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.
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
|
Of course, VBTLX and balanced funds always there and always simple.