Bernstein's bond choice for cowards and ST IG

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BlueEars
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Bernstein's bond choice for cowards and ST IG

Post by BlueEars » Sat Oct 28, 2017 10:55 am

I came across the Bernstein Coward's Portfolio shown here: /blog/william ... portfolio/

In it he puts the bonds into Short Term bonds. I think he is referring to 1 year corporate bonds but not sure about this. Was he trying to protect against inflation with this fairly short term selection?

Many investors here have preferred intermediate term bonds such as Total Bond Market. I recall one well schooled DFA oriented investor some years ago here who maintained that a short term investment grade fund was a good way to go in bonds. Swedroe said that ST IG was a good risk/reward combination.

Here is a 5 year Rolling Returns Morningstar graph for 4 bond types. Those are VFIDX (intermediate term investment grade), VFSUX (short term investment grade), VFISX (short term Treasury), and VBMFX (Total Bond Market):

Image

The early period before 1999 showed marginal gains for taking the extra risk of investment grade and/or longer duration bonds. Then over the last 20 years we seem to have seen a divergence in performance among these bond fund selections. Also we have seen a big reduction in the real returns for bonds from the year 2000. Probably a good explanation for why term risk has been rewarded.

Unfortunately this M* graph does not cover the 1970's period when longer term bonds had a tougher time. If I look at the Simba data the ST IG held up very well against Intermediate and Short Term Treasuries from 1976 to 1980 when inflation raged. Here is a clip from the Simba data:

Image

So I wonder, is Short Term Investment Grade (VFSUX) a good bond alternative going forward? Perhaps it should be strongly considered in a retiree's portfolio? Or at least a mix of intermediate and short term bonds.

Opinions welcome. :happy

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Why I chose Vanguard Total Bond Market Index Fund

Post by Taylor Larimore » Sat Oct 28, 2017 11:24 am

Blueears:

Bonds are for safety. Use stocks for higher return.

In my opinion, ANY good-quality, low-cost, short or intermediate-term bond fund will do the job of providing safety in a portfolio.

For my portfolio, I selected Vanguard Total Bond Market Index Fund which has never had an annual return less than -2.66%. In the 2008 stock bear market if gained +5%. I like its great diversification often called "The only 'free lunch' in investing."

Best wishes.
Taylor
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Re: Bernstein's bond choice for cowards and ST IG

Post by garlandwhizzer » Sat Oct 28, 2017 11:28 am

I own 4 bond funds, and STIG is one of them. I own both short and intermediate term high quality bonds. I include investment grade as high quality and of course government bonds. ST are less susceptible to inflation and/or principal loss in an increasing rate environment. IT yield more and in the absence of rising Inflation/rising rates, outperform. I do not hold long term bonds of any type except as modest portion of TBM.

Yields on all these instruments are low and unlikely to outpace inflation by any significant amount unless you stretch into LT and HYB. Bonds main purpose in the current yield environment IMO is not to provide a robust income stream which is not available on a low risk basis, but to offset equity volatility. HYB and LT bonds have been popular for years with yield-starved investors, and their yields have been driven down, lowering the spread to Treasuries. At current levels HYB and LTB yields do not adequately reflect their risk level IMO. We have had a long period of ultra low interest rates and are starting an expected gradual rising of rates (and perhaps inflation?) in the future. Historically, this has not been a good time to go long on bond duration.

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Re: Bernstein's bond choice for cowards and ST IG

Post by stlutz » Sat Oct 28, 2017 11:35 am

Bernstein only likes short-term Treasury bonds and CDs. He is not a fan of corporate bonds.

Here is an article by Bernstein summarizing his approach: https://wsj.com/articles/the-case-f ... 1445220146

Disclosure: I'm not a fan of Bernstein's approach on a strategic basis but it may make sense tactically now given the flatter yield curve are and small credit spreads--i.e. right now you're not getting paid much to take more risk either in terms longer maturities or lower credit ratings.

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Re: Bernstein's bond choice for cowards and ST IG

Post by BlueEars » Sat Oct 28, 2017 11:36 am

I included the Total Bond Market so that we can see the rising inflation period performance from 1976 to 1981. Excerpt from the Simba spreadsheet:

Image

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Re: Bernstein's bond choice for cowards and ST IG

Post by BlueEars » Sat Oct 28, 2017 11:54 am

stlutz wrote:
Sat Oct 28, 2017 11:35 am
Bernstein only likes short-term Treasury bonds and CDs. He is not a fan of corporate bonds.

Here is an article by Bernstein summarizing his approach: https://wsj.com/articles/the-case-f ... 1445220146

Disclosure: I'm not a fan of Bernstein's approach on a strategic basis but it may make sense tactically now given the flatter yield curve are and small credit spreads--i.e. right now you're not getting paid much to take more risk either in terms longer maturities or lower credit ratings.
Interesting thoughts. Right now the SEC yields are:
VFIDX 2.70% intermediate IG
VFSUX 2.08% short term IG
VFIUX 1.93% intermediate Treasury
VFIRX 1.41% short term Treasury

To me, VFSUX seems to look like a decent premium. If the yield curve really flattened a lot more, I would revisit this. One well know bond investor hypothesized that bonds might be more sensitive to the yield curve now with rates so low. But there was no data analysis to accompany that thought.

Alternative views?

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Re: Bernstein's bond choice for cowards and ST IG

Post by stlutz » Sat Oct 28, 2017 12:00 pm

Here is a chart showing the historical spread between BBB corporate bonds and Treasuries. Note that we are at the low end of the historical range now (expand the chart out to use "max" history): https://fred.stlouisfed.org/series/BAMLC0A4CBBB

Remember that a corporate bond fund will always have losses due to bonds being downgraded to junk (a STIG fund will sell the bond when it's no longer investment grade), so you need some higher yield to break even. You can't compare SEC Yields the same way you would the yield on two CDs of equal maturity.

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Re: Bernstein's bond choice for cowards and ST IG

Post by Sandtrap » Sat Oct 28, 2017 12:07 pm

I have VFSUX and Total Bond Market Index at 10/90 in my fixed allocation. I had more but I like Taylor's idea of simplification and am slowly consolidating things. I think it is "cowardly" enough. I am a fan of Bernstein's LMP but not all of it.
j :D

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Re: Bernstein's bond choice for cowards and ST IG

Post by lack_ey » Sat Oct 28, 2017 12:26 pm

stlutz wrote:
Sat Oct 28, 2017 12:00 pm
Here is a chart showing the historical spread between BBB corporate bonds and Treasuries. Note that we are at the low end of the historical range now (expand the chart out to use "max" history): https://fred.stlouisfed.org/series/BAMLC0A4CBBB

Remember that a corporate bond fund will always have losses due to bonds being downgraded to junk (a STIG fund will sell the bond when it's no longer investment grade), so you need some higher yield to break even. You can't compare SEC Yields the same way you would the yield on two CDs of equal maturity.
But if you look at returns mid-June 2014 to mid-February 2016 when the BBB OAS went from about 1.45 to 3, iShares 1-3 Year Treasury Bond ETF (SHY) only beat iShares 1-3 Year Credit Bond ETF (CSJ) by around 40 bp, and it had a 5 bp ER advantage.

In any case the spread varies down the yield curve as well, with a greater figure in higher maturities generally. There is some return from riding down that yield curve as well, to offset losses from downgrades and defaults.

The OAS for SPDR Portfolio Short Term Corporate Bond ETF (SPSB, formerly SCPB, with a 1-3 yr index) is a low 44.9 bp, while for SPDR Portfolio Intermediate Term Corporate Bond ETF (SPIB, formerly ITR, with a 1-10 yr index) is 73.0 bp.

I previously checked Vanguard Short-Term Corporate Bond Index Fund (VCSH) from 8/31/2013 to 8/31/2016, checking SEC yields in annual reports. SEC yields changed from 1.63% to 1.73%, with some slight ER drops I think, in addition to underlying yields changing. The BBB OAS series mentioned went from 2.10% to 1.83%. In that span the fund had an annualized return of 2.70%.

I wouldn't expect much at all now either but I don't think it's as bad as you imply.

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Re: Bernstein's bond choice for cowards and ST IG

Post by dbr » Sun Oct 29, 2017 9:58 am

An investor should not pick a portfolio of bonds. He should pick a portfolio. Risk and return are high for stocks and low for bonds and the lever is the stock/bond asset allocation. If a person wants he can wander around in the swamp of trying to optimize bond selection for mixed portfolios but I don't think there is any pirate treasure there. If all you own is bonds the situation might be more complicated.

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Re: Bernstein's bond choice for cowards and ST IG

Post by BlueEars » Sun Oct 29, 2017 10:35 am

Thanks for the replies here.

I took the Simba data since 1976 (the ST IG data started in 1976) and constructed 5 year rolling returns for some bond choices. So, for instance, the first 1980 result covers the years 1976 to 1980. Tbill's were winners in the raging inflation years to about 1981. In general as rates declined the intermediate term bonds did best. The red cells were the minimum returns (did not include tbills) and the green cells the max returns for the 5 year period.

Image

I also took the period 1940 to 1976. This included the inflation of the early postwar years but particularly the 1950's through 1960's when rates rose with moderate inflation. In this later period, short term Treasuries beat intermediate Treasuries. Does this suggest if we have a rising rate period and moderate inflation, that short term might be a good component of one's bonds?

Image

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Re: Bernstein's bond choice for cowards and ST IG

Post by QuietProsperity » Sun Oct 29, 2017 4:12 pm

I find myself with the good doctor on this topic. You can fairly easily replicate Corporate Bond exposure with a stock/treasury bond mix (Term + Credit). If you want a 10% Corporate Bond allocation, you can just split that into roughly 5% stocks and 5% treasuries and find a very similar outcome. Adding a specific Corp. Bond allocation is a waste for me personally as I already hold a stock and treasury allocation. Adjusting those would give me very similar exposure.

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Re: Bernstein's bond choice for cowards and ST IG

Post by BlueEars » Sun Oct 29, 2017 4:40 pm

QuietProsperity wrote:
Sun Oct 29, 2017 4:12 pm
I find myself with the good doctor on this topic. You can fairly easily replicate Corporate Bond exposure with a stock/treasury bond mix (Term + Credit). If you want a 10% Corporate Bond allocation, you can just split that into roughly 5% stocks and 5% treasuries and find a very similar outcome. Adding a specific Corp. Bond allocation is a waste for me personally as I already hold a stock and treasury allocation. Adjusting those would give me very similar exposure.
I would be interested in proving this to myself with some data. For instance, do I just take an SP500 + Intermediate Treasury mix and adjust its equity ratio until it gives the same performance as an SP500 + intermediate term IG fund like VFIDX? Is there a thread that has discussed this with actual numbers?

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Re: Bernstein's bond choice for cowards and ST IG

Post by Robert T » Sun Oct 29, 2017 5:33 pm

.
Bernstein – extracts from “Rational Expectations” book.
“Bonds are easier. As discussed earlier in the chapter, they’re your lifeboat and your opportunity supply— an option on the future, if you will. As we saw ... in bad times corporate bonds can take a real haircut (as can longer munis) ... During the last few bear markets, longer Treasuries did very well. But beware. Sooner or later, we’re going to have an inflationary crisis, and in such an environment, long duration will be a killer. Stick to short Treasuries, CDs, and munis.“

“Except in extraordinary circumstances, I don’t like corporate bonds. Besides their stock-like behavior in a panic, there’s also a good theoretical reason not to hold them, which is the agency conflict between a company’s bondholders and its stockholders.“
.Swensen also doesn't like corporate bonds. Prefers longer duration treasuries - some extracts
“No other asset type comes close to matching the diversifying power created by long-term, non-callable, default-free, full-faith-and-credit obligation of the US government.”

“Sensible investors focus on the diversifying characteristics of long-term government bonds, holding only the amount necessary to protect portfolios against financial trauma. If portfolios include the minimum allocation necessary to provide insurance against catastrophe, investors free up assets to diversify into alternative asset classes, achieving volatility reduction without sacrificing return. A low allocation to high-quality fixed income reduces the [opportunity] costs associated with holding bonds during normal circumstances and periods of unanticipated inflation, the environments in which fixed income positions tend to impair portfolio performance. Tailoring the bond portfolio to emphasize fixed income’s essential diversifying characteristics increases expected benefits in time of crisis, while reducing the long-term costs of holding bonds.”
My personal preference is a 0.0/0.5 credit[default]/term load target in fixed income (had same target over last 15 years). i.e. intermediate treasuries
.

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Re: Bernstein's bond choice for cowards and ST IG

Post by BlueEars » Sun Oct 29, 2017 6:34 pm

Robert T wrote:
Sun Oct 29, 2017 5:33 pm
...
My personal preference is a 0.0/0.5 credit[default]/term load target in fixed income (had same target over last 15 years). i.e. intermediate treasuries
Thanks for your comments Robert. How did you arrive at intermediate Treasuries versus short term Treasuries? I know that there should be a term premium but that seems to have been lost in the rising rate markets of the 1950's and 1960's.

We seem to have had two major periods in the US bond markets since 1952. One jagged rising rate period from 1952 to 1982, and then one jagged declining rate period from 1982 to the present (as shown here: https://fred.stlouisfed.org/series/GS5 ). In that rising rate period 2 year Treasuries seems to have beaten 5 year Treasuries more often then not (see my previous post just above). I'm a little concerned now that intermediate Treasuries are not quite the sweet spot they once were. Might we not move up in rates gradually, and might a better bet be short term Treasuries? I know over recent years short term Treasuries returns have been unexciting, some would say miserable.

So there are perhaps two issues: (1) consider increasing the equities some to equalize performance of Treasury bonds versus IG bonds, and (2) consider increasing the equities some to equalize the short term Treasury performance versus intermediate Treasury performance. Regarding the later I looked at 2 portfolios:
port 1: SP500 + 2 yr Treasuries
port 2: SP500 + 5 yr Treasuries.

I used the Simba data for 1952 to 2016 with roughly equal rising and falling rate periods. Then I adjusted the AA on the port 1 to give the same CAGR as port 2. So if port 2 was a 60/40 AA, it turned out both portfolios gave CAGR=9.3% when port 2 was set to 63/37. It seems that only a modest increase in equities is required to get equal performance over this long period.

If an investor is worried that we might experience some long term upward moves in rates, maybe one should go with short term Treasuries and a slightly higher equity allocation. For a retiree, this might be more important as inflation (and unexpected bursts) is a concern.

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Re: Bernstein's bond choice for cowards and ST IG

Post by Taylor Larimore » Sun Oct 29, 2017 6:50 pm

SatuMedia:

In his latest book, written for millennials, "If You Can," Dr. Bernstein recommends only one bond fund: Vanguard Total Bond Market Index Fund.

https://etf.com/docs/Ifyoucan.pdf

Best wishes
Taylor
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Re: Bernstein's bond choice for cowards and ST IG

Post by lack_ey » Sun Oct 29, 2017 6:57 pm

BlueEars wrote:
Sun Oct 29, 2017 6:34 pm
If an investor is worried that we might experience some long term upward moves in rates, maybe one should go with short term Treasuries and a slightly higher equity allocation. For a retiree, this might be more important as inflation (and unexpected bursts) is a concern.
For what it's worth there's some suggestion that the term premium may be negative now. Depends on the model and what you use. In any case it can't be that high, certainly not as high as a historical average over the last 50 years or so, unless you think short-term rates are going negative.

On the other hand it could well be that the negative correlation between stocks and bonds continues for a while, and high-quality intermediate-term and long-term bonds particularly effectively have negative stock market beta and are equity hedges in that sense. Market timing is never easy, and everybody hiding out in the short term has been wrong for years now...

For reference, the futures market currently predicts about two rate hikes from now through the end of September 2018.

On another note, there's also some evidence that equities are not really real assets (priced as real or behaving that way, tracking with inflation), despite maybe some intuitive support. They just have historically had a larger return than inflation. And don't get clobbered like nominal bonds do under bad tail events for inflation.

Disclaimer obviously that this could all be wrong, and it all matters less than equity allocation anyway. This is not going to be make-or-break for anybody unless inflation goes crazy and we have an extreme tail event.

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Re: Bernstein's bond choice for cowards and ST IG

Post by BlueEars » Sun Oct 29, 2017 7:10 pm

lack_ey wrote:
Sun Oct 29, 2017 6:57 pm
....
Disclaimer obviously that this could all be wrong, and it all matters less than equity allocation anyway. This is not going to be make-or-break for anybody unless inflation goes crazy and we have an extreme tail event.
Yes, I can agree with this. Still it is intellectually satisfying to try to understand bonds and take my best shot. I'm retired and the AA is 60/40 with a mix of older Ibonds, short term IG, and intermediate IG. Maybe I should consider replacing that intermediate IG with a mix of intermediate Treasury and some more short term IG. I really waiver on this. The comments in this thread so far are interesting food for thought.

If one has a $1M retirement portfolio and a 60/40 mix, then bonds are $400k. An added return of say 0.5% by picking the right bond components means $2k per year. OK, it is not really exciting but I would rather have that then not. :happy

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Re: Bernstein's bond choice for cowards and ST IG

Post by lack_ey » Sun Oct 29, 2017 7:22 pm

BlueEars wrote:
Sun Oct 29, 2017 7:10 pm
Yes, I can agree with this. Still it is intellectually satisfying to try to understand bonds and take my best shot. I'm retired and the AA is 60/40 with a mix of older Ibonds, short term IG, and intermediate IG. Maybe I should consider replacing that intermediate IG with a mix of intermediate Treasury and some more short term IG. I really waiver on this. The comments in this thread so far are interesting food for thought.

If one has a $1M retirement portfolio and a 60/40 mix, then bonds are $400k. An added return of say 0.5% by picking the right bond components means $2k per year. OK, it is not really exciting but I would rather have that then not. :happy
On a risk-adjusted bases, I doubt you're looking at anything like 0.5% on the portfolio. In any case you're likely better off chasing CD deals for a portion of fixed income.

I will say that a lot of the backtests and previous studies of corporate bonds vs. Treasuries has problems because they're not apples-to-apples and taking equivalent term risk. Over a backtest in which term risk is rewarded, this is kind of an unintentional stealth handicap. In fact, I think this part of the reason why short-term IG looks relatively good—just measurement error, as term risk differences between short-term IG and short-term Treasuries tend to be small and swamped out by the credit risk difference, whereas there's typically more of a term risk difference between intermediate-term and long-term IG and Treasuries.

So depending on tax situation the corporate bonds may be somewhat more useful than suggested in a number of places. There are some previous threads about this, including this one (again linking to something I wrote, just because I remember it offhand).

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Re: Bernstein's bond choice for cowards and ST IG

Post by BlueEars » Sun Oct 29, 2017 7:53 pm

Recently we experienced something that wasn't suppose to happen where we lived ... major league historic fires that destroyed lives and property. We personally came out OK but bad things can happen. Even if one is OK, trauma can remain.

In the financial area, bad things really did happen in the 1930's. I wouldn't want to hold even intermediate IG in such a period. And this alone could be an argument for intermediate Treasuries (as Roger T. mentions) or at least a mix of those plus short term IG. Or maybe even a mix of intermediate Treasuries and intermediate TIPS.

And then there are the personal investment issues: time of life, tax picture, risk profile, etc. I suspect some of us may even be biased a bit by our personal issues in these financial discussions. Yes, even I might be. :happy

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Re: Bernstein's bond choice for cowards and ST IG

Post by nbseer » Sun Oct 29, 2017 8:14 pm

I had all of my fixed income in VFSUX, but due to fears of interest rate increases and price drop, put it all in 1-year CD's paying 1.5%. I know that's less than VFSUX current yield, but didn't want to see that price go down. Plan on buying new CD's hopefully at a higher rate a year from now.. does this make sense?

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Re: Bernstein's bond choice for cowards and ST IG

Post by Robert T » Mon Oct 30, 2017 3:15 am

.
BlueEars wrote:
Sun Oct 29, 2017 6:34 pm
Thanks for your comments Robert. How did you arrive at intermediate Treasuries versus short term Treasuries?
As a general principal – I prefer to look at my portfolio as a whole, rather than fixed income in isolation, and prefer a long-term asset allocation (rather than trying to time the duration of fixed income allocations based on changes in relative yields). I have a 75% allocation to equities with a value and smaller cap tilt. The main function of fixed income in my portfolio (both the size of the allocation and content) is to help me stay the course with my high equity allocation (i.e. downside protection when equities tank). On using short-term vs. intermediate term treasuries for fixed income portion.

1. As per Swensen’s (2000 book), longer-term treasuries provide protection in financial crises (economic shocks) – as Fed often cuts rates to stimulate economy benefiting longer-term bonds (although currently not much left to cut). This worked well in 2008, from June 2007 to February 2009 – iShares 1-3yr Treasury = 12.6%; iShares 3-7yr Treasury = 20.0% - a period when equities, particularly small value declined significantly. Intermediate treasuries provided more downside protection, and provided more resources to buy cheaper equities.

2. From Swedroe’s 2003 book on The Successful Investor Today. "If you are going to hold a high allocation to value stocks, you should also consider holding longer-term fixed-income instruments. The recession/ deflation/ flight to quality risks of value stocks have negative correlation with the risks of longer-term fixed income instruments (which generally perform well in these types of environments). And since the evidence suggests that value stocks provide greater returns than growth stocks during inflationary periods, they offer greater protection than growth stocks against inflation risk inherent in longer term bonds. Thus holding a value tilt not only provides greater expected returns on your equity holdings, but it also allows you to take more interest-rate risk and thus potentially earn greater returns on your fixed income investments."

3. Adding longer-term treasuries to high equity allocations has, at least historically, provided superior mean-variance portfolios (see Swedore and Grogan “The Maturity of Fixed Income Assets and Portfolio Risk – Journal of Investing. I get the same results).

Obviously no guarantees.

Robert
.

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Re: Bernstein's bond choice for cowards and ST IG

Post by dcabler » Mon Oct 30, 2017 5:40 am

BlueEars wrote:
Sun Oct 29, 2017 10:35 am
Thanks for the replies here.

I took the Simba data since 1976 (the ST IG data started in 1976) and constructed 5 year rolling returns for some bond choices. So, for instance, the first 1980 result covers the years 1976 to 1980. Tbill's were winners in the raging inflation years to about 1981. In general as rates declined the intermediate term bonds did best. The red cells were the minimum returns (did not include tbills) and the green cells the max returns for the 5 year period.

Image

I also took the period 1940 to 1976. This included the inflation of the early postwar years but particularly the 1950's through 1960's when rates rose with moderate inflation. In this later period, short term Treasuries beat intermediate Treasuries. Does this suggest if we have a rising rate period and moderate inflation, that short term might be a good component of one's bonds?

Image
Hi Blue ears - by coincidence I was doing a very similar analysis over the weekend - I prefer treasuries, so I was looking only at STT, ITT and LTT. I had come to a similar conclusion that with rising interest rates, shorter duration bonds tended to do better and longer duration did better with falling interest rates. At least in my analysis the benefit during rising rates by going to shorter duration wasn't nearly as strong as longer duration was during falling rate periods. It's timing (gasp!) so I'm sure one could construct some sort of rule to tilt longer or shorter based on where interest rates are going - or one could just come up with an all-weather compromise that would do just fine over the period backtested....

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Re: Bernstein's bond choice for cowards and ST IG

Post by SimpleGift » Mon Oct 30, 2017 4:38 pm

dcabler wrote:
Mon Oct 30, 2017 5:40 am
...or one could just come up with an all-weather compromise that would do just fine over the period backtested....
Older SatuMedia may recall that years ago Bill Bernstein did some historical analysis on the best bond duration to choose for various portfolio mixes of stocks and bonds.

Both of his charts below reflect the same analysis, but just use different time periods and data sets. The chart on the left compares large company stocks combined with 30-day T-bills, 5-year and 20-year Treasuries for the 72-year period from 1926-1998. On the right, the chart shows these same bonds combined with various random stock allocations (including S&P 500 stocks, U.S. small stocks, international stocks, etc.) for the 27-year period from 1970-1996.
His conclusions? For high stock allocation portfolios, almost any bond duration did fine. Only with very low-volatility portfolios (<5% standard deviation) did T-bills make sense. For portfolios of moderate volatility (6%-12% standard deviation), 5-year Treasuries were the superior choice. In short, duration matters most when bonds make up the majority of one's portfolio.

Not sure the degree to which Mr. Bernstein's results are time-dependent — but this is about the best "all weather" analysis and set of recommendations I've seen.
Cordially, Todd

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Re: Bernstein's bond choice for cowards and ST IG

Post by aj76er » Mon Oct 30, 2017 5:11 pm

How about building a ladder of 5yr FDIC insured CD's? Currently these have a premium of ~40pbs over treasuries and yield similar to AAA corporate bonds. By spacing the rungs 1 year apart, you are fairly protected a rising interest rate environment. Perhaps hold a slice (~10%) in inter term treasury fund for rebalancing opportunities and/or liquidity needs.

Also, keep in mind that factoring in I-Bonds will lower your bond portfolio's overall duration.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Bernstein's bond choice for cowards and ST IG

Post by dcabler » Mon Oct 30, 2017 5:12 pm

Simplegift wrote:
Mon Oct 30, 2017 4:38 pm
dcabler wrote:
Mon Oct 30, 2017 5:40 am
...or one could just come up with an all-weather compromise that would do just fine over the period backtested....
Older SatuMedia may recall that years ago Bill Bernstein did some historical analysis on the best bond duration to choose for various portfolio mixes of stocks and bonds.

Both of his charts below reflect the same analysis, but just use different time periods and data sets. The chart on the left compares large company stocks combined with 30-day T-bills, 5-year and 20-year Treasuries for the 72-year period from 1926-1998. On the right, the chart shows these same bonds combined with various random stock allocations (including S&P 500 stocks, U.S. small stocks, international stocks, etc.) for the 27-year period from 1970-1996.
His conclusions? For high stock allocation portfolios, almost any bond duration did fine. Only with very low-volatility portfolios (<5% standard deviation) did T-bills make sense. For portfolios of moderate volatility (6%-12% standard deviation), 5-year Treasuries were the superior choice. In short, duration matters most when bonds make up the majority of one's portfolio.

Not sure the degree to which Mr. Bernstein's results are time-dependent — but this is about the best "all weather" analysis and set of recommendations I've seen.
Looks a whole lot like what my own analysis showed when I did it. Duration somewhere around 5 years +/- for my own personal portfolio seemed to be the sweet spot for the period I looked at: 1954 or so till today... In one account the bond fund duration is a little longer and in another it's around 5 or so. Next time I go in there, will probably consider shifting the duration downward a bit on the longer duration account by increasing my allocation to shorter term bonds. I do think, though, that in a long term upward or downward trend in rates you can do a little better by shifting durations, but that would be timing and we don't discuss that here on BH. :P

lack_ey
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Re: Bernstein's bond choice for cowards and ST IG

Post by lack_ey » Mon Oct 30, 2017 6:29 pm

If you extend that '98 analysis out another 19 years in which there was about a 1.6% annualized return difference between long term and intermediate term, in which term risk was negatively correlated with stocks, that's going to improve the 20-year Treasury result somewhat. Look at the return on the left side of the graph. The 5 year and 20 year are basically the same level on the y axis, looking at the 0% stocks part of the curve.

But sure, over the full period there's been historically it's pretty clear you'd have wanted to get into the intermediate range at least, with T-bills not doing that much for you unless you are targeting a really low vol. There's been a positive realized term premium, with this providing a diversifying source of return.

dcabler
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Re: Bernstein's bond choice for cowards and ST IG

Post by dcabler » Tue Oct 31, 2017 6:12 am

There's another view on this going here:
viewtopic.php?f=2&t=230878&p=3596883#p3596883

Da5id
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Re: Bernstein's bond choice for cowards and ST IG

Post by Da5id » Tue Oct 31, 2017 7:05 am

nbseer wrote:
Sun Oct 29, 2017 8:14 pm
I had all of my fixed income in VFSUX, but due to fears of interest rate increases and price drop, put it all in 1-year CD's paying 1.5%. I know that's less than VFSUX current yield, but didn't want to see that price go down. Plan on buying new CD's hopefully at a higher rate a year from now.. does this make sense?
Not really. I think that you can't predict future rates beyond what is currently priced into bonds and shouldn't really try either. People have been predicting interest rate hikes for a number of years... In any case, if you have fears about the impact of an interest rate increase on a short term bond fund you are probably investing in the wrong thing (bonds). By picking short term you are already mitigating the hit you take from interest rate hikes (and foregoing much of the benefits from interest rate cuts). That said, CDs are a fine alternative at this point and if they better suit you great. I have some VFSUX (for money I may need in the shorter term) but mostly VBTLX myself.

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