How much risk are you willing to take with your low risk investments? I have been using the Vanguard High Yield Corporate Bond Fund (VWEHX) for my bond allocation. My CAGR over my holding period so far (2 years) has been around 11% and it has annual returns of : 1 yr - 8.23%, 3 yr - 5.25%, 5 yr - 5.33%, 10 yr - 6.84%.
It isn't always as straight forward as that. You should not look at bond funds in isolation, but rather how they perform as part of your larger investment strategy. The issue with high(ish) yield (VWEHX) or long-term corporate (VCLT) bonds is that they have credit risk which is highly correlated with the stock market, which means they tend to crash at the same time. That tendency makes them less useful as diversifiers. Even though they have higher yields at first glance, they may not give you better investment returns overall.
I think the best bond allocation right now is an equal split between I-bonds, 5-yr CD ladder, and EDV. It provides both safety and diversification. It has more components though. Any two of those three is actually pretty good already. If you have 85% stock or more even any one of them is pretty good. You could just as well replace EDV with VCLT if you were using two or or all three of those.
Here is a backtest showing that lower-yielding long term treasury bonds gave better overall results than either of those two over the past 20 years or so, simply because they went up during the 2008 crash while the others turned sharply down at the wrong time.
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2017&lastMonth=12&endDate=12%2F14%2F2017&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&showYield=false&reinvestDividends=true&symbol1=VWESX&allocation1_1=20&symbol2=VUSUX&allocation2_2=20&symbol3=VTSAX&allocation3_1=80&allocation3_2=80&allocation3_3=80&symbol4=VWEHX&allocation4_3=20
And the other funds you mentioned:
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2017&lastMonth=12&endDate=12%2F14%2F2017&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=5&showYield=false&reinvestDividends=true&benchmark=-1&benchmarkSymbol=VBIAX&symbol1=VBILX&allocation1_1=20&symbol2=VBTLX&allocation2_2=20&symbol3=VFIUX&allocation3_3=20&symbol4=VTSAX&allocation4_1=80&allocation4_2=80&allocation4_3=80
PIMIX for me, though I don't have much in bonds as a percentage of my savings.
I like looking at how funds did during the 2008 downturn. Many bond funds matched the drop in stocks, but didn't do near as well on the recovery. All the risk, less of the reward.
PIMIX for me, though I don't have much in bonds as a percentage of my savings.
I like looking at how funds did during the 2008 downturn. Many bond funds matched the drop in stocks, but didn't do near as well on the recovery. All the risk, less of the reward.
How much risk are you willing to take with your low risk investments? I have been using the Vanguard High Yield Corporate Bond Fund (VWEHX) for my bond allocation. My CAGR over my holding period so far (2 years) has been around 11% and it has annual returns of : 1 yr - 8.23%, 3 yr - 5.25%, 5 yr - 5.33%, 10 yr - 6.84%.
I use VWESX, admiral version is VWETX. If you look at the history of the fund it has only lost 5-6% in the worst years of the market while stocks can lose 40-50% of their value. I am a ways out from my FIRE date so I am comfortable with the risk.
In the two years I’ve owned the fund I have averaged a 9% return.
I use VWESX, admiral version is VWETX. If you look at the history of the fund it has only lost 5-6% in the worst years of the market while stocks can lose 40-50% of their value. I am a ways out from my FIRE date so I am comfortable with the risk.PV shows a 16%+ loss for this fund (monthly data, daily would probably show larger). It also shows a 16% loss for long treasury bonds. The difference is the timing. VWESX lost it in 2008 when VUSUX was up and stocks crashed, while VUSUX lost it in 2013 which was a great year for stocks. VWESX also lost a bit in 2013. VWESX is not as volatile as the stock market, but it is risky in more situations: it does poorly when stocks do poorly but also when bonds do poorly. Dr. Bernstein would call this "bad returns in bad times" and suggest staying away. I'll grant that frequent crashes may mean frequent buying opportunities, so you might be ok with it if you are buying regularly. Then the question is "why this instead of more stocks?"
In the two years I’ve owned the fund I have averaged a 9% return.
All of this leads to an interesting question: Which investment options do well when the stock market tanks? I've been looking at bond index funds because I'm still relatively new to all this, but now I'm wondering about annuities and laddered CDs.
All of this leads to an interesting question: Which investment options do well when the stock market tanks?Nothing is guaranteed. In theory the US government has no risk of default, which means government bond prices are purely set by expectations for inflation, interest rates, and demand. Government bonds are supposed to do well in a stock crash because of a "flight to safety", which means everyone tries to buy them which drives prices up. They have done this in recent crashes, but nothing is guaranteed. Gold did well in the last downturn, but again nothing is guaranteed. There are also more complicated financial things (options, VIX, etc.), but I'm not into those.
Bond | Duration | Yield |
Long Term Government (VGLT) | 17.5 | 2.78 |
5-yr CD Ladder | 2.5 | 2.60 |
Series I Saving Bonds | 0 | 2.58 |
Equal Weight (1/3's) | 6.7 | 2.65 |
Total Bond Index (VBTLX) | 6.1 | 2.69 |
All of this leads to an interesting question: Which investment options do well when the stock market tanks?Nothing is guaranteed. In theory the US government has no risk of default, which means government bond prices are purely set by expectations for inflation, interest rates, and demand. Government bonds are supposed to do well in a stock crash because of a "flight to safety", which means everyone tries to buy them which drives prices up. They have done this in recent crashes, but nothing is guaranteed. Gold did well in the last downturn, but again nothing is guaranteed. There are also more complicated financial things (options, VIX, etc.), but I'm not into those.
I think you should be able to express a good reason for choosing a given bond fund instead of any or a combination of:
A stock fund, if you are after greater return
VBTLX, if you are after simplicity
CDs/I-bonds, if you are after safety
EDV/TLT/VGLT etc., if you are after pure interest rate risk/reward
When I considered bonds about a year ago, I decided that if I wanted to take credit risk I'd prefer to do it with municipal bonds instead of corporate bonds.
CD's and I-bonds don't look great at first, but they are effectively subsidized by the government to benefit small investors and have returns that are much higher than the bond market would allow, considering their tiny risk. CD's take work, and I-bonds have a purchase limit of $10,000 per year per SSN + $5,000 per tax return.
Here's the bond allocation I think seems ideal. It has similar duration and yield to VBTLX, but it expands tax-advantaged space, is partly protected against inflation, and has no credit risk, which should give it a big advantage over the long run. I like EDV more than VGLT personally.Of course, VBTLX and balanced funds always there and always simple.
Bond Duration Yield Long Term Government (VGLT) 17.5 2.78 5-yr CD Ladder 2.5 2.60 Series I Saving Bonds 0 2.58 Equal Weight (1/3's) 6.7 2.65 Total Bond Index (VBTLX) 6.1 2.69