing is the point of duration-matching.
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Re: A Radical Question Regarding Total Bond Index

Post by Beensabu »

Marseille07 wrote: Sun May 28, 2023 3:40 pm Most of our expenses are day-to-day such as paying for food, gas, mortgage / rent which do not require duration-matching.
If I need to pay for something tomorrow, then that money needs to have a duration of 0. So it needs to be cash.

We pay our day-to-day expenses with cash.

I pay my day-to-day expenses with my employment income.

A retiree pays their day-to-day expenses with retirement income.

If my day-to-day expenses my first year of retirement are 30 years in the future, the money I need to pay those expenses in 30 years can be in a longer duration investment (like stocks or long-term bonds) because I don't need it be cash for 30 more years.

If my day-to-day expenses my first year of retirement are 5 years in the future, the money I need to pay those expenses needs to be in a short duration investment with very little credit risk (like a 5-year CD or treasury bond) because I need it to be cash in 5 years.

The money we need to live our day-to-day lives in the future can be duration matched to when we need to turn it into cash.
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Re: A Radical Question Regarding Total Bond Index

Post by Marseille07 »

Beensabu wrote: Sun May 28, 2023 7:30 pm If my day-to-day expenses my first year of retirement are 30 years in the future, the money I need to pay those expenses in 30 years can be in a longer duration investment (like stocks or long-term bonds) because I don't need it be cash for 30 more years.

If my day-to-day expenses my first year of retirement are 5 years in the future, the money I need to pay those expenses needs to be in a short duration investment with very little credit risk (like a 5-year CD or treasury bond) because I need it to be cash in 5 years.
The problem with this logic is that we don't stock up 30 years of fixed income, not even close.

Imagine a retiree with a 1M portfolio drawing 40K/year. Even if we know she will need real 40K/year 30 years from now, she doesn't have 1.2M in fixed income even if she is 100% bonds. So...where exactly is the money she has today that she doesn't need to touch for 30 years?
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Re: A Radical Question Regarding Total Bond Index

Post by smooth_rough »

Interesting thought experiment.

With the standard 60/40 portfolio, replace bonds with 20% preferred stocks, and 20% utilities.

https://www.morningstar.com/funds/consi ... -utilities
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Re: A Radical Question Regarding Total Bond Index

Post by Beensabu »

Marseille07 wrote: Sun May 28, 2023 7:46 pm
Beensabu wrote: Sun May 28, 2023 7:30 pm If my day-to-day expenses my first year of retirement are 30 years in the future, the money I need to pay those expenses in 30 years can be in a longer duration investment (like stocks or long-term bonds) because I don't need it be cash for 30 more years.

If my day-to-day expenses my first year of retirement are 5 years in the future, the money I need to pay those expenses needs to be in a short duration investment with very little credit risk (like a 5-year CD or treasury bond) because I need it to be cash in 5 years.
The problem with this logic is that we don't stock up 30 years of fixed income, not even close.

Imagine a retiree with a 1M portfolio drawing 40K/year. Even if we know she will need real 40K/year 30 years from now, she doesn't have 1.2M in fixed income even if she is 100% bonds. So...where exactly is the money she has today that she doesn't need to touch for 30 years?
She doesn't have it yet. It's the same (similar) situation as me needing the money in 30+ years for retirement, except that the retiree in your example needs it in 30 years for her 30th year of retirement. That's why most people have an equities allocation in retirement - because while yield on fixed income is a source of return, that expected return probably isn't enough without stocks too. It's pretty rare to be able to liability match your entire retirement, although some people certainly can (and do).
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Re: A Radical Question Regarding Total Bond Index

Post by Marseille07 »

Beensabu wrote: Sun May 28, 2023 8:41 pm She doesn't have it yet. It's the same (similar) situation as me needing the money in 30+ years for retirement, except that the retiree in your example needs it in 30 years for her 30th year of retirement. That's why most people have an equities allocation in retirement - because while yield on fixed income is a source of return, that expected return probably isn't enough without stocks too. It's pretty rare to be able to liability match your entire retirement, although some people certainly can (and do).
But here is the thing right, unless you have *known* lumpy expenses down the road, what's the point of liability-matching today?

For day-to-day expenses, you don't need to liability match - you just pay as you go based on how much you have then. I would rather get the money invested than LM, since chances are the money will have grown more in the market. At least that's the hope, anyway.
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Re: A Radical Question Regarding Total Bond Index

Post by NYCwriter »

smooth_rough wrote: Sun May 28, 2023 8:05 pm Interesting thought experiment.

With the standard 60/40 portfolio, replace bonds with 20% preferred stocks, and 20% utilities.

https://www.morningstar.com/funds/consi ... -utilities
Renkenthaler was responding to a question about low bond yields in 2020. Now, cash is paying 5% short term and total bond funds (intermediate) are paying over 4%.
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Re: A Radical Question Regarding Total Bond Index

Post by nisiprius »

smooth_rough wrote: Sun May 28, 2023 8:05 pm Interesting thought experiment.

With the standard 60/40 portfolio, replace bonds with 20% preferred stocks, and 20% utilities.

https://www.morningstar.com/funds/consi ... -utilities
It's an exercise in "unequalized risks." Executive summary is: if what you actually want is "oh, equivalent risk to maybe 85/15 but without using bonds" his alternative might do if you don't mind some sector concentration into financial and utilities--but it is no substitute for 60/40, and over the time period I look at would have performed worse than just using 85/15

1) Rekenthaler's own subtitle is:

"Higher income and likely better returns, but with greater risk."

What makes a bond a "bond" is not that it provides an income stream, it's the binding legal contract that guarantees a specified income stream. Neither of these "bond alternatives" does.

They are stocks. If you want to say "bond-like stocks" OK, but stocks. And they both have heavy sector concentrations, making them less diversified than "normal" stock funds. "Utilities," obviously, are invested in utilities, which Rekenthaler himself notes are only 3% of the market.

Not mentioned by Rekenthaler--which I think is a significant omission--because of changing practices after the rise of junk bonds, preferred stock funds and ETFS have a heavy concentration in financials. In Ye Olde Days almost every company issued both common and preferred stock; not today. The phrase "common stocks" has almost vanished because preferred stocks are now an exotic speciality.

SPDR® ICE Preferred Securities ETF

Image

Have you already chosen to overweight financials in your portfolio? If not, why not?

2) Writers like to make changes in portfolio that increase risk and then compare before-and-after returns. But you have got to consider risk in some way. If you don't like standard deviation (volatility) use your own measure. But the question to be asked about any portfolio change that increases risk is whether it is any better than just increasing stock allocation. If we are willing to take more risk through a clever asset class substitution, we should be willing to do it the simple way of increasing stock allocation.

With that in mind, let's compare his "alternative balanced" fund after we adjust 60/40 to equalize risk. I'll use VTI (Total Stock) for stocks, PFF (iShares Preferred&Income) for preferred stocks, and VPU (Vanguard Utilities) for utilities.

The first portfolio (blue line) is his alternative allocation, 60% VTI, 20% PFF, 20% VPU. Notice that it experienced a -49.04% drawdown in 2007-2009 and did not recover until January 2011. This tells us already that his alternatives provided almost no protection during the financial crisis.

For the second portfolio (red line) I will use VTI and BND (Total Bond), but instead of using 60/40, I will hand-adjust the proportions by trial and error until it has the same risk as the "alternative." We'll do this in two ways. First, we'll match standard deviation, a measure of volatility.

That turns out to be 84.50% stocks, 15.5% bonds. The "alternative" portfolio isn't comparable to 60/40, it's comparable to about 85/15. And a "straight" 85/15 stock/bond portfolio would have had higher return and less of a decline in 2008-2009. Not a huge difference, but it's hard to see how the "alternative" (blue line) is any better.

Source

Image

When I compare standard deviations, often someone will object that volatility isn't the most important kind of risk. The other one that's easy to measure in PortfolioVisualizer, and quite meaningful to me anyway, is maximum portfolio drawdown. Would the alternative portfolio have provided protection in 2008-2009? We already know the answer is "no" and we can already see from the chart that it fell farther in 2008-2009 than 85/15, but let's do the exercise anyway. Let's see what traditional stock/bond allocation would have matched the "alternative" portfolio during the financial crisis.

It turns out to be... 96.22% stocks, 3.78% bonds! In terms of risk, his portfolio behaves like a 96/4 portfolio, not a 60/40 portfolio. And of course the result is that the risk-matched portfolio would have had much higher return:

Source

Image

In short, it is as if Rekenthaler answered the question "compared to 100% stocks, is there some way to reduce risk and provide an income stream other than bonds," but never answered the question "but is it better than reducing risk the same amount by using bonds?"
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Re: A Radical Question Regarding Total Bond Index

Post by smooth_rough »

nisiprius wrote: Mon May 29, 2023 7:00 am
smooth_rough wrote: Sun May 28, 2023 8:05 pm Interesting thought experiment.

With the standard 60/40 portfolio, replace bonds with 20% preferred stocks, and 20% utilities.

https://www.morningstar.com/funds/consi ... -utilities
It's an exercise in "unequalized risks." Executive summary is: if what you actually want is "oh, equivalent risk to maybe 85/15 but without using bonds" his alternative might do if you don't mind some sector concentration into financial and utilities--but it is no substitute for 60/40, and over the time period I look at would have performed worse than just using 85/15

1) Rekenthaler's own subtitle is:

"Higher income and likely better returns, but with greater risk."

What makes a bond a "bond" is not that it provides an income stream, it's the binding legal contract that guarantees a specified income stream. Neither of these "bond alternatives" does.

They are stocks. If you want to say "bond-like stocks" OK, but stocks. And they both have heavy sector concentrations, making them less diversified than "normal" stock funds. "Utilities," obviously, are invested in utilities, which Rekenthaler himself notes are only 3% of the market.

Not mentioned by Rekenthaler--which I think is a significant omission--because of changing practices after the rise of junk bonds, preferred stock funds and ETFS have a heavy concentration in financials. In Ye Olde Days almost every company issued both common and preferred stock; not today. The phrase "common stocks" has almost vanished because preferred stocks are now an exotic speciality.

SPDR® ICE Preferred Securities ETF

Image

Have you already chosen to overweight financials in your portfolio? If not, why not?

2) Writers like to make changes in portfolio that increase risk and then compare before-and-after returns. But you have got to consider risk in some way. If you don't like standard deviation (volatility) use your own measure. But the question to be asked about any portfolio change that increases risk is whether it is any better than just increasing stock allocation. If we are willing to take more risk through a clever asset class substitution, we should be willing to do it the simple way of increasing stock allocation.

With that in mind, let's compare his "alternative balanced" fund after we adjust 60/40 to equalize risk. I'll use VTI (Total Stock) for stocks, PFF (iShares Preferred&Income) for preferred stocks, and VPU (Vanguard Utilities) for utilities.

The first portfolio (blue line) is his alternative allocation, 60% VTI, 20% PFF, 20% VPU. Notice that it experienced a -49.04% drawdown in 2007-2009 and did not recover until January 2011. This tells us already that his alternatives provided almost no protection during the financial crisis.

For the second portfolio (red line) I will use VTI and BND (Total Bond), but instead of using 60/40, I will hand-adjust the proportions by trial and error until it has the same risk as the "alternative." We'll do this in two ways. First, we'll match standard deviation, a measure of volatility.

That turns out to be 84.50% stocks, 15.5% bonds. The "alternative" portfolio isn't comparable to 60/40, it's comparable to about 85/15. And a "straight" 85/15 stock/bond portfolio would have had higher return and less of a decline in 2008-2009. Not a huge difference, but it's hard to see how the "alternative" (blue line) is any better.

Source

Image

When I compare standard deviations, often someone will object that volatility isn't the most important kind of risk. The other one that's easy to measure in PortfolioVisualizer, and quite meaningful to me anyway, is maximum portfolio drawdown. Would the alternative portfolio have provided protection in 2008-2009? We already know the answer is "no" and we can already see from the chart that it fell farther in 2008-2009 than 85/15, but let's do the exercise anyway. Let's see what traditional stock/bond allocation would have matched the "alternative" portfolio during the financial crisis.

It turns out to be... 96.22% stocks, 3.78% bonds! In terms of risk, his portfolio behaves like a 96/4 portfolio, not a 60/40 portfolio. And of course the result is that the risk-matched portfolio would have had much higher return:

Source

Image

In short, it is as if Rekenthaler answered the question "compared to 100% stocks, is there some way to reduce risk and provide an income stream other than bonds," but never answered the question "but is it better than reducing risk the same amount by using bonds?"
Difficult to make direct apples to apple comparison with bonds and preferred stocks. Another wrinkle would be preferred stocks throw off qualified dividends that can be more tax efficient than bonds.
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Re: A Radical Question Regarding Total Bond Index

Post by catchinup »

nedsaid wrote: Fri May 26, 2023 3:10 pm Total Bond Market Index is a good bond investment. An intermediate term US Treasury fund over long time periods might be a bit better, particularly during times of economic distress. Vineviz had a great thread on Long Term US Treasuries.
How long would you say is a "long time period"?
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Re: A Radical Question Regarding Total Bond Index

Post by nedsaid »

catchinup wrote: Mon May 29, 2023 8:57 pm
nedsaid wrote: Fri May 26, 2023 3:10 pm Total Bond Market Index is a good bond investment. An intermediate term US Treasury fund over long time periods might be a bit better, particularly during times of economic distress. Vineviz had a great thread on Long Term US Treasuries.
How long would you say is a "long time period"?
One decade, maybe two decades.

Professor McQ addresses the question of intermediate term US Treasuries vs. Total Bond Market Index in this thread. He goes into a lot of detail.

viewtopic.php?t=398529
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