Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

In this Discussion

Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

    Support MFO

  • Donate through PayPal

Bonds v. Stocks

edited July 2011 in Fund Discussions
I just reallocated my IRA portfolio to three Vanguard index funds -- 50% Total Bond Market, 40% Total Stock Market and 10% Total International. I've never really followed or understood bond markets but my Vanguard adviser suggested this simple approach since I recently retired and seek capital preservation, a good night's sleep and to avoid a replay of the painful 2008 crash which saw my all-equities 401K plunge by about 40%. With the wild volatility of this past week, my bonds fund grows on days of sharp Dow downturns, and on the days the Dow gained, my bond fund declined. Is this a typical pattern I should expect for the longer term? Is there ever a scenario where both funds grow on the same day? Or maybe that's just still the greed lurking in me and I need to learn to love stability, sort of. Thanks.

Comments

  • I'm not the expert, but what you're seeing re: that inverse pattern is rather much the same as I notice, too, but not to a huge extent. My bond fund is an EM animal: PREMX--- so it's not so very inversely-tied to the Dow or S&P.
  • edited July 2011
    The user and all related content has been deleted.
  • Skipper,

    50% stocks, 50% bonds might be an appropriate portfolio for retirement. But you should not look at just one account. You should view all of your investments for the same goal, however distributed, to be one portfolio.

    I think you are a bit short on the International. I hope you have other international investments in other portfolios. I suggest you boost up International to 20%. You should even consider and even split.
  • edited July 2011
    Hi skipper,

    Others have noted valid ideas and thoughts.

    You wrote: "I just reallocated my IRA portfolio to three Vanguard index funds -- 50% Total Bond Market, 40% Total Stock Market and 10% Total International. I've never really followed or understood bond markets but my Vanguard adviser suggested this simple approach since I recently retired and seek capital preservation, a good night's sleep and to avoid a replay of the painful 2008 crash which saw my all-equities 401K plunge by about 40%. With the wild volatility of this past week, my bonds fund grows on days of sharp Dow downturns, and on the days the Dow gained, my bond fund declined. Is this a typical pattern I should expect for the longer term? Is there ever a scenario where both funds grow on the same day? Or maybe that's just still the greed lurking in me and I need to learn to love stability, sort of."

    My 2 cents: Relative to the Vanguard Total Bond index, VBMFX; as I will presume this is the index being used; do not confuse this index with a multi-sector bond fund/index or otherwise. The name "Total" for any fund/index needs to have the holdings looked at, as well as the prospectus to determine what the Total really means.
    VBMFX is similar to the Fidelity Total Bd fund, FTBFX we hold and both really need to be named as Total, U.S. high quality, gov't and corporate bond index/fund.

    Both will be subject to dowside pressure when interest rates increase, but if the rate change is slow, which I feel will be the case, these should also adjust slowly and maintain their values. The V Total bd index has a better 10 year return vs the V Total stk mkt index, related of course; to the market melt of 2008. You will find a .57% increase in the bond index last Friday. This was due to the poor jobs report and monies moving to a safer zone in gov't bonds and away from equities. You will find this bond index to be most happy when their is turmoil and uncertainity in the global and U.S. equity markets and/or political/military problems.

    The V Total Stock is U.S. large cap blend and the V Total Int'l is foreign large cap blend. (per M* data)

    This mix should be okay, but needs to be monitored, too. All 3 being named total means in this case, TOTAL to the aspect of the style/nature of each index. They are not total in regards to their name implications; as the indexes are not spread across multi sectors/cap sizes, etc. I recall (prior FA postings) your having other holdings aside from your IRA; so it is difficult to know how these 3 V indexes fit into your other holdings.

    This write is not a critisism of these holdings and/or you choices; but only to be aware of the holdings and how they may fit into your other investment areas.

    Take care,
    Catch
  • Hi Skipper,

    Several questions:
    (1) why your Vanguard adviser uses only 3 index funds?
    (2) what about active managed funds - Wellington, Wellesley Income, and other fine choices available through their brokerage?
    (3) I don't know if you are not paying for their advisory service. They should able to offer a much broader and diversified portfolio within your risk tolerance and retirement goal.
  • Thanks to all for the good feedback as usual. This is my entire retirement investment account. INVESTOR, I will chat with my Vanguard adviser about upping the International index piece though the overseas craziness every day makes me nervous. CATCH, it is the VBTLX Vanguard Total Bond Mkt Index (Admiral shares). I'm pretty sure it essentially mimicks VBMFX. SVEN, the adviser suggested these three funds but I have access to all Vang funds for the portfolio; just a way to keep it reasonably simple for now. I know Wellesley Income has high ratings for 3 and 5 years, so that remains a consideration. I'm not paying for their financial planner advisory service....yet. I think it is .50 percent for assets under management. I'm cheap, but I know that is about as low as it gets for this level of service. Cheers , --Skipper
  • Reply to @skipper: Last time I checked, it starts at 0.70% for asset under $1M, and it gets less at higher level, of course. Free service tends to provide limited recommendation. Good wishes...
  • MJG
    edited July 2011
    Hi Skipper,

    You stated that your goal is a capital preservation portfolio. Your original all-equity portfolio surely does not satisfy that objective, as you painfully learned in 2008. The portfolio was constructed for maximum likely returns without controlling for risk. For example, the US equity market generates positive returns about 70 % of the time on an annual basis.

    That’s acceptable for a 30-year old with a few decades before retirement, but is probably not a wise plan for a retiree or a near-retiree. By diversifying into US equity, International equity, and bond mutual funds you have made your portfolio more risk insensitive. That’s a closer approximation to satisfy your investment goal. Congratulations for that decision.

    However, as Milton Friedman observed “There are no free lunches”. There is a tradeoff between risk and reward. In general, to reduce the risk of a market downturn, it is necessary to accept a lower likely annual return. But adroit asset allocation is as close to a free lunch as is possible in the investment universe.

    By allocating resources among various asset classes, it is possible to approximately maintain the annual returns of an all-equity US portfolio while simultaneously substantially reducing the risky aspects of a portfolio (its volatility). This is usually accomplished by using asset classes that are not perfectly correlated with each other.

    Correlation is statistically measured by something called a correlation coefficient. For two investments, correlation coefficients run a spectrum from minus One to plus One. A correlation coefficient of plus One means that the two investments move Up and Down in perfect synch; a correlation coefficient of minus One means that the two investments are perfectly out of synch with one generating positive returns while the other produces negative results. A correlation coefficient of Zero means that the two investments behave in a random, uncoordinated manner relative to each other.

    When asset allocation is fully exploited, it is possible to maintain the annual return of an all equity portfolio at about one-half of the volatility. In 2008, instead of suffering a 40 % decline, a well-diversified portfolio might have reduced losses to one-half or one-third that level. Not perfect, but a major improvement.

    Correlation coefficients are dynamic and change over time. Historically, bonds have a correlation coefficient that varies from 0.2 to 0.4 relative to US equities. Foreign equities further diversify a portfolio because its correlation relative to US stocks is typically in the 0.5 to 0.8 range. Gold and other hard assets often have correlation coefficients that are neutral or slightly negative to US equity holdings.

    Your 3-holding group goes a long way to achieving an efficient portfolio, but the addition of other asset classes would improve its risk control.

    Since you are using passively managed products and are paying an advisor, you must be a relative novice at the investment game. Nothing wrong with that; we all were at that place at some time in our investment careers. You’ll learn by reading investment books and by visiting websites.

    To get you started in the book arena, I suggest you get a copy of Professor Burton Malkiel’s introductory book “The Random Walk Guide to Investing”. It’s a breezy 184-page book that will be a useful guide at this stage in your investment development.

    To see the benefits of asset allocation on a parametric level, I suggest that you visit Paul Merriman's fine website. It offers some excellent articles and provides a table that demonstrates how portfolio returns and volatility change as a function of various percentages of bond and equity holdings. The Link follows immediately.

    http://www.merriman.com/PDFs/FineTuning.pdf

    Please visit the site. I promise that you will learn something about portfolio management and risk control.

    Please do not worry about the portfolio returns and correlations on a daily basis. If you do, you will never sleep peacefully and the portfolio is too risky for your stated purposes.

    Good luck.

    Best Wishes.
  • Until the debt ceiling is raised you may take some serious lumps.
    I own no government bond funds.
    I take the rule of thumb that your bond allocation should equal your age seriously.
    Vanguard Total Bond Market is almost 70% government bonds, I wouldn't touch it.
    I'd much rather own VFICX which is only about 6% government.
  • MJG
    edited July 2011
    Reply to @MJG:

    Hi Skipper,

    In my haste to reply to your posting last night, I neglected to reference a book that suits your evolving investment philosophy and style to a capital “T”.

    At this juncture in your investment career, you are, knowingly or not, a passively managed Index investor. Of course that is easily changed if your studies, your circumstances, your goals, your wealth, and/or your risk adversity profile matures. Almost nothing is permanent in the investment world.

    The book I failed to reference is by Daniel Solin. It is presumptuously titled “The Smartest Investment Book You’ll Ever Read”. It is Not that. But it is an excellent introduction for the newbie investor that supports the investment strategy that perhaps you inadvertently adopted. It will give you some comfort in that it documents that your present investments are one way along a successful financial pathway.

    There are other equally attractive and rewarding paths to financial security. Your current portfolio is an inexpensive, low cost way to achieve your target objectives. Legendary John Bogle would fully endorse your decisions now.

    Another benefit of such a simple portfolio strategy is that it permits you to abandon the need for a paid advisor. With just a little time commitment, you can do that job with a much more complete understanding of your needs and fears than any advisor could ever supply.

    The Solin book is only 166 pages long including appendices. The appendices provide a simple asset allocation questionnaire and a risk/reward summary. The book is available in a paperback edition.

    Do as much investment learning as time permits. If time does not permit, make it so. The learning will be as rewarding as the accumulating profits. And please become as familiar with statistical concepts as your mathematical skill set allows. Statistical representations of market performance are ubiquitous within the investment industry and a required input when making financial decisions. Your familiarity with statistics will contribute to better sleeping, since its application will keep you in your comfort zone.

    I have confidence that you are on a solid investment pathway. Keep trucking.
  • edited July 2011
    The user and all related content has been deleted.
  • skipper, next time you get the itch to tinker (no need with your nice choices), check out AOM and AOR...
  • edited July 2011
    Reply to @Maurice:

    Howdy Maurice,

    Well, I sure can not tell anyone what would come to pass for a week or two if there is no compromise on the debt ceiling and related issues. However, with the TIPS funds, you must also remember that this investment area is also driven by a flight to safety, not unlike other U.S. Treasury issues. Many funds use TIPs holdings as parking places for their soft money and that many foreign gov'ts that hold U.S. Treasury issues are not just buying the std 2,5,7,10, 20 or 30 year stuff; they are also buying a fair amount of TIPS.
    With your Vanguard holding and the ER, you are holding these almost for free. I don't know what your other holdings may be, but I challenge those who visit this board, whether they have 5 or 50 holdings of any type that has a better YTD than your TIPS.
    Bet there are not many.
    If you feel there is no more pain to come out of Europe, and that the U.S. and China are on the mend and going forward, and that this will force U.S. interest rates to be increased; perhaps selling a portion of the holding would be in place.
    Lastly, what would you do with the proceeds???

    Just a little late night blabber from me...........
    Take care,
    Catch
  • edited July 2011
    The user and all related content has been deleted.
  • Skipper, I'd put some international bonds in there too and maybe a dividend stock fund. I think you're too light on international currencies and international exposure. FWIW.
  • Thanks again to all for this continuing education and rich discussion which gives me a reasonable sense of security about the portfolio and how to further educate myself. To clarify, MJG, I'm not paying the Vanguard adviser; he is free with my account level. Also, DAVID BOSTON, plz elaborate about AOM and AOR? And to everyone, I appreciate your detailed responses and advice, as always. --Skipper
Sign In or Register to comment.