VBND vs VAF vs VGB

I have to say that (so far) I am quite pleased I ended up going with none of the above and instead chose an active bond fund. All of the Vanguard passive bond funds are down significantly more due, it seems, to more rigid duration rules.

 

I am always interested in your updates @Redwing and appreciate your posts

 

So which bond fund did you choose?

 

Which active bond fund?

 

A few years back I had my bonds with Vanguard. But due to an ownership realignment for tax reasons I had to sell everything and restart. Historically active bond funds do outperform passive and have much more sensible distribution policies so I went with PIMCO. Runner up was Jamison Coote.

The brief bond massacre this time last year solidified my view of passive. Vanguard (and others) boosted their withdrawal spread to as high as 1.5% just when you might need to call on the safety of bonds for living or buying opportunities.

PIMCO made an annoyingly wrong call that made all their funds drop more than they should, but since then have covered their premium.

Specifically their Global Bond Fund is down less than half equivalent passive funds.

Given what has happened since I first started this thread (unprecedented etc etc) I admit to pondering how bonds can perform their intended volatility-dampening role in my portfolio any better than cash absent another eruption.

But that’s the thing. They are insurance.

 

I was wrong.

As the historic bond slump showed over the past few years, they aren’t necessarily insurance.

But just as active share funds failed to do protect investor gains by sticking to their strategy even it was obviously not working, active bond funds did the same.

We pay active managers to anticipate and react to market conditions. It is obvious to everyone now that bonds were always going to slump when interest rates rose.

It was to me and I was lucky enough to sell all my bonds before the worst of the downturn.

It should have been even more obvious to ‘experts’ and they should have taken steps.

 

Hate bond funds, cash only for me.

 

A good read, always interesting to look at all opinions.

Historical Analysis by the Poor Swiss on high-interest cash

Can you retire with cash instead of bonds?

Here are the conclusions

Recent times show Bonds haven't fared well, but over the longer terms

Vanguard Index Volatility Charts

 

Also a good read

Is 75/25 the New 60/40? - A Wealth of Common Sense

 

Spot on, I used to enjoy some of Peter Bernstein’s writing and remember this particular piece well.

So (for our circumstances) volatility is irrelevant as dividends do the job. So first up we don’t need Bonds for volatility smoothing.

Second cash and short dated term deposits are safer than Bond funds. With cash and term deposits we know our capital won’t suffer a loss and know when we can get it back. I’ve read the arguments stating that the turnover in bond funds should sort this out, but in what timeframe given the longer duration of the bonds in most bond funds.

Further we don’t pay Mgr fees on cash and term deposits, fees matter - more money in our pockets.

Finally given the greater safety of cash the barbell approach works well ie higher allocation to equities than we would have with bonds. We know the cash amount set aside to get through a difficult period is gonna be there when we need it. Unlike a bond fund we won’t be hoping and praying that the inverse relationship between stocks and bonds holds as there’s no guarantee it will!

 

Surely cash is simply equivalent to short term bond funds ? To impact volatility you need duration preferably in an actively managed bond portfolio.

It’s slightly more complicated at the moment because of the inverse yield curve which makes the floating rate bonds look more attractive, but again they act like cash with a small premium for risk when looking at the stable corporates.

it’s hard not to look at the comparison of returns above and be concerned that a re rating of required returns on capital is going to put downward pressure on equities (in spite of the constant influx of funds )

the same risk follows for commercial property which is still asking returns that extraordinarily low for risking capital. If interest rates settle at this higher point and the risk free rate commensurately is adjusted upwards for asset valuations, then a mix of bond types will look good, and also allow easy funds allocation into a re rated equities/ commercial RE market.

the problem with cash is you are almost guaranteed to lose value compared to inflation after tax

 

Yes, agree totally with that. My bad for not making that clear in my previous post. Trouble is there’s bugger all passive, low fee short duration product on offer here and active generally equals high fees. High interest cash accounts and short duration term deposits (both don’t incur Mgr fees) are easy for an Aussie investor and the short duration keeps them reasonably responsive to changes in interest rates.

Again agree with that. In general over the long term Cash and Bonds seem like a poor choice compared to equities for inflation adjusted returns. As usual this is merely my personal view and I’m certainly no expert. Mine is a very simple passive approach ie equities for returns (to fund our retirement) and cash / term deposits for safety / buffer which will vary depending on the individual’s circumstances.

Funny, through chance not design, in that our retirement portfolio is roughly like what Buffet recommends: 90% equity index fund / 10% short term bonds (cash and short duration term deposits). Have been retired for quite a while now and thus far finances, especially given our passive approach, have worked out way beyond expectation.

 

US Bonds are down 7% over the last 4 years, their worst 4-year return in history

 

On a more positive note:

The 60/40 Portfolio is Alive & Well - A Wealth of Common Sense

 

Who knows what the future holds, probably as interesting as the past

 

3 reasons why bonds make more sense than term deposits today

Bearing in mind the author is with PIMCO

 

How bonds ate the entire financial system

A very short, very wild history of the market that will shape the next financial crisis