Author Topic: Allocating to bonds  (Read 2150 times)

actionjackson

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Allocating to bonds
« on: February 01, 2017, 08:46:33 AM »
I've tried searching the forums for this, so please forgive the basic question.

If I'm planning on asset allocation of 70/30 split, stocks/bonds. What is the best way to get exposure to bonds. Everything I read that's bonds 101, just discusses how bonds are set up with interest, face value, maturity date yada yada... I'm not going to go buying individual bonds - that just seems like a pain.

So what does everyone here do for getting exposure to bonds - just through ETFs for bonds? Is anyone buying actual bonds?

geekette

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Re: Allocating to bonds
« Reply #1 on: February 01, 2017, 09:14:10 AM »
We just buy a bond fund (VBTLX)

actionjackson

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Re: Allocating to bonds
« Reply #2 on: February 01, 2017, 09:42:20 AM »
Great, thanks!

Any Aussies in here can chime in with which Vanguard bond ETF they buy?

There isn't really a total bond market fund on the ASX from what I can see - mostly just the Australian Gov Bond fund VGB. Then there is VIF - Vanguard International Interest fund - which seems to be a fund with bond investments across governments, heavily weighted to Japan/USA.

SeattleCPA

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Re: Allocating to bonds
« Reply #3 on: February 01, 2017, 09:49:05 AM »
This isn't relevant to someone outside US, but commonly when people go with a 30% allocation, they use US Treasuries since while the rate is lower than US corporate bonds, the Treasuries don't suffer from some of the flaws that non-Treasuries suffer from... like callability.

BTW, another related thought (probably again only for US investors) is that whatever corporate bond percentage you'd be happy with, you can go with a lower percentage in Treasuries.

actionjackson

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Re: Allocating to bonds
« Reply #4 on: February 01, 2017, 10:10:05 AM »
Callability is a non issue with a bond based ETF though right?

What's the advantage of treasuries or bonds direct, vs. an ETF?

I know this has probably been discussed a bunch - if anyone can link a thread, I'd appreciate it. I can't get the search function on this forum to work.

Mr Mark

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Re: Allocating to bonds
« Reply #5 on: February 01, 2017, 10:21:43 AM »
I get my bond % via a core holding in Wellington admiral. That way it's got a built in autobalace as they are 65/35 and I'm looking for about 15% max bonds. With a 30% allocation you probably need the bond index as mentioned

SeattleCPA

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Re: Allocating to bonds
« Reply #6 on: February 01, 2017, 11:21:29 AM »
Callability is a non issue with a bond based ETF though right?

What's the advantage of treasuries or bonds direct, vs. an ETF?

I know this has probably been discussed a bunch - if anyone can link a thread, I'd appreciate it. I can't get the search function on this forum to work.

Well, your ETF is not going to get called obviously.. the bonds inside them might. And callability isn't the only issue.

There's also the issue of liquidity which in extreme market conditions matters if you're trying to run with a disciplined asset allocation formula.

Also the credit risk thing maybe gets too emotional to talk about but Treasuries are massively less likely to default than, e.g, corporate bonds. If only for the reason that the Treasury ultimately has power to tax and ability  to literally print money.

actionjackson

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Re: Allocating to bonds
« Reply #7 on: February 01, 2017, 12:29:42 PM »
Callability is a non issue with a bond based ETF though right?

What's the advantage of treasuries or bonds direct, vs. an ETF?

I know this has probably been discussed a bunch - if anyone can link a thread, I'd appreciate it. I can't get the search function on this forum to work.

Well, your ETF is not going to get called obviously.. the bonds inside them might. And callability isn't the only issue.

There's also the issue of liquidity which in extreme market conditions matters if you're trying to run with a disciplined asset allocation formula.

Also the credit risk thing maybe gets too emotional to talk about but Treasuries are massively less likely to default than, e.g, corporate bonds. If only for the reason that the Treasury ultimately has power to tax and ability  to literally print money.

So that's the benefits of a diversified Bond ETF.

What's the benefits of purchasing bonds direct? Apart from the lack of a management % fee.

Radagast

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Re: Allocating to bonds
« Reply #8 on: February 01, 2017, 02:24:47 PM »
Great, thanks!

Any Aussies in here can chime in with which Vanguard bond ETF they buy?

There isn't really a total bond market fund on the ASX from what I can see - mostly just the Australian Gov Bond fund VGB.
Not Aussie. The VGB fund is probably a good choice. Generally the best bonds to buy are those issued by the authority responsible for taxes and creation of the money you use: your own government. There is generally little to gain from investing in international or corporate bonds. VGB should be fine. Even if there are other options, it is doubtful they will offer any significant benefit.

If you want to buy your own individual government bonds that is also OK, though you will need to do more research especially if Australian government bonds are callable. In general it is probably reasonable to start by buying government bonds which mature in 10 years. Every year buy a new 10 year maturity, so that after 10 years you will have 10 batches of bonds with one maturing every year. You may wish to sell them once they are within 1, 2, or 3 years of maturity if they are anything like US government bonds, because you are often able to eke out a slightly higher annualized return by doing so.


SeattleCPA

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Re: Allocating to bonds
« Reply #9 on: February 01, 2017, 02:48:21 PM »
Callability is a non issue with a bond based ETF though right?

What's the advantage of treasuries or bonds direct, vs. an ETF?

I know this has probably been discussed a bunch - if anyone can link a thread, I'd appreciate it. I can't get the search function on this forum to work.

Well, your ETF is not going to get called obviously.. the bonds inside them might. And callability isn't the only issue.

There's also the issue of liquidity which in extreme market conditions matters if you're trying to run with a disciplined asset allocation formula.

Also the credit risk thing maybe gets too emotional to talk about but Treasuries are massively less likely to default than, e.g, corporate bonds. If only for the reason that the Treasury ultimately has power to tax and ability  to literally print money.

So that's the benefits of a diversified Bond ETF.

What's the benefits of purchasing bonds direct? Apart from the lack of a management % fee.

Sorry, I was unclear. I didn't mean to say you should purchase bonds directly.

I was trying to say that since Treasuries do a better job of what bonds are supposed to do, you need less of them. Or so some people (me included) think...


WallStreetPhysician

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Re: Allocating to bonds
« Reply #10 on: February 01, 2017, 03:49:58 PM »
ETF: AGG
Mutual Fund: FSITX (Fidelity) or VBTLX (Vanguard)