TIPS vs Total Bond

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Always passive
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TIPS vs Total Bond

Post by Always passive »

According to Portfolio Visualizer, since 1.2001, TIPS delivered 4.3% annually, while Total Bond, 3.5%. So, why is it preferable to use Total Bond in the 3 fund portfolio?
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Re: TIPS vs Total Bond

Post by dbr »

Always passive wrote: Sat Jun 03, 2023 8:58 am According to Portfolio Visualizer, since 1.2001, TIPS delivered 4.3% annually, while Total Bond, 3.5%. So, why is it preferable to use Total Bond in the 3 fund portfolio?
It isn't necessarily though the choice should be based on whether it makes more sense in an individual case to own bonds that are offset for inflation or a fund of a larger diversified set of nominal bonds. For me the choice of indexed bonds seems to have been obvious and the one "error" I probably made was to invest half in TIPS and half in intermediate Treasuries though I have changed that now.

Mr. Bogle criticized the total bond index for not having enough corporates and thus a too low return. That 2001-present time period includes a long period of low interest rates, so we don't know how this will look for the next 30 years.

I would take exception to the statement "x% annually." Those number are the average compound return for a period but with a standard deviation of annual returns of around 4%-6%. Returns are variable and I would not consider 4.3% vs 3.5% to be a meaningful difference if taken as an indicator of future behavior nor as an indicator of something one could have known in 2001.
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Re: TIPS vs Total Bond

Post by Cocoa Beach Bum »

Always passive wrote: Sat Jun 03, 2023 8:58 am According to Portfolio Visualizer, since 1.2001, TIPS delivered 4.3% annually, while Total Bond, 3.5%. So, why is it preferable to use Total Bond in the 3 fund portfolio?
I believe TIPS are excluded from most so-called "total" bond indices. So why not diversify and invest in both? If you look at the history of a 50/50 split, you'll see the risk return ratios (i.e. Sharpe or Sortino) would have been improved without losing much CAGR (3.95% vs 4.37%) compared with a TIPS-only allocation.
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Re: TIPS vs Total Bond

Post by Always passive »

Cocoa Beach Bum wrote: Sat Jun 03, 2023 11:16 am
Always passive wrote: Sat Jun 03, 2023 8:58 am According to Portfolio Visualizer, since 1.2001, TIPS delivered 4.3% annually, while Total Bond, 3.5%. So, why is it preferable to use Total Bond in the 3 fund portfolio?
I believe TIPS are excluded from most so-called "total" bond indices. So why not diversify and invest in both? If you look at the history of a 50/50 split, you'll see the risk return ratios (i.e. Sharpe or Sortino) would have been improved without losing much CAGR (3.95% vs 4.37%) compared with a TIPS-only allocation.
I can certainly do that, and in my case I am retired and have a long individual TIPS ladder to support part of my expenses.
Notwithstanding that, my question was why not go government bonds (TIPS in this case) instead of Total bond index when TIPS are risk less, while the Total bond index is not since it has a corporate bond component.
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Re: TIPS vs Total Bond

Post by dbr »

Always passive wrote: Sat Jun 03, 2023 11:23 am
Cocoa Beach Bum wrote: Sat Jun 03, 2023 11:16 am
Always passive wrote: Sat Jun 03, 2023 8:58 am According to Portfolio Visualizer, since 1.2001, TIPS delivered 4.3% annually, while Total Bond, 3.5%. So, why is it preferable to use Total Bond in the 3 fund portfolio?
I believe TIPS are excluded from most so-called "total" bond indices. So why not diversify and invest in both? If you look at the history of a 50/50 split, you'll see the risk return ratios (i.e. Sharpe or Sortino) would have been improved without losing much CAGR (3.95% vs 4.37%) compared with a TIPS-only allocation.
I can certainly do that, and in my case I am retired and have a long individual TIPS ladder to support part of my expenses.
Notwithstanding that, my question was why not go government bonds (TIPS in this case) instead of Total bond index when TIPS are risk less, while the Total bond index is not since it has a corporate bond component.
Sure. My bonds are 100% TIPS. I personally feel that the idea of a three fund portfolio is perfectly well satisfied by using a TIPS fund rather than total bond fund. Others might make a case otherwise. I have a pretty good idea that the most supportable conclusion is that it doesn't make any difference. From the point of view of recommending diversified low cost index fund investing it is obviously logical to place total bond in the the fixed income slot of a general concept for this approach to investing. Worrying about exactly which bonds to hold starts to drop the discussion into a sea of noise without getting a clear conclusion one way or another. Of course no one is out there policing people's investment choices.

Have you ever been at one of those meetings where there is endless discussion based on the ability of anyone and everyone to ask "why not . . .?" and the result is no one decides anything. What bonds to hold within the general concept of a three fund portfolio is a lot like that.
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Re: TIPS vs Total Bond

Post by Gaston »

dbr wrote: Sat Jun 03, 2023 9:08 am the one "error" I probably made was to invest half in TIPS and half in intermediate Treasuries though I have changed that now.
May I ask why this was an error?
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Re: TIPS vs Total Bond

Post by dbr »

Gaston wrote: Sat Jun 03, 2023 12:07 pm
dbr wrote: Sat Jun 03, 2023 9:08 am the one "error" I probably made was to invest half in TIPS and half in intermediate Treasuries though I have changed that now.
May I ask why this was an error?
Because the decision I really wanted to make was all TIPS and went 50/50 because it seemed that "somehow it must be wrong" to be all TIPS. But I don't worry about that now.

In reality a person going 50/50 TIPS/Treasuries will be fine. Indeed, it is really difficult within a given range of selection of bond duration to prove that exactly what bonds they are really matters a lot. In fact, it might be pretty hard to show why the duration you choose for long term investing matters a lot except that cash (zero duration) probably does not offer very good return for the long run. At the other end junk or high yield bonds probably stick out as a less than desirable choice due to risk, but people do make an argument for some money in high yield bonds. Really you pay your money and you take your choice. Don't forget that it is the properties of a whole portfolio that matter and not just those of one holding.
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Re: TIPS vs Total Bond

Post by Always passive »

dbr wrote: Sat Jun 03, 2023 12:18 pm
Gaston wrote: Sat Jun 03, 2023 12:07 pm
dbr wrote: Sat Jun 03, 2023 9:08 am the one "error" I probably made was to invest half in TIPS and half in intermediate Treasuries though I have changed that now.
May I ask why this was an error?
Because the decision I really wanted to make was all TIPS and went 50/50 because it seemed that "somehow it must be wrong" to be all TIPS. But I don't worry about that now.

In reality a person going 50/50 TIPS/Treasuries will be fine. Indeed, it is really difficult within a given range of selection of bond duration to prove that exactly what bonds they are really matters a lot. In fact, it might be pretty hard to show why the duration you choose for long term investing matters a lot except that cash (zero duration) probably does not offer very good return for the long run. At the other end junk or high yield bonds probably stick out as a less than desirable choice due to risk, but people do make an argument for some money in high yield bonds. Really you pay your money and you take your choice. Don't forget that it is the properties of a whole portfolio that matter and not just those of one holding.
Do you use individual bonds or ETFs/funds?
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Re: TIPS vs Total Bond

Post by dbr »

Always passive wrote: Sat Jun 03, 2023 12:24 pm
dbr wrote: Sat Jun 03, 2023 12:18 pm
Gaston wrote: Sat Jun 03, 2023 12:07 pm
dbr wrote: Sat Jun 03, 2023 9:08 am the one "error" I probably made was to invest half in TIPS and half in intermediate Treasuries though I have changed that now.
May I ask why this was an error?
Because the decision I really wanted to make was all TIPS and went 50/50 because it seemed that "somehow it must be wrong" to be all TIPS. But I don't worry about that now.

In reality a person going 50/50 TIPS/Treasuries will be fine. Indeed, it is really difficult within a given range of selection of bond duration to prove that exactly what bonds they are really matters a lot. In fact, it might be pretty hard to show why the duration you choose for long term investing matters a lot except that cash (zero duration) probably does not offer very good return for the long run. At the other end junk or high yield bonds probably stick out as a less than desirable choice due to risk, but people do make an argument for some money in high yield bonds. Really you pay your money and you take your choice. Don't forget that it is the properties of a whole portfolio that matter and not just those of one holding.
Do you use individual bonds or ETFs/funds?
It's a mutual fund in the brokerage link of my 401k. The brokerage is Schwab so SWRSX is a convenient choice.
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Re: TIPS vs Total Bond

Post by Gaston »

dbr wrote: Sat Jun 03, 2023 12:18 pm
Gaston wrote: Sat Jun 03, 2023 12:07 pm
dbr wrote: Sat Jun 03, 2023 9:08 am the one "error" I probably made was to invest half in TIPS and half in intermediate Treasuries though I have changed that now.
May I ask why this was an error?
Because the decision I really wanted to make was all TIPS and went 50/50 because it seemed that "somehow it must be wrong" to be all TIPS. But I don't worry about that now.
Yes, we can all find something after-the-fact that worked better than the thing we chose, but I don’t think you made an error. I think you made a prudent decision.

On a related topic, I notice that for short-term TIPS, Vanguard offers both mutual fund and ETF products. Any reason to choose one over the other?
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Re: TIPS vs Total Bond

Post by dbr »

Gaston wrote: Sat Jun 03, 2023 12:33 pm
On a related topic, I notice that for short-term TIPS, Vanguard offers both mutual fund and ETF products. Any reason to choose one over the other?
I don't know why it would matter in general. Often an ETF works better if you want a Vanguard fund at another broker. My Schwab mutual fund at Schwab makes sense and also has a lower ER than a Vanguard fund would have (0.05% in this case). TIP, at iShares for another example, has a 0.19% ER.
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Re: TIPS vs Total Bond

Post by Gaston »

Scenario: One buys a nominal treasuries ETF and a TIPS ETF, putting 50% of one’s available cash into each fund. One ETF must be held in a taxable account, the other can be held in a tax-advantaged account. Which one would you put in taxable?
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Re: TIPS vs Total Bond

Post by jginseattle »

Gaston wrote: Sat Jun 03, 2023 5:20 pm Scenario: One buys a nominal treasuries ETF and a TIPS ETF, putting 50% of one’s available cash into each fund. One ETF must be held in a taxable account, the other can be held in a tax-advantaged account. Which one would you put in taxable?
Nominals.
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Re: TIPS vs Total Bond

Post by Always passive »

jginseattle wrote: Sat Jun 03, 2023 5:36 pm
Gaston wrote: Sat Jun 03, 2023 5:20 pm Scenario: One buys a nominal treasuries ETF and a TIPS ETF, putting 50% of one’s available cash into each fund. One ETF must be held in a taxable account, the other can be held in a tax-advantaged account. Which one would you put in taxable?
Nominals.
let me suggest that you read the following
https://papers.ssrn.com/sol3/papers.cfm ... _id=457380
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Re: TIPS vs Total Bond

Post by quisp65 »

Is that reflecting all TIPS including the longer duration? We know the bond market is efficient and if you are getting paid more it means you are taking on more risk somewhere.
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Re: TIPS vs Total Bond

Post by dkturner »

When inflation is declining is it preferable to hold inflation adjusted bonds or nominal bonds?
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Re: TIPS vs Total Bond

Post by Logan Roy »

Always passive wrote: Sat Jun 03, 2023 8:58 am According to Portfolio Visualizer, since 1.2001, TIPS delivered 4.3% annually, while Total Bond, 3.5%. So, why is it preferable to use Total Bond in the 3 fund portfolio?
Obviously with bonds, past returns are very often going to be an inverse of future returns. Which does better is already somewhat knowable by looking at the yields you're buying at (which might be completely different to the past).

David Swenson did his PhD on valuing corporate bonds, and concluded that efficient portfolios generally wouldn't hold them. They don't compensate you the way stocks do, nor diverse stocks the way Treasuries do.. I'd also argue the experience investors have had with bond losses, coming off 0% yields, is a lesson that even a sensible, passive approach probably should have limits. Buying long-dated Treasuries on 0% yields was "Return-free risk" .. I don't think it had anything to do with efficient markets; and everything to do with traders getting ahead of Fed moves. You don't want to be stuck holding a load of worthless debt.
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Re: TIPS vs Total Bond

Post by secondopinion »

Logan Roy wrote: Mon Jun 05, 2023 11:36 am
Always passive wrote: Sat Jun 03, 2023 8:58 am According to Portfolio Visualizer, since 1.2001, TIPS delivered 4.3% annually, while Total Bond, 3.5%. So, why is it preferable to use Total Bond in the 3 fund portfolio?
Obviously with bonds, past returns are very often going to be an inverse of future returns. Which does better is already somewhat knowable by looking at the yields you're buying at (which might be completely different to the past).

David Swenson did his PhD on valuing corporate bonds, and concluded that efficient portfolios generally wouldn't hold them. They don't compensate you the way stocks do, nor diverse stocks the way Treasuries do.. I'd also argue the experience investors have had with bond losses, coming off 0% yields, is a lesson that even a sensible, passive approach probably should have limits. Buying long-dated Treasuries on 0% yields was "Return-free risk" .. I don't think it had anything to do with efficient markets; and everything to do with traders getting ahead of Fed moves. You don't want to be stuck holding a load of worthless debt.
Could you post the research? I am not sure that statistical moments beyond the second are fairly assessed…
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Re: TIPS vs Total Bond

Post by Logan Roy »

secondopinion wrote: Mon Jun 05, 2023 12:54 pm
Logan Roy wrote: Mon Jun 05, 2023 11:36 am
Always passive wrote: Sat Jun 03, 2023 8:58 am According to Portfolio Visualizer, since 1.2001, TIPS delivered 4.3% annually, while Total Bond, 3.5%. So, why is it preferable to use Total Bond in the 3 fund portfolio?
Obviously with bonds, past returns are very often going to be an inverse of future returns. Which does better is already somewhat knowable by looking at the yields you're buying at (which might be completely different to the past).

David Swenson did his PhD on valuing corporate bonds, and concluded that efficient portfolios generally wouldn't hold them. They don't compensate you the way stocks do, nor diverse stocks the way Treasuries do.. I'd also argue the experience investors have had with bond losses, coming off 0% yields, is a lesson that even a sensible, passive approach probably should have limits. Buying long-dated Treasuries on 0% yields was "Return-free risk" .. I don't think it had anything to do with efficient markets; and everything to do with traders getting ahead of Fed moves. You don't want to be stuck holding a load of worthless debt.
Could you post the research? I am not sure that statistical moments beyond the second are fairly assessed…
You can find Pioneering Portfolio Management online, but I can't copy from it. So here's a short write-up:

"In the back of the book [Pioneering Portfolio Management] is a twenty-five-page appendix entitled "Impure Fixed Income," where Swensen argues that investors should avoid all types of bonds that are not U.S. government bonds. Fixed coupon U.S. government bonds provide steady income generation, capital preservation, and a hedge against economic downturn. In a frothy macroeconomic environment such as this one, investors should appreciate the diversifying characteristics of government bonds. However, in Swensen's own words, "investment grade corporate bonds, high yield bonds, foreign bonds, and asset-backed securities contain unattractive characteristics that argue against inclusion in well-constructed portfolios" (349). Foreign bonds contain currency exchange risk and the complexity of asset-backed securities argues for their avoidance."

I've also found the same from backtesting and optimising portfolios. I've almost never encountered a situation in which corporate bonds make a portfolio anything but worse.
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Re: TIPS vs Total Bond

Post by secondopinion »

Logan Roy wrote: Mon Jun 05, 2023 1:16 pm
secondopinion wrote: Mon Jun 05, 2023 12:54 pm
Logan Roy wrote: Mon Jun 05, 2023 11:36 am
Always passive wrote: Sat Jun 03, 2023 8:58 am According to Portfolio Visualizer, since 1.2001, TIPS delivered 4.3% annually, while Total Bond, 3.5%. So, why is it preferable to use Total Bond in the 3 fund portfolio?
Obviously with bonds, past returns are very often going to be an inverse of future returns. Which does better is already somewhat knowable by looking at the yields you're buying at (which might be completely different to the past).

David Swenson did his PhD on valuing corporate bonds, and concluded that efficient portfolios generally wouldn't hold them. They don't compensate you the way stocks do, nor diverse stocks the way Treasuries do.. I'd also argue the experience investors have had with bond losses, coming off 0% yields, is a lesson that even a sensible, passive approach probably should have limits. Buying long-dated Treasuries on 0% yields was "Return-free risk" .. I don't think it had anything to do with efficient markets; and everything to do with traders getting ahead of Fed moves. You don't want to be stuck holding a load of worthless debt.
Could you post the research? I am not sure that statistical moments beyond the second are fairly assessed…
You can find Pioneering Portfolio Management online, but I can't copy from it. So here's a short write-up:

"In the back of the book [Pioneering Portfolio Management] is a twenty-five-page appendix entitled "Impure Fixed Income," where Swensen argues that investors should avoid all types of bonds that are not U.S. government bonds. Fixed coupon U.S. government bonds provide steady income generation, capital preservation, and a hedge against economic downturn. In a frothy macroeconomic environment such as this one, investors should appreciate the diversifying characteristics of government bonds. However, in Swensen's own words, "investment grade corporate bonds, high yield bonds, foreign bonds, and asset-backed securities contain unattractive characteristics that argue against inclusion in well-constructed portfolios" (349). Foreign bonds contain currency exchange risk and the complexity of asset-backed securities argues for their avoidance."

I've also found the same from backtesting and optimising portfolios. I've almost never encountered a situation in which corporate bonds make a portfolio anything but worse.
It is as simple as this: do corporate bonds as a whole compensate for their loss due to default long-term? Regardless, the risk is skewed negatively (the higher the quality, the more negative skew and less general volatility); for the average investor with some limited timeframe (that might be 10-30 years), this places the odds (even if there were no premium) in favor of corporates over the timeframe versus treasuries. If one is making a 100+ year portfolio, then the skew is not going to be helpful for improving odds and the risk ends up being not well compensated (if odds matter).

So, although Swensen might argue the pointless of corporate bonds from a "institutional" standpoint, this is different from someone who might live to retire once.
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Re: TIPS vs Total Bond

Post by Logan Roy »

secondopinion wrote: Mon Jun 05, 2023 4:16 pm
Logan Roy wrote: Mon Jun 05, 2023 1:16 pm
secondopinion wrote: Mon Jun 05, 2023 12:54 pm
Logan Roy wrote: Mon Jun 05, 2023 11:36 am
Always passive wrote: Sat Jun 03, 2023 8:58 am According to Portfolio Visualizer, since 1.2001, TIPS delivered 4.3% annually, while Total Bond, 3.5%. So, why is it preferable to use Total Bond in the 3 fund portfolio?
Obviously with bonds, past returns are very often going to be an inverse of future returns. Which does better is already somewhat knowable by looking at the yields you're buying at (which might be completely different to the past).

David Swenson did his PhD on valuing corporate bonds, and concluded that efficient portfolios generally wouldn't hold them. They don't compensate you the way stocks do, nor diverse stocks the way Treasuries do.. I'd also argue the experience investors have had with bond losses, coming off 0% yields, is a lesson that even a sensible, passive approach probably should have limits. Buying long-dated Treasuries on 0% yields was "Return-free risk" .. I don't think it had anything to do with efficient markets; and everything to do with traders getting ahead of Fed moves. You don't want to be stuck holding a load of worthless debt.
Could you post the research? I am not sure that statistical moments beyond the second are fairly assessed…
You can find Pioneering Portfolio Management online, but I can't copy from it. So here's a short write-up:

"In the back of the book [Pioneering Portfolio Management] is a twenty-five-page appendix entitled "Impure Fixed Income," where Swensen argues that investors should avoid all types of bonds that are not U.S. government bonds. Fixed coupon U.S. government bonds provide steady income generation, capital preservation, and a hedge against economic downturn. In a frothy macroeconomic environment such as this one, investors should appreciate the diversifying characteristics of government bonds. However, in Swensen's own words, "investment grade corporate bonds, high yield bonds, foreign bonds, and asset-backed securities contain unattractive characteristics that argue against inclusion in well-constructed portfolios" (349). Foreign bonds contain currency exchange risk and the complexity of asset-backed securities argues for their avoidance."

I've also found the same from backtesting and optimising portfolios. I've almost never encountered a situation in which corporate bonds make a portfolio anything but worse.
It is as simple as this: do corporate bonds as a whole compensate for their loss due to default long-term? Regardless, the risk is skewed negatively (the higher the quality, the more negative skew and less general volatility); for the average investor with some limited timeframe (that might be 10-30 years), this places the odds (even if there were no premium) in favor of corporates over the timeframe versus treasuries. If one is making a 100+ year portfolio, then the skew is not going to be helpful for improving odds and the risk ends up being not well compensated (if odds matter).

So, although Swensen might argue the pointless of corporate bonds from a "institutional" standpoint, this is different from someone who might live to retire once.
I think it's more that corporate debt is subject to a lot of the same risks as stocks, but doesn't compensate investors as well. So holding corporate bonds alongside stocks serves no real purpose – it just dampens returns. While holding treasuries at least sometimes yields a 'free lunch'

“The best outcome for holding bonds to maturity consists of receiving regular payments of interest and return of principal,” he writes. “The worst outcome represents default without recovery. The asymmetry of limited upside and substantial downside produces a distribution of outcomes that contains a disadvantageous bias for investors.”

Swensen also argues that the premium corporate bonds’ earn over Treasuries is “insufficient compensation for the array of risks inherent in corporate debt” (those risks being credit risk, illiquidity, and callability).


Image

I'd also note that returns from junk bonds vs similarly duration matched treasuries haven't been that different over 40-50 years. Yet in one case you're taking on things with large default risk, and in the other: as low as it gets. And I use this to argue against the idea of risk premiums.
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Re: TIPS vs Total Bond

Post by secondopinion »

Logan Roy wrote: Mon Jun 05, 2023 4:31 pm
secondopinion wrote: Mon Jun 05, 2023 4:16 pm
Logan Roy wrote: Mon Jun 05, 2023 1:16 pm
secondopinion wrote: Mon Jun 05, 2023 12:54 pm
Logan Roy wrote: Mon Jun 05, 2023 11:36 am

Obviously with bonds, past returns are very often going to be an inverse of future returns. Which does better is already somewhat knowable by looking at the yields you're buying at (which might be completely different to the past).

David Swenson did his PhD on valuing corporate bonds, and concluded that efficient portfolios generally wouldn't hold them. They don't compensate you the way stocks do, nor diverse stocks the way Treasuries do.. I'd also argue the experience investors have had with bond losses, coming off 0% yields, is a lesson that even a sensible, passive approach probably should have limits. Buying long-dated Treasuries on 0% yields was "Return-free risk" .. I don't think it had anything to do with efficient markets; and everything to do with traders getting ahead of Fed moves. You don't want to be stuck holding a load of worthless debt.
Could you post the research? I am not sure that statistical moments beyond the second are fairly assessed…
You can find Pioneering Portfolio Management online, but I can't copy from it. So here's a short write-up:

"In the back of the book [Pioneering Portfolio Management] is a twenty-five-page appendix entitled "Impure Fixed Income," where Swensen argues that investors should avoid all types of bonds that are not U.S. government bonds. Fixed coupon U.S. government bonds provide steady income generation, capital preservation, and a hedge against economic downturn. In a frothy macroeconomic environment such as this one, investors should appreciate the diversifying characteristics of government bonds. However, in Swensen's own words, "investment grade corporate bonds, high yield bonds, foreign bonds, and asset-backed securities contain unattractive characteristics that argue against inclusion in well-constructed portfolios" (349). Foreign bonds contain currency exchange risk and the complexity of asset-backed securities argues for their avoidance."

I've also found the same from backtesting and optimising portfolios. I've almost never encountered a situation in which corporate bonds make a portfolio anything but worse.
It is as simple as this: do corporate bonds as a whole compensate for their loss due to default long-term? Regardless, the risk is skewed negatively (the higher the quality, the more negative skew and less general volatility); for the average investor with some limited timeframe (that might be 10-30 years), this places the odds (even if there were no premium) in favor of corporates over the timeframe versus treasuries. If one is making a 100+ year portfolio, then the skew is not going to be helpful for improving odds and the risk ends up being not well compensated (if odds matter).

So, although Swensen might argue the pointless of corporate bonds from a "institutional" standpoint, this is different from someone who might live to retire once.
I think it's more that corporate debt is subject to a lot of the same risks as stocks, but doesn't compensate investors as well. So holding corporate bonds alongside stocks serves no real purpose – it just dampens returns. While holding treasuries at least sometimes yields a 'free lunch'

“The best outcome for holding bonds to maturity consists of receiving regular payments of interest and return of principal,” he writes. “The worst outcome represents default without recovery. The asymmetry of limited upside and substantial downside produces a distribution of outcomes that contains a disadvantageous bias for investors.”

Swensen also argues that the premium corporate bonds’ earn over Treasuries is “insufficient compensation for the array of risks inherent in corporate debt” (those risks being credit risk, illiquidity, and callability).


Image

I'd also note that returns from junk bonds vs similarly duration matched treasuries haven't been that different over 40-50 years. Yet in one case you're taking on things with large default risk, and in the other: as low as it gets. And I use this to argue against the idea of risk premiums.
Of course, that timeframe had treasuries that are not callable, high-yield bonds are often callable, and a solid bull market to back it. From a callable bond standpoint alone, this has been a nightmare (if treasuries were callable, then it would have been much worse for them). You have not proven that the loss to default was greater than the coupon compensation. And as one get higher in credit risk, the lower the odds will be for observed premium anyway.

Swensen mentions illiquidity (mostly irrelevant to a long-term investor), credit risk (which is the point in question), and callability (which is not that common when one actually looks at the call dates of higher-quality bonds; I mean, a six month window around maturity on a 15+ year bond is a non-concern in my book). I mostly consider credit risk because we are not dealing with continuously callable bonds like we would have with mortgages.

As I have said, what might make sense for an "institutional" investor might not be so for the typical accumulator or retiree.
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Re: TIPS vs Total Bond

Post by paisano »

According to Treasury Monthly Statement of the Public Debt the marketable security types held by the public are currently:
  • bills: $3.941 T
  • notes: $13.768 T
  • bonds: $4.076 T
  • TIPS: $1.879 T
  • floating rate notes: $601 B
  • total marketable: $24.265 T
so TIPS (and FRNs) might deserve a 10.2% allocation of your government debt holdings based on (1.879+0.601) / 24.265
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Re: TIPS vs Total Bond

Post by watchnerd »

Always passive wrote: Sat Jun 03, 2023 8:58 am According to Portfolio Visualizer, since 1.2001, TIPS delivered 4.3% annually, while Total Bond, 3.5%. So, why is it preferable to use Total Bond in the 3 fund portfolio?
It's not my preference.

I'm not a fan of TBM -- too many nominal Treasuries because of QE, not enough corporates.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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watchnerd
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Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: TIPS vs Total Bond

Post by watchnerd »

dkturner wrote: Mon Jun 05, 2023 4:24 am When inflation is declining is it preferable to hold inflation adjusted bonds or nominal bonds?
TIPS are an insurance against unexpected inflation.

That includes inflation not declining as fast as the bond market thinks it will.

Current 10 Year Breakeven Inflation Rate (i.e. market estimate of inflation in the future) is 2.19%:

https://fred.stlouisfed.org/series/T10YIE

If that's wrong, and inflation is say 3%, TIPS will have been the better investment than nominals, even if 3% is lower than present inflation.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
secondopinion
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Joined: Wed Dec 02, 2020 12:18 pm

Re: TIPS vs Total Bond

Post by secondopinion »

paisano wrote: Mon Jun 05, 2023 10:51 pm According to Treasury Monthly Statement of the Public Debt the marketable security types held by the public are currently:
  • bills: $3.941 T
  • notes: $13.768 T
  • bonds: $4.076 T
  • TIPS: $1.879 T
  • floating rate notes: $601 B
  • total marketable: $24.265 T
so TIPS (and FRNs) might deserve a 10.2% allocation of your government debt holdings based on (1.879+0.601) / 24.265
Treasury bills, I think, are skipped as well by the total bond market fund.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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