Author Topic: Advisor recommends adding 2 new bonds funds  (Read 1893 times)

travelfreak111

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Advisor recommends adding 2 new bonds funds
« on: November 30, 2017, 06:29:45 AM »
I’m 32 years old and have my advisor paying .03% year at vanguard. My most of my investing are in taxable accounts therefore I need bond in my taxable account. I’m in 75% stock 25% bonds. I’m in a high tax bracket. In that account I have vanguard intermediate tax-exempt (muni)bond fund (vwitx). With a good amount of new additional money I added he now wants to 2 new tax-exempt bond funds; limited (vmltx) and long term (vwlux).

My question before I ask him, why do I need limited and long term fund if I already have intermediate,  which contains both long term and limited? Isn’t intermediate a one shop fund? Out of the bond portion 40% intermediate (vwitx), 30% limited (vmitx), 30% long term (vwlux).
I would like my portfolio simply as possible incase I ever decide to manage it on my own someday.

Eucalyptus

  • Bristles
  • ***
  • Posts: 333
  • Location: South Australia
Re: Advisor recommends adding 2 new bonds funds
« Reply #1 on: November 30, 2017, 05:02:57 PM »
In all the calculators I've played with, admittedly with much smaller total bonds (usually maxing at 10% of portfolio), playing with different bond allocations like you say he wants you to do, has little impact on either growth or none on portfolio survive-ability. I would just keep it simple too myself.

A non-equity like Gold has a far bigger impact on survive-ability.

Eucalyptus

  • Bristles
  • ***
  • Posts: 333
  • Location: South Australia
Re: Advisor recommends adding 2 new bonds funds
« Reply #2 on: November 30, 2017, 05:11:48 PM »
Ok, playing for you in a couple of Tyler's tools on Portfolio charts, mainly the Financial Independence tool. Assuming you are United States.

75 (total domestic market)/25 with the 25 as Intermediate, gives you 3.9% Perpetual WR, 4.6% Safe WR

75/10Intermediate/8Long/7Short (technically the allocation he's saying is 7.5 long 7.5 short but I can only enter whole percentages), gives you, DRUM ROLL, 3.9% PWR, 4.6%SWR.

In fact in this calculator, the simpler option (with savings rate set to 50%, and 0 savings already), gives you a "Years of Expenses" of 25.6, vs a higher required 25.8 for the complicated option.

Keep it simple.

I would put more effort into diversifying your stock portfolios and thinking about if 75/25 is right for you.

Cheers!

Eucalyptus

  • Bristles
  • ***
  • Posts: 333
  • Location: South Australia
Re: Advisor recommends adding 2 new bonds funds
« Reply #3 on: November 30, 2017, 09:52:25 PM »
Sorry I'm replying again...I think this is an interesting topic and I'm also to hear other people's thoughts and ideas. The purpose of bonds is mainly diversification for times of losing equity markets. One potential problem is high inflation at the same time, effectively making your bonds also go backwards. This has happened a few times but rare. (my understanding).

Gold, so it seems to go on available back data and theory, is what you have in your portfolio to fix those times. Testing on back data suggests to me that you don't need a huge amount, really, maybe 5% is plenty (Gold by itself doesn't return dividends and is entirely reliant on market driven market value growth). Playing with US market data this holds true, as it does for available Aus data.

Another potential option apart from metals other than gold (eg Silver...) is bond diversification, which your Advisor is suggesting. But, in your case I'm assuming that those bond products (without looking them up) stick to US-centred bonds? The US will have its own inflation rate, so you could potentially mitigate that (at least somewhat) by diversifying your bonds globally. This also diversifies, potentially, their returns and issues like, government bankruptcy/implosion/zombie apocolypse, etc. I'd be suprised if this worked better than Physical gold in hedging that type of risk, however, holding bonds over the long term will see more growth than holding Gold.

I'm not sure how to test this theory with available calculators though. Tyler would likely have ideas on how to do it or could do it.

travelfreak111

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Advisor recommends adding 2 new bonds funds
« Reply #4 on: November 30, 2017, 11:36:16 PM »
My advisor said by adding an additional short and long term bond it will help better target intermediate duration with a laddered yield curve exposure bringing down the risk. I get where he’s coming from. In the intermediate fund now It has 1% in short and 1% in long term. By adding the limited and long fund it will replicate the “total” muni bond. Vanguard doesn’t have a total muni bond fund. I also have in my IRA vanguard total bond fund and a small portion of total int bond fund (3% of entire portfolio). 
I’m diversified in the stock portion. I keep it simple with Total US, dev int, emerging int.


Sent from my iPhone using Tapatalk

Radagast

  • Handlebar Stache
  • *****
  • Posts: 1515
  • Location: West of the Mountains, East of the Sea
  • One does not simply work into Mordor
Re: Advisor recommends adding 2 new bonds funds
« Reply #5 on: December 01, 2017, 01:17:27 AM »
That seems nearly pointless to me. On the spectrum of Vanguard muni funds, Limited and Long Term are most similar to Intermediate. There is some argument for using a "barbell" , but that would usually be more extreme, such as Short Term and Long Term, or Money Market and High Yield. Playing around, these more extreme versions actually do give better yield per duration than what Advisor proposes.

Complete list of Vanguard general muni funds, durations, and yields.
Duration Yield   Fund
0.1   0.85   Money Market
1.2   1.15   Short
2.6   1.44   Limited
5.3   1.87   Intermediate
5.9   2.08   Total
7.1   2.36   Long
7.2   2.83   High Yield

An equal split between the three would give a duration of 5 years and a yield of 1.89%, compared to Intermediate with a duration of 5.3 and yield of 1.87%. OK, you pick up a fraction more yield for a fraction less risk, but the difference is very slight and fluctuates. Advisor can probably find something more useful to do with his time, like maybe doing nothing.

Vanguard doesn’t have a total muni bond fund.
VTEAX/VTEBX/VTEB?

Eucalyptus

  • Bristles
  • ***
  • Posts: 333
  • Location: South Australia
Re: Advisor recommends adding 2 new bonds funds
« Reply #6 on: December 01, 2017, 05:59:18 AM »


An equal split between the three would give a duration of 5 years and a yield of 1.89%, compared to Intermediate with a duration of 5.3 and yield of 1.87%. OK, you pick up a fraction more yield for a fraction less risk, but the difference is very slight and fluctuates. Advisor can probably find something more useful to do with his time, like maybe doing nothing.


The yields here are so close that the difference in rebalancing fees will probably just about swing it back to dead even if not the other way. But agree, pointless complication. Unless something(s) in particular has changed in recent years in bond markets that make historical market performances less predictive, thus giving reasons behind the idea?

chasesfish

  • Magnum Stache
  • ******
  • Posts: 3081
  • Age: 37
  • Location: Texas
    • Years in the making, I created a journal!
Re: Advisor recommends adding 2 new bonds funds
« Reply #7 on: December 01, 2017, 06:24:47 AM »
I keep it more simple (but also am not paying an advisor).  I just buy the admiral shares of the Vanguard Wellesely Income Fund and let the professional in that fund deal with the choice of bonds, duration, or equities that trade like bonds.

travelfreak111

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Advisor recommends adding 2 new bonds funds
« Reply #8 on: December 01, 2017, 10:01:30 AM »

[/quote]
VTEAX/VTEBX/VTEB?
[/quote]

Those are consider longterm. 60% of the bonds in that fund >10 years maturity.

Radagast

  • Handlebar Stache
  • *****
  • Posts: 1515
  • Location: West of the Mountains, East of the Sea
  • One does not simply work into Mordor
Re: Advisor recommends adding 2 new bonds funds
« Reply #9 on: December 01, 2017, 02:14:38 PM »
You can play around here:
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1996&firstMonth=1&endYear=2009&lastMonth=12&endDate=11%2F30%2F2017&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=3&showYield=false&reinvestDividends=true&benchmark=-1&benchmarkSymbol=VWITX&symbol1=VWITX&allocation1_1=34&symbol2=VMLTX&allocation2_1=33&symbol3=VWLTX&allocation3_1=33&allocation3_2=75&symbol4=VWSTX&allocation4_2=25&symbol5=VWAHX&allocation5_3=50&symbol6=VSGBX&allocation6_3=50
And see if you get any good results. Based on what I have seen, an intermediate term bond fund's position on the yield curve is usually pretty optimal for the fund to buy low and sell high. It looks to me like regular intermediate term has been the best bet, and I even cherry picked to give approximately the greatest amount of flat or inverted yield curve.

VTEAX/VTEBX/VTEB?
[/quote]
Those are consider longterm. 60% of the bonds in that fund >10 years maturity. [/quote]
Morning star shows them as intermediate term, and they actually have shorter duration than MUB, another total municipal bond index fund. The nature of municipal bonds is that many are issued with long maturities and call provisions, so the maturity of a total municipal bond market fund will tend to be longer. That's just how it is.

travelfreak111

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Advisor recommends adding 2 new bonds funds
« Reply #10 on: December 02, 2017, 04:19:05 PM »
You can play around here:
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1996&firstMonth=1&endYear=2009&lastMonth=12&endDate=11%2F30%2F2017&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=3&showYield=false&reinvestDividends=true&benchmark=-1&benchmarkSymbol=VWITX&symbol1=VWITX&allocation1_1=34&symbol2=VMLTX&allocation2_1=33&symbol3=VWLTX&allocation3_1=33&allocation3_2=75&symbol4=VWSTX&allocation4_2=25&symbol5=VWAHX&allocation5_3=50&symbol6=VSGBX&allocation6_3=50
And see if you get any good results. Based on what I have seen, an intermediate term bond fund's position on the yield curve is usually pretty optimal for the fund to buy low and sell high. It looks to me like regular intermediate term has been the best bet, and I even cherry picked to give approximately the greatest amount of flat or inverted yield curve.

VTEAX/VTEBX/VTEB?
Those are consider longterm. 60% of the bonds in that fund >10 years maturity. [/quote]
Morning star shows them as intermediate term, and they actually have shorter duration than MUB, another total municipal bond index fund. The nature of municipal bonds is that many are issued with long maturities and call provisions, so the maturity of a total municipal bond market fund will tend to be longer. That's just how it is.
[/quote]
Thanks for the info!!

Indexer

  • Handlebar Stache
  • *****
  • Posts: 1384
Re: Advisor recommends adding 2 new bonds funds
« Reply #11 on: December 02, 2017, 05:04:38 PM »
The Total Bond fund, what you would use in a lower tax bracket or within an IRA, is a mix of short, intermediate, and long term bonds. It sounds like they are replicating the Total bond fund maturity breakdown using the tax free bond funds. I see nothing wrong with it.

Of all the things an advisor could do that would catch my attention, this doesn't make the list. I wouldn't worry about it.

Quote
difference in rebalancing fees

He is describing Vanguard's advisory service. There are no transaction fees for Vanguard funds.