The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: ClaycordJCA on April 08, 2015, 10:23:53 PM
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I'd appreciate your thoughts as I am torn about whether to include foreign bonds in my asset allocation. If things go as planned, I expect to retire in 4 years at age 60. Asset allocation in my investment accounts (retirement and taxable combined) are presently 42% US Stock, 20% International Stock and 38% US bonds. Do I reallocate some of the bond money to foreign bonds? I understand the need to diversify, but at the same time recognize that my bond holdings are intended to provide stability by reducing the volatility of the overall portfolio. I believe foreign bonds may undermine the stability that is important when I'm this close to retirement. What say you?
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Vanguard thinks international bonds are a good component of a retirees portfolio. Their Target Retirement funds include international stock and international bond allocations.
https://personal.vanguard.com/us/funds/snapshot?FundId=0681&FundIntExt=INT#tab=2
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I never understood Vanguard's recommendation for foreign bonds. Their stated reason is that it provides some diversification benefits.
I agree that is true for diversifying returns, but the primary benefit of bonds is to reduce your risk in the event of a stock market crash (preserve your capital.) Foreign bonds introduce currency risk. During a market downturn, that currency risk impact is unpredictable. Money might flee the dollar, or flee to the dollar, depending upon what the crisis was that triggered the downturn.
During normal markets, the foreign currency risk may also help or hurt your returns. But bonds aren't there for long-term returns. That's what equities are for.
Not understanding why you would ever buy foreign bonds, I stay with US-based bonds. I do have significant foreign equity allocations (which is where I choose to take my currency risk.)
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I never understood Vanguard's recommendation for foreign bonds. Their stated reason is that it provides some diversification benefits.
I think it's reasonable to have some foreign bonds. I think the diversification benefits come from the fact that the domestic and international markets aren't too correlated (like now for example), so if domestic bonds are a drag on your portfolio for awhile, it could the that the international ones are doing well. It reduces volatility.
If you have a good asset allocation strategy and you stick with it even in downturns, you should have a lower volatility overall. But we're also talking about a small amount of your portfolio. For example, if you're 60/40 and your bonds are 75/25, that's only 10% in foreign bonds.
If you're taking an index-minded approach to investing (as I think is wise for most), "owning the world" is a reasonable idea. There are a lot of foreign bonds out there, and they probably should be represented in your portfolio based on your personal risk profile.
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Foreign bonds introduce currency risk.
Vanguard's international bond fond is hedged against currency risk.
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I've never really understood the role of foreign bonds. Foreign equities, for growth, yes, but bonds? You already have currency risk/exposure why equities. Why take on this risk with bonds?
Especially if you don't intend to draw your fixed income from that country in retirement? Just seems over-complicated.
I'd like to hear from others on this.
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Foreign bonds introduce currency risk.
Vanguard's international bond fond is hedged against currency risk.
Currency risk is the primary reason people invest in foreign bonds in the first place. When you're currency trading you generally put the money somewhere once you've changed your USD to Swiss francs or Vietnamese dong or whatever.
Pardon my ignorance but what is the expense ratio of the hedged fund? I wouldn't personally bother but I'm curious if the derivatives required to hedge pish the ER close to, or past, 1%
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Foreign bonds introduce currency risk.
Vanguard's international bond fond is hedged against currency risk.
Currency risk is the primary reason people invest in foreign bonds in the first place. When you're currency trading you generally put the money somewhere once you've changed your USD to Swiss francs or Vietnamese dong or whatever.
Pardon my ignorance but what is the expense ratio of the hedged fund? I wouldn't personally bother but I'm curious if the derivatives required to hedge pish the ER close to, or past, 1%
Vanguard Total International Bond Index Fund Admiral Shares (VTABX) - Expense Ratio 0.19%
https://personal.vanguard.com/us/funds/snapshot?FundId=0511&FundIntExt=INT
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Why aren't foreign bonds just one more form of diversification? In this case, a hedge against everything going to shit in your home country.
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Thanks, all. I think I will remain domestic.